Learning capability and businessperformance: a non-financial and

financial assessmentIsabel Ma Prieto

Universidad de Valladolid, Valladolid, Spain, and

Elena RevillaInstituto de Empresa, Madrid, Spain

Abstract

Purpose There has been little research that includes reliable deductions about the positiveinfluence of learning capability on business performance. For this reason, the main objective of thepresent study is to empirically explore the link between learning capability in organizations andbusiness performance evaluated in both financial and non-financial terms.

Design/methodology/approach Using data from 111 Spanish companies, research wasconducted through a structural equation modelling. In doing so, a measurement model wasconducted for the main constructs learning capability, financial performance and non-financialperformance- and examine the paths between them.

Findings The analysis shows the positive link existing between: learning capability andnon-financial performance; and non-financial performance and financial performance.

Originality/value This is a detailed empirical examination of learning capability as a source ofperformance in organizations. It should be of value to all those who think about the role of learningprocesses and knowledge in organizations, and who care about their effects on competitiveness.

Keywords Learning, Business performance, Knowledge management, Financial performance, Spain

Paper type Research paper

1. IntroductionResource based theories of strategy (RBV) argue that firms with valuable, rare, andinimitable resources have the potential of achieving superior performance (Barney,1991). Drawing on the concept of dynamic capabilities, Eisenhardt and Martin (2000)argue that, in addition to the resources themselves, the organizational processes of afirm are important because they facilitate the manipulation of resources intovalue-creating strategies. Knowledge-based resources are considered particularlyimportant for providing competitive advantage (Grant, 1996; Spender, 1996), andlearning processes are thus necessary to transform and refine a firms knowledgeresources in accordance with the environmental conditions. This link betweenknowledge and learning processes is often associated with the organizationalcapability to learn (Crossan et al., 1999; Sanchez, 2001).

The importance of both knowledge resources and learning processes to overallbusiness performance has long been acknowledged. The knowledge-based view of thefirm, which emerges as an extension of the resource-based view of the firm, argues thatheterogeneous knowledge bases among firms, and the ability to create and applyknowledge, are the main determinants of performance differences (Grant, 1996;Spender, 1996; Decarolis and Deeds, 1999). Past research into this topic has provided

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The Learning OrganizationVol. 13 No. 2, 2006pp. 166-185q Emerald Group Publishing Limited0969-6474DOI 10.1108/09696470610645494

some relevant insights. The link between organizational learning and businessperformance has been often discussed in literature (Cangelosi and Dill, 1965; Slater andNarver, 1995; Calantone et al., 2002; Ellinger et al., 2002), and there are also recentstudies that analyze how organizational knowledge affects business performance(Brokman and Morgan, 2003; Droge et al., 2003; Haas and Hansen, 2005). Theoreticaland empirical progress has also been made from the knowledge management literaturein identifying the direct link between knowledge management and businessperformance (Choi and Lee, 2003; Chuang, 2004).

However, the analysis of the effects of a learning capability on businessperformance is still one of the most exciting to make positive contributions to this field.On one hand, there is no general consensus on how to define and operationalize thelearning capability construct. Some researchers have put the concept on a level withknowledge management (Nevis et al., 1995; Goh, 2003) blurring learning capabilitywith its antecedents (practices, structures and procedures that facilitate and encouragefacilitating learning), whereas others have described it tautologically as the ability oforganizations to promote, continuously develop and sustain abilities to learn and createnew actionable knowledge (Ingelgard et al., 2002). Other studies have recognized themultidimensional nature of the construct (DiBella and Nevis, 1998; Jerez-Gomez et al.,2004), but it is still difficult to find reliable measures for this topic. These issueshighlight a need for greater clarity about the domain and operationalization of theconstruct. On the other hand, despite numerous discussions centre on why learningmatters and few concrete studies has tried to test the role of learning capability inbusiness performance (Bierley and Chakrabarty, 1996; Argote and Ingram, 2000;Ellinger et al., 2002), conclusions are still limited and unclear (Crossan et al., 1995;Castaneda, 2000; Vera and Crossan, 2003). With the exception of the study of Bontiset al. (2002), no attempt has been made to empirically test an organizational learningframework that includes the joint effect of learning processes and knowledge onbusiness performance. This is aggravated by the fact that business performance isusually considered as a single variable, without discriminating the non-financial andfinancial components of performance.

The present study is an attempt to reduce this gap by creating insight into the linkbetween learning capability of organizations and business performance. For thisexploration, a construct of learning capability is developed. Both the stocks ofknowledge existing in the firm and the flowing of that knowledge through learningprocesses are identified as components of learning capability. This way, learningcapability is proposed to be an important antecedent of business performance, which isevaluated using both non-financial performance and financial performance. In the nextsection, the conceptual framework is presented, and hypotheses are proposed. Methodsof study are then introduced, which includes information about the sample, measures,data analysis and results. Following a discussion of results, implications andlimitations are offered.

2. Theoretical framework2.1. Learning capability and its essential dimensionsThere are various ways of thinking about learning in organizations, each onecharacterized by a particular ontological view and by a range of contributions andproblems (Easterby-Smith, 1997). DiBella and Nevis (1998) identifies three main

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perspectives of theorizing in the organizational learning field: a normative perspective,for which organizational learning only takes place under a unique set of conditions; adevelopmental perspective, for which learning represents a late stage of organizationaldevelopment; and a capability perspective, which presumes that learning is innate toall organizations and there is no one best way for all organizations to learn. The focusof the capability perspective is not on some future vision of becoming a learningorganization, or in the characteristics to put in place to determine a learning capability.The focus is on learning that already exists, and thus in understanding what islearning and how we learn.

Although many authors on organizational learning have implicitly shown theimportance of learning capability, it is difficult to find an explicit definition of theconcept. There is agreement that learning capability is a multidimensional constructinvolving knowledge processing for change and improvement (Jerez Gomez et al.,2005). We believe that a description of the organizational capability to learn can bemade by means of two essential dimensions underlying beneath of the concept (Grant,1996; Decarolis and Deeds, 1999; Ingelgard and Roth, 2002): knowledge (what islearned) and its associated learning processes (how is learned). Knowledge is anestablished theoretical construct that has been proposed as heterogeneous resourcethat firms value in different manifestations (Amin and Cohendet, 2004) as a basis forcompetitive advantage. However, the problem of developing competitive advantages inorganizations is not only about the identification of knowledge as the basis forcompetitive advantage, but also about understanding how organizations can develop,retain, transfer and use that knowledge (Argote and Ingram, 2000), which is the role oflearning processes in organizations.

Several authors (Diericks and Cool, 1989; Crossan et al., 1999) have argued that allorganizations uphold a stock of knowledge, tacit or explicit, which needs to continuallyflow through learning processes to act in agreement with the environmentalrequirements. The stock of knowledge refers to all that is already known or needs to beknown, which includes knowledge as something that individuals, groups ororganizations have (knowledge as possession) and do (knowledge as practice). Henceknowledge stocks include knowledge (cognition) and knowing (action) (Cook andBrown, 1999) at the individual level, the group level, and the organizational level(Nonaka and Takeuchi, 1995; Crossan et al., 1999). Learning flows capture the enactingprocesses of interplay between knowledge and knowing so that new knowledge andnew ways of knowing emerge (Cook and Brown, 1999). Learning flows can thus beconsidered as knowledge streams that contribute to the accumulation of knowledge. Inessence, learning flows take knowledge stocks and result in new or modifiedknowledge intended to make sense of the world and for taking action accordingly(Sanchez, 2001). This may be considered to occur, nor just as an individual process, butas a social one enacted by the interaction of learners within specific contexts (Nicoliniand Meznar, 1995). Knowledge stocks are thus the content of learning flows (this is,what we learn or get to know) (Vera and Crossan, 2003), which are necessary to ensurethat sticky knowledge is transformed into fluid and actionable knowledge (Coakes et al.,2004) that is renewed and applied all over the organization. While learning flowsmodifies and creates knowledge stocks, existing knowledge stocks affect futurelearning flows (Vera and Crossan, 2003).

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The ongoing interaction between knowledge stocks and learning flows withinorganizations is represented in the concepts of exploration and exploitation (March,1991; Crossan et al., 1999). Exploration flows take place with the creation of newknowledge by individuals and the assimilation of that knowledge, which happenswhen individuals share knowledge within groups until being progressivelyinstitutionalized by in the organizations processes, systems and culture.Exploitation flows reflect how the firm harvests and incorporates existingknowledge into its activities by transferring organizational knowledge that has beenlearnt from the past down to the groups and organizational members. Exploration andexploitation flows are thus essential to understand how knowledge stocks areintegrated and translated into competence (March, 1991).

The aforementioned aspects enable us to conceptualize learning capability as thepotential to explore and exploit knowledge through learning flows that make possiblethe development, evolution and use of knowledge stocks that enact organizations andtheir members to add value to the business. Learning capability thus comprisesdynamically evolving knowledge stocks that continually flow both upward anddownward all of individuals, groups and the overall organization (Nonaka andTakeuchi, 1995; Crossan et al., 1999). Understanding learning capability by gatheringtogether both knowledge stocks and learning flows highlights three main aspects.First, the interdependence between knowledge stocks and learning flows implies theexistence of constant internal changes that lead to a continuous improvement thatallows the organizational activities to be maintained, improved or adapted according tothe environmental conditions (Jerez-Gomez et al., 2004). Second, the ongoing creation,acquisition, dissemination and integration of knowledge within the organizationbecomes a strategic capability that leads to continuous learning and furtherdevelopment of knowledge that is idiosyncratically complex and dynamic and, thus,unique (Barney, 1991; Grant, 1996; Spender, 1996). Aspects of knowledge stocks thatare valuable, rare and not easily imitable can be sources of competitive advantage, butonly if the organization is able to make the most of them through learning flows. Third,the effectiveness of learning capability should not be assessed on the basis of the bulkof knowledge stocks and learning flows, but on the basis of its utility in guidingbehaviours relative to the organizations relevant domain. It is not enough that learningflows generate new knowledge stocks, but the new knowledge needs to be relevant inthe strategic context of the organization (Crossan et al., 1999, Vera and Crossan, 2003).Therefore, an organizations superior performance depends on its ability to defend,capitalize and apply knowledge that it creates (Teece et al., 1997; Teece, 2000; Carmeliand Tishler, 2004) in combination with other resources and competences of the firm,and in agreement with its strategic direction.

2.2. Learning capability and business performanceThe development of a learning capability is not an end by itself. Learning flows andknowledge stocks are pursued by organizations as a necessary stage that explainsdifferences in performance. Past studies (Huber, 1991; Crossan et al., 1995) sustaindifferent views about the link between learning, knowledge, and businessperformance. However, it is possible to find arguments to defend the idea of thesignificance of learning capability to overall business performance. For example, thestudies of Cangelosi and Dill (1965), Stata (1989), Stewart (1997), and more recently

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Soo et al. (2004) mention that improved business performance is based on learningand different types of knowledge. Together, recent empirical efforts give support tothe impact of learning on business performance (Appleyard, 1996; Decarolis andDeeds, 1999; Argote and Ingram, 2000; Prieto, 2003; Gorelick and Tantawy-Monsou,2005). Learning capability has also been considered as a first-order capability that isessential to nurture other knowledge-based capabilities required to build andmaintain competitive advantages (Teece et al., 1997; Zollo and Winter, 2002).

The idea of the realistic existence of a positive link between learning capability andbusiness performance often relates the potential effects to the economic and financialsuccess and, in fact, some kind of indicators are used to evaluate this success. However,while financial indicators are critical to evaluating performance, business performanceis a complex concept, more extensive than the financial ratios usually applied. Businesspeople understand well that reported financial performance is influenced by manyfactors over time, such as accounting practices, the economic environment, newproduct and service releases, etc. Consequently, using financial performance measuresas only dependent variable for assessing the potential effects of learning capability istoo restrictive and may be imprecise. This idea has been previously supported byseveral authors (Zahra et al., 1999; Kennerley and Neely, 2000; Baldwin and Danielson,2002; Goh and Ryan, 2002), including contributions of the numerous efforts to measureintellectual capital in organizations. This field has produced several discussions aboutperformance measurement arguing that it is necessary to balance the traditionaleconomic valuation with the non-financial valuation of organizational performance.Kaplan and Norton (1992; 1996) provide in their famous Balanced Scorecard amulti-dimensional corporate measurement system including financials, customers,internal processes plus innovation and learning. The European Foundation for QualityManagement Excellence Model also supports that customers results, employeesatisfaction, and impact on society must be considered as essential performancecriteria (EFQM, 2001). Likewise, the Performance Prism by Neely and Adams (2001),explicitly adopts a stakeholder view of performance measurement that, together withthe traditional financial aspects of performance measurement, incorporates customerloyalty, company names and brand image, and other fundamental links asperformance indicators.

We suggest that the potential effects of learning capability on business performancecannot be determined exclusively by a financial assessment linked to a pyramid offinancial ratios. Effects also deal with the reaction of others (e.g. customers, employees,etc.) to the actions of the organization. This reaction will be better when theorganization has the potential to generate and apply knowledge that guide thefulfilment of others expectations along with the organizations purposes. Modernbusiness environment is characterized with increased importance and strength ofcustomers, employees and society in general. In fact, there is an only way to enlarge anorganizations financial performance, and it is through the identification andsatisfaction of market demands (Neely and Adams, 2001). To a great extent,organizations need to satisfy these demands by improving the perceptions about theorganizations products, services and practices. Organizations having a superiorlearning capability are able to coordinate and combine their traditional resources andcapabilities in new and distinctive ways, providing more value for their customers and,in general, stakeholders than can their competitors (Teece et al., 1997). This is possible

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by decreasing the time and cost associated with the creation, use and reconfiguration ofresources and capabilities (Zott, 2003). This should lead to advantages such asemployee satisfaction (which is considered to be a source of customer satisfaction),superior customer retention, improved organizational reputation, or new productsuccesses. Learning capability thus enables the ability to identify and respond tomarkets cues better, faster, and even cheaper than competitors. In other words,learning capability positively influences what we can designate a non-financialperformance of the organization.

H1. Learning capability improves the organizational non-financial performance.

As mentioned before, the organizations capability to learn is also considered toenhance the organizational financial performance. This claim for the direct positiverelation between learning capability and financial performance has been supported byseveral empirical studies, such as Bierley and Chakrabarti (1996), Baker and Sinkula(1999), Calantone et al. (2002), Ellinger et al. (2002) and Tippins and Sohi (2003). Fromour point of view, learning capability underpins the decisions and competences neededto efficiently develop the companys processes, products and value of service. This maylead to higher reduction of production cost, improve yield or reduce materialconsumption, increases in productivity and higher level of sales growth over time.Thus, it all will be an economic advantage to the firm. Therefore, if firms that are ableto continuously learn stand a better chance to sense and seize market opportunities,this should result in a higher economic value.

H2. Learning capability improves the organizational financial performance.

2.3. Non-financial performance and financial performanceAs aforementioned, even when firms financial performance is influenced by numerousfactors (economic conditions, changing government regulations which may favour onecompany over another, technological developments, changes in the cost of producingand delivering products or services due to macro-economic shifts, etc), the existence ofa significant direct relationship between a companys overall stakeholders satisfactionand the financial performance seems quite reasonable. Generally, non-financialperformance has no intrinsic value for companies directors. Rather, this non-financialperformance can be used as a leading indicator of financial performance and, specially,future financial performance that is not contained in contemporary accountingmeasures. In marketing, a fruitful stream of research has identified a strong positivelink between customer satisfaction, market share and profitability (Capon et al., 1990;Anderson et al., 1994; Anderson and Fornell, 2000). Customers satisfaction may meanmore customers will purchase and repurchase in the future. Satisfied customers arelikely to buy more frequent and in a greater volume and acquire other products andservices offered by the company. In addition, consistently providing products andservices that satisfy customers should increase the financial performance by reducingfailure cost. The larger the amount of customers leads to greater organizationalprofitability. Similarly, strong employee satisfaction should be reflected in thecompanys economic returns because it involves a better efficiency and productivity(Harter et al., 2002; Koy, 2001). Moreover, the cost of attracting new customers oremployees should be lower for organizations that achieve a high level of reputation.A high reputation can also help the introduction of new products and services by

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reducing the buyers risk of trial (Anderson et al., 1994). Reputation also can bebeneficial in establishing and maintaining relationships with key suppliers,distributors and potential allies (Anderson et al., 1994). In accordance, our lastpurpose is to examine if the non-financial performance can be considered a precedent ofthe long-term financial returns.

H3. Organizational non-financial performance positively affects organizationalfinancial performance.

To summarize our discussion, learning capability involves two major elements:knowledge stocks and learning flows. Both knowledge stocks and learning flows areintertwined in an iterative, dynamic, mutually reinforced sequence where knowledge isthe input and the output of numerous learning flows that create and leverageknowledge stocks. We propose that firms that proactively address both elements willhave an improved non-financial and financial performance. Figure 1 details howlearning capability affects business performance.

3. Empirical research3.1. Data collection and sample characteristicsA survey methodology was used for the empirical analysis. A thorough literaturereview guided the design of the questionnaire. A pre-test carried out throughseveral personal interviews with senior managers also helped to validate thequestionnaire. These interviews allowed us to clarify our survey items and rectifyany potential deficiency. Minor adjustments were necessary on the basis of specificsuggestions.

The questionnaire was mailed to a sample of 1,064 Spanish companies selected onthe basis of the Dun & Bradstreet database (50,000 main Spanish companies, 2000).Our sample consists of companies reporting between 50 and 2,500 employees.Sampled firms fit into activities from industry and service- facing dynamic andcompetitive environments, covering a wide enough range so as not to restrain thescope of analysis. Sample selection was guided by two factors. First, we have tried totarget companies where issues of knowledge and learning are generally recognizedas relevant and general. Second, we use a diverse sample to increase the generality ofresults. CEO of the company or a reasonable substitute such as the Human ResourceManager (mainly for large companies) were likely to be key respondents based ontwo criteria (Andreu Bench and Sole Parellada, 2001; Gardiner and Leat, 2001; Bontis

Figure 1.A model linking learningcapability and businessperformance

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et al., 2002): possession of sufficient knowledge; and adequate level of involvementwith regard of the issues under investigation. To asses the degree to which commonmethod bias might present a problem, all scale items for similar constructs aresubjected to a factorial analysis with a varimax rotation (Seibert et al., 2001; Tippinsand Sohi, 2003). Results indicate that the items loaded cleanly on the factors thatrepresent the expected constructs. Hence, no general factor emerged due to commonmethod variance.

Table I shows respondent characteristics in terms of industry type and total numberof employees. The mailing of the survey yielded 111 returns, representing an 11 percent response rate. Most of the final respondents belonged to services activity (83 percent). Conversely, firm size was quite well distributed, with the exception of companiesranging between 100 and 250 employees, which represent a major group, andcompanies with less than 50 employees, which represent a marginal group.

3.2. Measures descriptionThe measurement of the analysis variables has been built on a multiple-items method,which enhances confidence about the accuracy and consistency of the assessment.Each item was based on a five point Likert scale and all them are perceptual variables.Table II displays items used to measure the variables.

Learning capability. Learning capability has been measured as a multidimensionalconstruct in which learning flows and knowledge stocks are considered asrepresentative dimensions. Both learning flows and knowledge stocks are treated asfirst-order indicators of the second-order construct, learning capability.

Knowledge stocks in organizations exist at several levels (Nonaka and Takeuchi,1995; Crossan et al., 1999): the individual, the group and the organizational levels.Obviously, organizations learn through their individual members, which developknowledge through their personal experiences. Some individual knowledge may be

No. of responses% response

(over the final sample)

Industry typeManufacturing (chemistry, petroleum and others) 15 13.39Mining 4 3.57Total industry activity 19 16.96Transport, communications and public services 5 4.46Services 59 52.67Financing and insurance 28 25Total service activity 92 83.21Total 111 100

Number of employees, 50 8 7.250 a # 100 15 13.51100 a # 250 45 40.54250 a 500 16 14.41500 a # 1,000 14 12.61$ 1,000 13 11.71Total 111 100

Table I.Respondent

characteristics

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applied directly to perform the assigned task, but much of it is shared with otherindividuals in a group before becoming a basis for action. This way, individuals insidegroups develop knowledge in common in order to perform tasks in a coordinatedfashion. Similarly, groups in an organization interact and communicate theirknowledge to other groups, and acquire from them knowledge required to put theirown knowledge into action. As a result, knowledge becomes integrated in theorganization, and embedded in its systems, routines and values (Nonaka and Takeuchi,1995; Sanchez, 2001). Accordingly, we have initially measured knowledge stocksthrough 15 items, most of them adopted from relevant literature, especially Bontis et al.(2002): five items pertaining to the individual stocks, five items for group stocks andfive items for the organizational stocks of knowledge.

Learning flows in organizations are aimed at both the exploration and theexploitation of knowledge (Crossan et al., 1999). Exploration flows occur whenindividual members generate new knowledge, and the groups and the organizationprogressively integrate it. Exploitation flows encompass processes that take andtransmit embedded organizational knowledge that has been learnt from the pastdown to groups and individual members. Accordingly, learning flows are initiallymeasured by using ten items, five of them pertaining to exploration flows and fiveitems to exploitation flows. Again, these items are mainly based on Bontis et al.(2002).

Business performance. Business performance is measured by using two differentvariables: non-financial performance and financial performance. As the globalimpact of the learning capability cannot be assessed by an only and upper measure,identifying optimal measures for both variables of performance is inherentlyproblematic. So, we create two uni-dimensional constructs with multiple-indicatormeasures by selecting items from previous research. To obtain a comprehensiveview of non-financial performance, we have initially measured it by addressing fivedifferent perceptual measures: customers satisfaction (EFQM, 2001; Ellinger et al.,2002), customers growth (Kaplan and Norton, 1996; Saint Onge, 2002), employeesatisfaction (Johansson et al., 1998; EFQM, 2001, Goh and Ryan, 2002), quality inproducts and services, and the organizational reputation (EFQM, 2001; Bontis et al.,2002). Equally, financial performance is described through five perceptualmeasures: return on assets (Bierley and Chakrabarti, 1996; Calantone et al., 2002;Ellinger et al., 2002; Goh and Ryan, 2002), sales growth (Johansson et al., 1998;Tippins and Sohi, 2003), profitability (Johansson et al., 1998; Calantone et al., 2002;Tippins and Sohi, 2003), average productivity (Vekstein, 1998; Ellinger et al., 2002)and cost reduction (Ellinger et al., 2002). The use of perceptual measures ofperformance has been found to be consistent with objective measures (Dess andRobinson, 1984) and overcomes the strong reluctance of managers to provideobjective outcomes of performance.

4. Analysis and results4.1. Psychosometric proprieties of measurement scalesFigure 1 illustrates the proposed latent variable model, showing all structural paths.Before testing this model, a series of test was performed to assess theunidimensionality of the measures. Because multiple-item construct measuresvariables, and to verify that items tapped into their stipulated construct, a

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confirmatory factorial analysis (CFA) was employed to determine the validity of theconstructs.

Table III summarizes the number of items and the results of the reliability andvalidity test for the analysis variables. The internal consistency measures (Cronbachsalpha) were obtained in order to assess the reliability of the measurement instruments.The complexity of the model led us to conduct three separate confirmatory factoranalysis by using LISREL 8: two corresponding to each of the broad dimensions oflearning capability (the sets of constructs for both knowledge stocks and learningflows), and a third one for business performance. The paths were examined usingt-statistics (for expected factor loadings), whereas paths that were not specified wereevaluated using standardized residuals and modification indices. Based on thesestatistics and theoretical considerations, we deleted items if appropriate (Anderson andGerbing, 1988). Convergent validity was established by confirming that all items of thescale loaded significantly on their hypothesized constructs factors (Anderson andGerbing, 1988). Discriminant validity was assessed by comparing the x2 differencesbetween a constrained CFA (where the interfactor correlation was set to 1, indicatingthey are the same construct) and an unconstrained model (where the interfactorcorrelation was free). All x2 differences were found to be significant, providing supportfor discriminant validity (Anderson and Gerbing, 1988). Overall, the fit of the modelswas good, with GFI, AGFI, RMR and CFI all within recommended values (Bentler,1990; Joreskog and Sorbom, 1993a, 1993b).

In the framework, learning capability is a higher order construct composed ofknowledge stocks and learning flows. A second-order CFA confirmed themultidimensionality of learning capability as a higher-order construct. Table III showshow the loadings of the measurement items on the first-order factors, and the loadings ofthe measurement items of the first-order factors (knowledge stocks and learning flows)on the second-order factor (learning capability) were all significant at (p # 0.005).Further, the goodness of fit indices is also excellent. The estimation of the second-orderCFA implied the extraction of the indicators of knowledge stocks construct (individuals,group and organizational stocks) and learning flows construct (exploration andexploitation) through principal component analysis (using SPSS 10.0 for Windows).

4.2. Results of path analysisA structural equation model (conducted by LISREL 8) was used to determine thesignificant paths between learning capability, non-financial performance, and financialperformance. This analysis builds from the preceding confirmatory analysis. Then,fixed lambda values (lij) and measurement error variances are specified a priori in baseto the previous measurement models estimations. Table IV includes results, whichestimates path coefficients and their associated t-values (in parenthesis), as well as thegoodness of fit indices.

The coefficient for the path from learning capability to non-financial performance ispositive and significant at 0.05 level (p(0.05). Thus, this positive relationship suggeststhat H1 is supported. However, the path coefficient from learning capability tofinancial performance is 20.236 and non-significant (p(0.05), so H2 is not supported.Finally, the path from non-financial performance to financial performance is 0.681 andsignificant (p(0.05), therefore H3 is supported. Non-financial performance significantly

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Table III.Results of reliability andvalidity for the measures

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affects financial performance. Again, the GFI, AGFI, RMR and CFI indices are allwithin recommended values.

Hence, our results suggest the existence of a link between learning capability andbusiness performance. This link is derived from the organizational potential to satisfystakeholders expectations when crystallized in products, processes and services. Andif stakeholders satisfy their expectations about the organization, it will lead to theorganizational financial enhancement. Learning capability is thus directly linked tonon-financial performance and indirectly linked to financial performance.Non-financial performance is an intermediate outcome than must then be introducedto understand the effect of learning capability on business performance.

5. DiscussionThis research has examined the link between learning capability and businessperformance. Our empirical analysis has the following contributions. First, it hasestablished a measurement model for learning capability in terms of learning flows(exploration and exploitation) and knowledge stocks (individual, group andorganizational stocks). Second, the empirical analysis of the statisticallysignificant and positive link existing between learning capability and businessperformance, valuated in non-financial and financial terms. In particular, it is showna causality path where learning capability affects non-financial performance, andnon-financial performance affects financial performance. Hence, non-financialperformance exerts an important mediation effect between learning capability andfinancial performance. Based on the findings, a number of guidelines can be offeredboth scholars and practitioners regarding the role of learning capability in businessperformance.

First of all, the findings confirm learning capability as a higher-order construct thatinvolves both knowledge stocks and learning flows. Knowledge stocks include all thatis already known or needs to be known -knowledge and knowing-, and learning flowsare more concerned with the relationship between knowledge and knowing at theindividual, group and organizational levels. Following the scale development of Bontiset al. (2002), this study strongly supports the multidimensional conceptualization of theconstruct, so that learning capability cant be understood without knowledge stocksand learning flows as underlying dimensions. These dimensions show what theorganization learns and how it learns. In spite of the general consensus in the literaturewith regard to the efficient management of constant learning and knowledge aspowerful instruments for the maintenance and improvement of a firmscompetitiveness, there is not such a wide consensus about how managers can

PathsStandarized

parameters (t-values)

Learning capability ! Non-financial performance 0.827 (9.486)Learning capability ! Financial performance 2 0.236 (2 0.926)Non-financial performance ! Financial performance 0.681 (2.548)Notes: Goodness of fit: x 2 72:465; (P 0.130); GFI 0.903; AGFI 0.893; RMR 0.0781;CFI 0.980

Table IV.Results of path analysis

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contribute towards a more efficient development of a superior learning capability (JerezGomez et al., 2005). Establishing both knowledge stocks and learning flows assub-dimensions of learning capability reveals the different areas in which managerscan act to develop this capability. In this sense, knowledge management can beconsidered as an essential enabler for knowledge development and leveraging and,then, to extract from knowledge a performance advantage. Practitioners should designand implement knowledge management based on mechanism such as structures, socialpractices and information technologies that are practical for the organization toimplement to enhance its learning capability. However, practitioners must also have inmind that learning flows depend on past knowledge in its emergence and can beadjusted nearly instantaneously, but knowledge stocks may not be instantaneouslyadjusted by these internal knowledge flows. Moreover, knowledge stocks may alsoresult the absorptive capacity of the organization, which is largely intertwined withlearning capability since both relate knowledge stocks and learning flows, and relatethese variables to the creation and sustainability of competitive advantage (Zahra andGeorge, 2002).

Second, the existence of a link between learning capability and businessperformance is confirmed. The results of the study suggest that learning capabilityindirectly influences financial performance through their significant effect onnon-financial performance. It is thus important to have in mind the mediating role ofnon-financial achievements, so that it precedes the firms financial success. Learningcapability is thus a basis for organizational capabilities required to efficientlyaccomplishing the companys processes, products and value of service, and thus, itdetermines the organizational potential to create value for stakeholders better andfaster as a precondition of financial achievements. Managers play a key role indeciding which knowledge is relevant to be aware of and satisfy customers,employees and societys expectations that may constitute an opportunity toimprove. As stated by Vera and Crossan (2003), there must be a co-alignmentbetween an organizations business strategy and an organizationslearning/knowledge strategy. Otherwise, learning flows and knowledge stocksmay not be relevant for the organizations purposes and thus not guarantee positiveresults. Bierley and Chakrabarty (1996) define a knowledge strategy in terms of thestrategic choices that shape and direct the organizations learning flows anddetermine knowledge stocks. Zacks (1999) definition includes the notion of fit to thefirms business strategy. So, managers need to decide what to learn and how to learnwithin the strategic context of the organization and needs to be relevant in thecontext. Otherwise, it will be difficult to develop knowledge required to guide theintroduction and selling of new products/services in such a way that value forstakeholders is created.

Finally, companies that really care for their customers, employees and societyshould achieve better financial performance. However, the significant link betweenthe non-financial performance and the financial performance is moderate inmagnitude. This may be interpreted by considering that signs of financial successmay not occur instantaneously or in the same proportion than non-financialimprovements. Managers must thus realize that satisfied customers and stakeholdersmay not automatically be a source of profits and, moreover, they are not always asource of profits. Because efforts to increase current stakeholders satisfaction

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primarily affect future actions and behaviours, the greater portion of economicreturns from improving stakeholders satisfaction also will be realized in subsequentperiods. This all implies that a long-run perspective may be necessary for evaluatingthe overall effects of learning and knowledge on business performance. Together, thestakeholders profitability and, the financial value of the learning capability may bedependent on characteristics and contextual conditions such as the organizationalage (Calantone et al., 2002), industry type (Choi and Lee, 2003), market power(Tippins and Sohi, 2003), entrepreneurial orientation (Wiklund and Sheperd, 2003),and environment dynamism.

6. Limitations and future researchThis study is subject to a number of limitations. As a first limitation, this studyemphasizes the importance of learning capability for business performance, but doesnot address the issue of how learning capability should be carried out. Future researchcould identify the antecedents of learning capability and construct a comprehensibleframework of both antecedents and consequences. For example, the analysis of the roleof knowledge management as enabler of learning capability could manifest themediator role of learning capability between knowledge management andperformance. It could be also considered the moderating effect of knowledgemanagement on the relationship between learning capability and businessperformance.

Second, our study contributes to learning capability assessment by demonstratingthat is possible to measure theoretical relevant constructs that are unobservable. Buteven when we have tried to define our constructs as precisely as possible by drawingon relevant literature, and to closely link our measures to their theoreticalunderpinnings, the measurement items used here can realistically be thought of asonly proxies for an underlying and latent phenomenon that is neither fully nor easilymeasurable. In this sense, although the measure of organizational stocks as a constructof knowledge stocks performed satisfactory, its reliability was above 0.6 but below 0.7.Moreover, the adjusted measurement model uses only three perceptual items toevaluate non-financial performance and financial performance. While this isconsidered adequate for confirmatory factor analysis using LISREL, the use ofadditional and objective items might help capture the rich constructs to a greaterextend. Future research should then focus on the search and validation of a superiormeasure of learning capability.

Another limitation comes from single informants used as the source of information.Respondents were Human Resource Managers and, on default, CEOs. Although the useof these single informants remains the primary research design in most studies, multipleinformants would enhance the validity of the research findings. While one can expectthese managers to have a great deal of knowledge about the topics being evaluated, theiroutlook could be excessively narrow or even inclined to overrate what reality is. Repliesfrom multiple respondents and the obtaining of objective data especially outcomemeasures- would have significantly enhanced the present research.

Finally, in this paper business performance was the organizational outcome and,hence, a dependent variable. Future research should attempt to empirically assessthe degree in which business performance provides important feedback about theefficiency of learning capability and, ultimately, enables future learning capability.

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The purpose should be testing the existence of a retroactive effect that ties learningcapability and performance in a continuous loop. Research on this issue may requirea longitudinal approach by noticing the evolution of learning capability andbusiness performance over time. Longitudinal data should also instigate a moreexhaustive study of the relationship between learning capability and superiorperformance over time, together with the analysis of the relationship betweenfinancial performance and non-financial performance. This view is useful since thisstudy could not assess the existence of time lags concerning relationships due totheir cross sectional nature.

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Further reading

Senge, P. (1990), The Fifth Discipline, Doubleday, New York, NY.

Corresponding authorIsabel M Prieto can be contacted at: isabo@eco.uva.es

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