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734 International Journal of Management Vol. 24 No.

4 December 2007

Effect of Knowledge Management Systems on Operating


Performance: An Empirical Study of Hi-Tech Companies
using the Balanced Scorecard Approach
Pang-Lo Liu
Ta-Hwa Institute of Technology, Taiwan
Chih-Hung Tsai
Ta-Hwa Institute of Technology, Taiwan
Since the development of information technology and the use of web-based information
systems by firms, business management methods have become more sophisticated,
leading to significant changes in high-tech business models. To deal with globalization,
Taiwan's hi-tech enterprises have gradually adopted infonnation technology to shorten
manufacturing processes, reduce cost, increase flexibility, and improve product quality
and service quality to increase their overall international competitiveness. Many of them,
in consequence, have integrated their internal and external resources, and introduced
knowledge management (KM) systems to improve their operating performance. In the
present study, which utilized the balanced scorecard (BSC) approach to investigate the
effects ofthe introduction ofa knowledge management system on operating performance,
560 managers from major Taiwanese hi-tech companies competed a specially-designed
questionnaire. The results showed that after introducing knowledge management
there was a 5% to 10% improvement in performance in the customer, financial, and
internal business process areas and a 10% to 15% improvement in performance in the
learning and growth area, suggesting that the knowledge management systems that
were introduced had a positive effect on operating performance.
1. Introduction
Since 1990 hi-tech enterprises in Taiwan have become ofthe world's main production
centers, with an good understanding of the importance of knowledge management
systems for their operations. Many of them have in fact made effective use of their
knowledge management (KM) systems to win orders from leading international
suppliers. They found that among the advantages of such systems were: (1) significantly
shortened delivery time (2) dramatically reduced time spent on information searching
(3) more flexible production, and (4) smoother coordination and integration of tasks.
With this as background, the two major objectives of this study were to use the balanced
scorecard (BSC) approach to understand the operating performance of Taiwan hi-
tech companies, and to investigate the effects on operating performance among these
companies of knowledge management systems.
According to Davenport et al. (1996, 1998), knowledge management treats knowledge
as an extremely important asset that deserves to be carefully looked after. Anything
related to knowledge assets, their acquisition, organizing, sharing and use are knowledge
management activities. Nonaka et al. (2000) regarded knowledge as the application
of information and its output. Knowledge stems from experience and learning, and
International Journal of Management Vol. 24 No. 4 December 2007 735

comes from analyzing data in the form of reports, tables, and figures. Armbrecht et al.
(2001) argued that the acquisition, storage and application of knowledge creates value
for an organization and directly influences its performance. Gold etal. (2001) claimed
that knowledge infrastructure capability and knowledge process capability will have
a significant effect on the efficiency of an organization. Knowledge infrastructure
capability consists of technology, infrastructure and culture, whereas knowledge process
capability consists of knowledge acquisition, modification, application, and the capability
to protect knowledge. Wiig (1995) argued that Knowledge Management (KM)is a group
of well-defined procedures and methods used to excavate key knowledge from various
operations to assist in product development and strategies and to improve human resource
management practice. Holtshouse (1998) regarded knowledge as a 'kind of flow' that
can be exchanged between supplier and demander. Nonaka et al. (2000) argued that,
although the creation of knowledge is important, it is knowledge sharing that is really
critical to an organizatin's success. The main goal of KM is to create knowledge so
that organization members can learn from each other through the 'screw processes'
of socialization, externalization and combination—to enhance the competitiveness
of an organization. Liu et al. (2004) claimed that knowledge has become the main
manufacturing resource and a prerequisite for success in an increasingly competitive
global economy. Liu et al. (2005), argued that KM has a significant and beneficial effect
on new product strategy and new product development performance, especially in the
case of hi-tech companies in Taiwan. Davenport ef a/. (1996, 1998) concluded from an
analysis of case studies, that any successful KM system includes knowledge and skills
as well as relevant online search systems for obtaining knowledge—which systems in
turn help or assist employees to coordinate effectively with the relevant technology. In
the present study we will examine four aspects of KM, namely knowledge acquisition,
knowledge creation, knowledge storage, and knowledge sharing.
Kaplan & Norton (1996) proposed the idea of a so-called Balanced Scorecard (BSC)
to assess or measure the performance of organizations or enterprises, an approach they
felt was necessary to compensate or make up for defects in the traditional measurement
of performance, with its emphasis on financial indicators of success. BSC goals and
measures are derived from the vision and strategy of an organization. Four measurement
perspectives, financial, customer, internal business processes, and learning and growth
can be adopted in measuring the performance of an organization. Cameron (2002) pointed
out the effective implementation of BSC starts with top or senior managers. According
to the study by Olson & Slater (2002), different market strategies produce different
results, depending on which of these four perspectives is used to assess or measure
performance. In practice when using the BSC approach, innovation and growth are
the perspectives most frequently used. Youngblood & Collins (2003) proposed that in
developing an overall score, each BSC measure must be given a weight depending on its
importance. Hilton etal. (2000) argued that BSC is a kind of strategic tool for converting
strategy into action. A 'cross-linked value chain' can be formed by combining these
four perspectives. Stewart (2001) developed a so-called Project Life Cycle performance
measurement system based on combiningfinancial,organization, training and innovation.
736 International Journal of Management Vol. 24 No. 4 December 2007

and customer relationship perspectives. Khalid et al. (2002) conducted a study in which
they applied the BSC concept in a British steel company, using several indices of financial
and non-financial success, including market share, customer satisfaction, new product
introduction, operational profits, and return on investment.
Operating Performance
There are many ways to evaluate the operating performance of enterprise. For instance.
Van de Ven & Ferry (1980) argued that traditional financial measures of performance
are most frequently used by researches to indicate the effectiveness of an organization,
measures such as return on revenue, sale revenue, and profitability. In a study of 115
Canadian enterprises that used measures of product innovation and sales service, De
Brentani (1989) found that different groupings for different services and products leads
to different results, or indicators of performance. Sicotte & Langley (2000) argued that
'cross-functional' horizontal communication and information exchange can effectively
decrease the uncertainty that arises so often during the new product development process.
According to Brouthers (2002), market share, sales status, reputation, and customer
satisfaction are the most important indices of business performance.
Kaufman (1988) argued that any index of organizational performance must distinguish
the extent to which organizations are reaching their planned goals. Fortuin (1988)
treated indicesof performance as measures of overall efficiency in different parts ofthe
organization, measures whose aim is to help us understand whether and why managerial
processes are meeting their intended goals. MacArthur (1996) felt that measures of
organizational performance can be divided into quantitative or qualitative measures,
depending on the nature ofthe variables being assessed. A quantitative variables, such
as lead time, can be objectively and directly assessed or measured. However, it may
sometimes be more convenient and suitable to evaluate such a variable subjectively, for
instance when you just want to divide lead times into high, medium, and low categories
and objective data are not easily or quickly obtainable. Eccles & Pyburn (1992) argued
that in normal circumstances if someone wants to understand whether enterprise assets
are being used to increase stockholder value, financial indices should be used, they are
the appropriate index for assessing this aspect of an organizations's performance. This
research based on above literature will define and measure operational performance in
four ways, as: (I) financial performance; (2) business performance; (3) organization
performance; and (4) long-term resource advantages
Hi-tech Enterprises
Gould & Keeble (1984) argued that the appropriate performance measures for hi-tech
companies should be based on the proportion of R&D fees to outcomes, the speed of
technical innovation, and the percentage of employees who are managers, technicians and
R&D personnel, inand R&D. According to Shanklin & Ryans (1984), hi-tech enterprises
must have a strong technology foundation, posssess new or up-to-date technology for
replacing technology that may become obsolete, and the ability to adapt to changing
markets and alterations in demand. Chiu (2002) proposed that these characteristics
International Journal of Management Vol. 24 No. 4 December 2007 737

should include: (1) talent-intensive technology (2) capital-intensive technology (3) high
technology levels and complicated manufacturing processes (4) highly concentrated
markets, and (5) short product life cycles. In his examination of hi-tech companies
in Taiwan, Chiu (2002) divided them into six industrial groups: (1) integrated circuit
industry (2) computer and peripheral industries (3) telecommunication industry (4)
optic-electronic industry; (5) precision machinery industry, and (6) biotech industry.
We will adopt these groupings throughout this study.
Research Method
The purpose of this study is to examine the effects of knowledge management systems
on operating performance in hi-tech companies. Figure 1 shows the research structure
adopted.
Based on the literature survey, the following hypotheses were developed, each of which
is to be tested in the present study:
Relation between KM and operating performance
Hp KM capability has a significant effect on operating performance
H| p There is a significant positive effect of knowledge acquisition on operating
performance
H| j : There is a significant positive effect of knowledge creation on operating
performance
H| 3: There is a significant positive effect of knowledge storing on operating
performance
H| 4: There is a significant positive effect of knowledge sharing on operating
performance

Figure 1: Research structure using BS

Enterprise characteristics

BSC Knowledge management Operating performance


1. Financial 1. Knowledge acquisition H, 1. Financial
2. Customer 2. Knowledge creation 2. Business
3. Internal business process 3. Knowledge storing 3. Organization
4. Learning and growth 4. Knowledge sharing 4. Long-term advantage
resource
H2-2

Enterprise scale
738 International Journal of Management Vol. 24 No. 4 December 2007

Relations among enterprise characteristics, enterprise scale and operating


performance
Hj. Enterprise characteristics have a significant effect on operating performance.
H^ p Specific enterprise characterisitics have a positive effect on operating
performance.
H2.2: Enterprise scale or size has a significant positive effect on operating
performance.
In this research a specially-<leveloped questionnaire was mailed individually to 1000
managers working in different well-known Taiwanese hi-tech companies, each of whom
was involved in KM to some extent because they each were all hi-tech companies. 800
of this managerial sample replied. After excluding those responses which could not
be analysed for one reason of another (e.g., incomplete or missing data, confused or
ambiguous answers), we were left with 560 competed questionnaires, giving a response
rate of 56% from the managerial sample. Each response was from a manager in a
particular or different hi-tech firm.
SPSS 10.0 for Windows (software) was used to analyse these reponses from the
560 managers. The specific statistical techniques employed at different stages of
the investigation to test the research hypotheses were Cronbach's alpha coefficient,
ANOVA analysis, and the t-test for independent samples. Nunnally (1978) proposed
that scales—in questionnaires- are of acceptable reliability if they have alpha (internal
reliability) coefficients greater than 0.7. Since these coefficients were greater than 0.7
fkoreach ofthe scales use din this study, the scales in question can be regarded as being
sufficiently reliable( Table 1).
Analysis of Results
Some results of the study are given in the Table 2 which shows the effects of each of the
four aspects of KM on operating performance; specifically, they indicate the difference
between the mean operating performance of enterprises that 'carry out' or 'do' this

Table ]1: The reliability of each variable


Perspective KM Enterprise characteristics and
enterprise scale Operating performance
Cronbach's a 0.8997 0.8331 0.8315

Table 2: T-test for the effect of KM on operating performance


Enterprise operating performance
Knowledge management
F value P value
Knowledge acquisition 0.897 0.000***
Knowledge creation 0.895 0.003***
Knowledge storing 0.881 0.000***
Knowledge sharing 0.880 0.001***
Note: *P<0.1; **P<0.05; ***P<0.01
International Journal of Management Vol. 24 No. 4 December 2007 739

aspect of knowledge management (KM), in the view of the manager in the enterprise
who completed the survey, more than the average enterprise (first group) and the mean
operating performance scores of those that carry out or do this aspect of KM. less than the
average enterprise in the sample (second group), in the views ofthe respective managers.
As can be seen in Table 2, the p values or levels of significance (of the difference)
between these two groups of enterprises in their mean operating performances, as
given by the results of a series of t-tests, were 0.000 for knowledge acquisition, .003 for
knowledge creation, .000 for knowledge storing, and .001 for knowledge sharing. These
significant results suggest that carrying out or doing these each of these four aspects of
KM by enterprises has significantly positive effects on their operating performances,
as hypothesized.

Table 3 shows the results of the t-tests for the effect of enterprise characteristics and
enterprise scale or size on enterprise operating performance, assessed by the same
method. In each case, the results indicate or show the significance of the differences
between enterprises whose manager (in the sample) judged their enterprise to 'have' or
possess', or not to have or possess each of the following five characteristic of 'effective'
hi-tech firms, in the opinion of Chiu(2002); namely, talent-intensive technology, capital
intensive technology, high level technology, concentrated markets, and short product
life cycles. Enterprises whose manager felt they had each of these features comprised
the first group; enterprises whose manager felt they did not have all of these features
comprised the second group. Operating performance in the two groups of enterprises
was assessed in four areas, or from four perspectives; financial performance, business
performance, organizational performance, and performance of the enterprise in terms
of its long term resource advantage, in each case as judged by the managers from the
enterprises concerned who completed the questionnaire and formed the sample ofthe
study. Enterprises whose manager judged the performance of their enterprise in the
particular area (from the particular perspective) better or higher than the average—of all
the managers—comprised one group; those whose manager judged the performance of
their enterprise worse or lower than the average in this area comprised the other group. In
the same fashion, enterprises whose manager judged the size or scale of their enterprises
to be above or greater than the average—of all the managers in the sample— were

Table 3: The ANOVA-test for the effect of enterprise characteristics and


enterprise scale on operating performance
Operating performance
Enterprise characteristics Long-term
Financial Business Organization advantage
and enterprise scale resource
F value P value F value P value F value P value F value P value
Enterprise characteristics 0.885 0.000 0.875 0.000 0.785 0.000 0.889 0.000
Enterprise scale 0.881 0.001 0.880 0.003 0.882 0.000 0.901 0.000
Note: *P<0.1; **P<0.05; ***P<0.01
740 International Journal of Management Vol. 24 No. 4 December 2007

compared to enterprises whose managers judged their enterprises's size or scale to be


below or less than this average. Taking each of the four areas or perspectives in turn,
the significances (p-values) of the results from the ANOVA (F-values) performed
on the scores of the four relevant groups were for enterprise characteristics versus
financial performance, enterprise characteristics versus business performance, enterprise
characteristics versus organization performance, and enterprise characteristics versus
long-term advantage resource performance 0.000,0.000,0.000, and 0.000 respectively.
The p-values for enterprise scale versus financial performance, enterprise scale versus
business performance, enterprise scale versus organization performance, and enterprise
scale versus long-term advantage resource performance were 0.001,0.003, 0.000, and
0.000 respectively. These results are in line with the proposed hypothesis.
This study, as indicated earlier, examined performance from each ofthe four Business
Scorecard perspectives identified by Kaplan, and Norton (1996). In this way it was
hoped to have a study whose results would improve our understanding of how KM
works to improve operating performance, especially in hi-tech enterprises. Tables 4 to
7 indicate the percentages of enterprises in the sample of 560 hi-tech firms, all of whom
had implemented KM to some extent (so we are in effect judging their performance
after the introduction of KM), whose 'performances' in terms of— increased profits
from sales, of growth in customer satisfaction, of improvement in product quality,
and of better production technology over the same period capability-as judged by the
manager in the sample from each firm, fell into certain categories (of percentages).
Out of 560 businesses, profits from sales increased by over 20.1% in 4 companies, in
46 companies by 15.1 to 20.1%, in 150 companies profits from sales increased by 10.1
to 15%, in 225 companies by 5.1 to 10%, and in 175 companies by 0.1 to 5%. Table 4
shows these results.
Out ofthe 560 businesses, there were 4 companies whose customer satisfaction increased
by over 20.1 %, 6 companies where it increased by 15.1 to 20.0 %, 150 companies by 10.1
to 15%, 225 companies by 5.1 to 10%, and 175 companies where customer satisfaction
increased by 0.1 to 5%. Table 5 shows these results.
Out ofthe 560 businesses, 5 companies had their product quality increase by over 20.1%,
5 companies had their product quality increase by 15.1 to 20.0 %, 151 companies by
10.1 to 15%, 224 companies by 5.1 to 10%, and 175 companies by 0.1 to 5%. Table 6
shows these results.
Table 4: Increase in Profits from Sales
Sale profit increase percentage Numbers of
Percentage (%)
companies
0.1-5% 175 31.25
5.1-10% 225 40.17
10.1-15% 150 26.78
15.1-20% 46 1.07
Over 20.1 % 4 0.74
Total 560 100
International Journal of Management Vol. 24 No. 4 December 2007 741

Out of the 560 businesses, 3 companies had their production technology capability
increase by over 20.1%, 7 companies has theirs increase by 15.1 to 20.0 %, 225
companies by 10.1 to 15%, 175 companies by 5.1 to 10%, and 150 by 0.1 to 5%. Table
7 shows these results.
Based on the above analysis using the four balanced scorecard perspectives, it was found
that after the introduction of knowledge management by in forms in the sample there
was an average 5.1 to 10% performance improvement across these four aspects of the
BSC approach; increase in profits from sales (financial), growth in customer satisfaction
(customer), improvement in production quality (internal business processes) and a 10.1
to 15 % performance improvement in better production technology capability (learning
and growth). These results suggest that employees in these enterprises that have all
introduced KM to varying degrees have improved learnt more and grown in themselves
through the introduction of knowledge management. They also suggest that knowledge
management, in enterprises has a positive effect on their operating performance.
Table 5: Growth in Customer Satisfaction
Customer satisfaction growth Numbers of
percentage (%)
companies
0.1-5% 175 31.25
5.1-10% 225 40.17
10.1-15% 150 26.78
15.1-20% 6 1.07
Over 20.1% 4 0.74
Total 560 100
Table 6: Improvement in Product Quality
Product quality improvement Numbers of
percentage Percentage (%)
companies
0.1-5% 175 31.25
5.1-10% 224 40.25
10.1-15% 151 26.72
15.1-20% 5 0.89
Over 20.1% 5 0.89
Total 560 100

Table 7: Better Production Technology Capability


Better production technology Numbers of Percentage (%)
capability percentage companies
0.1-5% 150 26.78
5.1-10% 175 31.25
10.1-15% 225 40.17
15.1-20% 7 1.25
Over 20.1% 3 0.55
Total 560 100
742 Internationai Journal of Management Vol. 24 No. 4 December 2007

Conclusions
This research, which was conducted among hi-tech enterprises in Taiwan, examined
the effects of knowledge management on operating performance. The results of the
questionnaire survey of 560 managers from different hi-tech companies showed
that operating performance increased after knowledge management was introduced
and implemented-to varying degrees—in the enterprises. This research used four
perspectives, from the balanced scorecard approach, to measure operating performance
among these hi-tech companies. It was found that operating performance increased
significantly irrespective of how it was measured, no matter which of the four ways
indicated by this approach was used to assess performance. Specifically, there was a
5.1 to 10% performance increase when performance was examined from the financial,
customer, and internal business process perspectives, and a 10.1 to 15% increase when it
was examined the by learning and growth perspective. Overall, it seems that knowledge
management has a positive effect on operating performance, at least among the hi-tech
firms in this study.
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Contact email address: ietch@thit.edu.tw

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