Scriptie; Aging Workforce And Social Innovation

The Aging Workforce and Social Innovation Pre-Master S&I research paper (words: 3924)

G. Tijms Pre-MSc Business administration. Strategy and Innovation June 2009 For information http://www.linkedin.com/in/gertjantijms

Abstract Purpose – The purpose of this paper is to investigate the role of an aging workforce and its effect on social innovation. The paper identifies intellectual capital as human, structural and social capital which are the main elements of social innovation. The role of each important building block is analyzed and the author discusses their relationship with respect to social innovation. Design/methodology/approach – The paper is based on in-depth literature review of aging workforce management and (social) innovation literature. The fundamental underlying research questions that have driven the research are: ‘‘What are the effects of an aging workforce on intellectual capital?” and “What is the influence of an aging workforce on social innovation?” The paper is conceptual and aims to outline a theoretical framework for further empirical research. Findings – The paper first clarifies the effects of an aging workforce on intellectual capital and workforce shortage. Intellectual capital can be divided into human, structural and social capital. Three hypotheses are stated to be investigated for further research. Than the paper explores how these concepts relate with social innovation. Social innovation aims at the social side of innovation, new business concepts, working smarter, development of skills and competences, networking etc. This highly interrelates with the social aspects of an aging workforce and there might be some threats as well as opportunities within the interrelation of these two topics. The New Economy we are living in today creates great opportunities for social innovation. This is among other things caused by web based technological innovation which create the opportunity to work together with decreasing transaction and communication costs. Originality/value – The paper provides some insights in the relation between aging workforce literature and social innovation. Till now most studies have analyzed the different topics separately, this study tries to make the connection. Keywords: Aging workforce, Intellectual capital, Social innovation.

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Introduction and research gap Competition nowadays is shifting from financial capital to innovation, creativity and knowledge (human competencies), information and the strengths of a company’s network also called social capital (Allee and Taug, 2006). In literature this is called the New Economy, the shift from the industrial or post-Fordist economy (Gerometta and Häussermann and Longo, 2005) to the service oriented economy. Maybe it is even a step further to a new ‘networking/ social’ economy. Human competencies and firm’s social capital however are not organizational commodities, and they cannot be managed as commodities. The knowledge held by individuals must be passed on to others in order for that knowledge to be leveraged (Calo, 2008). Recruiting, motivating, and retaining a talented workforce are not short-term strategic concerns. They are systemic, protracted, and chronic problems that organizations will face for the foreseeable future. Demographic and workforce management will be as critical a strategic issue for organizations as financial and technological management. Especially nowadays when the impact of the global aging workforce is already remarkable and this will strongly develop into the future. Leibold and Voelpel (2006) describe in their book that the developed world’s workforce – the key source for innovation and effective companies – is shrinking at a frightening rate. The facts shown in the book describe the worse of the situation: in the United States, labor shortfalls of 5 to 10 million workers are expected in the next ten years. In Europe, populations are already decreasing in major countries, including, Germany, France, Italy and Austria (Leibold and Voelpel, 2006). McQuade and Sjoer and Fabian and Nascimento and Schroeder (2007) describe that before 2013, 20% of the European working population will go into retirement. In literature, various aspects of an aging workforce are illustrated. McMahan and Sturz (2006) describe the resistance of elder people to harmful exposures. Injury data suggest that although elderly workers are less likely to be hurt seriously enough to lose work time, they often take twice the time needed to return to work. They also do not give any data that proves that older workers are less productive. These findings are confirmed by Streb and Voelpel and Leibold (2008) who show that there is no 3

interrelation between age and performance. Streb et al., (2008) speak about matching which is one of the most promising tools in aging workforce management. This basically means, matching employees with the most suitable workplace according to his or her physical capabilities and training. An aging workforce also causes economic implications. McManus and Anderberg and Lazarus (2007) gives some examples of rising costs and dropping tax incomes. The costs of social security, medical costs and Medicare will grow while revenues of governmental tax will decrease as a result of fewer people in the workforce. This can cause an imbalance in the system. The OECD (2008) state in their economic survey in the Netherlands that the spending on health care and pensions will increase in the next four decades. Together with McManus et al., (2007) they spread the need for the government to take action. Policy solutions to restore sustainability should focus on containing aging-related costs, including a reform of the state pension scheme and later retirement. McManus et al., (2007) states a deficit in social security cash flow in 2017 in the US, forcing the government to take action. He gives three examples, increase federal taxes, cut other federal spending, or borrow additional funds from the public. With the current economic situation it can be necessary to speed these measurements up. The challenge It is meanwhile well known that productivity growth and competitive advantage cannot only be achieved by the introduction of new technologies and cutting cost strategies. Optimal utilization of social capital, working smarter and networking, are a few words that show the mindset of today’s organizational strategy. With the current situation of a Baby-boom generation which reaches its retirement age, questions will arise as how companies will anticipate on this huge exodus of experience, knowledge, social networks etc. Since the 1980’s more and more attention is addressed to social aspects of innovation. Social innovation is a broad concept and is defined by Pot and Vaas (2008) among other things as dynamic management, flexible organization, working smarter, development of skills and competences and networking. 4

Whereas different scientific researches speak about the impact of an aging workforce and the aspects of social innovation, there is actually no literature which describes the interrelations between these two topics. This paper deals with the possible effects of an aging workforce on social innovation. The research question is: What is the influence of an aging workforce on social innovation? To answer the main research question two related sub-questions will be stated within the article. Social innovation is highly interrelated with Social capital, which is an element of intellectual capital (McElroy, 2002; Landry and Amara and Lamari, (2000); Schiuma and Lerro, 2008). The broader subject of intellectual capital consists of three main forms of capital namely, human capital, structural capital and social capital. Sometimes relational capital is added, (Schiuma and Lerro, 2008) which can be seen as part of social capital as it will be in this research. Human capital, according to Schiuma and Lerro (2008) includes those factors that are built upon know-how, both tacit and explicit, which individuals and more generally regional stakeholders possess and exercise. Structural capital is what McElroy (2002) refers to as the embodiment and supportive infrastructure of human capital. That is why in this research structural capital will not be described separately. Social capital refers to the connection between social networks, it is the resource available to actors as a function of their location within a social structure (Adler, 2002). Social capital can take different forms; trust, reciprocity, shared values, norms and networking, these are all things that add value to a firm. In this paper the two main topics of intellectual capital will be captured, social capital and human capital. This paper has the following structure. After the introduction part there is done a literature review in which the sub questions will be stated. After the literature review, the methodology used for this research will be explained. This paper will end with the expected findings of the author based on the literature review. 5

Literature review This chapter will present the literature reviewed with respect to the aging workforce and social innovation. First a conceptual framework will be drawn, this might help the reader to better understand the paper.

Figure 1: conceptual model

Social innovation Innovation is meanwhile a well known phenomenon which occurs when a new idea (or a combination of old ideas) forms a different way of thinking and acting that changes existing paradigms (Adams and Hess, 2008). There is a wide range of definitions and there are many forms of innovation. The most famous type of innovation is probably technological innovation in which products are modified or sometimes invent to better meet customer needs. Since the 1980’s the importance of the social aspect of innovation is given more attention in literature. Social innovation is a broad concept, it includes among other things: dynamic management, flexible organization, working smarter, development of skills and competences and social networking (Pot and Vaas, 2008). Taatila and Suomala and Siltala and Keskinen (2006) describe social innovation as a form of organizational innovation which is about the capability to produce, receive and apply new knowledge and competences. Gerometta et al., (2005) focus in their definition on the relational side of social innovation, they refer to the creation of new links and new relations crossing emerging lines of fragmentation. Pot and Vaas (2008) describe four main reasons for the awareness of social innovation. In the first place they argue that social innovation is needed to enhance labor productivity with fewer people in the workforce because of the aging population. The aging generation, also called Baby Boom Generation, is a 6

demographic term used for the generation which is born after the Second World War in Europe and the United States. As already described in the introduction the aging workforce will cause some problems in the near future. Armstrong-Stassen (2008) describe that the median age in the US is projected to increase from 29,8 to 41,0 (1950-2050), in Europe this will even be an increase from 29,2 to 49,5 in 2050 (, 2008). This among other things causes labor shortfall in the next years as projected in figure 2.

Figure 2: How labor demand will exceed up to 2030 (Leibold and Voelpel, 2006)

Secondly, they mention the need to develop and utilize competences of the potential workforce with respect to the knowledge-based economy. Knowledge based assets and competences will be extremely important in the new knowledge-based economy. The above mentioned outflow of labor force has to be captured to reduce the loss of intellectual capital. In the Third place they argue that it is only possible to make fully benefit of technological innovations if they are embedded in social innovation. This means that technology only can work in an environment of proper organization and commitment and involvement of employees. As a fourth reason, Pot and Vaas (2008) mention that social innovation is more important for business success than technological innovation. This can be seen in a study of the Erasmus University/Rotterdam School of Management shows the essential role (75%) of social innovation in the success of renewal, see figure 3. Pot and Vaas (2008) describe social innovation as complementary to technological innovation.

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Figure 3: Explanation of success with technological and social innovation (Pot & Vaas, 2008)

Social innovation is highly interrelated with social capital, McElroy (2002) even speaks about social innovation capital. This concept refers to innovation capital of a collective, instead of that from individuals. It refers to the structural manner in which whole social systems (e.g. organizations, communities) organize themselves and carry out the production and integration of new knowledge. Johannessen (1998) calls it the cognitively open loop in which organizational learning and innovation occurs. This phenomenon is nowadays also seen within the concept of open innovation. Social capital is one of the elements of intellectual capital, it is one of the four by Schiuma and Lerro (2008) mentioned knowledge based assets of a company, the other three are human capital, relational capital and structural capital. Structural capital is what McElroy (2002) refers to as the embodiment and supportive infrastructure of human capital. Relational capital is within much of the literature seen as a part of social capital. That is why this research will focus on human capital and social capital as the main elements of intellectual capital. Social and human implications are described by Calo (2008) who talks about the management of talent and the critical role of knowledge transfer. He states that organizations run the risk of losing great stores of knowledge from the impending retirement of large numbers of baby boomers. Before these employees are floating out of the workforce their knowledge, contacts, skills and wisdom is either not 8

captured within the organization’s collective memory system or is not personally transferred to other employees within the organization. Given the age demographics of many organizations this loss of social and human capital will occur between now and 2020 unless proactive steps are taken (Calo, 2008). McQuade et al., (2007) talk about three main losses of employees who retire. •

Loss of an expert employee with knowledge of the products and processes of the company.

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Loss of customer and supplier contacts, relationships and established trust.

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Loss of understanding of the informal personnel networks.

Aging workforce and the loss of human capital Human capital, also called the human recourses of a company, includes those factors that are built upon know-how, both tacit and explicit, which individuals and more generally regional stakeholders possess and exercise. It requires training and development as well as retaining and attraction. Through the fact that today’s knowledge economy is gaining more and more attention in literature, human resource management is a widely discussed subject, also in aging workforce literature. Streb et al., (2008) speaks about a worldwide competitive market for skilled people due to the effects of globalization. Within certain industries, e.g. the food industry they speak already about a ‘war-for-talents’. Through the aging of today’s workforce, questions as; how can we transfer knowledge from one generation to another will arise (Calo, 2008). Increasingly, organizations need to recognize the need to retain these older skilled, experienced people in productive employment and to manage them effectively. According to Beaver and Hutchings (2005) HR managers today face a problem that is twofold. On the one hand they need to manage the aging of the workforce, on the other hand they need to attain and retain productive younger employees. The so called generation move (Generation X to Generation Y) faces some problems, one of the main issues is workforce mobility. Generation Y employees (born between 19801990) are different to motivate and retain with respect to Generation X. The knowledge resources of a company may include several types of knowledge: internal, external, explicit or tacit but the main resources are the people, the experts, 9

who ‘own’ the knowledge and know-how. Effective transfer of knowledge requires an understanding of the dynamics and processes of knowledge transfer (Johannessen, 1998). Calo (2008) also argues that while age often brings valuable expertise and wisdom, it also may lead to a lack of fully up-to-date skills and lowered motivation due to job and career satisfaction and inertia. This can also be seen as a loss of firms’ intellectual capital. In contrast to what Calo (2008) states about older workers’ job motivation and proactivity, a study of Veldhoven and Dorenbosch (2008) among 619 employees shows that there is no significant difference between age and developmental proactivity. Older employees are rather positively than negatively proactive. Sub question one The aging workforce causes loss of human capital? Aging workforce and the loss of social capital Social capital is defined by Adler (2002) as the goodwill that is engendered by the fabric of social relations which can be mobilized to facilitate action. Goodwill refers to the sympathy and trust which is offered by friends or relations. Landry and Amara and Lamari (2000) define the function of social capital as a variety of different entities with two elements in common. (1) They all consist of some aspect of social structures and (2) they facilitate certain actions of actors, whether persons or corporate actions, within the structure. Unlike other forms of capital, social capital inheres in the structure of relations between actors and among actors. Social capital can take different forms; trust, reciprocity, shared values, norms and networking. These are all things that, according to the social capital theory, add value within a firm, or between firms, by speeding the transfer of information and the development of new knowledge (McElroy, 2002; Landry et al., 2000). Taatila et al., (2006) defines organizational competence attributes as resource-based, individual-based and structure-based. Resource-based competences are the 10

facilitating platform that allows social attributes to function. Individual-based competences are embedded in individual persons and are the living energy behind innovation. Everything within an organization depends on the capabilities of individuals. However individual based attributes are not directly linked to social attributes because they are still embedded within individuals. The connection with structural-based competences, like organizational culture and network ties the individual based attributes within the social structure. How an organization will function still depends on the people within. There are two major schools of thought within the social capital theory. The ‘egocentric’ perspective, the value of individual relationships and the ‘sociocentric’ perspective in which social capital has more to do with the added value of the position of an individual in the structure (McElroy and Jorna and Engelen, 2006). Schiuma and Lerro (2008) state that the contribution of social capital to innovation is achieved by reducing transaction costs between firms and between firms and other actors particularly search and information costs, bargaining and decision costs, policing and enforcement costs. He even states that firms in communities with a large stock of social capital will always have a competitive advantage. (Reduce malfeasance, induce reliable information, cause agreements to be honored, enable employees to share tacit information and place negotiators on the same wave-length). Taatila et al., (2006) agree on this, they for example argue that the success story of Silicon Valley is basically its strong social network. As stated by McQuade et al., (2007), the aging workforce will cause a loss of customer and supplier contacts and a loss of understanding of the informal personnel networks, respectively Inter- and Intrasocial relationships (McElroy, 2002). This will have an impact on firm performance and the ability to innovate, as stated that social capital is highly interrelated with social innovation. Sub question two The aging workforce causes loss of social capital? Social innovation focuses on new ways of doing business, flexible organization, working smarter and using the power of the network (working in tribes) and in the 11

end being able to do more with less resources. Technological innovations are an important resource for social innovation. Through modern technologies transaction and communication costs are declining and the available intellectual resources are increasing. However the human/ social side of innovation is, as stated in figure 3 extremely important for successful innovation. Problems that might occur through the aging workforce call for other ways of doing business. New technologies and cutting cost strategies are no longer a guarantee for productivity growth and gaining a competitive advantage. Organizational innovation and competitiveness depends on their capability to produce, receive and apply new knowledge and competences (Taatila et al., 2006). Optimal utilization of the social and human capital might be necessary to survive the rules of the New Economy.

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Methodology. This research on social innovation within the framework of the aging workforce management is a desk-research study, in which the generated information can have both a theoretical and practical nature. The research gives a summary of all relevant literature concerning a problem statement. This collection of literature tries to describe a certain movement/ development in the market concerning the central subject in two steps. -

First; the combination of data from different sources, each with its own perspective.

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Second; the combination of data from different periods in time.

Because this study concerns a desk research, all data concerning this subject is limited to this research. This means that the used information regarding to the subject can be incomplete. Furthermore, follow-up studies can make the data in this study outdated. Research design The best way to do further research on this topic would be by doing qualitative research with a non-disguised direct approach. Qualitative research provides the opportunity to explore selected topics in detail and illuminate the way individuals create meaning through discussion with other people (Miller and Sinclair, 2009; Blumberg and Cooper and Schindler, 2008). This qualitative research will be done with focus groups. The focus group is a kind of group interview which in particular can provide insight into the issues the audience finds most important. According to Krueger and Casey (2000), focus groups are also especially helpful when insights, perceptions, and explanations are more important than actual numbers. Aging workforce is a topic which is possible to deal with when looking at numbers. However, the link with social innovation makes it more important to view it in a broader and dynamic context. Sample selection In addition to this literature review and in order to advance the understandings of an aging workforce with respect to social innovation, empirical research will be 13

conducted at large European service firms. The service industry is an interesting sector for social innovation research because it is mainly a knowledge-based industry with lots of innovation possibilities; a nice example is the financial service sector. Through the financial crisis this industry is in a position in which it has to reshape its organizational and social structures, which are good possibilities for social innovation. Pennings and Harianto (1992) show that the financial sector is dynamic with an extensive amount of strategic partnering and innovations. The financial sector processed a nice amount of innovations over the last decades; the introduction of ATM’s, internet banking and recently mobile banking. This all makes it an interesting industry to investigate. A large service firm has to be selected based on the following criteria: • It has to be listed in the Global fortune 500 Europe • It must be a broad based service provider which operates in several countries •

Organizational units work in branches with different environments

Procedure A total of 5 focus group meetings will be arranged, all meetings will take 2 to 3 hours and will be recorded. The focus groups will be between nine and eleven persons (a total of 50 participants). The interviews will be held by trained moderators and will have a non-structured nature. The values of these interviews are the unexpected findings. In accordance with Krueger and Casey’s (2000) principles, focus groups have to be homogeneous in nature. Composing a group with highly different characteristics will decrease the quality of the data. Individuals will tend to censor their ideas in the presence of people who differ greatly from them in power, status, job, income, education, or personal characteristics. This is why it will be necessary to conduct multiple sessions with middle managers, higher managers as well as experts on social innovation and the aging workforce to gain different insights regarding this research. The discussions begins with a preparatory activity, all participants have to present their thoughts about the new ‘network’ economy in 80 seconds with four pictures available out of 200. After the introduction exercise five subjects will be discussed 14

by the group. These subjects all are linked to the aging workforce and social innovation; (1) aging workforce, (2) social capital, (3) human capital, (4) innovation, (5) social innovation. The moderator has to make sure all participants are involved in the discussion. Data collection The data collected in the focus group meetings offer insights into how all participants think about and deal with aging workforce issues and social innovation. The recordings will be analyzed step by step to determine all existing perceptions of the different participants; this includes coding quotations and defining categories. The generated data relies upon words spoken by participants. The focus on language delivers this type of methodology the label qualitative. A report based on focus groups will feature patterns formed by words, called themes or perspectives. Patterns within the spoken language have to be analyzed (Krueger and Casey 2000).

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Expected findings The effects of an aging workforce will cause a workforce shortage in the upcoming years. Many researches indicate this movement and the effects are already remarkable. The loss of intellectual capital is a problem many organizations will face. Storage and transfer of social and human capital is necessary. However not all intellectual capital is transferable or possible to store, think about tacit and implicit knowledge and social networks. I expect new ways to store this intellectual capital to be found within the next years. Further research will be necessary to indicate the worse of the situation. Social innovation might play a role within aging workforce management. Doing more or the same work with fewer resources, working across boundaries in knowledge sharing networks and communities of practice are measurements that might help to reduce the effects of a global aging workforce. The power of social networks is already notable and this will develop into the future. Sharing/ networking and free content will become the standard and with decreasing transaction and communication costs the possibilities will be infinite.

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