‘Knowledge Managment and e-Learning in

SMEs’

Colin Gray
Professor of Enterprise Development
Open University Business School
Milton Keynes MK7 6AA
UK

Phone: +44 (0)1908 655862

e-Mail: c.w.j.a.gray@open.ac.uk

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Abstract: Although relatively few very small and medium enterprises (SMEs)
have yet been affected profoundly by moves towards a new information society or
knowledge economy, many more are already affected indirectly. Information and
communication technologies (ICT) are impacting on virtually all SMEs. Regular
studies conducted by the OUBS-based Small Enterprise Research Team
(SERTeam) and large scale EU and UK surveys of SMEs show near saturation use
of PCs, widespread access to the Internets and increased use of networked
computers, mobile telephony, palmtops and so on. However, local development
and policy reports reveal a picture of poor management and lack of ICT skills
prevailing among many SMEs. There are a growing number of policy initiatives, at
regional, national and EU levels, to improve ICT capabilities among SMEs and to
increase innovation and the development and sharing of knowledge within SMEs
through encouraging lifelong learning. ICT is also seen as opening new
possibilities for supporting e-learning in SMEs. Yet, once again, SME participation
is very low, particularly among the largest SME sector, the microfirms with fewer
than 10 employees. The most common reasons given by SME owners include lack
of time, inconvenient locations and low relevance.
Over the past 5 years or so, OUBS has been engaged in a number of longitudinal
and cross-sectional surveys of management development, use of ICT and
knowledge management in SMEs. Drawing on the findings from these regular
surveys, plus relevant findings from recent large scale EU and UK studies, this
paper examines SME learning needs and the effects of increased ICT-adoption on
the acquisition of knowledge necessary for their survival, growth and success in
the new economy, and whether ICT mediated e-learning holds the solutions for
acquiring these necessary competences and skills, and overcoming the common
SME participation barriers.

Keywords: SME, learning needs, training, management development, ICT,

knowledge management, e-learning.

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1. Introduction
There is tremendous pressure at government level (both national and EU) to
encourage greater participation in the information society by small and medium
enterprises (SMEs). This is reflected at policy level in pushing the role that SMEs
can play in innovation, in improving the functioning and competitiveness of supply
chains and in the wider spread and stronger effectiveness of e-commerce (DTI,
1998; EC, 1997, 1998). Two main related drivers appear in policy documents:
(1) increasing EU competitiveness in the face of global competition (especially from the US
and Japan);
(2) boosting sustainable local development in order to reduce social exclusion and to build a
knowledge economy in Europe.
Although global competition and regional economies tend to be the province of
large national firms and multinational corporations, the business effects impact on
SMEs. As well as facing tougher resource constraints in marketing their products
abroad, SMEs face tougher competition for necessary competences and skills in
local labour markets due partly to a poor supply of such skills and partly to
intensified competition from larger firms. In its 2002 report on workbased learning
in SMEs, Britain’s Learning Skills Development Agency (Hughes et al, 2002),
which has identified a number of critical skills shortages among different sectors of
SMEs, summarised the policy challenges as:
‘In a fast-changing world of work, the ability to adapt and develop new learning and skills is a
crucial ingredient in a successful economy. Globalisation and the knowledge-driven economy
require the UK to develop a more highly-skilled workforce in order to compete within high-
value-added sectors of the world economy,’ (page, 14)
In spite of the strong pressures, however, the report also acknowledged that SME
participation is very poor and that most training is informal. The report concluded
that workforce learning is very important in developing knowledge in the firm
necessary to its survival and growth but that ‘there are other ways in which the
workforce may be developed and a wide range of methods may be used. The range
includes open and distance learning (paper- or ICT-based)’.
Increased use and commercial applications by SMEs of more advanced
information and communication technologies (ICT) and related services are seen
by policymakers as the key to improved competitiveness and a knowledge
economy. A UK-government funded study by the Centre for Research on
Innovation and Competition (CRIC, 2000) into the future scenario for SMEs of the
ICT revolution drew strongly explicit links between the use and development of

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ICT as a main driver of the new ‘knowledge economy’ and future economic
success. CRIC adopted a fairly bullish approach to the future (it was conducted
before the stock exchange wipe-out of many new ‘dot.coms’). Even taking into
account the global shake-out in the ICT sector, the scale of change to their external
business environments faced by SMEs as a result of the ICT revolution is already
enormous. This paper describes the increase and changes in ICT use by SMEs, the
knowledge management implications and the effects these changes are likely to
have on future SME learning and management development, particularly the use of
e-learning to overcome low participation by the smaller SMEs.

2. SME Knowledge Issues

Knowledge is vital to business success but, even if it is difficult to define with
precision, it is not particularly mysterious. It sometimes thought of as part of a
continuum from data to wisdom as in figure 1, which Amin and Cohendet (2004)
term the ‘linear’ model (and suggest is too simplistic to describe how knowledge is
actually formed in firms).
Figure 1. Linear model of knowledge formation.

Data Information Knowledge Wisdom

Although knowledge creation is a much more organic and even random process
than the linear model suggests, the different categories provide a useful distinction
between the related concepts. Putting the directional arrows to one side, data can
be thought of as observations or ‘facts on the ground’ which become information
when communicated, shared or used for a purpose. Knowledge can be seen as
information that has meaning and is situated in a context. It can be learned through
formal study and codified, it can be acquired through conscious reflection on
experience and it can be absorbed directly from experience in a more hidden or
tacit form. Wisdom can be seen as the ability to use knowledge to further deepen
understanding and form insightful judgments and reflections.
With respect to SMEs, the focus is on two main crucial areas of knowledge –
(1) the functional areas of the business, which relate to the people in the firm;
(2) strategy and the need to remain competitive, or at least viable, which relate
to the firm itself as an organisation.

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 The degree of functional knowledge in a firm is related to the level and relevance
of formal training, experience and the response by firms to their perceived need for
capability in the functional areas. In turn, this seems to be related to levels of
education, source of knowledge acquisition (college, university, consultant, etc.)
and experience. In Britain, some 16 per cent of the workforce and university
graduates but the proportion is higher among younger SME owners and those in
manufacturing and business services (which includes consultants and the
professions). In 2004, the Small Enterprise Research Team (SERT), a non-profit
small firm research body (independent but based at OUBS), conducted a national
survey on the highest formal qualifications held SME owners and their functional
areas of knowledge need. Table 1 summarises the findings.
Table 1 Graduate and other small firm owners’ development needs
Post First Prof. Technical A-level GCSE, No All
grad degree vocational O-level quals.
ICT 44 37 44 36 39 41 40 40
Marketing 35 41 36 40 39 40 33 38
Finance 27 33 32 38 32 33 35 32
General mngt. 24 28 26 27 32 29 29 29
People/HR 15 20 23 26 23 22 15 21
Leadership 11 19 24 24 25 24 11 21
Personal devt. 19 19 19 19 23 19 11 17
Understand 15 15 14 13 17 15 15 14
small org.
None 6 13 11 14 16 14 4 11
Sample (n) 79 206 237 157 262 398 55 585
% 14 35 41 27 45 68 9 100
Source: SERT, (2004) NatWest Quarterly Survey of Small Business in Britain. Vol.20, no. 2.

Overall, ICT and marketing dominate with finance in third place. In all these areas,
the needs will be a mix of management competences and technical or operational
skills. First degree graduates have a stronger preference for marketing skills, which
is quite entrepreneurial, but the point that stands out is that there is a consistency
across all types of qualification regarding the identified areas for development. On
leadership, about which there has been a great deal of discussion in recent years,
there is middling interest except from the post-graduates and owners without
qualifications. SME owners with technical qualifications, in comparison with
holders of all other qualifications, do not have such a strong need for development
more effective use of ICT (this group would include those with ICT-related
qualifications) but they do feel a need to improve their marketing and financial
management skills. It is interesting that people who only have school-level
qualifications were more likely to report that they have no development needs.

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This suggests that there may be a lack of awareness among less qualified people on
their knowledge gaps. This lack of awareness, plus the lack of ICT skills (which is
confirmed by other surveys, pose real barriers to the spread of e-learning and the
development of knowledge through sharing with peers.
On the firm related knowledge, earlier work on organisational learning (Argyris
and Schoen, 1978) has re-emerged in concepts such as the learning organisation
(Senge, 1990) and knowledge management (Amidon and Skyrme, 1997).
Essentially, the model is one based upon knowledge sharing and, through constant
and open communication, the making explicit of often buried or tacit knowledge
held by all employees. The drawing together of experiential knowledge of key
employees (including the owner/manager) and the making explicit the effective
routines developed within the firm in order to share, combine knowledge and
create new knowledge is the innovative process that lies at the heart of knowledge
management.
With respect to the management of knowledge, it is important to note an important
distinction between types of SMEs. There are also a number of SMEs, mainly
those involved in tight networks, clusters or value-chains, where knowledge
sharing is also fundamental to their business (as opposed to others where
competitive edge comes from the more efficient management of existing routines
that are fairly common across and industry). For both types off SME, however,
there are a number of main areas of relevant knowledge – the existing
organisational and technical knowledge base, the acquiring of new knowledge
(usually through learning, training or transfer) and the creation of new knowledge
(innovation and operational improvements).
On the knowledge base, SMEs face two major challenges that reflect the two main
types of knowledge – (1) how to keep the firm’s capabilities, resources and
routines up to date, and (2) maintaining the owner-manager’s entrepreneurial and
management competences. The acquisition of new knowledge raises issues
concerning the source of information, the internal capacity for interpreting and
absorbing the new information as applicable knowledge and the use of the new
knowledge. The third area, the creation of new knowledge, raises very interesting
and challenging issues concerning innovation, creativity, and strategy but is outside
the scope of this paper.

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 ICT is seen as providing support for this process both internally and also in
relations externally with other firms. The use of internal e-mail or intranets within
the firm and e-mail, extranets or well managed, interactive websites externally with
customers, suppliers or partners is the sign of advanced SMEs that are participating
in the knowledge economy. It is a model that sees leadership more in terms of
facilitation and support than of direction. Clearly, for some SME owners this could
be a problem but for many it is reflects existing participative management styles.
Furthermore, in keeping with the knowledge management model, it is also
becoming clear that one of the most important factors of production that secure
competitive advantage is the use of experienced and skilled labour.
A lot of interest in knowledge management is more concerned with its potential to
transform relations between firms. There is increased interest in supply-chain
management, networking and partnerships between firms (Rhodes and Carter,
1999). Indeed, it is usually pressure from major customers that often pulls SMEs
into using extranets and Internet links in the first place (Quayle, 2001). Over the
past decade, the connectivity offered by the Internet has reduced the importance of
physical location for many industries (Rhodes and Carter, 1999). ICT has a key
role to play in managing the customer relationship and in seeking new customers.
The development of ICT-mediated formal and informal links between SMEs
and the growth of virtual clusters or industrial districts fits the knowledge
management approach but it is an under-researched area and little is known
about it. Indeed, little is yet known about how or whether the SMEs of the
future will use and generate knowledge in the ways outlined above but, in its
final report the UK National Skills Task Force (2000) was very clear that it
saw networks and clusters as the way for SMEs to overcome their skills and
knowledge gaps. It recommended the ‘development of new sectoral and local
learning networks to support the training and development needs of clusters
of small and medium sized businesses’.
;

Although there are few direct studies on knowledge management and SMEs,
a 1995 survey conducted by OUBS among some 2,500 SME owners revealed
that growth-oriented owners were more likely to be participative in their
management styles and more likely to network (Gray, 1998). Later OUBS

5
 research, as part of a study into the determinants of management
development, revealed the high growth firms to be more systematic and
strategic in their management development policies, including having higher
commitment to development from the top of the firm and identified managers
to be responsible for its implementation (Thomson and Gray, 1999; Thomson
et al, 2001). These are practices associated with learning organisations that
can benefit from using networks and clusters to use and create new
knowledge. This is also a process where the increased connectivity of ICT
might be expected to help.

3. SME adoption of ICT

EU and UK Regional development policy is concentrating less on individual
enterprises and increasingly on enhancing regional value chains through
encouraging more small and medium firms to participate in networks and inter-
organisational communications and cooperation. The broad aim is to boost
knowledge and technology transfer and development. At the level of SME policy,
the focus is now on increasing ICT adoption among SME in order to:
(i) protect their position in new international divisions of labour;
(ii) facilitate more and better knowledge sharing and creation between SMEs;
(iii) create new opportunities for 'on line' learning and support environments.
Increasingly, the Internet helps SMEs to participate in useful networks or to pursue
commercial and industrial linkages without a strong need for spatial proximity. In a
general, ICT adoption and use appears to be related to the size of the firm, with
larger and growth SMEs using for more ICT applications and functions than other
firms (Eursostat, 2001; Gray, 2003). Regular surveys conducted by OUBS-based
Small Enterprise Research Team (SERT) reveal that only a handful of microfirms
report that they do not own or use a computer. The patterns of ICT adoption by
SMEs in Britain are shown in Table 2, which is based on the findings of the SERT
quarterly surveys conducted over the past 20 years.

Table 2. SME use of computers 1985 – 2003 (percentages of annual total)
Size (staff) 1985 1991 1996 1999 2001 2003
1-4 20 56 73 72 82 87
5-9 29 71 86 82 86 91
10-14 38 79 88 88 97 100
15-49 61 82 94 94 97 100
50+ 72 97 95 96 100 100
All 36 68 81 81 88 92
Total (n) 1090 984 1099 601 720 687

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Source: Small Enterprise Research Team - NatWest Quarterly Surveys of Small Business in Britain
1:3;7:2;12:2;15:1;17:3;19:4

Despite the resistance of some very small microfirms, it is already clear that the
vast majority of SMEs, whatever their driving motivations and business
expectations, have become part of the wider ICT revolution to the business
environment. This has increased their need to have up to date knowledge of ICT
applications and of how to manage and use the massive increase in connectivity
that ICT supports both within firms and between them.
Over the past 20 years there has been a steady increase in the use of computers by
SMEs, reaching effective saturation, with many SMEs moving on from stand alone
computers to internal and external networks that facilitate the exchange of
information and, in some cases, the exchange of knowledge. In the past SMEs have
used their computers for accounting and little else, however, with the rapid
adoption of the Internet this is now changing with an increasing use of the Internet
to access to information (Lymer and Johnson 1997; Gray, 2003). The Internet also
offers significant opportunities for improving competence, skills and understanding
through rapid access to relevant and timely information.. ICT adoption seems to be
linked to size, industry, and the growth-orientation of the owners. However, it is
also clear that the implementation of ICT is also dependent on the type of owner
manager and their attitude, the more enthusiastic owners adopting ICTs to a higher
extent. The penetration the Internet and the use of websites is expanding rapidly
though, as Table 3 shows, there are still important size-differences.

Table 3. Size effects in SME adoption of  network ICT 2003 (column %)
ICT Adoption Micro Small Medium All
Networked computers 38 73 88 50
Intend to next year 11 8 3 10
Website 52 70 91 58
Intend to next year 11 11 6 11
Broadband 32 38 56 35
Total (n) 470 184 33 687
Source: Small Enterprise Research Team - NatWest Quarterly Survey of Small Business in Britain 19:4
The majority of all SMEs have adopted their own website and close to universal
adoption looks likely within a few years. Microfirms are far less likely to network
their computers and or to adopt broadband but both these rates are up significantly
since 2001 and look set to increase. Thus, most SMEs already have, or will soon
have, the right infrastructure to support learning online. Whatever barriers there are
to e-learning among SMEs will be due to factors other than technical.

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4. Prospects of e-Learning for SMEs
Although some ‘purists’ may insist that e-learning is conducted solely online, most
educationalists tend to a broader definition, such as that by the UK Learning and
Skills Development Agency, which defines e-learning simply as ‘the support or
enhancement of learning activities through the use of the Internet and related
technologies. ‘(LSDA, 2001). A common term used to describe methods that mix
online and face-to-face elements is ‘blended learning’. Earlier forms of e-learning
were delivered mainly through CD-ROMs, almost an extension of the even earlier
computer based training (CBT) models, but over the past five years the Internet has
taken over. Then and now, e-learning has tended to focus on training ICT and
business/management skills as then main content areas (Sloman and Rolph, 2003).
The experience of the Open University and other providers of open-learning
material for SMEs provides little grounds for optimism even though plenty of
individuals are attracted to this form of providing training opportunities. Managers
in larger and medium-sized firms are attracted by the advantages of open-learning
and, with more than 20,000 registrations, the Open University Business School
(OUBS) is the biggest single provider of management training in Europe.
However, only certain select segments of the vast population of small firm
managers are attracted to this form of management or skills training. In general,
most evidence suggests that the managers of Britain's smallest firms are resistant
not only to training but also to other forms of wider participation. Indeed, it now
seems beyond dispute that the active SMEs that do wish to expand and
professionalise their management skills and structure through training and the
adoption of appropriate standards are very much a minority.
A marketing research survey conducted for the Build a Better Business programme
at OUBS confirmed a high degree of interest in open-learning among growth-
oriented SMEs. In 1988, some 1,500 SMEs - most employing fewer than 50 people
- from the SBRT Database were surveyed on their attitudes towards training and
open-learning. Altogether 1,488 small business owners replied, some 37 per cent of
the entire database. More than half of the respondents (55 per cent) were from
firms employing 5-50 people (the target for the Build a Better Business
programme), with a large proportion of respondents (44 per cent) employing less
than 5 people and under 3 per cent employing more than 50.

8
Earlier management development studies conducted by OUBS found that one of
the strongest determinants of the amount of management development undertaken
in small firms was the presence of an explicit management development policy
(Thomson and Gray, 1999). SMEs also engage in fewer management development
activities than larger firms. Managers in SMEs are much less likely to have formal
appraisals or discussions on their training needs (41% of SMEs reported no
appraisal system compared with 27% of large firms). Table 4 summarizes the mean
score differences on formal management development activities (5-point Likert
scales, with 5 representing a very frequent activity).
Table 4. Management development practices (mean scores; n = 701)
Activities SMEs Large Non- Growth
firms growth
Link to competency 3.61** 3.83** 3.64* 3.85*
Use internal programmes 3.41** 3.85** 3.68 3.55
Use external courses 3.32** 3.58** 3.34** 3.66**
Use mentoring 2.82 2.96 2.79** 3.06**
Use qualifications 2.61** 2.94** 2.74 2.84
Use job rotation 2.22** 2.68** 2.41 2.54
Use e-learning 1.88 1.88 1.81* 2.01*
Use external placements 1.77** 1.97** 1.85 1.93
Significance of t-tests: * = p <0.05; ** = p<0.01
Source: European Management Development Leonardo project. Gray (2004)
Reflecting their bigger scale and resource base, larger firms are significantly more
likely to use their own internal training programmes and make time available for
managers to attend external courses (though these are the most common activities
for SMEs too). Large firms, with their higher numbers of line managers, are also
more likely to value qualifications. The more strategic approach of the growth-
oriented firms is reflected in their significantly stronger use of external courses
(which tend to be focused on bridging skills gaps through developing particular or
sets of competences not present in the firm), the stronger use of mentoring (usually
more bespoke than broader internal courses) and, interestingly, significantly more
use of e-learning (albeit, still at low levels).
General management skills, followed by sales and marketing then production were
the most popular functional areas with the growth-oriented firms being markedly
more focused on sales and marketing. On average, managers in entrepreneurial
firms spent 16 days on their management development activities compared with
just 11 days in non-growth firms but these differences were not significant. Nor

9
were there significant differences in average sums of money spent by firms on
general HR development or, more specifically, on management development.
However, all these activities relate to formal management and its development and
it is unclear how they relate to the intuitive entrepreneurial knowledge required to
run a successfully competitive small firm.

4. SME Learning Implications for the Future

There is little doubt that the increased diffusion of ICT applications and pressures
from global competition are already having an effect on capabilities required for
managing a successful SME. For instance, Freel (1999) identified the major skills
gaps that impede successful innovation in SMEs as:
(1) technical skills in the workforce;
(2) managerial competency;
(3) poor marketing skills.
These impediments to innovation and knowledge creation have not gone away.
This lack of competences and skills, especially those developed through experience
over time, adversely affect not only managers and staff, but also the foirms
capacity to communicate, absorb new knowledge and sell its own knowledge
effectively. Indeed, supporters of the learning organisation approach would hold
that competitive advantage between firms derives from the capabilities in
encouraging and harnessing the development and use of that tacit knowledge. ICT
offers an opportunity for that process to be further developed in scale and scope.
The use of the Internet by managers on OUBS courses, irrespective of the size of
their firms, to seek, gather and use information seems to be determined by
individual learning styles and ICT capabilities and varies widely between students.
On the social aspects of inter-active learning, OUBS evaluation studies indicate
that collaboration via CMC can be very successful, but only if particular attention
is given to the initial connection to the CMC system, and to the facilitation of the
initial stages of collaboration. Current MBA courses are now concentrating on
these two areas. Facilitation of collaboration is best engineered by reflective and
interactive activities, which are very important for learning [17] and the
intervention of skilled tutors on line to provide motivating individual support [18].
Internal evaluations revealed that CMC enhances the distance learning media mix
in the creation of a learning community.

10
Whether CMC can totally substitute for some parts of traditional delivery methods
remains a challenge for the future. Through online areas for tutor discussion and
the monitoring/mentoring system, the sharing of teaching ideas across a wide
distance learning teaching community has been greatly enhanced. However, it is
also clear that only around 10 per cent of students are really interactive (most read
the interchanges in the CMC but do not participate, thus weakening their learning
experience). Also, it is clear that the CMC has to be continuously moderated if it is
to be effective [20]. This can be quite resource demanding. Over the next few
years, as the OU becomes increasing global and the concept of on-line courses
develops, CMC is likely to assume a much more central role, alongside or
integrated into the use of the Internet. A key challenge is whether CMC continues
to enhance the distance learning media mix or whether it can substitute for some
aspects- perhaps leading to full-scale on-line courses without the loss of academic
integrity. Transferring well rehearsed and large scale monitoring and development
systems, for tutors and for students, to the online environment remain for us one
way of continuing to ensure high quality integrated student experiences in a
challenging market arena.
For instance, in the first stage where the inputs are being gathered relations with
suppliers have always been important but small firms have often had limited
choice on quality and price. Now, small firms actively use the search power of the
Internet to improve the source of their supplies. ICT has enabled a professionalism
to enter SME supply chain management. In the fourth stage, the marketing and
delivery stage, the same enthusiastic use of the Internet has not yet taken place.
The OUBS-based SERTeam quarterly survey (17:3) revealed an impressive
increase in the use of networked computers and websites also reveals that less than
15 per cent of small firms with websites update them weekly and that less than 7
per cent have the capacity to accept payments online. However, with more firms
using networked computers and having direct access to large customers, the scope
for small firms to benefit from stronger market information as outlined in the fifth
phase of Figure 1, has increased enormously.

5. Conclusions
The above discussion implies a strong role for a strategic approach (as opposed to
a tactical or reactive approaches that characterise the majority of SMEs) business

11
growth objectives, the adoption of ICT and management development. Research
into the take up and use of e-commerce by SMEs consistently identifies a lack of
strategic planning in the field. The implication is that strategic planning skills will
also be in stronger demand among successful SMEs in the future. This conclusion
is supported by OUBS studies in management development which have linked
formal management development policies and a learning supportive environment
with SMEs that have a growth strategy. However, these more strategic and
structured firms (the ones most likely to develop a properly integrated strategy that
embraces a planned use of ICT, e-commerce and knowledge management
practices) remain in the minority (Thomson et al, 2001).The pattern of intense
change and uncertainty with only a small minority of active SMEs adopting a
planned strategic approach to they manage the change is a familiar one.
Indeed, the high non-participation rates among the very smallest microfirms and
self-employed that characterises SME response to many small firm public policy
initiatives is also seen in the take-up and use of ICT. The findings of a six country
study on the impact of ICT on small rural firms that involved OUBS and SBRT,
found that roughly one quarter of small firms did not want to use computers or link
up to the Internet. For many of these firms, the lures of the information society are
not relevant.
For the small firms that do wish to engage, the existence of a formal policy
concerning management development and ICT strategy seems likely to be one
indicator of whether an organisation treats such development as central to its
business strategy (Pettigrew, 1997; Thomson and Gray, 1999). Formal policies are
more in evidence in organisations which give high priority to management and
staff development and to the development of the firm as a learning organisation.
The forces that seem to impel innovative SMEs towards this more formal approach
relate to the firm’s growth strategy, customer pressure and competition, reflecting
clear links between competitive pressures and the need to mange and generate
knowledge effectively. The successful SMEs of the future are likely to be those
that have developed themselves into flexible learning organisations which, in turn,
implies the need for more innovative approaches to business and management
development.

12
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