Proceedings of 10th Annual London Business Research Conference
10 - 11 August 2015, Imperial College, London, UK, ISBN: 978-1-922069-81-8
Nurturing SME Performance through Knowledge Management,
Learning Orientation, Strategic Improvisation
Hatinah Abu Bakar*, Rosli Mahmood** and Nik Nor Hasimah Nik Ismail***
Performance becomes an important achievement for small medium enterprise
(SME) to sustain in competitive business environment. This study addresses the
associations between knowledge management, learning orientation, strategic
improvisation and firm performance. The hypotheses were tested on 368
respondents which comprised of SME owners/managers who were randomly
selected from a sampling frame of registered SMEs. This study employed SEM-PLS
because it maximizes the variance explained in the dependent variable. The results
revealed that there is a significant association exist between knowledge
management, learning orientation, strategic improvisation and firm performance.
JEL Codes: Management, Sme Entreprenuership
1. Introduction
Small and medium enterprises (SMEs) are involved as significant economic agents for
Malaysia to achieve the high income nation status. SMEs become important drivers of
growth as Malaysia targets to become a developed and knowledge-based country.
Numerous studies claimed that SMEs can be deliberated as the backbone of the economy
(Amini, 2004; Radam, Abu & Abdullah, 2008; and Hoq, Ha, & Said, 2009). Based on SME
Master plan 2012-2020, SMEs contribute 99.2 percent of the total business establishment in
the country. As claimed by Singh and Mahmood (2014) SMEs contribute 32.5 percent of
gross domestic product (GDP), 59 percent of employment and make up 19 percent of total
exports. Based on the findings derived from World Bank Productivity and Investment
Climate Surveys in SME Master plan 2012-2020, they exposed six factors that can impact
the performance of Malaysian SMEs which comprised of innovation and technology
adoption, human capital development, access to financing, market access, legal and
regulatory environment and infrastructure. Hence, current SMEs are not achieving high
performance due to challenges faced in each of these areas. Therefore, SMEs in Malaysia
need to maneuver their operations in order to support the aim of achieving a high income
economy by 2020. It is expected to raise the SMEs’ GDP contribution from 32 percent
(2012) to 40 percent by 2020, and their share of employment and exports to 62 percent (59
percent in 2010) and 25 percent (19 percent in 2010) respectively (SME Master plan 20122012).
*Hatinah Abu Bakar, Faculty of Business and Management, Universiti Teknologi MARA, Kelantan, Malaysia. &
Phd Candidate, Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia, Kedah,
Malaysia. Email: hatin463@kelantan.uitm.edu.my
** Prof. Dr. Rosli Mahmood, School of Business Management, College of Business, Universiti Utara Malaysia,
Kedah, Malaysia. Email: rosli@uum.edu.my
***Dr. Nik Nor Hasimah Nik Ismail Faculty of Business and Management, Universiti Teknologi MARA,
Kelantan, Malaysia.Email: niknor@kelantan.uitm.edu.my
Proceedings of 10th Annual London Business Research Conference
10 - 11 August 2015, Imperial College, London, UK, ISBN: 978-1-922069-81-8
2.
Literature Reviews
2.1
Knowledge Management and Firm Performance
For the past 15 years, knowledge management (KM) has become increasingly familiar in
business organizations, an improvement from being an emergent concept (Zack, Mckeen,
& Singh, 2009). Rasula, Vuksic and Stemberger (2012) defined KM as “a process that
through creating, accumulating, organizing and utilizing knowledge helps to achieve
objectives and enhance organizational performance”. There are no universal acceptance on
the dimensions of KM (Yusof & Abu Bakar, 2012). Omerzel (2010) KM consists of five
elements, which includes the acquisition, storage, transfer and use of knowledge and the
measurement of its effects. Past studies have ascertained relationship between KM and
firm performance. Razaghi, Moosavi, and Safania (2013) revelaed that among the four
dimensions of KM i.e. knowledge acquisition, knowledge transfer, knowledge utilization and
knowledge recording, only knowledge management utilization has positive relationship with
firm performance.
Ramírez, Vasauskaite and Kumpikaitė (2012) in their investigation
confirm that KM’s component of acquisition, transfer and use of knowledge, have positive
direct and indirect influences on business innovation and, therefore, improve the company’s
performance. In the same vein, Rasula, Ksic and Stemberger (2012) found that knowledge
practices, measured through information technology, organization and knowledge, positively
affect organizational performance. Nawaz, Hassan, and Shaukat (2014) found three KM
practices i.e. knowledge acquisition, knowledge dissemination and responsiveness to
knowledge on innovation has positive relationship and firm performance. Conversely, Durst
and Runar (2012) state that in many SMEs there is lack of systematic knowledge
management. Hence, it is hypothesized
H1: knowledge management has a positive relationship with firm performance.
2.2. Learning Orientation and Firm Performance
Learning orientation (LO) competences are specifically imperative to develop the ability of
small firms for survival when dealing with unpredictable circumstances (Nonaka,1994;
Rhee, & Lee, 2010). Based on Sinkula, Baker and Noordewier (1997), LO comprised of
commitment to learning, open-mindedness and shared vision. Results of previous studies
also found that LO contributes directly and indirectly to firm performance (Nguyen & Barrett,
2006; Martinette, Obenchain, Gomez, & Webb, 2014). Ma, Zhu and Hou (2011) found that
LO increases in public accounting services firms. Long (2013) found that learning orientation
has a direct relationship on process innovation and, in turn, impacts firm performance.
Neverthless, LO does not have a direct and significant impact on firm performance.They
also found that process innovation plays a part as a full mediation variables between LO
and firm performance. In a similar vein, Hatch (1998) found LO does not significantly
influence firm performance in Veitnam marketing communication. Based on the review of
the litarature above, the authors hypothsize that
H2: Learning orientation has a positive relationship with firm performance.
Proceedings of 10th Annual London Business Research Conference
10 - 11 August 2015, Imperial College, London, UK, ISBN: 978-1-922069-81-8
2.3
Strategic Improvisation and Firm Performance
According to Vera and Crossan (2004), improvisation is a new, correct and knowledgeable
respond to a situation. Hmieleski and Corbett (2006) describe improvisation as attempting to
develop something new and useful to the situation, although it does not always achieve this.
Several studies found that there is no direct relationship between improvisation and firm
performance. According to Leybourne and Smith (2006), there is no direct relationship
between entrepreneur improvisational behaviour and new venture performance. In a similar
vein, Moorman and Miner (1998) claimed that there is no association between improvisation
and satisfactory project outcomes. Hmieleski and Corbett (2008) found that factors, like
environmental turbulence and real-time information served as moderating factors in the
relationship between improvisation and product effectiveness. Arshad and Hughes (2009)
revelead improvisational behaviour was found to have a positive correlation with new
venture performance (i.e., sales growth) when revealed by founders who were high in
entrepreurial self-efficacy(ESE), while improvisational behaviour was found to have a
negative relationship with new venture performance when exhibited by founders who were
low in ESE. Nevertheless, Neverthless, Arshad and Hughes (2009), Arshad (2011) and
Hmieleski et al., (2013) found organizational improvisation positively affects firm
performance. However, Arshad (2011) most studies of improvisation have been conducted
in western contexts, usually in the United States. Generalisation from these research
however do not necessarily translate directly to eastern countries that are culturally different
as well as managed in different ways. Long and Yu (2009) confess, research on
organizational improvisation is still scarce therefore resulted on conceptualizing opposite
views of. Due to the limitation of studies regarding improvisation in organisations, the third
hypothesis is posit:
H3: Strategic Improvisation has a positive relationship with firm performance.
Proceedings of 10th Annual London Business Research Conference
10 - 11 August 2015, Imperial College, London, UK, ISBN: 978-1-922069-81-8
Figure 1: Proposed Research Framework
3.
Research Methodology
This study employed quantitative research method and the instrument used to collect the
date was survey questionnaires. The unit of analysis is organization. A total of 368
respondents which comprised of SME owners/managers from SMEs in Malaysia. The
owners/managers were selected because they are the main informants of the firm’s
operation. The population will be restricted to only SMEs in the east coast of Malaysia:
Kelantan, Terengganu and Pahang. The questionnaires were adopted and adapted from a
few selected questionnaires and measured with 5 point Likert-scale ranging from strongly
disagree to strongly agree except for firm performance. KM scale was adapted from
previous studies by Rasula et al.,(2012).The LO questions were adopted from past
researchers such as Sinkula, Baker and Noordewier (1997) for strategic improvisation
questions was based on Vera and Crossan (2005). In term of performance,the questionnaire
was adopted from Wiklund (1999) who suggested that performance measures should
include growth and financial performance. In analyzing the data, Statistical Package for the
Social Sciences (SPSS) version 20 and Structural Equation Modeling Using Partial Least
Squares (SEM-PLS) version 2 were used (Ringle et al., 2014).
4.
Results
4.1
Composite Reliability and Construct Validity
The internal consistency reliablity and indicator reliability was assessed by examining the
composite realibility and indicator loading. According to Hair, Ringle and Sarstedt (2011) the
loading of 0.7 and above is an ideal indicator. Based on Henseler, Ringle and Sinkovics
(2009) loading 0.7 or higher are considered highly satisfactory, while loadings value of 0.5 is
regarded as acceptable the manifest variables with loading value of less than 0.5 should be
dropped (Chin,, 1998). Litwin (1995) suggested that value of Cronbach alpha (CA) should
be higher than 0.7 and composite reliability (CR) was also suggested cut off at 0.7 (Hair et
al., 2011).
Therefore, in this study, only item loadings of 0.7 and above were considered (see Figure 2).
Based on the result, eleven items were deleted. The composite reliability value is ranged
0.924 to 0.936 and Cronbach alpha is ranged 0.901 to 0.920 (see Table 1) which exceed
the recommend value of 0.7 by Hair, Black, Babin and Anderson (2010). Then, all AVE
values are above 0.5 which ranged 0.669 to 0.729 (see Table 1). Hence, the result above
indicated that all the values of consistency reliablity and indicator reliability are acceptable.
Fornell and Larcker's (1981) criterion also remarked that the assessment of discriminant
validity is that the square root of each construct’s AVE should be larger than the highest
latent variable correlations. In Table 1, the result indicated that there is adequate
discriminant validity due to the diagonal figures are higher than the off-diagonal figure both
corresponding rows and columns. As a result, the measurement model demonstrated
adequate convergent validity and discriminat validity.
Proceedings of 10th Annual London Business Research Conference
10 - 11 August 2015, Imperial College, London, UK, ISBN: 978-1-922069-81-8
Table 1. Discriminant Validity, Convergent and Constructs Reliablty Result
Construct
FP
KM
LO
SI
CR
AVE
0.818
Firm Performance (FP)
0.924
0.669
0.823
Knowledge Management(KM) 0.715
0.936
0.677
0.832
Learning Orientaton (LO)
0.715
0.810
0.931
0.692
Strategic Improvisation (SI)
0.704
0.782
0.802 0.854
0.930
0.729
4.2
CA
0.901
0.920
0.911
0.905
Hypotheses Testing
Path coefficients signify the strengths of the relationships among the independent and
dependent variables, The highest 𝛽 value symbolizes the strongest effect of predictor
(exogenous) latent variable towards the dependent (endogenous) latent variable (Aibinu &
Lawati 2010). Moreover, the R² value is the degree of predictive power of a model for the
dependent variable. Additionally, t-values of the parameter signify the strength of the
relationship the parameter represents; therefore, the higher the t-value, the stronger the
relationship is. Although values close to -1 to +1 are almost always statistically significant, a
standard error must be obtained using bootstrapping to test for significance (Helm et al.,
2009). The stability of the estimates was tested via a bootstrap re-sampling procedure (500
sub-samples).
In this study, three hypotheses were generated from the research model. The R² for this
model is 0.584, meaning that only 58.4 percent of the variance can be explained in the
extent of entrepreneurial orientation and strategic improvisation (see Figure 2). Based on
Cohen, Cohen, West and Aiken (2003) for a good model, the value of R2of endogenous
latent variable should be more than 0.26. Path coefficient and t-test value results show that
H1, H2 and H3 are supported. The results show that knowledge management (KM), learning
orientation (LO) and strategic improvisation (SI) positively influence the SMEs performance
at significant level of p<0.05 (See Table 2).
Figure 2. Path Analysis
Proceedings of 10th Annual London Business Research Conference
10 - 11 August 2015, Imperial College, London, UK, ISBN: 978-1-922069-81-8
Table 2. Path Coefficient and Hypotheses Testing
Hypothesis Relationship Std. Beta
t-value
Decision
H1
KM -> FP
0.295
4.763**
Supported
H2
LO --> FP
0.272
4.411**
Supported
H3
SI --> FP
0.255
4.877**
Supported
Note: if the t-value is greater than 1.645(*p<0.05)
5.
Conclusions
Results from this study proved that significant relationship exists between KM, LO and SI
with performance of SMEs. The study showed that the importance of KM, LO and SI in
accommodating the firm performance. Due to the competitive business environment the
owners/managers need to strengthen their ability and capability in dealing with dynamic
business environment with scarce resources.
Nonetheless, this study has several limitations that need to be addressed by future research.
First, the population of this study focused on the eastern region, so, perhaps future studies
should be based on larger samples, preferably to cover other regions such as the northern
and central region in Malaysia. It would also be interesting to compare the strategies made
by these three regions and the results could be generalized to all SMEs in Malaysia. The
study’s cross-sectional design poses another limitation since it can only provide the scenario
of one point in time. This is to determine the cause and effect or the impact of changes over
a period of time.As a result, in order to gain further insights into the dynamic nature of the
relationship between variables, a longitudinal investigation would allow the firms to be
studied over a period of time. Other than that, the suitable moderating and mediating variable
can be included for future studies to obtain an in-depth understanding of the nature of firm
performance.
6.
Acknowledgement
The authors would like to thank Ministry of Education (MOE) Malaysia and University
Teknologi MARA for financial support under Scholarship. The authors also pay special
thanks to the respondents who participated in the survey, without whose cooperation and
precious time the completion of this work was not possible.
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