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Journal of Business Research 64 (2011) 728736

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Journal of Business Research

How knowledge management mediates the relationship between environment and organizational structure
Chechen Liao a,, Shu-Hui Chuang b, Pui-Lai To c
a b c

Department of Information Management, National Chung Cheng University, Ming-Hsiung, Chia-Yi 621, Taiwan Department of Business Administration, Asia University, Wufeng, Taichung 41354, Taiwan Department of Management Information Systems, National Chiayi University, Chia-Yi 600, Taiwan

a r t i c l e

i n f o

a b s t r a c t
Literature examining how knowledge management (KM) capability helps organizational structures cope with uncertainty is limited. Thus, this study builds and tests an integrated model to investigate the relationship among environmental uncertainty, KM capability, and organizational structure. Data from 161 rms were collected and analyzed. The results from structural equation model analysis support a mediating KM capability between environmental uncertainty and structural attributes. Environmental uncertainty tends to require rms to increase their KM capability, which in turn manifests itself in structural changes. 2010 Elsevier Inc. All rights reserved.

Article history: Received 1 February 2010 Received in revised form 1 April 2010 Accepted 1 August 2010 Available online 9 September 2010 Keywords: Knowledge management Environmental uncertainty Organizational structure

1. Introduction The organizational structure of many rms reects a shift away from hierarchical structures and towards a greater reliance on decentralized authority, teamwork, and supporting incentives. This shift involves the role of information processing (El Louadi, 1998). While numerous previous researchers are optimistic regarding the promise of information processing to cope with organizational structures (Bron and Besanko, 1992; Miller and Drge, 1986), the literature also contains disagreement regarding the relationship between information processing and organizational structure (Attewell and Rules, 1984). Previous inconclusive ndings possibly result from the early treatment of information processing as a major effect on organizational structure. Recently, organizations offer an innovative perspective for information processing. This innovative perspective shifts the trend of traditional information-processing research towards the study of the relationship between knowledge management (KM) and organizational structure (Buckley and Carter, 2002). In order to distinguish this research from the relatively long accumulated research tradition in studying the relationship between information processing and organizational structure, the study includes making three fundamental changes in assumptions. First, information processing focuses on collecting, processing, and using data to accomplish the main tasks of a rm (Daft and Weick, 1984), while KM focuses on organizing and making important knowledge available to decision makers wherever and whenever it is necessary.
Corresponding author. E-mail addresses: (C. Liao), (S.-H. Chuang), (P.-L. To). 0148-2963/$ see front matter 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2010.08.001

While information processing provides the foundation for KM, the two are oriented differently. KM is used as a synonym for the management of work practices which improves the sharing of knowledge in an organization (Nonaka et al., 1996). KM also has a strong link to business strategy (Zack, 1999), in that its proponents claim that it should enable an organization to cope effectively with rapid environmental change and attain some form of competitive advantage. Second, leading organizational theorists advocate an open systems approach in the study of organizations. In essence, the open systems approach calls for an investigation of the relationship between the organization and KM. Most books on organizational theory and management published after the late 1990s either explicitly state or allude to the importance of KM. Publications in both popular (e.g., Compton, 2001) and academic literature (Conner and Prahalad, 1996; Kogut and Zander, 1996; Reagans and McEvily, 2003) also highlight the importance of KM in contemporary organizations. Birkinshaw et al. (2002) note that KM already affects individual approaches to work, and thus it is necessary to study the inuences of KM on organizational structures. Collectively, KM would have a more profound and direct impact on organizational structure than information processing that typies prior studies. Third, the increasing uncertainty in the external business environment shifts the focus upon resource as the principal source of sustainable competitive advantage. Knowledge is a resource that can be used to create gains from the uncertainties in business. Thus, environmental variables can have major impacts on KM (Grant, 1996a; Sharp, 2003) and KM application becomes vital for sustaining competitive advantage (Chuang, 2004; Johannessen and Olsen, 2003). In addition, structural contingency research has also argued that certain environmental variables, such as environmental uncertainty, can have a signicant

C. Liao et al. / Journal of Business Research 64 (2011) 728736


impact on organizational structure (Miller, 1991; Wang, 2001). Likewise, environmental changes manifest structural changes that are accomplished through the deployment of KM capability. Despite the importance of KM in contemporary organizations, intensive analyses or empirical studies on KM capability are limited. No wellknown study specically considers the mediating effect of KM capability. In other words, KM capability variables intervene and mediate the contingent relation between environmental uncertainty and organizational structure. Using the knowledge-based view of the rm (Grant, 1996b) as a theoretical foundation, this study builds and tests an integrated model that comprises constructs related to environmental uncertainty, KM capability, and organizational structure. This study investigates: (1) whether environmental uncertainty has a signicant impact on KM capability and organizational structural variables; and (2) whether KM capability has a signicant impact on structural variables. 2. Conceptual development and research variables All organizations need to possess knowledge about their environment and about the state of their internal affairs. Goll et al. (2007) highlight the importance for a rm to establish a repository of existing knowledge and maintain that existing knowledge capability can serve as an endogenous source of innovation and strategic change. Knowledge and its availability are so central in decision making that a number of management theorists advocate, via KM, increasing the availability of knowledge (Argote et al., 2003). In this theory, the congruence between the required knowledge and management of that knowledge is antecedent to organizational effectiveness. In some studies, researchers use KM as a conceptual or theoretical foundation to address organizational design problems (Birkinshaw et al., 2002; Buckley and Carter, 2002). Based on the management literature (Lee and Grover, 2000; Miller, 1991), four types of organizational design mechanisms help businesses cope with KM: centralization, formalization, complexity and integration. Thus, by taking the KM view as a theoretical foundation, this study examines the effects of environmental uncertainty on organizational structure with KM capability as the primary mediating factor. The basic argument is that the environment signicantly affects KM capability, while simultaneously inuencing organizational structures. KM capability can in turn affect organizational structures. Fig. 1 shows the proposed research model and the relationship of variables. The research model comprises three sets of variables that the following discussion describes. 2.1. Environmental uncertainty Environmental uncertainty is an important contextual variable in KM (Germain et al., 2001; Grant, 1996a) and organizational design (Gordon and Narayanan, 1984). Environmental uncertainty refers to the inability to assign probabilities with any degree of condence with regard to how environmental factors are going to affect the success or failure of the decision unit in performing its function. Environmental

uncertainty also refers to the variety of external forces with which an organization should interact (Kearns and Lederer, 2004; Ramamurthy, 1990). Information processing research and investigations into the relationship between environment and organizational structure most often apply this denition of environmental uncertainty (Miller, 1988). 2.2. KM capability The knowledge management capability of a rm refers to the degree to which the rm creates, shares, and utilizes knowledge resources across functional boundaries. This denition focuses on the rm's KM activities at the organization level rather than at the department, team, or individual levels because the purpose of this study is to understand how the rm adds value to its departments. This study examines rms' KM capability in terms of their emphasis on three KM activities: knowledge creation, sharing, and utilization (Argote et al., 2003). Knowledge creation refers to the degree to which the rm develops or creates knowledge resources across functional boundaries. The creation of knowledge resources does not occur in abstraction from the current knowledge and capability of the rm (Alavi and Leidner, 2001) since knowledge is path dependent (Cohen and Levinthal, 1990). The creation of knowledge across functional boundaries requires the capability to generate new applications from existing knowledge and to exploit the unexplored potential of new skills (Kogut and Zander, 1992). Nonaka's (1994) dynamic theory of organizational knowledge creation provides a theoretical backdrop on which to conceptualize the knowledge creation process. Knowledge sharing refers to the degree to which the rm shares knowledge resources across functional boundaries. To the extent that they can distribute each other's knowledge and learning, departments can do things better together over time (Prokesch, 1997). The ability of sharing and distributing knowledge resources across functional boundaries enables the rm to fundamentally change its business processes. The sharing of knowledge resources not only facilitates cross-functional interaction but also allows the sharing of knowledge repositories among process participants, thereby allowing greater collaboration and understanding of the entire process rather than having fragmented parts of the process. Knowledge utilization refers to the degree to which the rm applies the knowledge resources that are shared across functional boundaries. It allows the rm to reap returns on its knowledge resource. A rm may have capabilities in creating, sharing, and utilizing knowledge resources, but these capabilities are irrelevant if the rm cannot ultimately utilize the knowledge resources efciently (Argote et al., 2003). The capability to utilize a related knowledge base in decision making and problem solving allows the rm to respond more effectively to environmental changes, which, in turn, has a positive impact on the organizational structure such as integration mechanisms. In the absence of rm capabilities to use and act on knowledge, knowledge resources cannot have a positive effect on organizational structure. These three KM activities collectively enable the rm to create new knowledge, to share and distribute existing knowledge across functional boundaries, and to utilize the shared knowledge for effective decision making and problem solving. They co-exist, covary, and overlap with each other, and collectively dene the rm's KM capability. In a review of KM studies in IS literature, four interrelated activities (i.e., creation, transfer, integration, and leverage of related knowledge) have been identied to enable a rm to develop and employ KM capability. These interrelated activities complement and mutually support one another (Tanriverdi, 2005; Venkatraman and Tanriverdi, 2004). The coexistence of these interrelated activities can create additional, knowledge-based synergies that are not captured by any

Knowledge Management Capability Organizational Structure . Centralization Environmental Uncertainty . Formalization . Complexity . Integration
Fig. 1. Research model.


C. Liao et al. / Journal of Business Research 64 (2011) 728736

one of them in isolation (Tanriverdi, 2005). Thus, KM capability enables the rm to create and realize knowledge-based synergies across functional boundaries so that individual departments are worth more under its governance than they would be under the governance of separate departments. 2.3. Organizational structure Ghani et al. (2002) and Robbins (1990) dene organizational structure as the formal allocation of work roles and administrative mechanism to control and integrate work activities. This study focuses on the four most important aspects of structure which include centralization, formalization, complexity, and integration (Lee and Grover, 2000). Centralization describes the degree to which the right to make decisions and evaluate activities is concentrated. Formalization measures the extent to which an organization uses rules and procedures to prescribe behavior. Complexity refers to the degree to which different functions are distinguished with respect to goals, task orientation, and degree of autonomy. Integration describes the degree to which the activities of separate players in the organization can be coordinated through formal coordination mechanisms. Although these are not the only structural factors affecting organization design, they are the four fundamental elements in control and coordination and are often vital to rm performance (Lee and Grover, 2000). 3. Model and research hypotheses Fig. 1 presents the proposed model depicting a mediating effect of KM capability on the relationship between environmental uncertainty and structural variables. Specic research hypotheses explore the relationships among factors in the research model. 3.1. Environmental uncertainty and organizational structure Previous research on organization environment interaction shows that the environment has a signicant impact on organizational structure (Miller, 1988, 1991). Gordon and Narayanan (1984) suggest that environmental uncertainty represents a key variable affecting organizational structure. The following studies further discuss the relationships of environmental uncertainty to each of the four characteristics of organizational structure (centralization, formalization, complexity, and integration). Miller (1991) addresses that organizations become more decentralized in order to adapt to increasing environmental uncertainty. Decentralization is particularly more appropriate when an organization faces a complex and rapidly changing environment. Lee and Grover (2000) indicate that in order to cope with environmental uncertainty, an organization requires a structural complexity, which can include a diversity of marketing strategies, a diversity of production technologies, and a number of different product lines. Miller (1991) argues that environmental uncertainty has signicant effects on formalization of organization. High levels of formalization lead to rules and procedures that restrict risk taking. These are characteristics that help organizations recognize changes in environmental uncertainty. Daft and Lengel (1986) stress that to cope with environmental uncertainty, an organization necessitates a differentiated organizational structure with a broad array of formalized managerial positions and specialized tasks and a consequent need for liaison personnel to integrate the efforts of the various specialists performing these tasks. Consequently, adaptive organizations will display signicant relationships between environmental uncertainty and the use of decentralization, complexity, formalization and integration. Based on these arguments, this study examines the following hypotheses. H1: Environmental uncertainty has a signicant negative inuence

on centralization of organization. H2: Environmental uncertainty has a signicant positive inuence on formalization of organization. H3: Environmental uncertainty has a signicant positive inuence on complexity of organization. H4: Environmental uncertainty has a signicant positive inuence on integration of organization. 3.2. Environmental uncertainty and KM capability Firms operating in dynamic environments attach greater importance to knowledge (Van den Bosch et al., 1999). Germain et al. (2001) and Grant (1996a) emphasize the importance of KM in organizations, alleging that the environment is becoming increasingly dynamic and complex. Particularly, KM, differing from traditional information processing, is strongly related to an organization's adaptation to the external environment (Malhotra, 2000; Nonaka et al., 1996). Knowledge is a critical component of inter-rm rivalry; in order to successfully compete, an organization must possess KM capabilities to evaluate and quickly respond to competitors' actions. Grant (1996a) identies a positive relationship between environmental uncertainty and KM. Malhotra (2000) describes that the increasingly dynamic and discontinuous change in environment requires KM. Thus, under high uncertainty, rms must develop a KM capability enabling them to use prior knowledge to recognize the value of new information. By assimilating and applying the new information, rms can create new knowledge and capabilities. Therefore, based on these arguments, this study tests the following hypothesis. H5: Environmental uncertainty has a signicant positive inuence on KM capability. 3.3. Environment, KM capability, and structure Information processing can facilitate the organizational ability to cope with environmental uncertainty. However, Nonaka et al. (1996) assert that when organizations face highly uncertain or rapidly changing environments, then information processing needs to be adjusted and the role of KM must be emphasized. KM enables organizations to handle uncertain environments through knowledge sharing or knowledge creation, but information processing is only useful in helping people increase their working efciency. Fig. 1 shows that KM capability mediates the relationship between environmental uncertainty and organizational structure. Environmental changes create problems for a rm and make it necessary to design organizational structures to cope with these problems. However, in the knowledge-intensive era, creating the desired structural responses to the environment is very difcult without KM. Higher environmental uncertainty increases the need for KM (Bolloju et al., 2002; Malhotra, 2000). The greater the knowledge made possible through KM capability allows an ability to cope with the needs of additional knowledge required to adapt to environmental changes. By markedly reducing the costs of sharing and by increasing the quality and speed of knowledge sharing, KM enables more effective integration through forming new decision-intensive organizational structures. Birkinshaw et al. (2002) contend that achieving an appropriate alignment between organizational knowledge and structure is critical for achieving exibility and efciency in competitive and uncertain environments. More recently, Ditillo (2004) presents an integrative model of KM to cope with the organizational changes required to respond to environmental change. Overall, environmental uncertainty requires rms to increase their KM capability, which in turn manifests itself in structural changes. Thus, this study postulates that KM capability, which is induced by increasing environmental uncertainty, will lead increasingly to decision-making intensive structures. That is, the capability of KM mediates the base hypotheses (i.e., Hypotheses 14) regarding environmental uncertainty and organizational structure. To cope

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with increasing uncertainty, the KM capability leads to increased decentralization, formalization, complexity and integrated structures. Thus, this study examines the following hypotheses. H6: KM capability mediates the negative relationship between environmental uncertainty and centralization. H7: KM capability mediates the positive relationship between environmental uncertainty and formalization. H8: KM capability mediates the positive relationship between environmental uncertainty and structural complexity. H9: KM capability mediates the positive relationship between environmental uncertainty and integration. 4. Methods This section presents a brief description of the sample and an overview of the survey procedure used in this study, followed by an explanation of how the research variables were operationalized and measured. 4.1. The sample and data collection procedure The sample frame consists of a relatively homogenous sample of larger manufacturing rms in order to reach a higher degree of internal validity. These rms maintain similar applications and organization resources, alleviating moderating effects of the economy and industry. The chief executive ofcers (CEOs) of manufacturing rms contributed the key information in this study since CEOs are typically the primary decision-makers of organizational change in manufacturing rms. A survey was chosen as the method for data collection. Data collection was conducted in two phases: a pilot study phase and a questionnaire survey phase. In the pilot study phase, six manufacturing rms were chosen from the Common Wealth 1000 largest rms in Taiwan to pretest the questionnaire. Six CEOs completed the questionnaires. Then, interviews were conducted with these CEOs to determine whether there were any problems with the questionnaire. Based on feedback from these CEOs, minor modications were made to the questionnaire for the next phase of data collection. Responses from these six rms were not included in the nal sample. In the questionnaire survey phase, a package was mailed to the CEOs of 595 of the largest manufacturing rms listed in Common Wealth 1000 largest rms in Taiwan. The package contained a cover letter, a questionnaire and a prepaid reply envelope. The cover letter and questionnaire explained the purpose of the survey and asked the CEO to return the completed questionnaire within two weeks. The respondents were assured of the condentiality of their responses. The rst round mailing yielded 96 responses. The second mailing yielded an additional 87 responses, raising the total response to 183 and producing a nal response rate of 30.8%. However, 21 out of 183 respondents were excluded from the nal sample because their questionnaires were incomplete, leaving 161 valid questionnaires. Table 1 presents the characteristics of the responding rms. 4.2. Measurement of the variables A multiple-item method was used to construct the questionnaires. All of the items were validated in previous research and on a sevenpoint Likert scale ranging from strongly disagree (1) through neutral (4) to strongly agree (7). Since the survey was conducted in Taiwan, the original items were translated from English into Chinese. Validity was preserved in a rigorous process. A pretest was carried out by two professors and two Ph.D. candidates in the Information Management eld to verify the content validity of the instruments. The four academic experts reviewed the questionnaire design and offered comments. As a result, minor modications were made to the questionnaire to ensure a consistency of semantic meaning between English and Chinese, and overall readability of the questionnaire.

Table 1 Distribution of returned questionnaire. Range (a) Industry type Food/beverage Plastic Textile/ber Machinery Electric equipment and cable Chemistry Papermaking Steel Rubber Transportation Electronics Others (b) Total sales revenue (NT$) range Less than $3 Billion $.3.1 Billion to below $4.1 Billion $4.1 Billion to below $6.1 Billion $6.1 Billion to below $8.1 Billion $8.1 Billion to below $10.1 Billion $10.1 Billion to below $20.1 Billion $20.1 Billion and above (c) Number of employees Less than 100 101300 301500 5011000 10012000 20013000 Over 3000 (d) Position of respondents CEO Lower than CEO Number of rms (n = 161) 9 12 14 13 5 12 3 11 5 3 57 17 18 26 31 34 22 8 22 7 40 30 36 18 8 22 116 45 Percent 5.6 7.5 8.7 8.1 3.1 7.5 1.9 6.8 3.1 1.9 35.4 10.6 11.2 16.1 19.3 21.1 13.7 5.0 13.7 4.3 24.8 18.6 22.4 11.2 5.0 13.7 72.0 28.0

4.2.1. Environmental uncertainty Previous studies use the diverse forces of the external environment as an index for measuring environmental uncertainty (Kearns and Lederer, 2004; Ramamurthy, 1990). The environmental uncertainty instrument by Ramamurthy (1990) is more suitable and thus adapted. This measure is a seven-point Likert scale which consists of ve items (see Table 2). These items reect both the size and diversity of customers, suppliers, and competition. 4.2.2. KM capability KM capability was measured by three interdependent KM activities: the creation of knowledge resources across functional boundaries, the sharing of knowledge resource across such functional boundaries, and the utilization of knowledge resource. Therefore, this study evaluates KM capability by measuring the extent to which the organization engages in or supports the creation, sharing, and utilization of knowledge resources across functional boundaries. Knowledge creation was operationalized by questioning informants about the degree to which the organization engages in or supports the creation of knowledge resources across functional boundaries. Meanwhile, knowledge sharing is determined by asking the informants about the degree to which the organization engages in or supports the sharing and distribution of knowledge of individual function, which may also be applicable across other functional boundaries. Lastly, knowledge utilization was operationalized by asking the informants about the degree to which the organization engages in or supports the utilization of knowledge across functional boundaries. 4.2.3. Organizational structure The four structural variables include centralization, formalization, structural complexity, and integration. These are the aspects that emerge most consistently in the literature (Lee and Grover, 2000). The organizational structure instrument used by Lee and Grover (2000) was adopted. Centralization was measured using six items. Each of

732 Table 2 Items used to measure research constructs. Environmental uncertainty ENU1 ENU2 ENU3 ENU4 ENU5 KM capability KM1 KM2 KM3 KM4 KM5 KM6 KM7 KM8 KM9 KM10 Centralization CEN1 CEN2 CEN3 CEN4 CEN5 CEN6 Formalization FOR1 FOR2 FOR3 Complexity COM1 COM2 COM3 Integration INT1 INT2 INT3

C. Liao et al. / Journal of Business Research 64 (2011) 728736 Table 3 Assessing the measurement model. Construct/item Environmental uncertainty ENU1 ENU2 ENU3 ENU4 ENU5 KM capability KM1 KM2 KM3 KM4 KM5 KM6 KM7 KM8 KM9 KM10 Centralization CEN1 CEN2 CEN3 CEN4 CEN5 CEN6 Formalization FOR1 FOR2 FOR3 Complexity COM1 COM2 COM3 Integration INT1 INT2 INT3 Standardized loading t-value R2 Composite reliability .81 .63 .63 .78 .78 .72 .86 .87 .86 .88 .87 .89 .85 .82 .85 .87 .71 .76 .83 .79 .76 .69 .84 .91 .87 .79 .85 .62 .65 .89 .87 8.28 8.28 11.06 10.99 9.79 13.61 13.89 13.58 14.05 13.91 14.33 13.22 12.53 13.42 13.79 9.97 10.93 12.33 11.43 10.96 9.48 12.82 14.49 13.39 10.92 12.05 8.08 8.87 13.44 12.97 .40 .40 .62 .61 .51 .96 .74 .76 .74 .77 .76 .79 .71 .67 .73 .75 .89 .51 .58 .68 .62 .58 .47 .90 .71 .83 .75 .80 .62 .73 .39 .85 .43 .79 .76 .65 .57 .76 .57 .74 Variance extracted .46

In our industry, there is considerable diversity of customer needs variety of competition dissimilarity of supplier size of partnership number of competitors Our company creates new knowledge for application across functional boundaries. Our company creates operation systems for application across functional boundaries. Our company creates managerial policies and processes for application across functional boundaries. Our company engages in the process of distributing knowledge among departments. Our company has a standardized reward system for sharing knowledge. Our company designs activities to facilitate knowledge sharing across functional boundaries. Our company engages in processes of integrating different sources of knowledge across functional boundaries. Our company engages in processes of transferring knowledge to employees across functional boundaries. Our company engages in processes which apply experiential knowledge across functional boundaries. Our company engages in processes which apply knowledge to solve new problems across functional boundaries. In our company, there is considerable decision by top management: i.e., new product introduction capital budgeting set of pricing policies entrance to new market changes in manufacturing process personnel policy Our company stresses extent of rules/procedures documentation reliance on rules and procedures tolerance level of rule violation In our company, there is considerable number of different product lines diversity of production technology diversity of marketing strategies Our company stresses frequency of interdepartmental committees frequency of interdepartmental task forces frequency of liaison personnel

other variables, including formalization, complexity, and integration, was evaluated using three items. Table 2 provides a complete list of the questionnaire items. 5. Analysis and results Data analysis applies a multi-step approach. First, the measurement model was tested by subjecting the measures to a series of conrmatory factor analyses (CFA). Second, a structural equation model was developed to test the hypotheses. 5.1. Measurement model Table 3 presents standardized loading and other metrics for the item measures as well as reliability and validity measures. Hair et al. (1998) suggest that in a sample of 150 respondents, factor loadings of .45 and above are signicant. In this study, all items in the measurement model indicate factor loadings ranging from .62 to .91 and are thus acceptable for the remainder of the analysis. The reliabilities metrics for all the six constructs, ranging from .80 to .96, also exceed the recommended threshold of .70 (Segars, 1997) and are

fully acceptable. Average variance extracted (AVE) shows that ve of the six AVE values exceed the recommended threshold of .50 (Segars, 1997) while the environmental uncertainty construct has an AVE very close to that norm. Table 4 further displays the intercorrelations among latent variables (Aryee and Chen, 2006). Correlation analyses show that environmental uncertainty has a signicant association with complexity (r = .42, p b .01) and KM capability (r = .19, p b .05). KM capability is signicantly associated with formalization (r = .47, p b .01), with complexity (r = .45, p b .01), and with integration (r = .58, p b .01). In addition, Cronbach's alpha was used to examine the reliability of the instruments. A cutoff value of higher than .7 is acceptable since these instruments have been adopted from previous studies (Nunnally, 1978). All constructs have higher than .7 cutoff alpha values, ranging from .78 to .96.

Table 4 Intercorrelations among latent variables. Variables 1. 2. 3. 4. 5. 6. Centralization Formalization Complexity Integration KM capability Environmental uncertainty 1 [.88] .16* .09 .20 .14 .04 2 [.90] .26** .22** .47** .04 3 4 5 6

[.78] .41** .45** .42**

[.81] .58** .15

[.96] .19*


N = 161; Figures in parentheses are reliabilities. *p b .05 **p b .01.

C. Liao et al. / Journal of Business Research 64 (2011) 728736 Table 5 Hypotheses testing, direct/indirect effects, and total effects. Independent variables Dependent variables Centralization Direct effects Indirect effects Total effects Formalization Direct effects Indirect effects Total effects Complexity Direct effects Indirect effects Total effects Integration Direct effects Indirect effects Total effects KMC Direct effects Indirect effects Total effects ENU Standardized effects .07 .02 .05 t-value .94 1.53 .57 KMC Standardized effects .15 .15 t-value 1.94 1.94


.05 .09 .04

.75 2.34 .52

.49 .49

6.87 6.87

.35 .07 .42

5.25 2.29 5.90

.39 .39

5.81 5.81

.04 .11 .15

.62 2.39 1.93

.57 .57

8.75 8.75

.19 .19

2.49 2.49

ENU = environmental uncertainty; KMC = knowledge management capability. Goodness of t index (GFI) = .95. Comparative t index (CFI) = .90. Incremental t index (INI) = .90. Standardized RMR = .06.

3 and 5. Additionally, this study also found that KM capability has negative and direct effects on centralization (t = 1.94; p b .05), and positive and direct effects on formalization (t = 6.87; p b .00), complexity (t = 5.81; p b .00) and integration (t = 8.75; p b .00). The signicant inuences of KM capability on centralization, formalization, complexity and integration coupled with the effect of environmental uncertainty on KM capability demonstrate the critical value for exploring the mediating effects of KM capability. A structural equation model was examined to determine whether KM capability mediates the effect of environmental uncertainty on organizational structure. The results reveal that KM capability is a strong mediator and signicantly mediates the relationship between environmental uncertainty and the three aspects of organizational structure (i.e., formalization, complexity and integration). The direct, indirect and total effects are depicted in Table 5. The indirect path, for example, from environmental uncertainty to formalization is the following: .19 .49 .09 because it is mediated through KM capability. Total effects are simply the sum of direct and indirect effects. As can be seen, the indirect effects from environmental uncertainty, through KM capability, to formalization (t = 2.34; p b .05), complexity (t = 2.29; p b .05) and integration (t = 2.39; p b .05) are all conrmed. However, the mediating effect of KM capability on the relationship between environmental uncertainty and centralization fails to reach signicance. Thus, the results indicate support for Hypotheses 7, 8 and 9. KM capability plays a more inuential and direct role in selected environmentstructure relationships (i.e., environmentformalization, environmentcomplexity, and environmentintegration). 6. Discussion and implications Results of the structural equation model testing a mediating role of KM capability provide support for the model as Fig. 2 and Table 5 show. KM capability and organizational structure (i.e., formalization, complexity, and integration) are signicantly related and in some way working together. Previous studies explain and predict the rst part of mediating relationships, from the environment to KM. Grant (1996a), for instance, points out that high environmental uncertainty will result in greater need of knowledge integration, which can be achieved by greater use of KM. The fast changing business environment, characterized by discontinuous change, requires a re-conceptualization of KM as it has been understood in information processing practices and research. One such re-conceptualization is proposed in this article in the form of a model for developing KM capability to respond to environmental change. The second part of the mediating relationship from KM capability to organizational structure implies that higher KM capability, spurred by increasing environmental uncertainty, develops into to more formalization, more complexity, and more integration mechanisms. Organizations facing uncertain environments tend to require KM capability for facilitating continual reassessment of organizational routines to ensure that organizational decision-making processes, as well as underlying assumptions, keep pace with the unpredictably changing business environment. The analytical results demonstrate that formalization is positively associated with KM capability, but the total effect of environmental uncertainty on formalization of the organization is insignicant. The effect is indirect, suggesting that KM capability fully mediates the effect of environmental uncertainty on formalization. This result may occur because in this knowledge-intensive era, organizations facing environmental uncertainty tend to emphasize KM capability as an enabler for effectively managing rules/procedures documentation which consequently results in a higher extent of formalization. In other words, organizations tend to increase their KM capability in an attempt to match the intensive knowledge requirements associated

5.2. Structural model In this study, the structural equation model was tested using the maximum likelihood method. As Table 5 shows, the goodness-of-t indices demonstrate adequate levels of t (GFI = .95, CFI = .90, IFI = .90, SRMR = .06). The indicators for GFI, CFI, and IFI are above the recommended lower limit of .90 (Bentler, 1992; Bentler and Bonett, 1980; Bollen, 1989). The SRMR is below the recommended upper limit of .08 (Brown and Cudeck, 1993). The study includes examining ve hypotheses for bivariate relationships through a structural equation model, as Fig. 2 and Table 5 show. The results show that environmental uncertainty has direct effects on KM capability (t = 2.49; p b .01) and complexity of organizational structure (t = 5.25; p b .00). Environmental uncertainty has no signicant associations with the other three aspects of organizational structure. The results indicate support for Hypotheses

.15* Knowledge Management Capability .19** Environmental Uncertainty .35*** .04 .57***


.07 .05

.49*** Formalization

.39*** Complexity


Fig. 2. Results of structural modeling analysis. *, ** and *** are associated with twotailed condence levels of .05, .01 and .00 respectively.


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with uncertain environments. Meanwhile, as organizations enhance KM capability, KM serves as a new method to increase the level of formalization, which reects the environmental changes encountered by an organization. Therefore, to cope with environmental uncertainty, KM capability is increased, which in turn cultivates a higher degree of formalization within the organization. KM capability also signicantly relates to structural complexity. Similarly, the total effect of environmental uncertainty on structural complexity is considerable. This nding broadly reects the ndings of previous research. The literature contains some evidence that organizations in uncertain environments are more structurally complex and perform information processing (Daft and Lengel, 1986). Organizations facing uncertain environments are likely to diversify product technologies, establish numerous product lines, and implement diverse marketing strategies based on the changing needs of customers. Critical response activities such as these place a heightened focus on the customer and allow organizations to exploit an opportunity created by changing environments; organizations are continually striving to provide the very best product and service. In order to react frequently and quickly to both the problems and the opportunities resulting from the highly competitive and everchanging business environment, organizations need to invest more in product lines and production technology. In addition, the pace of change and the degree of uncertainty in the future business environment are expected to accelerate. Thus, organizations are going to operate under increasing pressures to produce more, using fewer resources. Consequently, such organizations must increase their structural complexity. The work continues to grow more diverse and requires greater breadth and depth of knowledge. Much of this greater breadth and depth of knowledge must be acquired via KM capability. KM capability increases the variety of knowledge available to employees on diverse problem solving. This leads to a more accurate and complete analysis of complex problems and ultimately improves the effectiveness of the solutions generated by the employees. Thus, enhancing employee usage of KM capability and increasing the amount of required knowledge would permit the employee to cope with more complex organizations. Investigating the relationship between KM and the level of integration mechanisms used, Ditillo (2004) forecasts that KM reduces administrative overloads and increase the need for integrative mechanisms such as management control systems. For instance, if organization managers and auditors involved in performing interdepartmental tasks believe that knowledge sharing will lead to more effective audits, the availability of required knowledge would encourage them to have more productive audits than would otherwise be the case. The ndings in this study conrm the role of KM capability assumed on integration of organization. The results indicate that integration is positively associated with KM capability and the total effect of environmental uncertainty on integration is also signicant. Although environmental uncertainty has a strong inuence on integration, a larger part of this effect is indirect through KM capability. Reading Table 5, the total effect of environmental uncertainty on integration of organization is .15, while the indirect effect through KM capability is .11. Thus, KM capability acts as a strong and signicant mediator of the effect of environmental uncertainty on integration of the organization. The results of the mediating effects of KM capability indicate that, as organizations deal with an increasingly uncertain environment, they adopt more formalized and more complex structures and use more integrated mechanisms. However, the analytical results do not show a mediating effect of KM capability on organization centralization level. KM capability itself does have a negative effect on centralization of organization and is also positively associated with environmental uncertainty. However the indirect effect is not large enough to reach signicance.

Knowledge sharing and the availability of required knowledge empower employees at the lower level of organizational hierarchy and may encourage them to participate in more decision making activities than they would otherwise. This tendency would result in a more decentralized organizational structure, which could even be strengthened with an enhanced capability of KM responding to an uncertain environment. However, environmental uncertainty does not produce a consistent variation in a rm's level of centralization and is thus detrimental to the mediating effect of KM capability. One possible explanation may be that an organization could adopt a hybrid structure. For instance, a rm may intentionally adopt centralization for nancial-related decision making, but use decentralization for marketing-related decision making in order to respond quickly to the fast changing international market. Grant (1996b) observes that decisions which require accessing and processing quantiable information have become increasingly centralized (e.g., nancial risk management); conversely, decisions which require tacit and idiosyncratic knowledge (e.g., strategic planning or investment appraisal) have become increasingly decentralized. Another possible explanation may be that decision-making authority could be intentionally centralized by management to reinforce existing structures. A third possible explanation may be respondent bias, which can affect the results of a statistical survey if respondents answer questions in the way they think the questioner wants them to answer rather than according to their true beliefs. This occurs most often as a result of the wording of the question. For example, if asking CEO's whether top management is involved in the decision-making, there could be a bias towards answering yes. Possibly, asking the opposite if there is signicant involvement by employees in decision making the results might be different. As businesses demand more simplied organizational forms through business reengineering or restructuring, the results of this study show that responses to environmental pressures foster KM intervention, in turn leading to more formalized, complex, and integrated organizational structures. Some may argue that this perspective presumes a KM imperative, in that KM capability directly affects structural attributes. The analytical results also bring forth potential implications regarding the business value of KM in four directions. First, KM forms a basis for the new enabling systems that help managers to redesign their organizations. Using this innovative technique, KM can be a method of achieving organizational simplicity by, for example, reducing layers of management as well as relying more on formalized rules and procedures. Second, the application of KM may reect the timespace discontinuity between knowledge creators and actual users. Restated, more innovative uses of knowledge may not be promptly realized by the actual users. In addition, knowledge users only partially apply knowledge. In order to widely apply knowledge, organizations should universalize applicable knowledge through educational trainings and information sessions. Third, to obtain organizational performance/cost improvements over time, organizations need to develop KM strategies for business development demands such as seeking new opportunities or organizational restructuring. For instance, an organization may develop a KM platform serving as a force to facilitate greater knowledge creation and sharing, in that employees would be able to process more knowledge and make better decisions in response to environmental changes. Fourth, the capability of KM represents an occasion for organizational change where actions over time may eventually establish new senses about appropriate KM capability. The results also produced an interesting nding that environmental uncertainty is not associated with centralization, formalization, and integration of organization. For centralization, one possible reason could be the presence of a hybrid structure that is characterized by neither centralized nor decentralized forms. A rm may centralize some decision rights while decentralizing others, leading to a hybrid structure. For formalization, previous research has been optimistic

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about formalization of organization to cope with the uncertainty of environment (Miller, 1991). However, this study fails to verify the relationship between uncertainty and formalization. One possible explanation could be that as high environmental uncertainty places more pressure on the organization to respond effectively (Eisenhardt, 1989), the nature of formalization, on the contrary, implies some levels of bureaucracy with usual inefciencies. A nature of formalization that discourages creative, autonomous work and learning might impose constraints on an organization's capability to respond to changes in the environment. Finally, for integration, an organization with a highly integrated structure may have highly formal coordination mechanisms for interdepartmental activities. Previous research suggests that environmental uncertainty accelerates this trend by facilitating greater structural integration in organizations (Daft and Lengel, 1986). However, the multitude and diversity of tasks needed to cope with uncertain environments requires task and role specialization; this in turn necessitates formal and informal coordination mechanisms to reconcile differences among the specialists. Informal coordination is a exible approach to effective collaboration in complex, dynamic, and uncertain environments. Thus, an organization may achieve integration partially through informal coordination. In addition, the measurement of environmental uncertainty was difcult, complex, and diverse. Environmental uncertainty in this study was measured using a one-dimensional construct in which average variance extracted (AVE) falls slightly below the identied threshold. Using a one-dimensional measure of environmental uncertainty could possibly contribute to the insignicant support rendered for H1, H2, and H4, and could be a limitation of the study. 7. Conclusion, limitations, and future research Results of this study show the relationships between environmental uncertainty, KM capability, and organizational structure. Business managers who understand these relationships can use this knowledge to effectively increase decision quality and reduce knowledge-sharing costs. Additionally, KM can enable managers to better understand how various organizational structures can t the contemporary environment. Organizations thus emphasize the capability of KM in dealing with environmental uncertainty and its impact on the organization structure. The ndings provide support for the fact that KM capability plays a mediating role in certain environmental and structural attributes. A couple of limitations of this study should be noted. First, because the research was conducted in Taiwan, the organization phenomena observed in the study may not hold true in other countries with different cultures. Thus, investigating cross-cultural differences in organizational mechanisms designed for coping with KM should also be a valuable future research direction. Second, while the research model is theorized to be causal, this study only adopts a crosssectional approach in which cause and effect data are captured at the same time. Thus, the ability to draw denitive causal implications from this study is limited. Future research is encouraged to adopt a longitudinal approach for better causality testing. Future research can also build on and extend the proposed integrated model of KM by including other potential variables such as organizational performance from the different contexts. More research needs to clarify the impact of strategic orientation or top managers' intention on the deployment of KM and organizational structures. References
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