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Effects of Knowledge Management and Strategic Improvisation On SME Performance in Malaysia

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Asian Social Science; Vol. 11, No.

9; 2015
ISSN 1911-2017 E-ISSN 1911-2025
Published by Canadian Center of Science and Education

Effects of Knowledge Management and Strategic Improvisation on


SME Performance in Malaysia
Hatinah Abu Bakar1, Rosli Mahmood2 & Nik Nor Hasimah Ismail3
1
Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia, Sintok, Kedah, Malaysia
2
School of Business Management, College of Business, Universiti Utara Malaysia, Sintok, Kedah, Malaysia
3
Faculty of Business, Universiti Teknologi MARA Kelantan, Machang, Kelantan, Malaysia
Correspondence: Rosli Mahmood, School of Business Management, College of Business, Universiti Utara
Malaysia, 06010 Sintok, Kedah, Malaysia. Tel: 60-49-28-7495. E-mail: rosli@uum.edu.my

Received: October 29, 2014 Accepted: December 15, 2014 Online Published: April 2, 2015
doi:10.5539/ass.v11n9p207 URL: http://dx.doi.org/10.5539/ass.v11n9p207

Abstract
This research aims to determine the relationship between knowledge management (KM) and strategic
improvisation with performance of small-medium enterprises (SMEs). The research employs a quantitative mail
survey method and data were collected randomly from the owner/managers of registered SMEs. A total of 131
usable responses were received. Partial Least Square (PLS) modelling was used to estimate the hypothesized
research model. Significant relationship was found to exist between KM and performance, and also between
strategic improvisation and performance.
Keywords: small and medium enterprises, knowledge management, strategic improvisation, performance
1. Introduction
Small and medium enterprises (SMEs) are crucial to the economic development of most nations. A strong SME
sector stimulates an upward mobility of an economy with the creation of job opportunities and innovation
promotions (Herath & Mahmood, 2014). However, SMEs also face many constraints such as technological
backwardness, shortage of entrepreneurial competencies, capabilities and skills among the key management,
insufficient use of information technology and poor product quality (Emine, 2012). In Malaysia SMEs constitute
99 percent of the total business establishments, contribute 32.5 percent of gross domestic product (GDP), and 59
percent of employment (Singh & Mahmood, 2014). However, low level of performance is one of the key issues
affecting the sector. Thus SMEs need to be more resilient in this globalized business environment where
competitive rivalry has multiplied in its magnitude. These include the need for SMEs to refigure their strategic
orientation in the form of knowledge management and strategic improvisation in order to benefit from the rapid
change and to gain and maintain competitive advantage. Therefore the objective of this study is to investigate the
effects of knowledge management and strategic improvisation on the performance of SMEs.
2. Literature Review
2.1 Knowledge Management and Firm Performance
Knowledge management (KM) has been increasingly recognized as an important tool for sustaining competitive
advantage and improving performance. According to Rastogi (2000) and Lawson (2003), KM is a process in
integrating and coordinating systematically the acquisition, creation, and deployment of knowledge, experience
and expertise in an organization. The process involves systematic analyses, planning, acquisition, creation,
development, storage and use of knowledge to achieve organisational goals (Omerzel, 2010; Suzana & Kasim,
2010). An effective KM strategy will lead to lesser time in the process of information and reuse of knowledge
because it enhances the creation, transfer and utilisation of knowledge in the organisation (Alavi, 2000). The
process of creating, sustaining and renewing in KM usually results in value creation and improvement in
organisational performance (Allee, 2003).
Past studies have examined the relationship between knowledge management and firm performance. McKeen et
al (2006) found significant positive links between high adoption of KM practices and high performance while
Liao and Chuang (2006) concluded that KM resources have positive influence on KM process capabilities which,

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in turn positively influences firm performance. Chuang (2004) who empirically examined the association
between KM capabilities and competitive advantage found evidence that KM has a significant impact on
competitive advantage. Hsu (2006) also established that KM process capability lead to superior firm
performance. Kridan and Goulding (2006) found the significance of KM for enhancing the organizations’
performance and that led them to better position, and the study by Lee, Kim and Kim (2012) demonstrated the
relevance of KM infrastructure for organizational performance.
Gloet and Terziovsky (2004) who explored the relationship between KM practices and innovation performance
found that the humanistic approach to KM was significantly and positively related to innovation performance
whereas the technology based KM and innovation performance was negatively related. Mills and Smith (2011)
did a study on KM and organizational performance: a decomposed view using the survey method to evaluate the
impact of specific KM resources on organizational performance in Jamaica. It was found that some knowledge
resources such as organizational structure and knowledge application are directly related to performance, while
others, such as technology and knowledge conversion, are not. However, Kongpichayanond (2013) found
support that KM enhanced innovation performance directly, and also indirectly associated with innovation
performance through a mediator, Total Quality Management. Nonetheless, Zaim et al. (2007) indicated that even
though a significant relationship was found between KM and performance, the result could not be generalized to
a wider population. Similarly Zack et al (2009) argued that the results based on North American and Australian
companies could not be generalized to other geographic, economic and culture. Thus it is hypothesized that:
H1: There is significant and positive relationship between knowledge management and SME performance.
2.2 Strategic Improvisation and Performance
Organisations which are struggling to continuously adapt and survive in today’s rapidly changing environment
are turning to an emerging technique known as improvisation. According to McKnight and Bontis (2002)
improvisation is the “ability to spontaneously recombine knowledge, processes and structure in real time,
resulting in creative problem solving that is grounded in the realities of the moment”. The spontaneous action is
resulted not through a deliberate process of thought and evaluation but on the spur of moment based on the
intuition guiding the way (Crossan & Sorrenti, 2002; Ciborra, 1999; Moorman & Miner, 1998).
Strategic improvisation is the best strategy to cope with the rapid changes in environmental demands because it
provides the organization with flexibility and capabilities. Organisations which do not have ‘time’ to plan may
found improvisation useful as a strategy (Baker & Nelson, 2005; Kamoche et al., 2003). Improvisation is also
seen as a new paradigm for organisation’s strategic choice (Eisenhardt, 1997), strategic performance construct
(Moorman & Miner, 1998), emergent learning (Mintzberg, 1994), and strategic renewal (Vera & Crossan, 2005).
Few studies have investigated the direct effect of improvisation on firm performance (Arshad & Hughes, 2009;
Arshad, 2011). Most of other studies only examined indirect correlation between improvisation and performance
through some moderating factors (Vera & Crossan, 2005), or focused on new product success teams and new
product development as the main performance measures (Akgun, Lynn, & Byrne, 2006; Leybourne &
Sadler-Smith, 2006; Vera & Crossan, 2005; Akgun & Lynn, 2002). Leybourne and Sadler-Smith (2006) found
no significant relationship between improvisation and satisfactory project outcomes, while Akgün et al. (2006)
indicated the impact of improvisation on new product success. Other studies included Hmieleski and Corbett
(2008) who focused on the relationship between improvisation behaviour of firm founders with performance,
and Hmieleski, Corbett and Baron (2013) on improvisational behavior of entrepreneurs and performance, and
who investigated the direct impact of improvisation on firm performance. Nonetheless, there is still a paucity of
studies that examine the direct relationship between strategic improvisation and firm performance as a whole.
Thus the following hypothesis:
H2: There is significant and positive relationship between strategic improvisation and performance of SMEs in
Malaysia.
3. Research Methodology
The sample for the study comprised of owner/managers from the SMEs in Malaysia. Owner/managers were
targeted because they are the key informants of the business and usually they are involved in the overall running
of the firms. In addition, the views of the owner/managers often represent the views of the entire firms. A total of
131 useable questionnaires were collected from the respondents.
The questionnaires were developed using established measures from previous studies. The knowledge
management measure was adapted from Rasula, Vuksic and Stemberger (2012). It consisted of nine items which
include questions on accumulation, utilization, sharing practices and knowledge ownership identification. The

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strategic improvisation of seven items was measured using scales adapted from Vera and Cossan (2005). The
items were measured on a five-point Likert scales where ‘5’ represents strongly agree, and ‘1’ represents
strongly disagree. For measuring performance, a subjective self-report assessment was used. This technique was
employed because it was expected that the owner/managers would be unwilling to disclose full financial data.
This study measured performance with eight items, and the respondents were asked to rate their firm
performance on a five-point rating scale. It has been found that subjective measures are correlated with the
objective measures of performance (Dess & Robinson, 1984).
Descriptive statistical analysis was performed using SPSS for Windows 18.0 to analyze the nature of the data
and to develop a profile of respondents. Partial Least Square (PLS) path modeling was used to analyse the
relationships between knowledge management and performance, and between strategic improvisation and
performance. PLS was used because it is capable of maximizing the explained variance in the dependent variable.
In addition PLS does not require normality of the data distribution, and also does not demand specified minimum
sample size (Hair et al., 2014).
4. Results
4.1 Demographic Profile
Table 1 shows that the number of male respondents is slightly higher than the female respondents with 71
(54.2%) and 60 (45.8%) respectively. Majority of the respondents (63 or 48.1%) either held Sijil Pelajaran
Malaysia (SPM) or Sijil Tinggi Pelajaran Malaysia (STPM) qualifications while another 32 respondents (22.4%)
obtained their Diplomas and 29 (22.1%) with First degree qualification. Three respondents held post degree
qualifications with two who obtained Master degree and one a PhD holder. In terms of years in operation, 66
(50.4%) of the respondents’ firms have been established between 5-10 years and 46 (35.1%) have been in
operation in less than 5 years. Another 11 (8.4%) percent of the respondents’ firms were established between
11-15 years. Only 4 (3.1%) firms have been in existence for more than 20 years. With regard to number of
employees, 55.4 percent of the firms have less than 5 workers, 42 percent have between 5-50 workers, and four
(3.0%) firms have between 51-150 workers.

Table 1. Profile of respondents


Characteristics Frequency Percentage
Gender
Male 71 54.2
Female 60 45.8
Education
PhD 1 8.0
Master 2 1.5
Bachelor 29 22.1
Diploma 32 22.4
SPM/ STPM 63 48.1
Others 4 3.1
Years in Operation
Less than 5 years 46 35.1
5-10 years 66 50.4
11-15 years 11 8.4
16-20 years 4 3.1
More than 20 years 4 3.1
Number of employees
Less than 5 employees 72 55.4
5-50 55 42.0
51-150 4 3.0

4.2 Construct Validity


The construct validity is the extent to which a set of items in an instrument represents the construct to be
measured. If the measurement model shows an acceptable level of model fit, then it is an evidence for the
availability of construct validity (Hair et al., 2014). The validity of the measurement model was assessed by
testing the convergent validity and discriminant validity. The convergent validity exists when the indicators of

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one construct converge or share a higher proportion of variance. The violation of the convergent validity
adversely affects the findings. The convergent validity in the model was established by calculating the factor
loadings, the average variance extracted (AVE) and composite reliability (CR) for all constructs. Hair et al.,
(2010) suggested the cut off value for loadings at a minimum of 0.5 as significant. All loadings in this study
which are greater than 0.5 and the high values of the CR and AVE indicate the presence of convergent validity
(See Table 2).

Table 2. Results of convergent validity analysis


Construct Item Loading CR AVE
FP1 0.897
FP2 0.901
Performance (FP) FP3 0.843 0912 0.776
KM1 0.799
KM2 0.782
KM3 0.698
KM4 0.588
Knowledge Management KM5 0.735 0.909 0.527
KM6 0.762
KM7 0.705
KM8 0.715
KM9 0.727
SI1 0.811
SI2 0.723
Strategic Improvisation (SI) SI3 0.818 0.900 0.564
SI4 0.718
SI5 0.772
SI6 0.692
SI7 0.713

Discriminant validity is the extent to which a construct is different from other constructs (Hair et al., 2010).
Establishing discriminant validity implies that a construct is unique and that the set of items measuring a
construct is distinct from another set of items measuring other constructs. In examining discriminant validity the
Fornell and Larker (1981) criterion was used. It compares the square root of the AVE values with the construct
correlations, and that each construct’s AVE should be higher than construct’s highest squared correlation with
other construct. Table 3 shows the correlation matrix where the diagonal figures represent the square root of the
VE extracted of the constructs. The test results indicate that there is adequate discriminant validity since the
diagonal elements are significantly greater than the off-diagonal elements in the corresponding rows and
columns.

Table 3. Results of discriminant validity analysis


EO FP SI
Firm Performance (FP) 0.881
Knowledge Management 0.474 0.726
Strategic Improvisation (SI) 0.519 0.684 0.751
Note: Values in the diagonal (bold) are square root of the AVE while the off diagonals are the inter construct
correlations.

4.3 Hypotheses Tests


Partial Least Squares (PLS) analysis was used to generate a structural model and then to conduct the hypotheses
testing. The path coefficients generated by PLS provide an indication of the relationships and can be used similar
to the traditional regression coefficients (Gefen, Straub, & Boudreau, 2000). Path coefficients indicate the
strengths of the relationships between the independent and dependent variables, and a significant path indicates
that the relationships and hypotheses are empirically supported. Meanwhile R² value is a measure of the
predictive power of a model for the dependent variable, and the larger the value is, the larger the percentage of
variance explained. T-values of the parameter indicate the strength of the relationship the parameter represents,

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and the higgher the t-valuue, the strongeer the relationsship is. The boootstrapping prrocedure usingg 5000 sample
e was
used to obtain the t-valuues of each coeefficient (Chin,, 2010; Efron & Tibshirani, 1993). Resultss of the analysiis are
depicted inn Figure 2.
Path analyysis was used to test the twoo hypotheses ggenerated from m the research model. The R R² for this mod
del is
0.296, meaaning that onlyy 29.6 percentt of the variancce can be expllained in the eextent of know wledge management
and strateggic improvisatiion. Based on path coefficiennt and t-test vaalue results shoow that H1 and H2 are supported.
The resultts show that knowledge
k mannagement (KM M) and strateggic improvisattion (SI) positiively influence the
SME perfoormance at siggnificant level oof p<0.05 (Seee Table 4).

Figure 2. Reesults of path aanalysis

Table 4. Path coefficientt and Hypothesses testing


Hypothesis Rellationship Std. Betta Std.. Error t-value Decision
H1 KMM -> FP 0.222 0.1110 2.027* Supported
H2 SI -> FP 0.367 0.1112 3.287* Supported
*Significaance at p<0.05

5. Conclussions
This studyy investigated the effects off knowledge m management aand strategic immprovisation on performanc ce of
SMEs in Malaysia. Result
R of the analysis shoows significannt positive reelationship beetween knowlledge
managemeent and perforrmance. Thuss it can be inncluded that kknowledge maanagement praactices are crritical
elements ffor improvemeent in the perfformance of S SMEs. This finnding can be used to improove the knowlledge
managemeent practices among
a the SMMEs in the timee of rapid channge in the envvironment. SMMEs should em mploy
these KM practices thatt is acquiring, creating, storiing, sharing, iimplementing and disseminaating knowledge in
order to m
make strategic decisions
d that ccan lead to impproved performmance and sustain competitivve advantage.
The findinngs also demonnstrate that straategic improviisation does coontribute to an increased perfformance. Stra ategic
improvisattion which connstitutes sponttaneity, creativvity and intuitiion, is even neecessary in situuations that require
immediatee corrective acctions where m most of the SM MEs are in. Im mprovisation may increase the flexibility y and
adaptabilitty of the SME Es in those situuations. In adddition it can bbe a source off competitive advantage bec cause
creativity and intuition in strategic ddecision makinng affects perfformance in cchanging businness environm ments.
Thus to suucceed SMEs needn to foster more strategicc improvisatioonal actions thaat can bring ouut change, enh hance
operationaal efficiency, annd contribute tto organizationnal performancce and compettitive advantagge.

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