perceived environmental impact on knowledge

JOURNAL OF BUSINESS MANAGEMENT (JBM) VOL. 1(1), pp. 6-34, JULY 2013 REF NUMBER: 0520130702 ONLINE: http://www.projournals.org/JBM

----------------------------------------------------------------------------------------------------------------------------

Full Length Research Paper ----------------------------------------------------------------------------------------------------------------------------

PERCEIVED ENVIRONMENTAL IMPACT ON KNOWLEDGE RESOURCES AND SOCIAL NETWORK: EVIDENCE FROM MALAYSIA AMRAN AWANG1 , ZAINAL ARIFFIN AHMAD 2 , ABDUL RASHID SAID ASGHAR 1 , KHAIRUL ANWAR SUBARI 1, SHAMSUL ANAZ KASSIM 1

1Universiti 2Universiti

Teknologi MARA, Malaysia Tenaga Nasional, Malaysia.

Accepted 8 JULY, 2013 ---------------------------------------------------------------------------------------------------------------------------ABSTRACT In this study we argue that the knowledge and networking relationship are related with growth, efficiency, and effectiveness among the Malaysian Bumiputera small and medium agro-based enterprises (SMAEs) and even more positive relationship established in appropriate environment. The study on 615 agro-based industries ascertained some direct impact of knowledge and network, moreover in the presence of appropriate perceived environmental factors as moderators on the relationship, all knowledge and network variables showed more positive relationship. Interaction effects of perceived environmental factors capitalizing in their interaction terms on the knowledge, network and growth, efficiency, effectiveness relationship were also strongly evidenced. Strategic alliance and social network explains higher firms growth, efficiency and effectiveness when dynamic product market environment is also high. On the other hand, tacit knowledge explains higher effectiveness when munificent environment and product market environmental dynamism are also high. The study lends support to knowledgebased view, network and contingency theory.

Keywords: Organizational resources, perceived environmental factors, knowledge, network, performance, SMAEs, Malaysia ------------------------------------------------------------------------------------------------------------ ---------------------------*Corresponding Author. Email: [email protected]

----------------------------------------------------------------------------------------------------------------------------

PERCEIVED ENVIRONMENTAL IMPACT ON KNOWLEDGE RESOURCES AND SOCIAL NETWORK: EVIDENCE FROM MALAYSIA

0520130702

1. INTRODUCTION The study focuses on the impact of perceived environmental factors on knowledge-based resources and network in explaining some firms competitive advantages and performance. The effort discloses direct impact of those internal and external organization resources on firms’ growth, efficiency and effectiveness and also the indirect impact of the external environmental factors that expected affecting organizational outcomes. This is an effort to verify transition of leadership impact on program in Malaysia that has been extended on the redevelopment of their agricultural industry as cited in the ninth and tenth Malaysia Plans 20102015 (Malaysia, 2010). Agricultural sectors in Malaysia with ample fund allocation are expected to improve their strategies, technological capabilities and human capital development in relation to their growth and performance (Malaysia, 2010). The improvement in the sector calls for critical input of knowledge-based resources that lead to better growth, efficiency and effectiveness, alternately appropriate environment shall help to improve the relationship or vice-versa. This paper addresses issues of to what extent knowledge and network strategy explain Malaysian SMAEs growth, efficiency and effectiveness and how perceived environmental factors play its role in influencing the relationships. Other issues continue to explore the effect of knowledgebased resources on smaller firms performance that remain under research due to extensive concentration on larger firms [35]; [68]; [72]. This is a major gap due to SMEs are typically more resource constrained and have less organizational slack than large firms, and therefore face greater challenges in developing a knowledge base while managing the tensions and tradeoffs associated with exploration and exploitation. Additionally, smaller firms differ from larger firms in terms of their organizational structures, managerial styles, responses to the environment, and how they compete [12]; Man, Lau, & [36]; [67]. Larger firms have competitive advantages based on their size because of increased market power, economies of scale, reduced costs of inputs, and more abundant resources for product development and advertising [12]; [33]; [64]. SMEs must overcome size disadvantages by creating advantages in flexibility of production [28], speed of attack [12], niche strategies focusing on price and quality [15]; [91], and disrupting the status quo through innovation 17]; [71]. A second gap in the literature is that research on knowledge strategies has inexplicably failed to consider the environmental context of firms. A core concept of strategic management is that certain strategies are more effective in certain environments [60]; [63]. However, no research has been conducted that evaluates the success of different knowledge strategies in different environmental contexts. This is particularly important for SMEs, which are usually more vulnerable to external influences than larger firms since their competitive advantages tend to be less sustainable as the environment changes (Man et al., 2002). Clearly, studying the effects of the competitive environment on SMEs' knowledge strategies and performance is desirable. Thus, the objectives of this study are to examine the direct relationship between Malaysian SMAE's knowledge-based resources, network strategy and firms’ outcome variables such as growth, efficiency and effectiveness and the possible moderating role of perceived environment variables. More specifically, we intend (1) to determine if the knowledge and network strategies are distinct constructs for SMAEs; (2) to clarify whether knowledge and network are complementary and mutually reinforcing, or are substitutes; (3) to delineate the nature of the relationships between knowledge and performance, and between network and performance; and (4) to determine whether these relationships are moderated at what level of perceived environment factors namely dynamism, hostility and munificence. We tested our hypotheses on data collected from multiple respondents at 615 small and medium-sized agro-based firms’ ownermanager.

2. THEORY AND HYPOTHESES 2.1 FIRMS KNOWLEDGE, NETWORK STRATEGIES AND PERFORMANCE Bierly III and Daly iterated that a knowledge strategy provides firms with set of strategic choices in two knowledge domains: (1) the creation or acquisition of new knowledge (exploration), and (2) the ability to leverage existing knowledge to create new organizational products and processes (exploitation).[5] The Page 2 PRO JOURNALS [JBM] - PERCEIVED ENVIRONMENTAL IMPACT ON KNOWLEDGE RESOURCES AND SOCIAL NETWORK: EVIDENCE FROM MALAYSIA By Amran Awang 1 , Zainal Ariffin Ahmad 2 , Abdul Rashid Said Asghar 1 , Khairul Anwar Subari 1 , shamsul anaz kassim 1

Journal of Business Management (JBM)


0520130702

most crucial element of a firm's knowledge strategy is resource allocation that is the degree to which the firm focuses its resources in generating new knowledge radically or enhancing the existing knowledge base incrementally. Verifying these tradeoffs, [54] argued that the continuous and incremental exploitation of current knowledge maximizes profits in the short run, and the exploration of radically new knowledge is more likely to maximize long-term firm success. However, pursuing a strategy of exploration entails higher costs and increased risk for a firm, but is more likely to lead to a sustainable competitive advantage. On the other hand, concentrating resources too heavily on exploration may prevent firms from reaping the benefits that come from developing these knowledge breakthroughs. Focusing on exploration tends to slow down the developing and the refining of skills and processes associated with the firm's current competencies. A strong commitment to an exploitation strategy entails trade-offs as well. According to [54], organizations that focus on incremental knowledge gain may find themselves experts in areas that have become obsolete, getting better and better at things that customers no longer value. According to [49], not many firms are successful at simultaneously developing both radical and incremental knowledge, primarily due to limited resources within the firm. Explicitly focusing on either exploration or exploitation as a means of enhancing the knowledge base generally implies not focusing on the other approach. As researchers (e.g.,[38]; [74]; [89]) have pointed out, focusing on radically new knowledge and focusing on incrementally enhancing a current knowledge base often require very different types of organizational cultures, capabilities, and structures. Once a firm creates a competence in either exploration or exploitation, it is usually more efficient for the firm to continue on that particular path [49]. Additionally, researchers in the field of management of technology have differentiate radical and incremental innovations [18]; [22];[27], viewed as outputs of exploration and exploitation, respectively. [18] noted that radical and incremental innovations usually require different organizational structures, processes, and cultures, and usually occur at different points of an industry's evolution [85]. Specifically, the punctuated equilibrium model of change describes industry evolution as long periods of incremental innovation interrupted by brief periods of radical innovation [69]; [85]. [86] argued that firms should try to simultaneously excel at exploration and exploitation, and identified a few examples of firms that are successful at both the development of radically new knowledge and the exploitation of existing knowledge: e.g. Johnson and Johnson, Asea Brown Boveri, and Hewlett-Packard. They labeled these rare paradoxical companies that are successful at simultaneous exploration and exploitation as "ambidextrous organizations" [86]. Rather than typifying the firm that excels at either exploration or exploitation, these exceptional firms possess the seemingly contradictory skills and competencies of both, and have subcultures within the organization that support each approach. These firms can be characterized as being creative yet pragmatic, loose and tight, chaotic as well as efficient. They allow substantial freedom yet maintain control. These companies have complex organizational cultures and structures that not only accept conflict, but also use that conflict as an impetus in the knowledge-creation process. Flexible organizational forms [89], modular organizational structures [73] and N-form organizations [38] have been proposed to manage such paradox within an organization, mostly by designing the organization to facilitate knowledge transfer and integration. Large companies seemingly have an advantage over small companies in succeeding as "ambidextrous" organizations because they typically have much broader access to the multitude of resources required to create a complex organizational structure, manage multiple subcultures, and sustain both exploration and exploitation capabilities within the firm. Network theory has been through series of relentless effort of investigations since early 1960s found in Philips (1960) followed by Evans (1966). Attempts in understanding the theory firstly focused on the fundamental theories. Major theories offering explanations of inter-firm cooperation, such as economics and sociology, provide different interpretations of network existence, which stem from diverse backgrounds and, therefore, are hardly compatible. However, if synthesized, these interpretations could provide valuable synergies for explanation of inter-firm cooperation. Secondly, we explore the theory of the firm, which offers a new network paradigm. Included in it theories have provided an important contribution, combining existing explanations with alternative, i.e. knowledge focused argumentation. For instance, the knowledge-based view of the firm, by placing knowledge as a main source of competitive advantage, offers alternative socially based knowledge protection mechanisms, which substantially enrich explanations of the inter-firm cooperation. Finally, it is argued that participation of the firm in a network provides both individual benefits for the firm and collective benefits, which could be only reached through participation of all members of the network. This perception implies that network form of organization is a natural part of the economic and social environment, which exists simultaneously with other organizational forms, could be equally important and possesses specific mechanisms, not attributable to the firm (hierarchy) or market. Page 3 PRO JOURNALS [JBM] - PERCEIVED ENVIRONMENTAL IMPACT ON KNOWLEDGE RESOURCES AND SOCIAL NETWORK: EVIDENCE FROM MALAYSIA By Amran Awang 1 , Zainal Ariffin Ahmad 2 , Abdul Rashid Said Asghar 1 , Khairul Anwar Subari 1 , shamsul anaz kassim 1



0520130702

This study attempt to fill the gap found in the relationship between knowledge and network strategy and growth, efficiency and effectiveness, and the possible moderating role of external environmental factors. Results from a sample of small manufacturing firms indicate that exploration and exploitation are distinct and complementary constructs. The relationship between exploration and performance is linear and positive, while the relationship between exploitation and performance is concave, indicating that there is a point at which focusing on exploitation leads to reduced returns. Additionally, we find that the competitive environment moderates the relationship between exploitation and performance, such that exploitation has a stronger impact on performance in stable and high-tech environments than in dynamic and low-tech environments. Exploration also has a stronger impact on performance in high-tech environments than in low-tech environments. Strong cooperative relationship between organizations, namely, social capital, increases mutual trust between companies, and it reduces the transaction cost of exchanging resources between organizations. Social capital can be observed as the network that connects businesses, and thus it facilitates business to perform well and to achieve competitive advantages (Batjargal, 2003; Benson, 1998; Florin, Lubatkin & Schulze, 2003; Pennings, Lee, & Van Witteloostuijn, 1998). For new ventures, social capital plays an important role in identifying entrepreneurial opportunities and securing external resources. Aldrich and Zimmer (1986) discover that social network is essential to opportunity identification, idea test, and resource acquirement for startups. New ventures are likely to have brilliant perspectives if they strongly develop their social capital at their initial stage of business. In addition, previous research indicates that the influence of entrepreneurial network on organizational development is positive (Hansen, 1998). The tie between new startups and venture capital companies facilitates the startups to enhance their performance (Lee, Lee & Pennings, 2001). In similar vein, a study of [10] justifies network constraint appears to be an informer/client characteristic that influences his/her ability to take advantage of social networks as an informing channel and performance enhancement. Therefore, the components of social capital, namely, social interactions, relationship quality, and externalities, benefit new ventures to receive resources and knowledge, to reduce the transaction cost between organizations, and to have positive influences on organization outcomes. Consequently, one can hypothesize that as the knowledge-based and social capital of new venture becomes more favorable, the better outcome will be. Hence we posit: H1: Better small firms knowledge base shall help explain higher growth H2: Better small firms knowledge base shall help explain higher efficiency H3: Better small firms knowledge base shall help explain higher effectiveness H4: Improved small firms networking shall help explain higher growth H5: Improved small firms networking shall help explain higher efficiency H6: Improved small firms networking shall help explain higher effectiveness.

2.2 KNOWLEDGE, NETWORK STRATEGY AND THE EXTERNAL ENVIRONMENT Environmental impact on SMEs has been found in the literature since 1970s cited in Khandwalla (1976) and 1980s in Miller (1986). Smaller business is always easily distracted with changes in environment especially in anticipating challenges that demand resources commitment. The phenomena drove smaller businesses away from competing in highly volatile or competitive environment. In the West, environmental phenomenon no longer posed as a great threat to firms as long as they can manage to uphold certain conditions. Referring to [81] that western economies were mature enough even though the competition was intense it was regulated whereby intellectual property laws really protect risky innovations. Arbitrary government decisions that may disregard market conditions protect SMEs (Li & Atuhene-Gima, 2001; Li & Zhang, 2007). These scenarios were vague in Malaysia and more evidence shall help her SMEs to react accordingly. Contingency theories illustrate the importance of alignment or fit among different constructs related to organizations, and explain how the relationship between measures of strategy and performance can be moderated by various environmental factors ([2]; [50]; [63]; [88], 1989; [95]; [94]). Thus far, researchers have not agreed on one best way to conceptualize the external environment and have developed many Page 4 PRO JOURNALS [JBM] - PERCEIVED ENVIRONMENTAL IMPACT ON KNOWLEDGE RESOURCES AND SOCIAL NETWORK: EVIDENCE FROM MALAYSIA By Amran Awang 1 , Zainal Ariffin Ahmad 2 , Abdul Rashid Said Asghar 1 , Khairul Anwar Subari 1 , shamsul anaz kassim 1



0520130702

different measures. We have chosen three frequently used measures that we believe best capture the effects of environmental elements, and are most relevant to this particular study. These constructs— dynamism [21]; [94], munificence (Dess & Beard, 1984; [80]; [92] and hostility [83]; [57]; [76]--are discussed in further detail in the next sections.

2.3 PERCEIVED ENVIRONMENTAL HOSTILITY, DYNAMISM AND MUNIFICENCE Hostile environment is an inevitable phenomenon that surfaces within any business environment. Due to that, hostile environment may give significant impact to a certain extent in approving or disproving firms’ performance. Torkelli et al. (2012) proved that hostile environment was negatively related to performance and did not moderate the network competence and international performance relationship. Environmental dynamism refers to the rate of environmental change and the unpredictability of that change [21]; [24]; [45]. Industries may experience high dynamism due to shifts in firms' technological capabilities, entry of new competitors, and changes in customers' preferences [8]. Extreme situations of industry dynamism result in conditions of hyper-competition, where the benefits of almost all forms of competitive advantage are short-lived [20]. Conditions of high dynamism may limit the size advantage realized by large firms, and may present opportunities for smaller competitors. Smaller firms can be successful in dynamic environments by developing breakthrough technologies and by using their flexibility to quickly introduce new products [50]; [90]; [94]. Since technological advancements usually quickly diffuse to competitors in dynamic industries, firms must repeatedly launch new products to be successful over the long term, even if that means cannibalizing market share from one's own products [9]; [20]; [25]. Thus, we expect firms that follow an exploration strategy and focus on developing new knowledge to be more successful in dynamic environments. Conversely, the benefits of exploitation are limited in dynamic environments. Attempts to continually and incrementally exploit the firm's current knowledge base become futile when other firms are rapidly developing new technologies and launching radically new products. In relatively stable environments, where competition is based more on efficiency and cost reduction, firms will focus more on incremental process innovations rather than radical product innovations [75]. Also, dominant designs are more durable in stable environments, enabling more opportunities to make incremental product innovations around a dominant design [23]. Thus, the exploitation strategy is more successful in a stable environment than a dynamic environment. Environmental munificence refers to the extent the environment can support sustained growth [21]; [80]; [92]. The primary determinant of environmental munificence is the stage of the industry life cycle [21], which is generally considered to be the most important moderating variable for the strategy-performance relationship [42]. Researchers have found that the growth stage of the industry life cycle is when firms are most profitable and the industry is most attractive [26]; [60]. Similarly, [51] provided support for the proposition that new ventures are more likely to be successful when launched during the growth stage. The major advantage of environmental munificence is that it enables firms to create more organizational slack, which allows firms to direct more resources to research and development (R & D) and the entire new product-development process [7]; [21]. Thus, firms are better able to develop the competencies necessary to pursue an exploration strategy. In addition, during periods of high industry growth there is less incentive for competitors to aggressively attack each other and competitive advantages are sustainable for longer time periods. Indeed, one of the biggest competitive challenges during this period is often the ability of firms to increase their manufacturing capability to meet the demand for their own products [31]. Thus, many firms do not even have the ability to take market share from competitors. We believe that exploration is also more likely to occur and more likely to lead to higher performance in industries with high munificence. The effect of munificence on exploitation is not quite as straightforward. If exploration and exploitation are viewed as substitutes and, therefore, require significant trade-offs, then when exploration is most common (industries with high munificence) exploitation should be less common. Conversely, when exploration is least common (industries with low munificence) exploitation should be most common. But if exploration and exploitation are viewed as independent complementary constructs, this does not have to be the case. Indeed, it could be argued that exploitation will lead to higher performance during periods of high munificence than during periods of low munificence because there are more opportunities to compete in different market segments and niches. Organizational systems that facilitate exploration, such as a team-based structure and open communication systems, can also facilitate Page 5 PRO JOURNALS [JBM] - PERCEIVED ENVIRONMENTAL IMPACT ON KNOWLEDGE RESOURCES AND SOCIAL NETWORK: EVIDENCE FROM MALAYSIA By Amran Awang 1 , Zainal Ariffin Ahmad 2 , Abdul Rashid Said Asghar 1 , Khairul Anwar Subari 1 , shamsul anaz kassim 1



0520130702

exploitation [5]. Even though the benefits of exploitation may eventually be limited as both the firm and competitors develop radically new products via exploration, a generally more benign competitive environment enables firms to maximize returns on exploitation. Hence we posit: H7: Increasing environmental factors impacts positive relationship between knowledge and growth H8: Increasing environmental factors impacts positive relationship between network and growth H9: Increasing environmental factors impacts positive relationship between knowledge and efficiency H10: Increasing environmental factors impacts positive relationship between network and efficiency H11: Increasing environmental factors impacts positive relationship between knowledge and effectiveness H12: Increasing environmental factors impacts positive relationship between network and effectiveness.

2.4 THEORETICAL FRAMEWORK Insufficient evidence prevail in previous studies allow us to formulate the schematic representation of the theoretical framework shown in Figure 1. Firms knowledge and network strategies directly explain growth, efficiency and effectiveness. Perceived environmental factors namely dynamism, hostility and munificence indirectly affect the relationship. The framework shall help in filling the identified gaps.

3. RESEARCH METHOD 3.1 SAMPLING AND UNIT OF ANALYSIS The study observes on the response of owner or manager who represents one BSMAEs in Peninsular Malaysia where each BSMAEs were the unit of analysis. The list and particulars of BSMAEs were supplied by Malaysian Agriculture Department, Muda Development Authority (MADA), Kemubu Development Authority (KADA), Federal Agricultural Marketing Authority (FAMA), Agro Bank and Farmers Association Organizations (FAOs). The lists supplied comprised of 3876 SMAEs, after scrutinizing the details of the firms, we manage to mail a questionnaire to each of 2000 BSMAEs selected. The selection was done according to non-proportionate random sampling technique. A total of 615 questionnaires were returned and usable comprise of 135 BSMAEs in southern region representing 22 percent, 349 BSMAEs from the northern region representing 57 percent, and 131 BSMAEs from eastern region representing 21 percent. Therefore, the response rate was about 31percent. Demographic of the firms’ owner or manager response to questionnaires was as follows, most of them were owners represented by 95.3% and 4.7% were the managers. The gender was female represented by 59% more than male. The age brackets were dominated by respondents who are more than 40 years old represented more than 70%, whereas those with 40 years or younger represented by 30%. Education Page 6 PRO JOURNALS [JBM] - PERCEIVED ENVIRONMENTAL IMPACT ON KNOWLEDGE RESOURCES AND SOCIAL NETWORK: EVIDENCE FROM MALAYSIA By Amran Awang 1 , Zainal Ariffin Ahmad 2 , Abdul Rashid Said Asghar 1 , Khairul Anwar Subari 1 , shamsul anaz kassim 1



0520130702

background showed most representations were those finishing lower level education represented more than 85%, on the other hand, 15% were college graduates. Firms’ demographics were divided into five categories. First, BSMAEs type of business were mainly manufacturers and processors of agro-based product represented by 70%, other types such as the producers in livestock, fishery and service sectors were between 3%-15%. Second, firms’ legal registration status mainly the sole proprietor represented by 78.9%, other forms were private limited company and partnership represented by 10.4%, and public limited companies represented by less than 1%. Third, firms’ size according to number of employees 77.9% were mainly very small firms that employed less than 5 workers, 22% were those firms employed between 6-50 employees and firms employed more than 50 employees represented less than 1%. Fourth, firms’ cycle influence, 71% were those influenced by the cycle and only 22% were those firms free from cyclical influence. And fifth, agriculture dependence was represented by 48.3% that BSMAEs relying totally on agriculture sector as their source of survival and 51.7% were those dependence on agriculture and any other sectors.

3.2 INTSRUMENT AND MEASUREMENT The control variables were utilized to ensure those other variables such as the firms’ demographic should affect the model under study [17]; Wilklund & Shepherd, 2003). Since all control variables were originally dichotomous, [32] suggested that they were dummy-coded. The non-metric variable transformed into metric variable by assigning “1” or “0” to a subject. Those assigned “0” were the reference category. The control variables in the study comprised of type of business where service SMAEs were the reference variable, others were the controls. Registration status observed the limited companies as the reference. Firms’ size controlled for smaller-sized SMAEs. Cyclical effect considered those SMAEs not affected as the reference group. And for dependency measures controlled for SMAEs that solely dependent on agriculture sectors. Knowledge was adopted from Wilklund and Shepherd (2003), network was from Zhou et al. (2006). Perceived environmental factors were adopted from Miller (1983, 1986). Growth was adopted from Dess and Robinson (1984), efficiency was from Murphy et al. (1996) and effectiveness was from Mahoney and Weitzel (1976). A total of 12 items - knowledge, 11 items – network, items – perceived environmental factors, firms’ growth and efficiency – 5 items and effectiveness – 5 items. All items measured using a 5point Likert scale, response to statements range from “1” – strongly disagree to “5” – strongly agree. Ensuring the variable used to be free from measurement error we formulate all items that load in a factor into a summated mean score to represent specific variable [32]. This is done after all items have satisfy factor analysis and reliability runs.

3.3 DATA ANALYSIS STRATEGY Data analysis strategy capitalizes on item analysis prior to exploratory factor analysis (EFA) of the BSMAEs’ EO dimensions based in the region where they operate. Item analysis was the first step to verify the content validity (Schriesheim, Powers, Scandura, Gardiner & Lankau, 1993). Furthermore, Hinkin (1995) cited that any measure should be judged and must be adequately captured specific domain of interest without any extraneous content. EFA produced loading matrix after some reduction to the items analyzed. Items that reduced were due to two reasons, first, when they failed to score at least .50 of the measures of sampling adequacy showed in anti-image correlation matrix table, second, when they were found cross-load in the factor loading table. After data were reduced, we rerun the analysis whereby final output was produced. HMRA were done in four stages, first stage observed controlling for type of business, form of registered entity, firm size, business cycle and agro dependency. All control variables were dummy-coded by assigning value ‘1’ to the observed control and ‘0’ to the others. The independent and moderator variables were standardized scales where ‘0’ was assigned as the arbitrary point. The second, third and fourth stage observed changes in the model when independent, moderator and interaction terms (IV x MV) variables were entered respectively. Model significance showed in adjusted R square and F-value at p