Knowledge Management in SMEs – Current Practices and Potential Benefits

Nadeem Kureshi
Center for Advanced Studies in Engineering, Islamabad, Pakistan
nadeemkureshi@gmail.com

Ali Sajid
Center for Advanced Studies in Engineering, Islamabad, Pakistan
alisajid61@yahoo.com

Abstract

Knowledge management (KM) is fast growing as a distinct source of competitive advantage

among businesses. KM usually requires allocation of significant resources which are
utilized through a greater focus on definite knowledge assets and the cultivation and
development of channels through which knowledge flows.

While such resource allocations and subsequent effective utilization can be associated with
larger businesses; Small and Medium Enterprises (SMEs), being resource constrained by
their very nature find it difficult to undertake and institutionalize KM. It can also be argued
that among all the resources required for successful running of a business, SMEs can
possibly mobilize and manage the Knowledge resource most effectively. This situation can
be particularly crucial when we consider that SMEs form more than 90% of businesses in
most countries; a SME sector doing effective KM can make significant contribution to any
national economy.

This paper investigates KM practices in SMEs. A particular focus is placed on existing

literature that addresses the issues and opportunities concerning adoption of KM by SMEs.
Based on the literature review, a survey of SMEs is conducted that probes into barriers
prohibiting a wider adoption of KM by SMEs. Sectoral trends have also been investigated.
All investigations have been conducted in northern industrial belt of Pakistan.

Results indicate a greater want for KM adoption in SME sector and a clear performance
gaps between adaptors and non-adaptors are shown. Results also show a need for a
reliable model of KM in SMEs in contemporary literature.

The results can potentially be used for public sector policy making regarding Small
Businesses and successful entrepreneurial initiatives in SMEs.

Key words: Knowledge Management, SMEs, Pakistan, Developing Economy.

Introduction

SMEs are considered as the main economic agents of a country. They form from 50% to as much as 99%
of economies. (See for example: Light (1993), Acs (1992), Schwenk and Shrader (1993)). They are major
sources of job generation in a country besides being a huge export base.
 SME Sector of Pakistan

Total number 32,00,000

As percent of total businesses 99%

Share in Industrial Employment 78%
Share in Value Addition 28%
Manufacturing exports earning 25%
Contribution to GDP over 30%
Exports value Rs. 140 billion

87% SMEs employ less than 5 people

98% SMEs employ less than 10 people

Table 1. SMEs in Pakistan

Adopted From: Economic Survey of Pakistan – 2005-06, SME Policy, Pakistan, 2006.

SMEs form more than 99% of the total businesses in Pakistan. They have a huge share in country’s
industrial employment and manufacturing exports. (ESP, 2005-06-07). In manufacturing and other
sectors, 87% of SMEs employ less than 5 people while a staggering 98% employ less than 10 persons.
SME sector caters for 25% of manufacturing exports in Pakistan, while its share in value addition is 28%.

Comparing the 3.2 million SMEs in Pakistan with only a few hundred businesses that have any kind of
formal Quality Standards or Standards in place (For example see Fatima and Ahmad 2005, 2006, 2006b;
Awan & Bhatti 2003; Moosa 1999) it can be appreciated that most SMEs have minimal quality systems in
place, and their product quality is either not being ensured, or is being ensured through less understood
and informal phenomenon.

The importance of SMEs has been realized by almost all governments to varying extents and there have
been many successive public sector initiatives to improve the performance of this sector. This includes
establishment of SMEDA in 1998 and establishment of SME Bank. Moreover, almost all major
international donor agencies (e.g. ADB, World Bank, ILO, UNDP) have started initiatives in the SME
sector within the last five years (Bhutta, Rana & Asad; 2007).

Bhutta et al. have pointed out the “virtual non-existence” of scientific data about SMEs in Pakistan as the
biggest frustration for researchers. With ESP (2006 and 2007) and SMEDA offering little scientific
information on SMEs, the seminal work by Bhutta et. al. seems to be the only reliable scholarly
publication addressing SME sector globally.

The above cited seminal work by Bhutta et. al. have concluded that performance of SMEs is on a
decreasing trend with SMEs showing little optimism about the future of their businesses. About 71% of
SMEs believe that business will either stagnate or will go down in next one year. Only 5% of the SMEs
export their products and businesses in general perform poorly if they supply only in the domestic
markets.

Comparing the reported increase in number of SME businesses in Pakistan (from approximately 40,000 to
3.2 million between 1988 and 2007 (Census of Establishments Government of Pakistan, 1988; Directory
of Industrial Establishments, Government of Punjab, 2002; and ESP 2006); and considering it with the
reported performance of SMEs, the high rate of business closure and a higher number of sick or low
performing business is vindicated. The following figure represents the notion graphically:

Confirmed Knowledge
Number of units From Scholarly
Quality added Literature
Performance
Inference

Closed/Sick
Units

Time
Figure 1. Performance of SMEs

Knowledge Management in SMEs

Keeping in view the context described above, there is a need for much deeper scholarly analysis of the
working practices of SMEs in developing economies, particularly Pakistan. A particular focus is required
to identify interventions that are least costly and thus can have a higher degree of direct adaptability by
private business entities. In particular, the management of their knowledge assets is crucial as this gives
them the crucial competitive advantage in the background of being resource constrained and thus
competition on bases such as technology, human resource, IT etc may not be feasible for them. SMEs
generally compete on the basis of their know-how and do not possess resources to acquire resources such
as land, labor and capital.

It must also be emphasized that the start of an SME business in on a presumption by the entrepreneur that
he possesses knowledge about that business. The knowledge asset of an SME therefore has to be
preserved and used to leverage advantage. Moreover, SMEs generally can not spare resources for high
cost formal trainings and thus the working knowledge must be transferred from experts (entrepreneur) to
unskilled workers.

Similarly, the workforce hired by SMEs is not the brightest university minds as their costs are not
affordable by SMEs. Assuming prefect markets where high paid jobs go on fair competition, the
workforce coming to an SME will, in all probability, be the left-over, who have not been adjusted in
higher paid LME jobs. This again calls for in-house training of the workforce, and thus effective
knowledge management comes in. In cases where SMEs plan expansion, the entrepreneur must train his
protégés for years until he can open another outlet or unit.

SMEs are judged by the external world, such as lending institutions, investors, suppliers, and customers,
on their knowledge and knowledge-exploitation capabilities.
Building upon the most common paradigm in KM literature, the knowledge hierarchy (Nissen, 2000;
Davenport and Prusak, 1998), Hicks, Daterro and Gulap (2006) have proposed a five tier hierarchy. The
following table shows the concept with the volume and actionability of the tiers.

Tier Manifestation
Reengineering
INNOVATION Knowledge-
Based Goods and
Services
SOLUTIONS Intelligent
Systems
Best Practices
Decision Support
Systems
INFLUENCES Learning
Systems
Yellow Pages
Reports
Documents
FACTS Databases
Data Warehouses
INDIVIDUAL Human Mind
Volume Actionability

Table 2. Hicks, Daterro and Gulap (2006) Five Tier Knowledge Hierarchy

They have defined Individual knowledge as ‘‘knowledge contained only in the mind of a person.’; Facts
as ‘‘atomic attribute values about the domain.’’; Influences as ‘‘data in context that has been processed
and/or prepared for presentation.’’; Solutions as ‘‘clear instructions and authority to perform a task.’’; and
Innovation as ‘‘the exploitation of knowledge-based resources.’’

In their empirical research of Knowledge Management in Finnish SMEs, Salojarvi, Furu & Sveiby (2005)
have found that while most of the firms have KM know-how, only a small proportion has been able to
leverage it to their growth advantage.

In their qualitative and quantitative work on comparing KM perceptions and practices among large
businesses and SMEs, McAdam & Reid (2001) have found that SME sector is less advanced with a
mechanistic approach to knowledge and lack of investment in KM approaches and systems.

In their seminal qualitative work on knowledge management practices of SMEs, Desouza and Awazu
(2006) have outlined five peculiarities of SME in the way they manage their knowledge, compared to
larger firms. Following is a brief description on those attributes:
Dominance of Socialization in SECI Cycle

Figure 2. The SECI cycle of knowledge creation (Nonaka and Takeuchi, 1995)

The Nonaka SECI cycle shown above has been found operational and effective in larger organization.
However, in SMEs, the process of Socialization overshadowed all other activities of SECI model by
influencing the bulk of knowledge transfer from owner to employees and between employees.

Common Knowledge
“Common Knowledge” is defined as knowledge known to all members of an organization. While in
larger firms, the depth and breadth of common knowledge is very little, in SMEs its depth and breadth is
much pronounced. All employees have knowledge of a fairly large number of common business
activities. For example, in a café, all employees know about “opening up the door, to running the register,
making a cappuccino, serving a sandwich, mopping the floor, and entering the receipts at close”.
Breadth of common knowledge can also be explained with the dominance of socialization in SECI cycle,
with more knowledge diffusion through socialization interactions.

Knowledge Loss
When an experienced employee leaves a company, an important knowledge source is lost. With high
employee turn-over rated in the industry these days, this is a real issue with many businesses. SMEs, on
the other hand seem little effected by this. This can be attributed to the following:

• Higher socialization results into thick social bonds and leaving is rare.
• The owner being the prime knowledge source remains in business.
• The higher degree of common knowledge ensures little loss.
• Higher socialization gives quick knowledge to new-comers and thus organizational knowledge
levels are restored.

Exploitation of external sources of knowledge

Exploitation of external knowledge sources by larger organizations is not used as a source of competitive
advantage. In SMEs however, it has been found that external knowledge is used considerably more than
larger firms.
Chen at. Al (2006) have also confirmed that prevailing belief that external knowledge is of prime
importance for SMEs, and that SMEs have very strong needs for external knowledge and inter-
organizational knowledge transfer.
People centered KM, technology in background
Larger organizations use technology to manage knowledge. Generally, huge data bases are used to store
and disseminate knowledge. In SMEs, however, knowledge management seems to be a people centered
issue. Knowledge is “created, shared, transferred and applied” through people.

Wong & Aspinwall (2005) have outlined 11 Critical Success Factors (CSF) for KM in SMEs. Following
is the list of the SCFs in order of importance.

1 Senior management support and leadership

2 A knowledge-friendly culture
3 Development of a technological infrastructure
4 A clear strategy for managing knowledge
5 Measuring the effectiveness of KM
6 Roles and responsibilities for KM
7 Systematic KM processes and activities
8 Incentives to encourage KM practices
9 Allocation and provision of resources
10 Effective people management practices
11 Appropriate training for employees

Table 3. Wong & Aspinwall (2005) CSFs for KM in SMEs

Knowledge Management Survey

A sub-survey was conducted to gauge the current Knowledge Management know-how, use and
effectiveness in the SMEs. The instrument contained other investigation besides knowledge management
(not of interest to this paper). The survey was mailed to of 530 managers of registered SMEs. In parallel,
attempts were made to administer the same survey in scheduled personal meetings/interviews. A total of
100 such requests were made where as 47 of the interview requests were accepted. The whole exercise
yielded a total of 107 usable responses; including 47 from structured interviews (yielding a response rate
of 47%) and 60 from e-mails responses (yielding a response rate of 11.3%). The overall response rate
came at 16.9%.

Following are statistical representation of the segregation of respondents’ firms by their categories,
represented in data collected under organizational information described, in preceding paras.

Approximately 92% of the firms represented manufacturing sector. (Capital Goods Manufacturing 38%,
Textile Manufacturing 5%, Food related manufacturing 8% and Other manufacturing 19%)

Approximately 89% percent of the respondents’ firms were operating in Private Sector. Approximately 79
percent of the respondents’ firms had gross annual sales of less than Rs. 100 million, thus providing a
high degree of fit to SME definitions. Similarly approximately 51% of the respondents’ firms had 100 or
less employees and approximately 82% of the respondents had 250 or less employees. This again
represents a high fit to SME definitions.
While no direct relation exists between the percentage of female employees in the work force with quality
performance and practices, it might be of interest to note that approximately 78% of the respondents’
firms had 5% or less female employees in their workforce while 84 percent had 20% or less female
employees in their workforce. This is not, by any means un-typical of manufacturing sector SMEs.

Minitab 15 Statistical software was used to analyze the results.

Results

Following is a brief statistical summary of the awareness of knowledge management among the
owners/manager of sample SMEs:

Variable Mean SE Mean Variance CoefVar Skewness Kurtosis MSSD

KM 2.879 0.109 1.278 39.27 0.32 -0.56 0.915
Awareness

Table 4. Brief Statistical Summary

How do you rate your understanding of “Knowledge Management”?

A nderson-Darling N ormality Test
A -S quared 4.08
P -V alue < 0.005
M ean 2.8785
StDev 1.1303
V ariance 1.2776
Skew ness 0.323234
Kurtosis -0.563174
N 107
M inimum 1.0000
1st Q uartile 2.0000
M edian 3.0000
3rd Q uartile 4.0000
NONE SOMEWHAT AVERAGE ABOVE-AVERAGE HIGH M aximum 5.0000
95% C onfidence Interv al for M ean
2.6619 3.0951
95% C onfidence Interv al for M edian
2.8858 3.0000
95% C onfidence Interv al for StDev
9 5 % C onfidence Inter vals
0.9965 1.3060
Mean

Median

2.6 2.7 2.8 2.9 3.0 3.1

Figure 3. Graphical Summary

Brief Analysis
Knowledge Management has a low perceived awareness among owners/manager of SMEs. With
approximately 74% respondents indicating average or below understanding of it, the mean is at 2.87 on a
scale of 5.

Pearson Correlation Analysis with firm data:

Knowledge Revenue Employees #

Management
Awareness
Revenue 0.543 - -
0.000
Employees # 0.473 0.758 -
0.000 0.000
Female Employees % 0.177 0.353 0.369
0.068 0.000 0.000

CELL CONTENTS PEARSON CORRELATION

P-VALUE

Table 5. Pearson Correlation with firm data

The Pearson correlation analysis shows a strong positive correlation between a firms revenues and the
knowledge of this technique. A similar correlation is shown between number of employees and
knowledge of this technique.

Effectiveness of the use of Knowledge Management

Knowledge Management Effectiveness Summary

A nderson-Darling N ormality Test
A -S quared 5.01
P -V alue < 0.005
M ean 4.2093
S tD ev 0.8880
V ariance 0.7885
S kew ness -0.43470
Kurtosis -1.61785
N 43
M inimum 3.0000
1st Q uartile 3.0000
M edian 5.0000
3rd Q uartile 5.0000
LITTLE-EFFECTIVE MODERATELY-EFFECTIVE HIHGLY-EFFECTIVE M aximum 5.0000
95% C onfidence Interv al for Mean
3.9360 4.4826
95% C onfidence Interv al for M edian
4.0000 5.0000
95% C onfidence Interv al for S tD ev
9 5 % C onfidence Inter vals
0.7322 1.1286
Mean

Median

4.0 4.2 4.4 4.6 4.8 5.0

Figure 4. Statistical Summary – Knowledge Management Effectiveness

The graphical summary above indicates a mean of approximately 4.2 on a scale of 5. The responses show
a poor fair fit around mean with no entries reporting ineffectiveness. It must however be kept in mind that
majority of the respondents were non-adopters.

Current Use of “Knowledge Management”

Chart of Knowledge Management Use Pie Chart of Knowledge Management Future Use
Category
60
N
Y
50

40
Percent

30

20

10

0
N Y
T8USEYN
Percent within all data.

Figure 5. Use Statistical Summary

Approximately 60% of the respondents have indicated that their firms do not use this technique. This
result supports its lack of diffusion into Pakistani businesses. Of those not using this technique,
approximately 58% said their firms are likely to adopt this technique in the coming three years while they
remaining did not expect its adoption.

Discussion

Better decision making, faster response time, increased profit and improved productivity have been
reported for firms that have adopted KM (KPMG, 1998). Realizing its importance, larger organizations
have institutionalized KM into their systems, and attempts are made to leverage KM for higher
productivity and competitiveness. SMEs however have a distinct profile when it comes to KM practices.
Their practices are attributable to their lack of resources, peculiar management structures, low employee
turn over rates, strong personal bondages among employees and other factors.

The results apparently do not conform to the findings by Desouza and Awazu (2006), where as strong
conformance is observed to the findings by McAdam & Reid (2001). This understandable since KM has a
strong cultural context and the higher degree of socialization in SMEs also indicate a strong reliance on
culture for knowledge generation, sharing and diffusion.

This study was limited to the awareness of KM, its use and effectiveness and use in Pakistani SMEs. For
further research, deeper investigations such as case studies of KM in SMEs, analysis of KM CSF
adoption and effectiveness may be looked into. Moreover, long and short term effects on the growth and
performance of business who undertake KM initiatives can be investigated.
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