Nowadays, firms are active in a fast-changing environment. Firms should constantly know the demand of customers to stay competitive in the market (D’Aveni, 1994). Knowing the customer is key, as it increases the dependency on the external knowledge of a firm. Absorptive capacity is one of the abilities of a firm to make full use of their external knowledge. Absorptive capacity (ACAP) is defined as the ability of a firm to identify, assimilate and exploit knowledge from the environment (Cohen & Levinthal, 1990).
The study of Cohen and Levinthal (1990) is seen as the theoretical fundament of ACAP. In their study, they provide a new perspective on learning and innovation in which they define ACAP by introducing the 3 components of ACAP. According to Cohen and Levinthal (1990, p. 128), ACAP constitutes of; first, recognizing the value of new information, second; assimilate this new information and; third, apply it to commercial ends. Zahra and George (2002) introduced a reconceptualization of ACAP in which they made a distinction between potential ACAP (acquisition and assimilation) and realized ACAP (transformation and exploitation). The variables used in this study are in line with Todorova and Durisin (2007). Todorova and Durisin (2007) argue that their study misses a number of important issues, which were initially raised by Cohen and Levinthal (1990) (see Appendix 1). First, they reintroduce the component recognizing the value as the original first component. Second, they argue that knowledge transformation is an alternative process, instead of the next step after assimilation. This second adjustment to the reconceptualization of Zahra and George (2002) result in the nullification of the distinction between potential ACAP and realized ACAP.
Prior research has shown that absorptive capacity is positively related to firm performance and innovation (Cohen & Levinthal, 1990; Tsai, 2001; Kostopoulos, Papalexandris, Papachroni, & Loannou, 2001). Although empirical research shows the relevancy of ACAP, Volberda, Foss, and Lyles (2010) identified various research gaps in the literature regarding antecedents of absorptive capacity. Volberda et al. (2010) emphasized the limited research on managerial antecedents and the impact of individual actors on absorptive capacity. Dominant logic/management cognition as a limitation to (dynamic) managerial capabilities forms one of the antecedents which are not examined intensively yet.
Zahra and George (2002) introduced a reconceptualization of the concept of ACAP in which they argue that ACAP is a dynamic capability. Dynamic capability gives the organization the ability to refine, extend and leverage existing competencies or to create new ones by incorporating acquired and transferred knowledge into its operations, enabling the organization to respond better to strategic change (Zahra & George 2002, p. 190). Augier and Teece (2009) discussed the multiple components of dynamic capability. In their article, they state that the emergence of new products and processes results from new combinations of knowledge sensed and seized by management. According to Augier and Teece (2009), essential dynamic managerial capabilities are decision-making skills and organizational processes to sense and seize opportunities.
Lane, Koka, and Pathak (2006) introduced internal drivers as an influencer of a firm’s ACAP, such as characteristics of a firm’s structures and processes, the strategic direction and firm’s members’ mental models. Individual members’ cognition could provide new insights regarding what knowledge is recognized, how it is transformed and assimilated, and finally, how and to what extent it is applied. These skills could be linked to managerial short-termism and myopia, since these concepts evaluate the ability of a manager to identify the potential as consequence of knowledge acquiring and exploiting and their ability to make decisions regarding long-term investments, such as R&D.
The tension between short-term earning and long-term value creates an intertemporal trade-off, which is suboptimal (Hayes & Abernathy, 1980; Laverty, 1996). This suboptimal trade-off is a result of two possible outcomes of dealing with long-term versus short-term results. However, managerial short-termism as an antecedent of absorptive capacity has not been examined yet in present research. This article, therefore, aims at examining the relationship between managerial short-termism and the various components of absorptive capacity, which result in the following problem definition:
How, and to what extent, does managerial short-termism influence the dimensions of absorptive capacity?
In addition to the main problem definition, a moderator analysis will be conducted. This analysis will examine the impact of performance measurement systems on the relationship between managerial short-termism and ACAP. In line with the tension between intertemporal choices, prior research suggests that intertemporal choices from a manager’s perspective are not always optimal intertemporal choices for a firm (Antia, Pantzalis, & Park, 2010). Performance measurement and reward systems are possible instruments to navigate behaviour of employees and align their decisions with the general strategy and the organization’s strategic direction. The concept of performance measurement consists of two different uses (systems): diagnostic and interactive uses. Henri (2006, p. 533) defines diagnostic use as a set of formalized procedures that use information to maintain or alter patterns in organizational activity. Interactive use of performance systems is characterized by a more developmental role and stimulate opportunity seeking and learning throughout the organization (Henri,2006).
This study contributes to the literature regarding absorptive capacity by analysing the impact of managerial short-termism on each of the components of absorptive capacity, according to Todorova and Durisin (2007). Since the reconceptualization of Zahra and George (2002), little further research on the antecedents of the main components of absorptive capacity has been conducted. This research aims to contribute to the present research regarding managerial antecedents of absorptive capacity. Adding to the present research, this research examines managerial short-termism as a part of the dominant logic of a manager and provide new insights regarding the effect of dominant logic on absorptive capacity. Moreover, this research enhances the understanding of a manager on how to adapt, enhance or exploit their capabilities as a manager to make full use of external knowledge to stay competitive in their industry. Additionally, a moderator analysis, based on the impact of performance measurement systems, will examine the relationship between managerial short-termism and ACAP more intensively. This study aims at offering managers a different perspective on ACAP and provide managers with relevant information regarding their performance measurement systems to mitigate short-termism.
This study will further examine the concept of absorptive capacity and, in particular, the impact of managerial short-termism. First, a theoretic overview will be provided and the relevancy of each of the developments will be discussed. Second, based on the literature overview, the conceptual model is explained and the corresponding hypotheses are composed. Fourth, the method to conduct this study will be thoroughly discussed. Finally, the results and conclusion of this study will be discussed.
2. Literature review
In this section, a theoretic overview will be provided as regards to absorptive capacity (ACAP), managerial short-termism and performance measurement systems. The theoretic overview within this section is two-sided. First, the most important developments throughout the years regarding each of these variables will be discussed. Second, this overview will focus on the relevancy of each of these developments and will further emphasize the need for additional research.
Absorptive capacity
Although Kedia and Bhagat (1988) in their study on international technology transfer first mentioned absorptive capacity (ACAP), the study of Cohen and Levinthal (1990) is seen as the theoretical fundament of ACAP. In their study they provide a new perspective on learning and innovation in which they define ACAP by introducing the three components of ACAP. According to Cohen and Levinthal (1990, p .128), ACAP constitutes of, first, recognizing the value of new information, second, assimilate this new information and, third, apply it to commercial ends. In their study, Both authors emphasize that ACAP is a learning capability and path dependent and therefore, is a function of prior (related) knowledge, which consequently, depends on the ACAP of the organization’s individual members.
Both authors suggest that an organization’s ACAP strongly depends on prior related knowledge. However, the ability of an organization to recognize the value of new information, and consequently the ability to assimilate and exploit this information, is not solely a function of prior external experience/knowledge (Pennings & Harianto, 1997). There is an important role for organization mechanisms in determining the organization’s ACAP such as routines, systems and processes (Jansen et al., 2005). Organizations should develop combinative capabilities, which enable them to synthesize and acquire knowledge resources and generate new applications from those resources (Kogut & Zander, 1992). This is in line with the dynamic capability view of ACAP. Dynamic capability is defined as ‘the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environment.’ (Teece, Pisano, & Shuen, 1997).
In addition to the theory of Cohen and Levinthal (1990) in which ACAP is a function of prior knowledge, Zahra and George (2002) introduce another viewpoint on this theory by considering absorptive capacity as a dynamic capability. This “capability view of ACAP” states that prior knowledge creates an ACAP capability in a firm, which enables an organization to learn, deploy new capabilities and further enhance resources of prior knowledge (Zahra & George, 2002). Supporting this dynamic capability perspective of ACAP, Zahra and George (2002) introduce a distinction among four capabilities of ACAP: acquisition, assimilation, transformation and exploitation. These four capabilities are assigned to two main dimensions: acquisition and assimilation are part of potential ACAP and transformation and exploitation are part of realized ACAP. The relevancy of this distinction as regards to managerial influence and short-termism, is that firms focusing on potential ACAP are able to develop a continuous flow of new, ready to use information which subsequently can be used by these firms. The firms which emphasize the realized APAC dimension achieve short-term results by exploiting all available knowledge, but risk to fall in a competence trap, in particular a familiarity trap (Ahuja & Lampert, 2001). This familiarity trap results from an (over)emphasis on exploiting and improving existing knowledge, preventing a firm to explore new knowledge sources.
Although Zahra and George (2002) provided some useful new insides regarding ACAP, Todorova and Durisin (2007) (see Figure 1) argue that their study misses a number of important issues, which were initially raised by Cohen and Levinthal (1990). First, they reintroduce the component recognizing the value as the original first component. Second, they argue that knowledge transformation is an alternative process, instead of the next step after assimilation. This second adjustment to the reconceptualization of Zahra and George (2002) result in the nullification of the distinction between potential ACAP and realized ACAP. Third, Todorova and Durisin (2007) claim that the introduced contingency factor of social integration must influence all components of absorptive capacity and can be seen as both a positive and a negative influencer. Finally, they emphasize the dynamic aspect of ACAP by adding feedback links, since these feedback links are indispensable in organizational change and evolution.
Dynamic capability
Despite the multiple flaws of the early reconceptualization, discussed by Todorova and Durisin (2007), ACAP is still considered as a capability, more specifically a firm’s dynamic capability. A dynamic capability is the ability of an organization to respond to strategic change (Teece et al., 1997; Augier & Teece, 2009). It gives the organization the ability to refine, extend and leverage existing competencies or to create new ones by incorporating acquired and transferred knowledge into its operations, enabling the organization to respond better to strategic change (Zahra & George 2002, p. 190).
Lane, Koka, and Pathak. (2006) studied the link between ACAP and organizational learning. ACAP was considered as a dynamic capability, in line with the reconceptualization of Zahra and George (2002) and the modification by Todorova and Durisin (2007), and organizational learning was linked with the three component which were introduced by Cohen and Levinthal (1990) (i.e. recognizing value of new information, assimilation, application to commercial ends). Lane et al. (2006, p.856) define absorptive capacity as a firm’s ability to utilize externally held knowledge through three sequential processes: first, recognizing and understanding potentially valuable new knowledge outside the firm through exploratory learning, second, assimilating valuable new knowledge through transformative learning and finally, using the assimilated knowledge to create new knowledge and commercial outputs through exploitive learning.
In their study, Lane et al. (2006) introduced internal drivers as an influencer of a firm’s ACAP, such as characteristics of a firm’s structures and processes, the strategic direction and firm’s members’ mental models. Individual members’ cognition could provide new insight regarding what knowledge is recognized, how it is transformed and assimilated, and finally, how and to what extent it is applied.
Cognition
Considering the introduction of ‘mental models’ as an influencer of a firm’s ACAP through individual cognition by Lane et al. (2006), one could potentially argue that managers have a certain impact on the strategic direction regarding ACAP. Managers can be seen as “cognizers” (Calori, Johnson, & Sarnin,1994) who reduce complexity they face by developing mental maps that result in dominant management logic (Prahalad & Bettis, 1986; Bettis & Prahalad, 1995).
Dijksterhuis. Van den Bosch, and Volberda (1999) argued that management logic could potentially influence managerial schemas through contextual variation at national, industry and, more importantly, firm level. Additionally, these management logic may influence new organization forms, and therewith the ability of a firm to manage external information and knowledge. For instance, firms applying a classical management logic (Dijksterhuis et al., 1999, p. 572; Volberda, 1998) are likely to favour a functional form and systems capabilities. Due to this functional form and systems, these firms limit their absorptive capacity (Van den Bosch et al. 1999, p.560)
The study of Van den Bosch and Van Wijk (2001) initially recognized the relevance of managers regarding knowledge-related processes. Sanchez (2001) linked management cognition with dominant logic. Sanchez (2001) argued that managers tend to continuously develop their dominant logic by developing theories about their environment and embed this in their dominant logic. Minbaeva, Pedersen and Björkman (2003) underscored the importance of motivation of an individual and their abilities (i.e. education) as a driven factor of their absorptive capacity. Lenox and King (2004) further emphasize the relevance of managerial actions. In their article, they state that the role of managers is underestimated. Additionally, Lenox and King (2004) argue that managers have a direct impact on the firm’s ACAP through providing information to potential adopters in the organization.
Managerial short-termism
There is a constant battle in each company between securing long-term value (Porter, 1992) and achieving short-term results to survive (Merchant, 1990; Simons, 1999; Van der Stede, 2000). The battle between these two ends on the continuum creates an intertemporal trade-off, which is suboptimal (Hayes & Abernathy, 1980; Laverty, 1996). This suboptimal trade-off is a result of two possible outcomes of dealing with long-term versus short-term results. The first possibility is that managers extrapolate short-term actions into (optimal) long-term consequences. In this case, managerial myopia is not problematic. The second possibility is that short-term results are achieved at the expense of the long-term, which have detrimental consequences for the company (Marginson & McAulay, 2008).
There are two main concepts as regards to managerial short-termism: short-term orientation and myopia. Short-term orientation is defined as the preference for actions in the near term that have detrimental consequences for the long term (Laverty, 1996). Myopia is the difficulty of assessing the long-term consequences, irrespective of whether this is suboptimal (Marginson & McAulay, 2008). Alternatively, Samuel (2000) define myopia and short-termism in terms of disposition. Samuel (2000, p.494) argues that shareholder myopia is the tendency of shareholders to focus on the behaviour of stock prices in the short-term as opposed to the long-term. Likewise, managerial myopia is defined as the managerial behaviour focused on short-term earning in favour of long-term growth. Miller (2002) emphasized the cognitive side of managerial short-termism. In line with, Levinthal and March (1993), Miller (2002) divides myopia into two forms: temporal myopia (i.e. focus on the short-term) and spatial myopia (i.e. lack of awareness of other technologies available within or outside the organization.
Moderator Performance measurement
Nevins, Bearden and Money (2006) argued that focusing solely on earnings measures can lead to manipulative earnings management to the detriment of the long-term value creation in an organization. In line with the tension between intertemporal choices, prior research suggests that intertemporal choices from a manager’s perspective are not always optimal intertemporal choices for a firm (Antia, Pantzalis, & Park, 2010).
Performance measurement and reward systems are a possible instrument to navigate behaviour of employees and align their decisions with the general strategy and organization’s direction. If the performance of a certain manager is measured based on creating future value instead of maximizing revenue in the short-term, decisions made by employees which are beneficial for long-term benefits will also be beneficial for the manager and therefore more promoted. Additionally, intertemporal choice will also be influenced by the amount and frequency of rewards (Frederick, Loewenstein, & O'Donoghue, 2002) and the sequence of measurement and timing of rewards (Thaler, 1981).
Performance measurement based on earnings is a frequently used executive compensation system (Rappaport, 2005). However, rewards systems based on earnings could be considered as an short-term oriented measurement system (Lambert, 2001). The study of Hoskisson, Hitt, and Hill (1993) conclude that incentive systems based on annual performance are negatively related to R&D intensity. In addition to this study of Hoskisson et al. (1993), Rappaport (2005) argues that short-term oriented reward systems are solely based on existing contracts and neglect future contracts or earnings, which largely represent the future value. These results suggest that short-term oriented reward systems are detrimental for the long-term.
As regards to long-term oriented performance measurement, Chakhovich, Ikäheimo and Seppala (2010) examined which reward systems are considered as long-term oriented. Their study suggested that managers considered stock prices, sales and earnings per share as long-term based reward systems. Chakhovich et al. (2010) argued that solely stock prices and return measures were able to successfully stimulate both short-term and long-term behaviour. However, performance measurement based on stock prices has a couple of limitations. First, stock prices are influenced by various factors; most of these factors are not manageable, such as market trends. Second, stock prices do not represent the real intrinsic value, since managers could withhold important information from the external market (Merchant & Sandino, 2009). Finally, the study of Souder and Bromiley (2012) has shown that a stock-based performance measurement system is negatively related to asset durability, indicating that it has a negative effect on managerial long-term orientation.
Since there is no clarity in prior research as regards to short-term versus long-term performance measurement systems, this study will concentrate on the impact of two different types of performance measurement: diagnostic use and interactive use. Simons (1994) emphasize two different performance measurement types of uses (systems): diagnostic and interactive uses.
Diagnostic use
Henri (2006, p.533) defines diagnostic use as a set of formalized procedures that use information to maintain or alter patterns in organizational activity. Diagnostic systems are information systems that reduce uncertainty, and consequently aid strategy implementation (Bisbe & Otley, 2004). Widener (2007) argues that diagnostic uses stimulate the alignment between behaviour of employees and organizational goals. Koufteros, Verghese and Lucianetti (2014) focus on three diagnostic uses that enhance resource orchestration, namely: monitoring, focusing attention and legitimization. Monitoring enables managers to track performance and discover flaws (Henri 2006) and to compare with competitors (Widener, 2007). Focusing attention generates information which is pertinent in directing organizational members on issues of strategic significance (Koufteros et al. (2014). In line with Simons et al. (2000), Widener (2007) states that by focusing attention, an organization is able to set boundaries regarding employee behaviour. Legitimization is characterized by justification of decisions and actions (Henri, 2006).
Interactive use
Interactive use of performance systems is characterized by a more developmental role and stimulate opportunity seeking and learning throughout the organization ( Henri, 2006). Interactive use of performance measurement system stimulates dialogue in an organization, which results in a stimulation of idea development and initiatives (Henri, 2006; Widener 2007). Additionally, Henri (2006) states that interactive use supplies an organization two attributes. It expands the capability of an organization to process information and fosters communication within an organization.
3. Conceptual model
As mentioned in the introduction, the conceptual model (see Figure 2) will be discussed within this section. This conceptual model consists of two variables. First, the independent variable managerial short-termism; second, the dependent variable absorptive capacity, which is divided into five dimensions. Each of these dimension will be intensively examined in regard to the independent variable, managerial short-termism. Finally, a moderator analysis will be conducted, in which the impact of performance measurement systems on the relationship between managerial short-termism and AC will be examined. This section provides the hypotheses regarding the multiple relations that form the base of this study.
Recognizing the value was initially introduced by Cohen and Levinthal (1990) as the first component of ACAP. Since the reconceptualization of Todorova and Durisin (2007) forms the base of this study regarding the construct of ACAP, recognizing the value is composed as the first dimension of ACAP. Recognizing the value of ACAP emphasizes the ability of a firm to analyse the potential of new knowledge for the organization. Short-term oriented managers characterize themselves by a strong focus on the current situation. Furthermore, short-term oriented managers tend to prefer immediate results rather than higher future value. As regards to the dimension of recognizing the value of new knowledge, one might argue that short-term oriented managers neglect the potential value of new knowledge. Short-term oriented managers are concentrated on targets in the near future. In their need to meet those targets, short-term oriented managers tend to ignore the future needs of customers, and thereby underestimate the value of their recognizing ability. Since short-term oriented managers tend to focus on the current situation, the emphasis on the potential of new knowledge is mostly neglected. Thus, managerial short-termism limit the ability to recognize the value of new knowledge.
Hypothesis 1a. Managerial short-termism will be negatively related to recognizing the value of new knowledge.
Acquisition refers to an organization’s capability to identify and acquire externally generated knowledge that is critical to its operations (Zahra & George, 2002 p.189). Zahra and George (2002) name three attributes as potential influencers of an organization’s ACAP: intensity, speed and direction. In their reconceptualization, Zahra and George (2002) made a distinction between potential and realized ACAP, in which acquisition was part of potential ACAP. As discussed in the literature review, short-term oriented managers risk falling in a competence trap, more specifically a familiarity trap. This competence trap suggests that a manager is solely focused on exploiting and improving their existing knowledge at the expense of exploring new knowledge (Ahuja and Lampert, 2001). It is based on a cognitive limitation as a result of managerial short-termism, which suggests that the focus on short-term earnings results in neglecting the potential value of new information . Thus, managerial short-termism hampers the acquisition of new externally generated knowledge.
Hypothesis 1b. Managerial short-termism is negatively related to the acquisition of new externally generated knowledge.
Assimilation dimension refers to the firm’s routines and processes that allow it to analyse, process, interpret, and understand the information obtained from external sources (Kim, 1997a; Kim, 1997b; Szulanski, 1996; Zahra & George, 2002). The dimension of assimilation emphasizes the availability of existing cognitive structures. In this case, the new information is within the existing search zone. The organization is able to deal with this information, because the new information is closely related to the organization’s context and to its prior knowledge (Todorova & Durisin, 2007). Although the assimilation dimension is driven by the extent to which an organization is externally oriented, assimilation stresses the importance of the existing search zone. One could argue that each organization has an existing search zone to some extent. In the case of a short-term oriented organization, this search zone will be minimal, but still present. Therefore, short-term oriented organizations contain the ability to assimilate new information. Furthermore, the dimension of assimilation emphasizes the presence of existing cognitive structures to deal with external information. Since the external knowledge derives from the existing search zone of an organization, these organizations already contain the cognitive structures to incorporate this knowledge into their processes. All in all, managerial short-termism enhances assimilation of new information.
Hypothesis 1c. Managerial short-termism is positively related to assimilation of new knowledge.
In contrast of the dimension assimilation, transformation refers to information and knowledge, which are initially perceived as incompatible with the current cognitive frames of an organization (Zahra & George, 2002). In this case, new knowledge cannot be assimilated, and therefore an organization needs to transform their cognitive structures to deal with this new knowledge. Todorova and Durisin (2007) consider transformation as an alternative process to assimilation, following acquisition. In managing an organization there is a constant battle between exploring new information and exploiting existing knowledge. Short-term oriented managers tend to be more exploitive in comparison with long-term oriented managers. Beside the more exploitive strategic view, transformation demands time and effort of the organization, which distracts from the main purpose of the organization, according to a short-term oriented manager. Besides distraction from the main purpose of the organization, exploration of the market, and accordingly the allocation of resources, will negatively impact the profitability of an organization as these resources will only pay off in the long-term rather than the short-term. The purpose of short-term oriented organizations is exploiting their existing knowledge and gaining revenue as quickly as possible to secure profits. Thus, managerial short-termism hampers the level of transformation in an organization.
Hypothesis 1d. Managerial short-termism is negatively related to transformation of information and knowledge.
Exploitation is an organizational capability based on routines that allow an organization to refine, extend, and leverage existing competencies or to create new competencies by incorporating acquired and transformed knowledge into its operations (Zahra & George, 2002, p. 190). Short-term oriented managers are focused on gaining revenue and maximizing profits in the near future. To achieve this, the emphasis of their strategy is on exploiting existing knowledge within the organization. By exploiting existing knowledge, the organization is able to gain maximum revenue with minimum investments. In addition to gaining maximum revenue on the one side, managers should also focus on limiting their costs on the other side to maximize their profits. Thus, managerial short-termism stimulates exploitation of available knowledge and information.
Hypothesis 1e. Managerial short-termism is positively related to exploitation.
Moderator – Performance measurement systems
Simons (1994) emphasize two different performance measurement types of uses (systems): diagnostic and interactive uses. Henri (2006, p.533) defines diagnostic use as a set of formalized procedures that use information to maintain or alter patterns in organizational activity. Diagnostic systems are information systems that reduce uncertainty, and consequently aid strategy implementation (Bisbe & Otley, 2004). Interactive use of performance systems is characterized by a more developmental role and stimulate opportunity seeking and learning throughout the organization ( Henri, 2006).
As regards to diagnostic uses, Widener (2007) argues that diagnostic uses not only motivate employees to perform, but moreover, to align their behaviour with organizational goals. In the case of a short-term oriented manager, these organizational goals tend to be based on short-term earnings. Although these goals neglect the potential of external knowledge and information, diagnostic uses will still stimulate behaviour in line with these goals. Henri (2006) states that diagnostic uses can assume a variety of orientations, such as internal or external, short-term or long-term (Franco-Santos, Lucianetti, & Bourne, 2012). This would suggest that diagnostic uses enhances the impact of short-termism, and therefore diagnostic uses are positively moderates the relationship between short-termism and absorptive capacity.
Bisbe and Otley (2004) argue that interactive control systems are measurement systems that enhances the focus on constantly changing information. Moreover, they state that interactive systems emphasize strategic uncertainty and signal the need to focus on these uncertainties. The focus on environmental changes tend to enhance the relevancy of new knowledge and an organization’s ACAP. Thus, interactive system enhances the relation between managerial short-termism and absorptive capacity.
Hypothesis 2a. Diagnostic use positively moderates the relationship between managerial short-termism and recognizing the value of new knowledge
Hypothesis 2b. Interactive use positively moderates the relationship between managerial short-termism and absorptive capacity
Taking all hypotheses in consideration, the conceptual framework, as showed in figure 2, is conducted:
Absorptive Capacity
Figure 2: Conceptual model
4. Methods
In order to examine the relation between ACAP, managerial short-termism and performance management systems, a quantitative study will be conducted. This quantitative study is based on a survey, collecting data innovative oriented start-ups and small- and medium-sized enterprises, and cross-sectional analyses. The section below provides a short description of the population, the procedure to collect data, the operationalization of the constructs and the corresponding measurements and, finally, introduces the data analysis plan.
Data collection
This study will be conducted at innovative oriented start-ups and small- and medium-sized enterprises (SMEs). There are multiple reasons why these organizations are interesting for this study. First, innovative firms are, to a certain extent, dependent on absorptive capacity regarding external information and knowledge. These organizations have to explore their potential market and customers and the concerning demands. Additionally, there is a need within these SMEs to stay up to date as regards to new innovations in the industry and potential improvements. Second, research has shown that the failure rate of start-ups is approximately 90% (Forbes, 2015). Start-ups face a turbulent period in which they have to survive in the short-term and maintain or add value in the long-term. Third, most of the start-ups has only one, possibly two, visionaries who determine the strategy. Due to this strict vision, start-ups could potentially be more susceptible for managerial short-termism. All in all, start-ups and SMEs are an excellent population to examine the impact of managerial short-termism on the multiple dimensions of absorptive capacity.
In contacting these organizations in order to collect data various ways were used. Initially, Novel-T, previously known as Kennispark Twente, was selected as data generator and, practically, all firms located here were visited personally. However, since the response-rate was lower than expected, I started orientating outside of Novel-T to explore new potential respondents. As a result, multiple overarching networks were selected which were focused on innovation, creativity and entrepreneurship. Consequently, the database was expanded with CeeCee (Enschede), High Tech Campus (Eindhoven), Rotterdam Innovation Campus and ECE Campus (Rotterdam). Nearly all organizations were visited at these various campuses. In the meanwhile, next to visiting the organizations personally, the organizations were also contacted by e-mail in order to generate response.
Sample size
The sample size is based on a study of Green (2001), suggesting that the sample size could be calculated by multiplying the number of variables by 8 and adding 50 (N ≥ 50 + 8M, where m is the number of variables). In the case of this study, this formula suggests a minimal sample size of 106, where M is 7. This sample size is based on the number of variables used for each regression analysis. In each regression, a dimension of ACAP forms the dependent variable and the predictors consist of managerial short-termism, four control variables (discussed later) and diagnostic- and interactive uses in the case of the moderator analysis.
Measurement
The measures used in this study are based on existing scales from the literature. This subsection discusses the various used variables, the sources of these variables and potential implications regarding this study.
Dependent variable – managerial short-termism
The measurement of managerial short-termism will be based on the developed scales of Marginson and McAulay (2008) (see Appendix 2), which are derived from interview data and pretesting. In their approach, they focus on intertemporal choice. Intertemporal choice is characterized as a decision in which the course of action that is best in the short term is not the same course of action that is best over the long run (Laverty, 1996 p.828). In their attempt to capture intertemporal trade-off, Marginson and McAulay developed two types of measures, a direct measure and an indirect measure. The direct measure consists of two items and is a direct attempt to measure intertemporal tradeoff. The indirect consists of five items. The indirect measure captures short-termism by means of its association with the need for predictable goal achievement, while “long-termism” represents the need for innovation and learning (Simons, 1995) (Marginson & McAulay, 2008 p.280). In line with the measurement of Margins and McAulay, questions 1 and 3 are reverse-scored.
Since managerial short-termism is an abstract construct and therefore hard to pinpoint, the scale in this study will be a 7-point Likert scale in contrast to the five-point scale used in the study of Marginson and McAulay (2008). This increases the ability for a respondent to select their corresponding opinion. Additionally, a 7-point Likert scale is similar to the used scales as regards to ACAP and therefore simplifies the analysis.
Independent variable – ACAP
In line with the reconceptualization of Todorova and Durisin (2007), recognition forms the first dimension of ACAP. This dimension will be measured using the scales of Ferreras-Méndez, Newell, Fernández-Mese, and Alegre (2015) (see Appendix 3), which are based on prior literature (Szulanski, 1996; Jansen et al., 2005; Arbussà & Coenders, 2007). Their three-item scale measures the firm’s ability to scan and search industry information from external sources. Jansen et al. (2005) developed a scale which measured the two dimensions of Zahra and George (2002), potential ACAP and realized ACAP (see Appendix 3). The items of Jansen et al. (2005) are derived from relevant literature and in-depth interviews with 15 managers at different branches (Jaworski & Kohli, 1993; Szulanski, 1996). Potential ACAP consists of acquisition and assimilation. Six items measures the intensity and direction of acquisition. Additionally, three items gauge the extent to which SMEs are able to analyse and understand new knowledge. Realized ACAP consists of transformation and exploitation. Six items will measure the extent to which SMEs are able to reconfigure acquired knowledge into their operations. In addition, six items measure the extent of exploitation of external knowledge. All items are measured using a 7-point Likert scale. In line with the scales used on prior literature, various items are reverse-coded.
Moderator – Performance measurement systems
Koufteros et al.(2014) developed a scale to measure the two different uses of performance system (see Appendix 4). Diagnostic use is calculated as a second-order construct and operationalized through three first-order construct: consisting of monitoring, focusing attention and legitimization. The three first-order constructs are derived from the measure of Henri (2006). Monitoring consists of four items, focusing attention includes seven items and, finally, legitimization is derived from a scale consisting of nine items. The operationalization of interactive use, conducted by Koufteros et al. (2014), is based on content of Widener (2007). The scale consists of five items.
Control variables
As regards to managerial short-termism, this study will control for demographic characteristics, such as age, gender and level of education. Research has shown that these variables might influence a manager’s beliefs, values, opinions and actions (Knight, Pearce & Smith, 1999), and consequently their time horizons. In addition to these demographic characteristics, this study will control for firm size (i.e. the number of full-time employees).
Data analysis
The data analysis will consist of multiple sub-analyses. First, the descriptive statistics will be analysed. Second, a scale reliability analysis will be conducted using a calculation of Cronbach’s alpha and a factor analysis. The calculation of Cronbach’s alpha will improve the validity of the used scales by eliminating disrupting items. The factor analysis may possibly result in the elimination of items within the various scales to prevent multicollinearity. As a result of these eliminations, the used scales provide a better reflection of the measured concepts. Third, a correlation analysis will be conducted to identify potential correlation between the examined variables. Although this analysis neglects causation, it will display relatedness of variables and provides a first implication as regards to the hypotheses. Fourth, to examine the proposed hypotheses, an OLS regression analysis will be conducted. Based on these results, the conclusion regarding the proposed hypotheses will be formed. As part of this analysis, the moderator analysis will be conducted, to examine the impact of performance measurement systems on the relationship between managerial short-termism and the various dimensions of ACAP, using an OLS regression.