Content uploaded by Jenny Darroch
Author content
All content in this area was uploaded by Jenny Darroch on Jun 08, 2015
Content may be subject to copyright.
Knowledge management, innovation and
firm performance
Jenny Darroch
Abstract
Purpose – To provide important empirical evidence to support the role of knowledge management
within firms.
Design/methodology/approach – Data were collected using a mail survey sent to CEOs representing
firms with 50 or more employees from a cross-section of industries. A total of 1,743 surveys were mailed
out and 443 were returned and usable (27.8 percent response rate). The sample was checked for
response and non-response bias. Hypotheses were tested using structural equation modelling.
Findings – This paper presents knowledge management as a coordinating mechanism. Empirical
evidence supports the view that a firm with a knowledge management capability will use resources more
efficiently and so will be more innovative and perform better.
Research limitations/implications – The sample slightlyover-represented larger firms. Data were also
collected in New Zealand. As with most studies, it is important to replicate this study in different contexts.
Practical implications – Knowledge management is embraced in many organizations and requires a
business case to justify expenditure on programs to implement knowledge management behaviours
and practices or hardware and software solutions. This paper provides support for the importance of
knowledge management to enhance innovation and performance.
Originality/value – This paper is one of the first to find empirical support for the role of knowledge
management within firms. Further, the positioning of knowledge management as a coordinating
mechanism is also an important contribution to our thinking on this topic.
Keywords Knowledge management, Innovation, Business performance
Paper type Research paper
Introduction
Knowledge management has recently emerged as a new discipline in its own right and,
given its newness, is probably still developing its theoretical home. In this paper, an
enhanced understanding of knowledge management will be provided by revisiting the
works of Penrose (1959) and Nelson and Winter (1982). In doing so, this paper will argue that
although knowledge in itself is a resource, the effective management of knowledge enables
those within the firm to extract more from all resources available to it. Further, knowledge
management plays an important supporting function by providing a coordinating
mechanism to enhance the conversion of resources into capabilities. The remainder of
this section explains this perspective.
An understanding of why firms exist and how resource allocation decisions are made within
firms has been a central theme in economic theory (Penrose, 1959). However, the treatment of
resources in economic theory has, at times, been problematic. For example, in general
equilibrium theory (a mainstay of neo-classical microeconomic theory) resources were
considered to be homogeneous, information perfectly available and evenly distributed, profit
maximization central and an equilibrium level of output guidedproduction decisions (Penrose,
1959). Clearly, general equilibrium theory was deficient in that it failed to properly consider
what went on inside firms (Nelson, 1991). There were several early and notable attempts to
DOI 10.1108/13673270510602809 VOL. 9 NO. 3 2005, pp. 101-115, QEmerald Group Publishing Limited, ISSN 1367-3270
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 101
Jenny Darroch is an Assistant
Professor of Marketing at the
Peter Drucker and Masatoshi Ito
Graduate School of
Management at Claremont
Graduate University. Her current
research focuses on the
interface between marketing
and entrepreneurship, in
particular the comparison
between market driven and
driving markets firm behaviour.
She has also published
extensively on the role of
knowledge management within
organizations, in particular as an
antecedent. Prior to joining
Claremont Graduate University,
She was the Director of
Entrepreneurship and Senior
Lecturer in Marketing at the
University of Otago in New
Zealand. E-mail:
jenny.darroch@cgu.edu
break away from the general equilibrium model. Of particular relevance here is Penrose’s
(1959) book, The Theory of the Growth of the Firm. Penrose (1959) argues that although
markets set price signals that influence resource allocation, those within the firm make
decisions on what activities the firm will be involved in, how those activities will be performed,
what resources are required, which resources are allocated to different activities and,
ultimately, which resources are used. As a consequence, internal processes and insights
rather than external market prices and cost signals will greatly influence a firm’s growth.
However, decisions about internal processes are burdened with a considerable degree of
uncertainty since decision makers often do not have full information upon which to act. This
may be because either full information is unavailable or the information is asymmetrically
distributed (Clarke and McGuiness, 1987; Coase, 1937). Therefore, in order to understand the
internal operations of a firm, it is important to understand not only the types of resource
decisions but also to acknowledge the affect of information on those resource decisions.
As already indicated, what makes the contribution of Penrose (1959) important is that she
endeavoured to consider what goes on inside a firm, something not traditionally accounted
for by mainstream economists (Nelson, 1991; Sautet, 2000). Furthermore, Penrose’s (1959)
work contributed to the foundations for what is now called the resource-based view of the
firm, one of a number of theories of the firm (Sautet, 2000; Wernerfelt, 1984). In this paper, the
suggestion is that her work also underpins the new discipline of knowledge management
(this assertion will be revisited again shortly).
Central to Penrose’s (1959) paper, and therefore to the resource-based view of the firm, are
decisions about the acquisition and use of resources. But what exactly are resources?
Resources are generally categorized as tangible assets (or resources) and intangible assets (or
resources). Examples of tangible assets include financial resources, types of capital equipment,
land and buildings, location and the qualification profile of employees. Intangible assets are
more difficult to describe. One typology of intangible assets is presented by Hall (1993) and was
recentlyusedbyFerna
´ndez et al. (2000). Here, intangible assets are either people dependent
(e.g. human capital) or people independent and include organizational capital (e.g. culture,
norms, routines and databases), technical capital (e.g. patents) and relational capital (e.g.
reputation, brands, customer and employee loyalty, networks within the distribution channel, the
ability of managers to work together, relationships between buyers and sellers, etc.)[1].
Perhaps more important than the classification of resources is the manner in which Penrose
(1959, p. 25) views them:
Strictly speaking, it is never the resources themselves that are the ‘‘inputs’’ into the production
process, but only the services that the resources can render. The services yielded by resources
are a function of the way in which they are used – exactly the same resources when used for
different purposes or in different ways and in a combination with different types or amounts of
other resources provides a different service or set of services.
This contribution is important because it illustrates that simply owning resources is not
necessarily going to provide any kind of advantage to the firm. More specifically:
The services that the resources will yield depend on the capacities of the men using them, butthe
development of the capacities of men is partly shaped by the resources men deal with (Penrose,
1959, p. 78).
As Penrose (1959) implies, the knowledge of an employee is based upon his or her skills and
experiences and ability to absorb new knowledge. Therefore, while knowledge is a resource
in its own right, the way in which knowledge is managed and used will affect the quality of
services that can be leveraged from each resource owned by the firm. Thus knowledge
management is placed in an important supporting role within the firm.
An alternative way of viewing knowledge management is to consider it as a coordinating
mechanism that enables resources to be converted into capabilities (Nelson and Winter,
1982). As Nelson and Winter (1982) attest, coordinating mechanisms are required to ensure
people not only know their own jobs but are also able to interpret and respond to information
PAGE 102
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
VOL. 9 NO. 3 2005
flowing into the organization. One could argue that knowledge management is simply a more
modern term to describe Nelson and Winter’s (1982) concept of a coordinating mechanism.
Thus, effective knowledge management, a capability in its own right, is also critical to the
long run survival of the firm because it underpins the development of other capabilities.
Therefore, it seems that while Penrose (1959) is rightly attributed with providing theoretical
foundations from which the resource-based view of the firm was spawned, she also provided
an important contribution to the new discipline of knowledge management.
Having accepted the importance of effective knowledge management, it is disappointing to
note that there is little guidance in the extant literature as to what effective knowledge
management really means and even less guidance as to what the quantifiable outcomes of
effective knowledge management might be. Perhaps this incomplete treatment of
knowledge can be explained when one accepts that the identification and measurement
of knowledge and knowledge management is difficult given the tacitness of much
knowledge and the tacit component to knowledge management (Nonaka and Takeuchi,
1995). While the difficulty in identifying and measuring knowledge and knowledge
management provides one plausible explanation as to the dearth of empirical studies in this
discipline, another explanation might simply be that knowledge management is a relatively
new discipline. As suggested by Preiss (1999, p. 39), ‘‘the need now is for analytical
methods that can be used in this new discipline, so that management may add a quantitative
dimension to qualitative [knowledge management] approaches.’’
This paper addresses these deficiencies in two ways. First, a richer understanding of
Penrose’s (1959) contribution can be explained by integrating knowledge management into
the resource-based view of the firm. In addition, Nelson and Winter’s (1982) view, that
coordinating mechanisms (restated here as knowledge management behaviours and
practices) are required for resources to be transformed into capabilities, can be established.
Second, seeing knowledge management in a supporting role may limit any acceptance of its
importance. Therefore empirical evidence as to the consequences of effective knowledge
management is also required. Possible consequences of effective knowledge management
include: competitive advantage (Connor and Prahalad, 1996; Hall, 1993) improved financial
performance (Teece, 1998; Wiig, 1997); innovation (Antonelli, 1999; Carneiro, 2000; Dove,
1999; Nonaka and Takeuchi, 1995); anticipation of problems (Carneiro, 2000); enhanced
organizational learning (Buckley and Carter, 2000); and superior use of information
(Carneiro, 2000). This paper will empirically examine the link between knowledge
management and innovation and firm performance.
By way of summary, Figure 1 provides an overview of the conceptual model described so far
in this paper. Inputs, including knowledge inputs, are shown as influencing organizational
routines. Routines for knowledge dissemination and responsiveness to knowledge are
provided as examples of the many types of routines performed within an organization. Some
routines will develop into organizational capabilities and many will also influence the
acquisition of resources. Resources, routines and capabilities underpin outputs such as
innovations and affect outcomes such as financial performance.
Hypothesis development
This paper examines the role of effective knowledge management in two ways. First, the
paper examines the suggestion that effective knowledge management supports the
conversion of all other resources into capabilities. Since capabilities underpin the long run
survival of a firm, firms with effective knowledge management behaviours and practices are
‘‘ Internal processes and insights rather than external market
prices and cost signals will greatly influence a firm’s growth. ’’
VOL. 9 NO. 3 2005
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 103
likely to make better use of resources and so will exhibit superior outcomes such as more
innovation and superior financial performance. Therefore:
H1a. Firms that effectively manage knowledge are likely to be more innovative.
H1b. Firms that effectively manage knowledge are likely to perform better.
Second, the paper examines the direct contribution of effective knowledge management to
two outcomes of interest: innovation and performance. Consistent with Darroch (2003),
knowledge management is presented in three parts: knowledge acquisition, knowledge
dissemination and responsiveness to knowledge. While little guidance comes from the
extant literature, this paper proposes a positive relationship between the three knowledge
management components. That is, a firm with access to a greater pool of knowledge will
have better-developed knowledge dissemination and responsiveness to knowledge
behaviours and practices. Similarly, a firm with better-developed knowledge
dissemination behaviours and practices will be more responsive to knowledge. The
hypotheses related to the discussion in this section are:
H2. Knowledge acquisition positively affects knowledge dissemination.
H3. Knowledge dissemination positively affects responsiveness to knowledge.
H4. Knowledge acquisition positively affects responsiveness to knowledge.
Recall that there are only a limited number of studies reported in the extant literature that
consider the consequences of effective knowledge management. However, there are a
number of studies that consider antecedents of innovation and performance. Many of these
antecedents may be applicable within a definition of knowledge management. For example,
Capon et al. (1992) profiled innovative firms in the USA and found that acquiring other firms,
as a way of accessing new knowledge, did not significantly affect the ability of a firm to
innovate. However, Capon et al. (1992) did find that hiring scientists, spending money on
applied R&D to develop new products and encouraging scientific discussions enhances the
ability of a firm to innovate.
Probably the most frequent area of research linking knowledge management and innovation
relates to the role of inter-functional co-ordination, teamwork and the use of networks to
facilitate innovation. There are many good review articles in this area. Perhaps one of the
more extensive reviews is that of Griffin and Hauser (1996) who examined the integration
between R&D and marketing, citing such integration as an important antecedent of new
product success. In this article, Griffin and Hauser (1996, p. 202) make recommendations
based on a summary of a large number of empirical studies, that integration is achieved by
the design and location of physical facilities, personnel movement, informal social systems,
organizational structures, incentives and rewards, and formal integrative management
Figure 1 The conceptual model
PAGE 104
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
VOL. 9 NO. 3 2005
processes (e.g. the use of the stage-gate new product development process or quality
functional deployment process). Henard and Szymanksi (2001) provide another
comprehensive review article. The authors undertook a meta-analysis of the antecedents
of new product performance. Of the 24 antecedents reported frequently (i.e. n$10), two
related to aspects of knowledge management: cross-functional integration and
cross-functional communication. However, the results of the meta-analysis found that
neither could be generalized across research studies.
Several studies provide mixed evidence of the effect of organizational climate on innovation
(e.g. Amabile et al., 1996; Anderson and West, 1998; Capon et al., 1992; Tang, 1999). In this
paper, it is argued that organizational climate is an antecedent of knowledge management
since few items included in climate studies can be considered knowledge management
behaviours and practices. To place climate as an antecedent of knowledge management is
consistent with work by researchers such as Jaworski and Kohli (1993), who positioned
organizational climate as an antecedent of a market orientation or Homburg and Pflesser
(2000) who included a market oriented culture as an antecedent of market orientation
behaviours and practices.
Thus, it is difficult to draw conclusions from the extant literature about the relationship
between effective knowledge management and innovation. This is not because empirical
evidence refutes the existence of such a relationship, but simply because research
examining this link is developing. In spite of limited evidence, one of the primary aims of this
paper is to empirically investigate a link between effective knowledge management and
innovation that, to date, has largely only been proposed in the literature. Thus, based on
mixed but scant empirical results, it is proposed that each component of the knowledge
management construct will positively affect innovation. In order for innovation to occur,
managers first need to have knowledge about the internal and external forces that affect the
firm – the more knowledge, and the greater the variety of knowledge, the better. Second,
knowledge must flow freely around the firm – the better the dissemination of knowledge the
greater the likelihood of innovation as more people within levels and departments of the
organization are exposed to new knowledge that interacts with the knowledge already held.
Lastly, an innovative organization is, by definition, responsive. In fact, innovation is a
response in itself. Therefore, the more responsive and agile an organization is the more likely
it is to be innovative. Thus, the relevant hypotheses are:
H5. Knowledge acquisition positively affects innovation.
H6. Knowledge dissemination positively affects innovation.
H7. Responsiveness to knowledge positively affects innovation.
Finally, this paper argues that effective knowledge management is a worthwhile activity for
managers to emphasize. For managers to encourage the development of knowledge
management behaviours and practices, they need evidence that financial performance will
be enhanced as a consequence. However, once again there are very few studies linking
aspects of knowledge management and performance and as a result, each component of
the knowledge management construct is presented as positively affecting performance. The
relevant hypotheses are:
H8. Knowledge acquisition positively affects performance.
H9. Knowledge dissemination positively affects performance.
H10. Responsiveness to knowledge positively affects performance.
‘‘ Simply owning resources is not necessarily going to provide any
kind of advantage to the firm. ’’
VOL. 9 NO. 3 2005
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 105
For the sake of completion, a further relationship examined in this study is the link between
innovation and performance. A positive relationship between innovation and performance is
fairly well established in the extant literature (e.g. Avlonitis and Gounaris, 1999;
Atuahene-Gima, 1996; Capon et al., 1992; Deshpande
´et al., 1993; Han et al., 1998; Li
and Calantone, 1998; Manu and Sriram, 1996; Mavondo, 1999; Va
´zquez et al., 2001). On this
basis, the following hypothesis is presented:
H11. Innovation positively affects performance.
Research design
Data
The data were obtained from a sample of New Zealand organizations with 50 or more
employees. This screening criterion was established on the basis that larger organizations
would require the existence of some processes to facilitate knowledge management. The
most senior person within each organization was identified and asked to complete the survey,
assuming that he or she would be in a position to comment on the flow of knowledge around
the entire organization rather than the flow of knowledge within one or a few departments.
The administration of the survey proceeded in three stages. After identifying a total of 1,743
organizations with 50 or more employees (see www.Kompass.com for a description of the
database) and representing a cross section of industries. A pre-notification letter was sent to
potential respondents explaining the purpose of the research and announcing the imminent
arrival of the survey. Respondents were also promised a report-card summary of the knowledge
management profile of their organization as an incentive to complete the survey. Two weeks
later, a copy of the questionnaire was mailed to potential respondents, along with a cover letter
and a stamped addressed return envelope. The useable sample size was 443 and the effective
response rate (after adjustments) was 27.8 percent. The sample was not strictly representative
of industry groupings within New Zealand and slightly over-represented larger firms. Since
there has been little empirical research on knowledge management practices reported in the
extant literature, it is difficult to know how industry classification or industry size might bias the
results. To check for non-response bias, a random cross section of 150 organizations, from
which there had been no response, was selected and sent a brief questionnaire for completion.
Of this group, 44 (29.3 percent) completed the brief questionnaire. Next, data was categorized
into one of four waves. Results of ANOVA tests showed no significant differences between
mean responses from early, late or non-respondents and therefore no significant difference
between each category of respondents.
Definition of variables
Knowledge management orientation. Darroch (2003) developed three scales to measure
behaviours and practices for each of component of knowledge management: knowledge
acquisition, knowledge dissemination and responsiveness to knowledge. Knowledge
acquisition is captured by six factors: valuing employees attitudes and opinions and
encouraging employees to up-skill; having a well-developed financial reporting system;
being market focused by actively obtaining customer and industry information; being
sensitive to information about changes in the marketplace; employing and retaining a large
number of people trained in science, engineering or math; working in partnership with
international customers; and getting information from market surveys. Five factors describe
the knowledge dissemination construct: readily disseminating market information around
the organization; disseminating knowledge on-the-job; using techniques such as quality
circles, case notes, mentoring and coaching to disseminate knowledge; using technology
(such as teleconferencing, videoconferencing and Groupware) to facilitate communication;
and preferring written communication to disseminate knowledge. Lastly, responsiveness to
knowledge was described by five factors: responding to knowledge about customers,
competitors and technology; being flexible and opportunistic by readily changing products,
processes and strategies; and having a well-developed marketing function.
PAGE 106
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
VOL. 9 NO. 3 2005
Innovation. The original Booz Allen Hamilton (1982) typology of innovation is used in this
paper. Here, innovations are categorized as new to the world, new products to the firm,
additions to existing product lines, improvements or revisions to existing product lines, cost
reductions to existing products, or repositioning of existing products. New to the world
innovations are typically characterized as radical innovations while the other categories are
incremental innovations. In spite of recent attempts to revisit innovation typologies (for a
recent discussion of this see Avlonitis and Gounaris, 1999 or Garcia and Calantone, 2002),
the Booz Allen Hamilton (1982) scale still maintains reasonable face validity.
Performance. This paper uses comparative and internally reflective performance measures,
for example, ‘‘Compared with the industry average, our company is more profitable’’ and
internally reflective performance measures, for example, ‘‘We are more profitable than we
were five years ago’’ (the measures used are based on those found in Avlonitis and
Gounaris, 1999; Deshpande
´et al., 1993; Jaworski and Kohli, 1993; Va
´zquez et al., 2001).
These performance measures capture both financial measures (in this case profit) and
non-financial measures (e.g. market share and sales growth).
Results and discussion
Tables I-IV provide the results of the correlation analysis and are provided to test H1. Tables I
and III use summated scores for each knowledge management component while Tables II
and IV provide more detail by using all sixteen knowledge management factors. To assist
readability, correlation coefficients are omitted if not statistically significant. Table I confirms
that the three knowledge management components do correlate with all types of innovation
and so preliminary evidence is provided to support the view that a firm with a capability in
knowledge management is also likely to be more innovative.
However, the detail provided by Table II suggests that a firm with a capability in knowledge
management is less likely to develop new to the world innovations. In other words, when a
firm develops a new product or service for which it lacks the scientific or business
expertise, a capability in knowledge management may not be helpful. By contrast, firms
developing incremental innovations (and so are working within the boundaries of existing
scientific and business expertise) tend to have well developed knowledge management
behaviours and practices. This finding is interesting because it implies that knowledge
management behaviours and practices flourish when those inside the organization work
within the confines of existing capabilities. This interpretation is also consistent with a view
presented earlier by Tushman and Anderson (1986) who attest that incremental
innovations are competence enhancing, while radical (i.e. new to the world innovations)
are competence destroying. In the context of this paper, new to the world innovations have
the potential to put the business at risk, because not only is an existing knowledge
management capability almost irrelevant but also existing resources available to the firm
may not be well utilized.
Table I Correlations of knowledge management scales with innovation types
Knowledge acquisition Knowledge dissemination Responsiveness to knowledge
We have launched products that are the first of
their kind in the world 0.30* 0.29* 0.17*
We often introduce new ranges of products or
services not previously offered by this company 0.30* 0.32* 0.45*
We often add new products or services to our
existing ranges 0.36* 0.39* 0.46*
We often improve or revise existing products or
services 0.51* 0.49* 0.59*
We often change our products or services in
order to reduce costs 0.26* 0.16* 0.30*
We often reposition existing products or services 0.32* 0.31* 0.41*
Note: * result significant at
a
,0:01
VOL. 9 NO. 3 2005
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 107
Table II Correlations of knowledge management factors with innovation types
New to
the world
New to
the firm
New products to
existing ranges
Improve existing
products
Change products
to reduce costs
Reposition
existing products
Knowledge acquisition
KAF1. Organization values employees’
attitudes and opinions 0.13* 0.20* 0.27* 0.38* 0.14* 0.24*
KAF2. Organization has well developed
financial reporting systems – 0.17* 0.16* 0.25* 0.21* 0.17*
KAF3. Organization is sensitive to
information about changes in the market
place 0.14* 0.34* 0.38* 0.47* 0.26* 0.35*
KAF4. Science and technology human
capital profile 0.27* – – – – –
KAF5. Organization works in partnership
with international customers 0.21* 0.19* 0.26* 0.27* 0.20* 0.14*
KAF6. Organization gets information
from market surveys 0.19* 0.25* 0.29* 0.39* 0.19* 0.23*
Knowledge dissemination
KDF1. Market information is freely
disseminated 0.15* 0.28* 0.34* 0.45* 0.21* 0.27*
KDF2. Knowledge is disseminated
on-the-job – 0.22* 0.22* 0.27* – 0.16*
KDF3. Use of specific techniques to
disseminate knowledge 0.15* 0.19* 0.18* 0.28* 0.11* 0.17*
KDF4. Organization uses technology to
disseminate knowledge 0.25* – 0.13* – – 0.14*
KDF5. Organization prefers written
communication 0.13* 0.20* 0.17* 0.28* – 0.13*
Responsiveness to knowledge
KRF1. Responds to customers – 0.16* 0.20* 0.32* 0.15* 0.14*
KRF2. Well-developed marketing
function – 0.30* 0.35* 0.42* 0.23* 0.34*
KRF3. Responds to technology 0.23* 0.30* 0.26* 0.35* 0.19* 0.22*
KRF4. Responds to competitors – 0.27* 0.23 0.32* 0.21* 0.27*
KRF5. Organization is flexible and
opportunistic 0.16* 0.47* 0.47* 0.40* 0.34* 0.45*
Note: * result significant at
a
,0:01
Table III Correlation of knowledge management scales with performance types
Knowledge acquisition Knowledge dissemination Responsiveness to knowledge
Comparative performance measures
Compared with the industry average, we are
more profitable 0.23* 0.19* 0.31*
Compared with the industry average, we have a
greater market share 0.17* 0.18* 0.35*
Compared with the industry average, we are
growing more rapidly 0.35* 0.31* 0.43*
Internal performance measures
In general, our organization is performing better
than it did 12 months ago – – –
In general, our organization is performing better
than it did five years ago – – –
Over the past 12 months, our organization has
met its performance objectives – – 0.18*
Over the past five years, our organization has
met its performance objectives 0.28* 0.21* 0.23*
Note: * result significant at
a
,0:01
PAGE 108
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
VOL. 9 NO. 3 2005
The results in Table III are mixed. All correlations between knowledge management and
comparative performance measures were positive and significant. However, there were only
a limited number of significant correlations between knowledge management and internal
measures of performance. The detail provided in Table IV supports the view that many
individual knowledge management factors do not correlate with types of performance
measures. One possible explanation for these results could be that comparative
performance measures may suffer from a halo affect whereby CEOs exaggerate the
performance of their own firm. Further, knowledge management is not the only variable to
Table IV Correlation of knowledge management factors with performance types
Comparative measures Internally reflective measures
More
profit
Greater
market share
More
growth
Better
performance
over 12 months
Better
performance
over five years
Met objectives
over 12
months
Met objectives
over five
years
Knowledge acquisition
KAF1. Organization
values employees’
attitudes and opinions – – 0.24* 0.17* 0.23* 0.20* 0.29*
KAF2. Organization has
well developed financial
reporting systems 0.26* – 0.26* – 0.16* 0.22* 0.26*
KAF3. Organization is
sensitive to information
about changes in the
marketplace 0.31* 0.29* 0.39* 0.13* 0.12* 0.20* 0.21*
KAF4. Science and
technology human capital
profile – – – – – – –
KAF5. Organization works
in partnership with
international customers 0.18* – 0.17* – 0.13* 0.15* 0.21*
KAF6. Organization gets
information from market
surveys 0.13* 0.13* 0.17* – – – 0.17*
Knowledge dissemination
KDF1. Market information
is freely disseminated 0.24* 0.18* 0.30* 0.12* 0.18* 0.22* 0.23*
KDF2. Knowledge is
disseminated on-the-job – – 0.22* – 0.18* 0.22* 0.23*
KDF3. Use of specific
techniques to disseminate
knowledge – – 0.20* – 0.15* – 0.16*
KDF4. Organization uses
technology to disseminate
knowledge – – – – – – –
KDF5. Organization
prefers written
communication – – 0.13* – 0.13* – 0.15*
Responsiveness to
knowledge
KRF1. Responds to
customers 0.24* 0.17* 0.28* – 0.17* 0.28* 0.26*
KRF2. Well-developed
marketing function 0.30* 0.26* 0.38* – 0.18* 0.18* 0.22*
KRF3. Responds to
technology 0.17* 0.14* 0.28* – 0.19* 0.21* 0.28*
KRF4. Responds to
competitors 0.27* 0.28* 0.29* – 0.15* 0.19* 0.14*
KRF5. Organization is
flexible and opportunistic – – 0.21* – – – –
Note: * result significant at
a
,0:01
VOL. 9 NO. 3 2005
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 109
affect performance. Other variables, such as the economic or competitive environment in
which the firm operates might have a greater impact on performance.
To conclude this part of the discussion, at an aggregated level it is reasonable to accept H1a
and conclude that firms with well developed knowledge management practices and
behaviours are more likely to develop incremental innovations. However, H1b is rejected
because there is insufficient evidence to support the view that firms with well developed
knowledge management practices and behaviours will perform better. An examination of
individual knowledge management factors also favours these conclusions.
Structural equation modelling was used to test for the effects of knowledge management on
innovation and performance and to test for the effect of innovation on performance. Figure 2
provides an illustration of the model tested. Fit statistics were good (
x
2¼69:64, df ¼44,
GFI ¼0:96, AGFI ¼0:92, NFI ¼0:95, TLI ¼0:97, RMSEA ¼0:05). Squared multiple
correlations for innovation was 0.41 and for performance was 0.35. Results are provided
in Table V.
The three knowledge management components behaved as proposed in the hypotheses.
That is, knowledge acquisition positively affected both knowledge dissemination (H2) and
responsiveness to knowledge (H3). In addition, knowledge dissemination positively affected
responsiveness to knowledge (H4). Thus, H2-4 are strongly supported (
a
,0:01). Thus, a
firm with access to a greater pool of knowledge is likely to have better developed knowledge
dissemination and responsiveness to knowledge behaviours and practices. Similarly, a firm
with better-developed knowledge dissemination behaviours and practices is likely to be
more responsive to knowledge.
Figure 2 The measurement model
Table V Results of structural equation modelling
Hypothesis Regression weights Total effects Direct effects Indirect effects Hypothesis supported?
H2 KA !KD 1.22** 1.12** 0.00 Yes
H3 KD !KR 0.15** 0.15** 0.00 Yes
H4 KA !KR 0.96** 0.79** 0.17** Yes
H5 KA !innovation 3.20** 1.29** 1.92** Yes
H6 KD !innovation 0.75** 0.55** 0.20* Yes
H7 KR !innovation 1.35** 1.35** 0.00 Yes
H8 KA !performance 1.86** 0.72 1.90** Indirect only
H9 KD !performance 0.03 20.21 0.20** No
H10 KR !performance 1.24** 1.11** 0.00 Yes
H11 Innovation !performance 0.09 0.09 0.00 No
Notes: Squared multiple correlations: KA ¼0:00; KD ¼0:44; KR ¼0:51; innovation ¼0:41; performance ¼0:35; sample size ¼441.
*
a
,0:05; **
a
,0:01
PAGE 110
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
VOL. 9 NO. 3 2005
All three components of knowledge management positively predicted innovation and so
H5-7 are accepted (
a
,0:01). The link between knowledge management and innovation
was conceptually supported in the literature, although not well supported with empirical
evidence. Thus, in this study, a firm capable in all three knowledge management
components is more innovative. A widely held view has been that intangible knowledge is
likely to be harder for competitors to access and copy and so this type of knowledge
provides greater potential for developing competitive advantages (Foss, 1996; Kogut and
Zander, 1992; Nonaka and Takeuchi, 1995). Further, knowledge dissemination and
responsiveness to knowledge impact upon the creation of sustainable competitive
advantages because of their ambiguity and uniqueness to the firm and the fact that
knowledge becomes embedded in organizational processes (Day, 1994; Fahey and Prusak,
1998; Grant, 1996; Teece, 1998, 2000). The results reported in this paper are important
because they show that, in order to be innovative, having knowledge is as important as what
is done with that knowledge.
Of the three knowledge management constructs, only responsiveness to knowledge
appeared as a statistically significant antecedent of performance and so H10 was accepted.
This result supports the view that responsive organizations are likely to extract more from
their resources, and so will enjoy superior benefits than less responsive organizations
(Penrose, 1959). Knowledge acquisition affects performance but this relationship is
mediated by responsiveness to knowledge and so H8 is only partially supported on the
basis of statistically significant indirect effects. There is no support for the hypothesis that
knowledge dissemination affects performance (H9). Thus, firms with a knowledge
management capability do not necessarily perform better.
The hypotheses tested here were presented without direct empirical support from the extant
literature. One possible reason for these results then is that the knowledge management
construct is broad and includes knowledge about both market and non-market activities; it
may transpire that non-market activities do not have any direct impact on profitability. Thus,
there is likely to be a larger gap between, say, getting an idea from an employee and a
subsequent financial performance improvement versus responding to a customer’s
expression of an unmet need and a subsequent financial performance improvement.
However, by the time the organization is ready to respond to the knowledge, the gap
between any internal company activities and performance will have closed, hence the
relationship between responding to knowledge and performance.
The relationship between innovation and performance was not supported and so H11 is
rejected. This result contradicts research reported in the area. A possible reason for the
apparent contradiction with the extant literature is that other innovation-performance studies
reported earlier did not consider categories of innovation but instead, considered the
general characteristics of the innovating firm (e.g. Atuahene-Gima, 1996; Capon et al., 1992;
Manu and Sriram, 1996; Mavondo, 1999, Va
´zquez et al., 2001), the number of innovations
(e.g. Han et al., 1998; Va
´zquez et al., 2001) or the advantages of the new product (e.g. Li and
Calantone, 1998). Thus, direct comparisons are less relevant given the different
operationalization of constructs. However, in spite of the disappointing results reported
here, it would be unwise for managers wanting to enhance performance not to pursue
innovation since in the current environment; innovation might be required to simply remain
competitive. Without innovation, firms risk losing their competitive position by falling behind
(Veryzer, 1998).
Conclusions
Implications for theory
Within firms, decisions are made as to what activities the firm will be involved in, how those
activities will be performed, what resources are required, which resources are allocated to
different activities and, ultimately, which resources are used (Penrose, 1959). Against this
backdrop, this paper argues that knowledge takes on a number of roles: first, knowledge is,
in itself, both a tangible and intangible resource (Hall, 1993); second, having access to
VOL. 9 NO. 3 2005
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 111
knowledge supports any decision making about resources; third, a capability in knowledge
management enables those within a firm to leverage the most service from knowledge and
other resources (Penrose, 1959); and fourth, effective knowledge management makes
contributes to innovation and performance.
The role of effective knowledge management as a coordinating mechanism was established
by providing evidence that firms with a propensity toward developing incremental
innovations were more likely to have well-developed knowledge management behaviours
and practices. One can assume that these firms not only have a knowledge management
capability but also effectively use other available resources. This result provides early
empirical support for the ideas of Penrose (1959) and Nelson and Winter (1982) by showing
the role of knowledge management as a coordinating mechanism when developing
incremental innovations.
However, there was limited support for the view that a firm developing new to the world
innovations had well-developed knowledge management behaviours and practices, nor
was there conclusive evidence for the proposition that superior financial performance and
knowledge management co-existed. One interpretation of this result is that new to the world
innovations require those within the firm to move beyond their comfort zone, to take on board
new knowledge and to develop new capabilities. It may be that a reliance on existing
knowledge and existing processes to disseminate and respond to that knowledge may
inhibit the development of new to the world innovations. For performance, it may be that
there is perhaps too large a gap between the supporting role of knowledge management
and performance as an outcome.
All three knowledge management components were found to have a direct effect on
innovation, but only responsiveness to knowledge directly contributed to financial
performance. This result is particularly important because seminal works on knowledge
management, for example Nonaka and Takeuchi’s (1995) book, The Knowledge-creating
Company, present knowledge management as imperative for innovation. Although Nonaka
and Takeuchi’s definition of knowledge management is more consistent with the knowledge
dissemination component of the construct used in this paper, my results are important
because they provide the first empirical support for the multiple conjectures that are made
about the consequences of effective knowledge management.
While disappointing that only responsiveness to knowledge directly affected performance,
the findings can be explained by the large gap between non-market knowledge and
performance. Once again, to have empirical evidence to add richness to the discussion of
the consequences of effective knowledge management is an important outcome of this
study.
Implications for managers
Knowledge management has been hailed as a new discipline. Unfortunately, the
interpretation of the construct knowledge management is often confused with the
introduction of information technology as a solution to capture knowledge. This paper
presents a broader concept of knowledge management by using sixteen knowledge
management factors previously found to be characteristic of a firm effectively managing
knowledge (Darroch, 2003). The paper also provides evidence of the importance of effective
knowledge management. Therefore, managers should consider programs to enhance the
‘‘ A firm capable in knowledge acquisition, knowledge
dissemination and responsiveness to knowledge is more
innovative. ’’
PAGE 112
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
VOL. 9 NO. 3 2005
16 knowledge management behaviours and practices since a firm that does effectively
manage knowledge will be more innovative.
Limitations
The sample used in this study over-represented firms with 200 or more employees and was
not completely representative of industry sectors. However, the effect of firm size or industry
type on knowledge management is unknown. For example, it might transpire that larger firms
or firms in knowledge intensive industries need to manage knowledge more effectively given
a greater number of people, divisions or locations or abundance of complex knowledge.
However, larger firms might also find dissemination and responsiveness activities more
difficult. Along with possible sample biases, one should also note that New Zealand firms are
characteristically small by world standards (there are approximately only 3,000 firms with
more than 50 employees and of those, only 30 have more than 1,000 employees). Clearly,
there is a need to replicate the study in different contexts.
Future research
This research found that firms effectively managing knowledge were also more innovative
and performed better. The study also found knowledge management positively affected
innovation and responsiveness to knowledge positively affected performance. One of the
central tenets of this paper is that effective knowledge management enables good quality
services to be extracted from other resources. Future research is required to firmly establish
this assertion by further examining the supporting role of knowledge management. Lastly,
given the importance of knowledge management to knowledge-based societies, it is hoped
that a stream of research will emerge that provides further confirmation of the results
reported in this study and identifies other consequences, and of course antecedents, of
effective knowledge management.
Note
1. This categorization has been widely accepted in the extant literature. However, explicit information
such as databases, market research reports, financial data and reports and patents are best
categorized as tangible assets since, theoretically, they can be bought or sold. This paper suggests
that the term intangible assets is reserved for assets that have a significant tacit knowledge
component, such as organizational culture, relationships with suppliers and customers and the
experience and intellectual capital of employees. This reclassification then enables intangible
assets to more rightly lay claim to being difficult to measure and therefore manage. By contrast,
tangible assets are generally easier to measure and manage.
References
Amabile, T.M., Conti, R., Coon, H., Lazenby, J. and Herron, M. (1996), ‘‘Assessing the work environment
for creativity’’, Academy of Management Journal, Vol. 39 No. 5, pp. 1154-84.
Anderson, N. and West, M.A. (1996), ‘‘The team climate inventory: development of the TCI and its
applications in teambuilding for innovativeness’’, European Journal of Work and Organisational
Psychology, Vol. 5 No. 1, pp. 53-66.
Antonelli, C. (1999), ‘‘The evolution of the industrial organization of the production of knowledge’’,
Cambridge Journal of Economics, Vol. 23, pp. 243-60.
Atuahene-Gima, K. (1996), ‘‘Market orientation and innovation’’, Journal of Business Research, Vol. 35,
pp. 93-103.
Avlonitis, G.J. and Gounaris, S.P. (1999), ‘‘Market orientation and its determinants: an empirical
analysis’’, European Journal of Marketing, Vol. 33 Nos 11/12, pp. 1003-37.
Booz Allen Hamilton (1982), New Products for the 1980s, Booz Allen Hamilton, New York, NY.
Buckley, P.J. and Carter, M.J. (2000), ‘‘Knowledge management in global technology markets’’, Long
Range Planning, Vol. 33, pp. 55-71.
Capon, N., Farley, J.U., Lehmann, D.R. and Hulbert, J.M. (1992), ‘‘Profiles of product innovators among
large US manufacturers’’, Management Science, Vol. 38 No. 2, pp. 157-68.
VOL. 9 NO. 3 2005
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 113
Carneiro, A. (2000), ‘‘How does knowledge management influence innovation and competitiveness?’’,
Journal of Knowledge Management, Vol. 4 No. 2, pp. 87-98.
Clarke, R. and McGuiness, T. (1987), The Economics of the Firm, Basil Blackwell, Oxford.
Coase, R.H. (1937), ‘‘The nature of the firm’’, Economica, Vol. 32, pp. 386-405.
Connor, K.R. and Prahalad, C.K. (1996), ‘‘A resource-based theory of the firm: knowledge versus
opportunism’’, Organization Science, Vol. 7 No. 5, pp. 477-501.
Darroch, J. (2003), ‘‘Developing a measure of knowledge management behaviours and practices’’,
Journal of Knowledge Management, Vol. 7 No. 5, pp. 41-54.
Day, G. (1994), ‘‘The capabilities of market-driven organizations’’, Journal of Marketing, Vol. 58, October,
pp. 37-52.
Deshpande
´, R., Farley, J.U. and Webster, F.E. Jr (1993), ‘ ‘Corporate culture, customer orientation, and
innovativeness in Japanese firms: a quadrad analysis’’, Journal of Marketing, Vol. 57, January,
pp. 23-37.
Dove, R. (1999), ‘‘Knowledge management, response ability, and the agile enterprise’’, Journal of
Knowledge Management, Vol. 3 No. 1, pp. 18-35.
Fahey, L. and Prusak, L. (1998), ‘‘The 11 deadliest sins of knowledge management’’, California
Management Review, Vol. 40 No. 3, pp. 265-76.
Ferna
´ndez, E., Montes, J.M. and Va
´zquez, C.J. (2000), ‘‘Typology and strategic analysis of intangible
resources: a resource-based approach’’, Technovation, Vol. 20, pp. 81-92.
Foss, N.J. (1996), ‘‘Knowledge-based approaches to the theory of the firm: some critical comments’’,
Organization Science, Vol. 7 No. 5, pp. 470-6.
Garcia, R. and Calantone, R. (2002), ‘‘A critical look at technological innovation typology and
innovativeness terminology: a literature review’’, Journal of Product Innovation Management, Vol. 19
No. 2, pp. 110-32.
Grant, R.M. (1996), ‘‘Toward a knowledge-based theory of the firm’’, Strategic Management Journal,
Vol. 17, Winter special issue, pp. 109-22.
Griffin, A. and Hauser, J.R. (1996), ‘‘Integrating R&D and marketing: a review and analysis of the
literature’’, Journal of Product and Innovation Management, Vol. 13, pp. 191-215.
Hall, R. (1993), ‘‘A framework linking intangible resources and capabilities to sustainable competitive
advantage’’, Strategic Management Journal, Vol. 14, pp. 607-18.
Han, J.K., Kim, N. and Srivastava, R.K. (1998), ‘‘Market orientation and organizational performance:
is innovation a missing link?’’, Journal of Marketing, Vol. 62, October, pp. 30-45.
Henard, D.H. and Szymanksi, D.M. (2001), ‘‘Why some new products are more successful than others’’,
Journal of Marketing Research, Vol. 38, pp. 362-75.
Homburg, C. and Pflesser, C. (2000), ‘ ‘A multiple-layer model of market-oriented organisational culture:
measurement issues and performance outcomes’’, Journal of Marketing Research, Vol. 37, November,
pp. 449-62.
Jaworski, B.J. and Kohli, A.K. (1993), ‘‘Market-orientation: antecedents and consequences’’, Journal of
Marketing, Vol. 57, July, pp. 53-70.
Kogut, B. and Zander, U. (1992), ‘‘Knowledge of the firm, combinative capabilities and the replication of
technology’’, Organisation Science, Vol. 3 No. 3, pp. 383-97.
Li, T. and Calantone, R.J. (1998), ‘‘The impact of market knowledge competence on new product
advantage: conceptualization and empirical examination’’, Journal of Marketing, Vol. 62, October,
pp. 13-29.
Manu, F.A. and Sriram, V. (1996), ‘‘Innovation, marketing strategy, environment and performance’’,
Journal of Business Research, Vol. 35, pp. 79-91.
Mavondo, F.T. (1999), ‘‘Environment and strategy as antecedents for marketing effectiveness and
organizational performance’’, Journal of Strategic Marketing, Vol. 7, pp. 237-50.
PAGE 114
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
VOL. 9 NO. 3 2005
Nelson, R.R. (1991), ‘‘Why do firms differ, and how does it matter?’’, Strategic Management Journal,
Vol. 12, pp. 61-74.
Nelson, R.R. and Winter, S.G. (1982), An Evolutionary Theory of Economic Change, Harvard University
Press, Cambridge, MA.
Nonaka, I. and Takeuchi, H. (1995), The Knowledge-creating Company, Oxford University Press, New
York, NY.
Penrose, E. (1959), The Theory of the Growth of the Firm, Oxford University Press, Oxford.
Preiss, K. (1999), ‘‘Modeling of knowledge flows and their impact’ ’, Journal of Knowledge Management,
Vol. 3 No. 1, pp. 36-46.
Sautet, F.E. (2000), An Entrepreneurial Theory of the Firm, Routledge, New York, NY.
Tang, H. (1999), ‘‘An inventory of organisational innovativeness’’, Technovation, Vol. 19, pp. 41-51.
Teece, D.J. (1998), ‘‘Capturing value from knowledge assets: the new economy, markets for know-how
and intangible assets’’, California Management Review, Vol. 40 No. 3, pp. 55-79.
Teece, D.J. (2000), ‘‘Strategies for managing knowledge assets: the role of firm structure and industrial
context’’, Long Range Planning, Vol. 33, pp. 35-54.
Tushman, M. and Anderson, P. (1986), ‘‘Technological discontinuities and organisational environments’’,
Administrative Science Quarterly, Vol. 31, pp. 439-65.
Va
´zquez, R., Santos, M.L. and A
´lvarez, L.I. (2001), ‘‘Market orientation, innovation and competitive
strategies in industrial firms’’, Journal of Strategic Marketing, Vol. 9, pp. 69-90.
Veryzer, R.W. Jr (1998), ‘‘Discontinuous innovation and the new product development process’’, Journal
of Product Innovation Management, Vol. 15, pp. 304-21.
Wernerfelt, B. (1984), ‘‘From critical resources to corporate strategy’’, Strategic Management Journal,
Vol. 5 No. 2, pp. 171-80.
Wiig, K.M. (1997), ‘‘Knowledge management: an introduction and perspective’’, Journal of Knowledge
Management, Vol. 1 No. 1, pp. 6-14.
VOL. 9 NO. 3 2005
j
JOURNAL OF KNOWLEDGE MANAGEMENT
j
PAGE 115
