The 2
ndInternational Conference on Human Capital and Knowledge Management
(IC-HCKM 2015)
The Influence of Knowledge Management Capabilities on SMEs’
Innovation (Case Study : Palembang SMEs)
Ervi Cofriyanti
a1, Rika Kharlina Ekawati
baSTMIK GI MDP, Rajawali Street No. 14, Palembang 30113, Indonesia bSTIE MDP, Rajawali Street No. 14, Palembang 30113, Indonesia
Abstract
Nowadays, Small and Medium Enterprises (SMEs) in Indonesia are still not optimal in innovating, both in terms of product innovation, process and management. Therefore the position of SMEs is still far behind compared to large companies. Whereas in the Indonesian economy, SMEs can provide employment and support the Indonesia's GDP. In order that SMEs can survive in the tight competition and improve the SMEs’ performance, SMEs must continuously innovate. To emerge the ability to innovate, an organization needs to implement the knowledge management. However, there are few SMEs in Indonesia that have implemented knowledge management in their organization. Therefore, it requires the study about the influence of knowledge management on innovation. To answer this question, the research conducted on Palembang SMEs that have implemented knowledge management in their business activities. The amount of sample are 115 SMEs. The data are collected by distributing the questionnaires. The results are then analyzed using variance-based structural equation modeling (SEM) assisted with software SmartPLS. The results of this study show that knowledge infrastructure capability has no effect on SMEs’ innovation. While the knowledge process capability has a positive significant effect on innovation.
Keywords: SMEs; Knowledge Management; Innovation
1. Introduction
Come near to the implementation of ASEAN Economic Community (AEC) 2015, much attentions and initiatives are done for the development of SMEs in Indonesia. Because the role of SMEs in supporting the economy of the country is very significant. According to the latest data of the planning bureau of ministry of cooperatives and SMEs of the Republic of Indonesia, on 2011 and 2012, SMEs can absorb the employment approximately 97% and the contribution to Indonesian Gross Domestic Product increases into 59,08% on 2012 from 58,05% on 2011, as shown on table 1.
Table 1. The Data of SMEs Contribution Based on Employment Absorption and GDP.
Indicator Year 2011 (%) Year 2012 (%)
In ASEAN countries, more than 96% companies are SMEs. The SMEs contribution to GDP is about 30 – 57% and the contribution of employment absorption is 50 – 98% (www.smecda.com). Based on the data, the initiatives of SMEs development are very important, because SMEs is proven as a driving force of national economic growth in both Indonesia country and ASEAN countries. Although the role of SMEs is very strategic
1* Corresponding author. Tel.: +62-711-376400; fax: +62-711-376360.
E-mail address:ervi@mdp.ac.id
2 Ervi Cofriyanti, Rika Kharlina Ekawati
in Indonesia, there are still many problems that faced by Indonesia SMEs, such as the unfair business practices, the limited access to market, the low productivity (low-tech), limited access to the bank credit and low entrepreneurial spirit (www.smecda.com). Therefore, SMEs must improve their productivity and competitive advantage, so that they can survive and compete with other SMEs from ASEAN countries. This can be done by continously making innovation, both in product and process. According to Lyu, Yan and Li (2009), there are two important capabilities that a company must have to gain a competitive advantage, namely information technology and innovation capability. Innovation is related to the knowledge that can be used to create products or processes and new services in order to increase the competitive advantage and meet the customer's ever-changing needs. To emerge the innovation, it can be achieved by applying knowledge management in the company. But there are still many SMEs that have not yet implemented the knowledge management in their organization. Knowledge management is a series of processes that covers the creation, dissemination, and utilization of knowledge and includes the process of knowledge creation, and facilitating the transformation of implicit knowledge into explicit knowledge that is accessible and can be used to solve relevant problems (Spector and Gerald, 2002).
By applying knowledge management in their organization, SMEs will be able to create, capture, share, and increase the knowledge needed in order to innovate both in terms of products, services and management. Based on Vaccano and Veloso (2010), the utilization frequency of knowledge management supporting tools has a direct positive impact on the new product performance and the marketing rate, which in turn have an impact on organizational performance, such as financial performance. It is also obtained by Slavkovic and Babic (2013) which shows the results of an empirical test to the leading companies in Serbia that knowledge management has a positive significant effect on organizational innovation dimensions, namely administrative innovation and process innovation. The results of this study can provide an evidence and recommendations to the management of SMEs in Indonesia, particularly in the Palembang city to implement knowledge management in their organization so that it can enhance the innovation capability in small and medium enterprises.
2. The Purpose of The Study
This study has a purpose to analyze the influence of knowledge management capabilities on SMEs’ innovation. The study is conducted on SMEs of Palembang City that have implemented the knowledge management in their organization.
3. Research Method
According to data from the division of SMEs on Government Agency of Industry and Trade Province South Sumatra, the amount of SMEs are 1723 on 2007. The majorities of field are industry, trade and services. Based on the information of the department head of industry and trade, SMEs that classified have used information technology and knowledge management are the mid-level SMEs. We take samples of SMEs referring to The Enactment No. 20 Year 2008 about Small-Medium Enterprises, and there are 115 SMEs that meets the criterias of mid-level SMEs and that have implemented knowledge management components in their business processes. The usage of samples due to the number of respondents and the limitation of research time, so that the usage of samples is expected to represent the total of population and is compliant according to the SEM (Structural Equation Modeling) sample criteria, namely the minimum number of 100 (Ferdinand, 2005). The questionnaires use likert scale of 5 points where 1 indicates strongly disagree opinion and 5 indicates strongly agree opinion. Before the list of questions or questionnaire posed to the respondents, we take the reliability and validity testing of the questionnaires. The purpose of this testing is to obtain the reliable and valid list of questions, so that it can be properly used to infer the hypothesis.
4. The Model and Variables of The Research
Ervi Cofriyanti, Rika Kharlina Ekawati
According to Becerra and Sabherwal (2010), there are five components of knowledge management infrastructure such as organizational culture, organizational structure, information technology infrastructure, common knowledge and the physical environment. Meanwhile, (Gold, Malhotra and Segars, 2001) and (Emadzade, Mashayekhi and Abdar, 2012) states that there are three knowledge infrastructures, namely knowledge technology infrastructure, organizational culture and organizational structure. Emadzade, Mashayekhi and Abdar (2012) defines that information technology is an infrastructure capability that facilitates the flow of knowledge and reduces barriers related to communication within the organization. This definition is consistent with Becerra and Sabherwal (2010), which states that information technology infrastructure includes processing, data storage and communication technologies and systems. While organizational culture is the core of knowledge management that is essential and can encourage the interaction and collaboration of individuals (Emadzade, Mashayekhi and Abdar, 2012). Becerra and Sabherwal (2010) adds that an organizational culture is the norms and beliefs to guide the behavior of the organizational member. This is important as an enabler of knowledge management in organization.
Meanwhile, flexible organizational structure encourages a variety of knowledge and cross-functional collaboration within the organization, it is not obtained in a rigid organizational structure. So, nowadays, there has been a lot of changes in the organizational structure in the form of a hierarchy into the form of more flat network. Organizational structure capability is to facilitate the flow of knowledge that created by the organization's policies, processes, and rewards systems, which influence people to interact with and from or to whom he is willing to share knowledge (Emadzade, Mashayekhi and Abdar, 2012) and (Becerra and Sabherwal, 2010).
(2) Knowledge Process Capability
Becerra and Sabherwal (2010) states that there are four processes in knowledge management such as knowledge discovery process, knowledge capture process, knowledge sharing process and knowledge application process. Meanwhile, (Gold, Malhotra and Segars, 2001) and (Emadzade, Mashayekhi and Abdar, 2012) also divide it into four processes, namely knowledge acquisition process, knowledge conversion process, knowledge application process and knowledge protection process.
Knowledge acquisition refers to the extent of the firms develops or creates knowledge resources across functional boundaries. This can occur through the processes and activities of interaction, feedback, innovation, brainstorming, and benchmarking (Emadzade, Mashayekhi and Abdar, 2012).
Knowledge conversion can occur through the processes and activities of the synthesis, refinement, integration, combination, coordination, distribution and restructuring of knowledge. Information technology such as e-mail, repositories, intranet portal, teleconference and mentoring activities, collaboration and training play a major role in knowledge transferring (Emadzade, Mashayekhi and Abdar, 2012).
Knowledge application refers to the extent of the companies implements knowledge resources that are shared across functional boundaries. This allows the company to reap the results of the knowledge resources. The capability of leveraging the knowledge in accordance with the requirements for decision-making and problem solving allows the company to effectively respond to environmental changes. Knowledge is used in the context of the user can learn and generate new knowledge (Emadzade, Mashayekhi and Abdar, 2012).
Knowledge protection is required to ensure that the knowledge resources can run and be controlled effectively in the organization. This particularly includes the use of copyrights and patents on information technology systems so that the knowledge is protected by filename, user name, password and file-sharing protocols that can ensure the user is the accessible user (Emadzade, Mashayekhi and Abdar, 2012).
4 Ervi Cofriyanti, Rika Kharlina Ekawati
In general, innovation means the adoption of new ideas or behaviors in a company. A company with an innovative capacity is believed to have the competence to change employee ideas into products and services according to customer needs. Innovations can be embodied in the use of new technologies, implementation of new administrative practices, the production of new products and the provision of new services (Lee, Leong, Hew and Ooi, 2013). Innovation can take many forms. In this study, we shall take two forms of innovation, namely product innovation and process innovation.
Product innovation is related to generate ideas or the creation of something entirely new that is reflected in changes of final product or service offered by the organization, while process innovation is related to changes in the way companies produce the final product or service through diffusion or adoption of innovation has been developed elsewhere (Prajogo and Sohal, 2006) and (Lee, Leong, Hew and Ooi, 2013).
Based on Gold, Malhotra and Segars (2001) shows that knowledge infrastructure capability and knowledge process capability has significantly positive effect on innovation and organizational effectiveness. And the result is consistent with the results of Slavkovic and Babic (2013) suggest that the knowledge management processes such as creating, transferring, applying knowledge have significantly positive effect on process innovation, administrative innovation and organizational performance. Likewise Lee, Leong, Hew and Ooi (2013) suggests that the knowledge management processes such as acquiring, sharing, applying, storing the knowledge have significantly positive effect on technological innovation, namely process innovation and product innovation. Therefore, in this study, we make some hypothesis, namely :
H1 : Knowledge infrastructure capability has significantly positive effect on SMEs’ innovation. H2 : Knowledge process capability has significantly positive effect on SMEs’ innovation.
Based on the above theoretical study, we make a research hypothetical model as follows:
Fig. 1 Research Hypothetical Model
5. Result and Discussion
After the questionnaires are distributed, 9 of 115 questionnaires are invalid because the questionnaires are not filled completely. The demographic summaries of 106 questionnaires can be shown on table 2.
Table 2. The Demographic Summaries.
Ervi Cofriyanti, Rika Kharlina Ekawati
The results of path coefficient testing can be shown on table 3.
Table 3. The Results of Path Coefficient Testing.
Indicator T-Statistics
KIC -> INO KPC ->INO
1.925793 5.597778
Table 3 shows that the first hypothesis (H1), namely knowledge infrastructure capability (KIC) has no effect on SMEs’ innovation (as seen from the t-statistics value < 1.96, i.e 1.926). While the second hypothesis, namely knowledge process capability (KPC) has significantly positive effect on SMEs’ innovation (as seen from the t-statistics value > 1.96, i.e 5.598). As we see the results, the SMEs’ management have implemented the knowledge management process although simple such as knowledge seeking processs to improve the quality and innovation of products/ services. Some of knowledge management processes in SMEs are supported by information technology and some others are not. In this study, knowledge infrastructure capability such as information technology does not significantly affect the products/services innovation. According to Zimmerer, Scarborough, and Wilson (2008), low-tech methods such as whiteboards, post-it note, and face to face meetings remain effective for small businesses. In addition, based on the results of descriptive statistics show that most of the information technology that used by SMEs in Palembang for supporting knowledge management process is telephone in amount of 54,9% while the use of the internet/ intranet only 25%, less than 50%. So that the information technology component does not significantly affect compared to the components of organizational culture and structure.
6 Ervi Cofriyanti, Rika Kharlina Ekawati
innovation, and administrative innovation. But the results of Emadzade, Mashayekhi and Abdar (2012), in line with this study, show that information technology and organizational culture as the components of the knowledge infrastructure capability do not affect the organizational performance, while the organizational structure affects on organizational performance through mediator variable, innovation. The results indicate that small firms are superior in managing knowledge than large firms, it is due to their size and simplicity (Zimmerer, Scarborough, and Wilson, 2008). SMEs’ owners who have implemented knowledge management in their firms realized that knowledge is a strength and that managing the knowledge can generate huge profits. Knowledge can be a source of creativity and innovation which is the heart of the ability of small companies to compete with the large company. If they failed to do so, the company can not survive in the business.
In this study, knowledge process capability affects innovation in some factors such as the update level of the company's new products, the use of updated technological innovation in new products, the rate of new product development, number of new products that are marketable, and the rate of change in the process, engineering, and technology.
6. Research Implications
6.1. Implications for SMEs
The results of this study prove that knowledge management has significantly positive effect on innovation, especially SMEs in Palembang. Therefore, SMEs that have not implemented knowledge management in their organization should immediately apply the knowledge management process in their business processes. Because it can help to overcome the internal and external problems of SMEs such as the limited working capital, low-quality human resources, and lack of mastery of science and technology (www.fiskal.depkeu.go.id). By applying knowledge management can have an impact on the organization and organizational performance at some level, namely people, process, product, and the overall organization (Becerra and Sabherwal, 2010).
The impact on people or human resources, knowledge management can improve employee’s learning and update their knowledge in accordance with their respective fields through externalization, internalization, socialization processes and community of practices. The processes of externalization and internalization jointly assist individuals in learning. Socialization also assists individuals in acquiring knowledge with joint activities such as meetings, informal discussions and others. When the knowledge management processes in the organization encourage its employees to always learn from each other, employees have the information and knowledge that are necessary to adapt over the organization environment that is constantly changing. Awareness to bring new ideas and engage in informal discussions not only prepare employees to respond for the change but also make them accept the changes.
So the knowledge management emerges a great adaptibility among employees and increases employee’s knowledge or skills (Becerra and Sabherwal, 2010). It also can solve the problem of low-quality human resource, and lack of mastery of science and technology. The other problem faced by SMEs, namely the existence of trade liberalization, such as the implementation of the ASEAN-China Free Trade Area (ACFTA), which effectively has prevailed in 2010. On the other hand, the government has signed on cooperation agreement of ACFTA or other agreement, but without considering the prior readiness of SMEs in order to compete.
This condition will be heavier during the implementation of the planned ASEAN Community by 2015. If the government do not provide for SMEs’ readiness, SMEs are not able to survive and will eventually bankrupt as well (www.fiskal.depkeu.go.id). Therefore, in order to make SMEs can compete with foreign companies, SMEs must constantly improve the product or service innovation, namely through the implementation of knowledge management in the company. Because based on the results of this study and previous studies such as Gold, Malhotra and Segars (2001), Slavkovic and Babic (2013) and Lee, Leong, Hew and Ooi (2013) state that knowledge management can bring innovation, both product, process and administrative innovation, which will have an impact on organizational performance.
Ervi Cofriyanti, Rika Kharlina Ekawati
a problem and in developing more innovative organizational processes. Knowledge management can also encourage brainstorming to improve the innovation process. In addition, the knowledge management process can help organizations create new products or improve product quality by adding significant value compared to the previous product. Value-added products can derived from knowledge management as an impact of the process innovation in organization(Becerra and Sabherwal, 2010).
This needs to be done to add value of SMEs themselves, primarily in order to compete with foreign products are increasingly present at the industrial and manufacturing centers in Indonesia, since SMEs are the economic sector that is able to absorb labor in Indonesia. Here are some things that can be done to manage the existing knowledge within the company to be continously preserved and provide a positive impact for the company, namely (Zimmerer et. al, 2008) : The first step in creating a knowledge management program is making an inventory of specific knowledge of the company that can bring them a competitive advantage. The program includes an assessment of the knowledge bank that has been collected by employees from all levels of the organization at all times. The second step is to set the essential knowledge and dissiminate it to everyone who need it throughout the enterprise.
6.2 Implications for The Government
In the implementation of knowledge management within SMEs, the government's role is also required in order to assist SMEs in overcoming obstacles such as lack of information technology infrastructure to support knowledge management processes and constraint that are still many small business owners who do not know the definition and benefits of management knowledge for the company. Based on these constraints, there are some suggestions for the government, especially the government of Palembang so that the implementation of knowledge management in SMEs can run well, namely:
1. In terms of data of information technology utilization in Palembang SMEs, it is only 23.7% have been using the internet. This amount is not up to 50%, while the role of the internet is very important related to product innovation and promotion of the SMEs products. Therefore the Government of Palembang City needs to make a policy or assistance in collaboration with the private sector such as internet providers to give assistance for SMEs. In addition, there needs a training about the internet for SMEs so that SMEs owners will understand about the information technology.
2. Most of SMEs do not realize that their company has run knowledge management. It can be concluded SME owners do not know what knowledge management is. In the future, there should be a training of the definition and the importance of knowledge management, and also strategies of managing the knowledge management for SME owners in Palembang that organized by the Department of SMEs and Cooperative of The Government of Palembang.
8 Ervi Cofriyanti, Rika Kharlina Ekawati
7. Conclusion
Based on the previous discussion, we can conclude :
1. The results of hypothesis testing shows that the first hypothesis (H1), namely knowledge infrastructure capability (KIC) has no effect on SMEs’ innovation. While the second hypothesis of knowledge process capability (KPC) has significantly positive effect on innovation.
2. Knowledge process capability affects innovation in some factors such as the update level of the company's new products, the use of updated technological innovation in new products, the rate of new product development, number of new products that are marketable, and the rate of change in the process, engineering, and technology.
8. Recommendation
Some recommendations are given for further research are:
1. The research sample can be expanded by adding SMEs of other cities in the Province of South Sumatra, except Palembang, to determine whether knowledge management also affect toward the ability of SMEs’ innovation and performance in districts of South Sumatra Province, besides the Municipality of Palembang.
2. The research hypothetical model can be developed by adding other indicators such as common knowledge and physical environment on the variable of knowledge infrastructure capability as proposed by (Becerra and Sabherwal, 2010) that there are five components of knowledge management infrastructure, namely organizational culture, organizational structure, information technology infrastructure, common knowledge and physical environment.
Acknowledgements
This research is supported by The General Directorate of Higher Education (DIKTI) through ‘Penelitian Dosen Pemula’ grant No. DIPA-023.04.1.673453, on December 5th, 2013 DIPA REVISI.
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