The effect of knowledgemanagement capability and

dynamic capability onorganizational performance

Shu-Mei Tseng and Pei-Shan LeeDepartment of Information Management, I-Shou University,

Kaohsiung, Taiwan

Abstract

Purpose – The current conventional strategic management model is incapable of dealing withvarious questions on organizational management in a dynamically discontinuous environment. Hence,how an enterprise can effectively apply its knowledge management (KM) capability and develop auniquely dynamic capability in order to provide quick response to a dynamic environment has becomean urgent need. The purpose of this paper is to discuss the above-mentioned issues.Design/methodology/approach – In order to gain best exploration on KM capability, dynamiccapability, and organizational performance, the questionnaire and statistical analytical techniqueswere used.Findings – The results indicate that dynamic capability is an important intermediate organizationalmechanism through which the benefits of KM capability are converted into performance effects at thecorporate level. That is, KM capability enhances the dynamic capability of organizations. While dynamiccapability, in turn, increases organizational performance and provides competitive advantages.Research limitations/implications – This research applied a purposive sampling method andobtained a slightly inadequate number of respondents. Therefore, it is suggested that future researchshould apply a random sampling method to collect more responses and increase the generalizability.Practical implications – This research aims to investigate KM capability, dynamic capability, andorganizational performance, as well as establish and verify the patterns of the aforementionedrelationships based on how enterprises implement their KM capabilities and dynamic capabilities toenhance organizational performance.Originality/value – There is still little related literature investigating the relationships among KMcapability, dynamic capability, and organizational performance. Hence, this study appliesquestionnaire methods as the main research tools in order to conduct an in-depth investigation intothe influence of KM capability and dynamic capability on organizational performance. Furthermore,this research is expected to provide enterprises with valuable suggestions for management practices.

Keywords Organizational performance, Dynamic capability, Knowledge management capability

Paper type Research paper

1. IntroductionKnowledge is the most important intangible asset, therefore business managers strivein many ways to use this asset to create the highest value (Quintas, 2002). However,how to efficiently control, apply, and develop knowledge in order to effectivelygenerate and reuse knowledge is determined by enterprises’ knowledge management(KM) capabilities (Davenport et al., 1998; Leonard-Barton, 1995; Soo et al., 2002). Inother words, it is important to investigate how an enterprise effectively develops itsKM capability in order to provide and share intangible assets to win marketcompetition. Furthermore, the rapid development of technology and the internet notonly accelerates the changes of external environments, but also pressures enterprises

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/1741-0398.htm

Received 6 June 2012Revised 17 August 2012Accepted 8 September 2012

Journal of Enterprise InformationManagementVol. 27 No. 2, 2014pp. 158-179r Emerald Group Publishing Limited1741-0398DOI 10.1108/JEIM-05-2012-0025

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to recognize that they need to evolve along with the market trends and environmentalchanges. Due to the fact that the basic perspectives on traditional resources lacka mechanism for transforming resources into competitive advantages, an enterprisemay be unable to identify the middle- and long-term dynamic changes in theenvironment in order to immediately respond to market changes. Therefore, the onlysolution for an enterprise to enhance organizational performance is through enhancingits corporate dynamic capability (Afuah, 2001).

Based on the World Competitive Yearbook 2010-2011 by the World Economic Forum,Taiwan ranked 13th in the world and fourth in Asia, which is one position lower than2009-2010. Based on this reality and a highly competitive environment, the difficult taskfor Taiwan’s business managers is how to enhance competitive advantage in order tointegrate, establish, and reconfigure the dynamic capabilities to provide immediateresponse toward the dynamic environment. Furthermore, in previous studies, manyscholars have confirmed that KM capability and dynamic capability influenceorganizational performance (Hasan and Al-hawari, 2003; Bassie, 1997; Wiig, 1997).However, most studies merely focussed on the influence of KM capability onorganizational performance or the influence of dynamic capability on organizationalperformance. There are currently few studies that investigate the relationships amongKM capability, dynamic capability, and organizational performance. Hence, this researchaims to investigate KM capability, dynamic capability, and organizational performance,as well as establish and verify the patterns of the aforementioned relationships based onhow enterprises implement their KM capabilities and dynamic capabilities to enhanceorganizational performance.

2. Theoretical background2.1 KM capabilityCapability refers to the ability to implement and integrate resources to achievecorporate goals, as well as results acquired from long-term accumulation of interactionamong various resources (Grant, 1995). KM capability is the ability of an enterprise toleverage existing knowledge through continuous learning to create new knowledge(Bose, 2003). Liu et al. (2004) stated that KM capability not only refers to the ability toacquire knowledge and information, but also to the organizational capability to protectknowledge and information in order to encourage staff to use this ability as a tool towork more efficiently. Freeze and Kulkarni (2007) further indicate that effectiveleverage of different knowledge capabilities can be done through differing strategies,processes, and technologies. Due to the fact that knowledge is a key strategic resourceto create corporate value (Drucker, 1993; Zack, 1999; Bhatt et al., 2005), enterprisesstrive to develop knowledge resources to the maximum in order to achieve corporategoals. Furthermore, whether an enterprise can effectively utilize knowledge resourcesand develop knowledge determines the pros and cons of KM capability. Hence, it canbe understood that KM capability has become a significant attribute of competitiveadvantage (Andrew, 2005).

Gold et al. (2001) pointed out that KM capability consists of knowledgeinfrastructures and KM processes. The knowledge infrastructure includes technology,structure, and culture; while KM processes include the organizational capabilitiesof knowledge acquisition, conversion, application, and protection. Simultaneously, inorder to effectively leverage knowledge infrastructure, it is crucial to rely on KMprocesses, which makes it possible to store, transform, and transfer knowledge.Tanriverdi (2005) investigated the influence of KM capability on the corporate

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performance of multi-business-unit corporations and divided KM capability intoproduct KM capability, customer KM capability, and managerial KM capability.Furthermore, Tanriverdi also described knowledge creation, transfer, integration, andleverage as the four main dimensions to measure the influence of three kinds of KMcapability on corporate performance. Fan et al. (2009) further combined knowledgeinfrastructure and KM processes and proposed seven attributes (i.e. technology,structure, culture, acquisition, conversion, application, and protection) to beapplied in a fuzzy multiple decision-making method to measure organizational KMcapability. On the other hand, Aujirapongpan et al. (2010) explained corporateKM capability based on the perspectives of resource-based and knowledge-basedcapabilities. Resource-based capability refers to different angles of resources toinvestigate KM capability and an assumption that possessing different resources willresult in different KM capabilities and influence the infrastructure capability of KMcapability, including technology, organizational structure, and culture. Furthermore,the knowledge-based capability perspective particularly emphasizes intangible assets,KM process, and managing different kinds of knowledge. Aspects that influence KMcapability based on the knowledge-based perspective are expertise, learning, andinformation capabilities.

As above-mentioned, this study defined that KM capability is the ability of anenterprise to leverage existing knowledge to create and protect new knowledge.Furthermore, an enterprise should combine personal skills and knowledge, physicaland technical resources, structure and culture to stimulate the ongoing knowledgedynamism (Prieto and Easterby-Smith, 2006).

2.2 Dynamic capabilityDynamic capabilities represent the ability of a firm to create new manufacturingprocesses and new products/services in order to rapidly respond to changingenvironments (Helfat et al., 2007; Teece, 1998). Dynamic capabilities also refer to a firm’sability to integrate, establish, and redeploy internal and external resources into the bestconfiguration in order to be able to create and develop new capabilities and create newmarket opportunities (Eisenhardt and Martin, 2000; Wu, 2007). According to Pavlou andEl Sawy (2011), dynamic capabilities are usually embedded in organizational processesand routines that allow an enterprise to adapt to the changing market conditions in orderto reconfigure its source base, enable morphing and adaptation, and eventually achievean edge over competitors.

Luo (2000) mentioned that there are three critical components of dynamic capability,which are: capability possession (i.e. having distinctive resources), capability deployment(i.e. allocating distinctive resources), and capability upgrading (i.e. dynamic learningand building new capability). Wang and Ahmed (2007) identified adaptive, absorptive,and innovative capabilities as three main factors of dynamic capability. Adaptivecapability is the ability of a firm to identify and utilize potential market opportunities;absorptive capability is a firm’s ability to learn from partners, to integrate externalinformation and transform it into firm-embedded knowledge; and, innovativecapability refers to the ability to develop new products and/or markets throughalignment of strategic innovative orientation with innovative behaviors and processes.Liu and Hsu (2011) indicated that dynamic capabilities consist of two dimensions,namely, capability exploitation and capability upgrading. Capability exploitation ishow a firm exploits rent-generating resources that are firm specific, difficult to imitate,and have the ability to generate abnormal returns. On the other hand, capability

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upgrading is how a firm is engaged in building new capabilities through learning fromorganizations, creating new skills, or revitalizing existing skills in new circumstances.Pavlou and El Sawy (2011) further posited four dynamic capabilities, namely, sensing,learning, integrating, and coordinating capabilities, as a sequential logic to reconfigureexisting operational capabilities. Sensing capability is the ability to identify, interpret,and pursue opportunities in the environment, while learning capability is the ability toenhance existing operational capabilities with new knowledge. Integrating capability isthe ability to assimilate individual knowledge with the unit’s new operationalcapabilities, and coordinating capability is the ability to orchestrate and deploy tasks,resources, and activities in the new operational capabilities.

Consequently, this study defined that dynamic capabilities area firm’s ability to createand utilize organizational embedded resources for achieving a sustainable competitiveadvantage. In other words, a firm should rely on its ability to create, maintain, and renewits bases of competitive advantage in turbulent environmental conditions (Easterby-Smithand Prieto, 2008). If a firm with highly dynamic capabilities is able to quickly cope withthe dramatic changes in the external environment, it can establish competitive advantageand increase their market value. However, it is difficult to build a new capability as itdemands effective organizational processes for new learning (Liu and Hsu, 2011).

2.3 Organizational performanceAn organization is a group of people allocated based on responsibilities and levels asa complete organization in order to achieve the same goal through adapting and copingwith the changing environments. Performance is the level of target achieved by anorganization (Sloma, 1980), or as an evaluation on the effectiveness of individuals,groups, or organizations. At the individual level, it refers to job satisfaction, achievedgoals, and personal adjustment; at the group level, it refers to morale, cohesion,efficiency, and productivity; and at the organizational level, it is about profit, efficiency,productivity, absenteeism rate, turnover rate, and adaptability (Ivancevich, 1977). Lin(2005) pointed out that performance is not only about previous achievements, but alsoincludes the potential ability to successfully achieve future goals. Robbins and Coulter(1996) further pointed out that performance is an objectively existing fact that providesboth objective and subjective evaluation. Organizational performance constitutes allbehaviors related to organizational objectives depending on the contribution levels ofindividuals to the organization (Borman and Motowidlo, 1993). The final goal of anenterprise is to enhance performance; therefore, the enhancement of organizationalperformance is at the core of corporate strategic management, which itself influencesprospects of an enterprise (Venkatraman and Ramanujam, 1986).

Enhancing organizational performance is the focus of every manager in everyenterprise. In order to succeed at enhancing organizational performance, it is crucialfor an organization to establish a comprehensive measurement index that providesmanagers and staff with clear directions and goals set by the enterprise. Ruekertet al. (1985) divided the organizational performance measurement index into threedimensions: efficiency, effectiveness, and adaptability. Keats (1988) pointed out that theorganizational performance measurement index could be classified into univariate andmultivariate effectiveness measures. Currently, the performance measurement index ismostly based on multivariate effectiveness measures, which itself can be divided intofinancial and non-financial measurement indexes. Venkatraman and Ramanujam(1986) also assumed that performance could not only be measured based on thefinancial measurement index, but also by organizational performance, which can be

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measured based on financial performance, business performance, and organizationeffectiveness. Financial performance is measured based on the following standards:return on investment, sales growth rate, and revenue; while business performance notonly includes the financial measurement index, but also includes operational performancethat covers market share, product quality, new product introduction, marketingeffectiveness, production added value, and other non-financial matters. Organizationaleffectiveness is the most widely used measurement type, which includes the two types ofmeasurement indexes abovementioned, and resolves various internal conflicts to meetvarious goals of the staff, such as staff morale and so on.

Kaplan and Norton (1996) proposed a balanced scored card as a tool to measure theoverall organizational performance and includes four perspectives, namely, the customers,the internal business process, learning, and growth. In recent years, other scholars havecontinually discussed the organizational performance measurement index. For example,Tippins and Sohi (2003) suggested profitability, rate of return on investment, customerretention, and sales growth rate as the organizational performance measurement indexes,while Lee and Choi (2003) suggested market share rate, comparisons of success with othercompanies, growth rate, profitability, and ability to innovate as the organizationalperformance measurement indexes. Further, Maltz et al. (2003) developed the dynamicmulti-dimensional performance and five organizational performance measurementindexes including financial performance, market/customer, process, people development,and future to measure the success of different types of corporate management. Im andWorkman (2004) proposed the relative market share rate, relative sales value, relativereturn on investment rate, relative revenue rate, and degree of target achievement as thefive dimensions to measure organizational performance. Shang and Marlow (2005)adopted pre-tax profit, return on assets, and return on investment as three dimensions tomeasure organizational performance; and finally, Bolat and Yilmaz (2009) dividedorganizational performance into seven measurement indexes, namely, organizationaleffectiveness, productivity, profitability, quality, continuous improvement, work quality,and social responsibility.

3. Conceptual model and hypothesesThis research investigates the relationship among KM capability, dynamic capability,and organizational performance to understand how to apply an enterprise’s KMcapability to enhance their dynamic capability in order to enhance organizationalperformance for acquiring competitive advantage. Figure 1 shows the correlationbetween KM capability and dynamic capability on organizational performance.

3.1 KM capability and dynamic capabilityDrucker (1993) pointed out that a knowledge- and economy-based society is amanagement-oriented social pattern, while the main purpose of management is to

H3

H1 H2

Knowledgemanagement

capability

Organizationalperformance

Dynamic capabilityFigure 1.Basic research model

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enable knowledge to generate effects or effectively implement KM to facilitatean enterprise’s smooth operation. Zahra and George (2002) further divided knowledgeabsorptive capacity into potential knowledge absorptive capacity and realizedknowledge absorptive capacity. Potential knowledge absorptive capacity includesknowledge acquisition and assimilation capability; while realized absorptive capacityincludes transformation and exploitation capabilities of new knowledge. Potentialknowledge absorptive capacity provides enterprises with strategic flexibility andfreedom to grasp the trends of external environments in order to quickly adjust andevolve into the changing market that eventually enhances dynamic capabilities. On theother hand, realized knowledge absorptive capacity aims to systematically integrateknowledge into the organization in order to enhance organizational performance. Zolloand Winter (2002) considered that an organization should transform knowledge ownedby individuals into organizational knowledge, as well as maintain the learning process,knowledge sharing, and reusing in order to enhance dynamic capability to adapt andrespond to the changing environment. Many studies have further explained thatdynamic capability is the ability of an enterprise to innovate, integrate, reconfigure,and liberate internal and external resources. These processes of transformationare related to the capabilities of utilizing and managing organizational knowledgeresources (Bowman and Ambrosini, 2003; Iansiti and Clark, 1994; Cepeda and Vera,2007). Shuen (1994) also pointed out that dynamic capability is generated from alearning mechanism consisting of the three following processes – accumulation ofexperience, knowledge linking, and knowledge coding – therefore, organizationalmanagement and knowledge learning are crucial sources of dynamic capability. Sherand Lee (2004) assumed that KM capability could be seen as a way to improve productsand processes, improve decision-making strategy, and adjust and refreshorganizational core capabilities, which is also the key of an organization to establishand maintain dynamic capability. Therefore, if an enterprise is equipped with excellentKM capability, it is possible to strengthen its dynamic capability. Iris and Vikas (2011)also pointed out that there is a close relationship among e-learning, KM, and dynamiccapability. An organization can promote knowledge sharing through e-learning toenhance KM capabilities, as well as to positively influence the dynamic capability.Hence, it is known that KM capability is an important source for organizationaldynamic capability. Based on this fact, this research further investigates the influenceof KM capability to enhance dynamic capability. Therefore, this study proposes thefollowing hypothesis:

H1. The degree of KM capability will have a positive effect on dynamic capability.

3.2 Dynamic capability and organizational performanceMany studies have found that the integration and coordination of internal and externalknowledge and resources not only enhances the dynamic capability, but also improvesthe performance of developing new products (Grant, 1996a; Petroni, 1998; Tripsas,1997). Hunt and Morgan (1996) stated that learning is a kind of resource that issimultaneously crucial and complex; enterprises should strive to learn faster than theircompetitors in order to obtain competitive advantage. Therefore, an enterprise cannotonly understand and fulfill potential customer needs through learning, but alsoaccelerate development of new products and services to improve operational process inorder to enhance customer satisfaction and organizational performance (de Geus, 1988).

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Teece et al. (1997) and Eisenhardt and Martin (2000) also pointed out that enterprisesshould be equipped with the ability to detect and reconfigure assets, structures andresources to be faster and more sensitive to acknowledge changes in the environment, tograsp opportunities, and reform organizational resources in order to create strategiesthat can generate customer value and increase organizational performance. Therefore,it can be understood that coordination, learning, and cognitive abilities are the mostimportant resources for an enterprise to create organizational value (Kogut and Zander,1996). Whether an organization can utilize its dynamic capability to successfully build,integrate, and reconfigure resources that will be the key to the success is of primaryconcern (Zott, 2003). Wu (2006) further found that dynamic capability is a crucialintervening variable that transforms resources into performance, which means that ifenterprises can utilize dynamic capabilities, it is possible to manage internal andexternal resources to enhance organizational performance and gain high competitiveadvantage. Wang and Ahmed (2007) further explained that dynamic capability helpsenhance corporate performance, particularly when an enterprise has a synchronizeddevelopment capacity and corporate strategy, which can lead to superior performance.Therefore, it can be said that dynamic capability is crucial for an enterprise to be ableto cope with changes in the environment by delivering the right knowledge at the righttime to the right person, as well as encourage knowledge sharing in order to achieveorganizational goals, thereby enhancing organizational performance (Quinn, 1999).Hence, this research proposes the following hypothesis:

H2. The degree of dynamic capability will have a positive effect on organizationalperformance.

3.3 KM capability and organizational performanceGrant (1991) pointed out that enterprises should be equipped with richer resources andbetter abilities than their competitors in order to be able to maintain their competitiveadvantages in the ever-changing market. Grant (1996a) further elaborated that if anenterprise can possess heterogeneity, value, and specification in its knowledge resourceas well as integrate its expertise with external and internal resources, then it not onlyenhances its ability to solve problems, but also enhanced its competitive advantage(Afuah, 1998). Dosi et al. (2003) also pointed out that the prerequisite for acquiring theleading position in the market is whether an enterprise is able to accumulate pastexperiences and transform knowledge owned by individuals into organizationalknowledge, as well as be able to adapt to the environment through continuous learningand development. It is understood that knowledge sources are the most importantresource of an enterprise to operate its business, while organizational KM capabilitynot only directly influences the capability to innovate, grasp business opportunities,respond toward the dynamic environment, and coordinate both external and internalresources, but also influences the organizational performance (Felin and Hesterly,2007). Kiessling et al. (2009) further explained that there is a tight relationship amongKM capability, innovation, product improvement, and enhancement of staff skills.When an enterprise possesses rich strategic resources and capabilities, it is easier tosurvive, grow, and earn profit in the competitive market. Therefore, an enterpriseshould continuously enhance its KM capability in order to enhance its organizationalperformance (Bharadwaj, 2000; Bollinger and Smith, 2001). Chih et al. (2008) pointedout that KM capability is an important factor that influences organizational performance.

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If an enterprise is able to acquire the right knowledge and integrate both external andinternal knowledge, it is possible to enhance organizational performance (Scherer, 2000).Therefore, it is understood that KM capability has become a priceless intangibleresource, while the sophistication of KM has an even stronger influence on organizationalperformance (Talisayon, 2002). If an enterprise can create new knowledge from existingknowledge and reuse it through learning, then the organizational performance can beenhanced (Baker and Sinkula, 1999; Bassie, 1997; Slater and Narver, 1995). Hence, thisstudy proposes the following hypothesis:

H3. The degree of KM capability will have a positive effect on organizationalperformance.

4. Method4.1 Sample and measuresAs the objective of this research was to investigate the influence of KM capability anddynamic capability on organizational performance, this study was aimed at small-medium enterprises that have implemented KM as a sampling frame. The samplingmethod applied in this research was purposive sampling. As for questionnairerespondents, the main target subjects were the senior managers in the service,technology, and manufacturing industries. The questionnaire was anonymous, mainlydistributed on-site and online through e-mails. Simultaneously, in order to facilitate thequestionnaire distribution and high responsiveness, the enterprises were contacted viatelephone and e-mails to be informed of the research objective in order to ease theirsuspicions of the questionnaire. Finally, the statistical results obtained from thequestionnaire were analyzed.

The measurement items of the questionnaire were based on relevant literature andverified by a panel discussion with some experts. The language used in explainingquestions was plain Chinese and easily understood. Therefore, content and constructvalidities of this research design were fulfilled. The final questionnaire comprised fourparts. It included KM capability, dynamic capability, organizational performance, andthe demographics of the sample. A seven-point Likert-type scale, ranging from 1(strongly disagree) to 4 (neutral) to 7 (strongly agree), was used to measure the researchvariables. Moreover, the Pearson’s correlation analysis and regression analyses wereconducted based on the summated scores.

4.2 The questionnaire collection and data analysisThe questionnaire was conducted between January 3 and 28, 2012, and distributedonsite. In total, there were 237 questionnaires collected. Among them, 232 were valid;the other five were incomplete or unclear, and hence discarded. Table I shows thedemographic breakdown of the sample which includes gender, age, education level,type of occupation, average monthly income, job position, and years of experience.

4.3 Reliability and validityFirst, this research applied item analysis to measure the relevance of eachquestionnaire item. The results show that the research variables (i.e. KM capability,dynamic capability, and organizational performance) were appropriate. Second,exploratory factor analysis was employed and questionnaire items which had notreached the standard for factor selection were deleted. Factors were then named based

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on the relation of the questionnaire items for each factor. From the results offactor analysis, this research eventually divided KM capability into knowledge transferand knowledge protect; dynamic capability was divided into sensing capabilityand integrating capability; and, organizational performance was divided into financialperformance and non-financial performance. The final questionnaire items are shown inthe tables below. Measurements of KM capability are listed in Table II, measurementsof dynamic capability in Table III, and measurements of organizational performance inTable IV. Table V outlines the results of the reliability and validity tests performedon the final questionnaire items. Internal consistency measures (Cronbach’s a) wereobtained in order to assess the reliability of the measurement instruments. The item-to-total correlation, which was calculated between each individual item and the sum of theremaining items, was used to determine the convergent validity. When the item-to-totalcorrelation score was lower than 0.4, the case was eliminated from further analysis. Thereliability level is acceptable if the value is at least 0.8 for the basic research and 0.7 for theexploratory research (Nunnally, 1978). The content validity of the instruments wasestablished by adopting the constructs that have already been validated by other scholarsand experts. From the analyses mentioned above, it was found that the questionnaireitems on each factor met the requirements of reliability and validity.

5. Analysis and results5.1 Pearson’s correlation analysisTable VI shows that the correlation coefficient between KM capability and dynamiccapability is 0.815, which is a highly positive correlation. The correlation coefficientsof each KM capability factor – knowledge transfer and knowledge protect – withdynamic capability are 0.786 and 0.652, respectively. For the correlation amongall dynamic capability factors, the results show a strong correlation reaching a

Variable Type % Variable Type %

Gender Male 53.4 Average monthlyincome

p19,999 NTD 0.9Female 46.6 20,000-49,999 NTD 27.6

Age p22 0.4 50,000-79,999 NTD 53.023-27 10.8 80,000-99,999 NTD 12.528-32 12.1 X100,000 NTD 6.033-37 16.8 Job position Basic-level staff 57.838-42 21.6 Basic-level manager 15.1X43 38.4 Middle-level manager 12.9

Education level High school and lower 3.0 High-level manager 14.2Undergraduate 58.2 Years of work

experienceo1 year 7.8

Graduate 34.1 1-3 years 9.5Post-graduate andabove 4.7 4-6 years 15.1Type of

occupation Service industry 62.9 7-9 years 11.6Manufacturingcompanies 16.4 10-12 years 9.9High tech industry 14.2 13-15 years 9.5Others 6.5 X16 years 36.6

Note: n¼ 232

Table I.Demographiccharacteristics ofthe responding firms

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Factors Measurements Sources of previous research

Knowledgetransfer

We are already equipped with adequateprofessional knowledge

Gold et al. (2001), Chih et al. (2008),Fan et al. (2009), Tanriverdi (2005),Aujirapongpan et al. (2010)We able to proactively obtain

new knowledgeWe are adept in utilizing informationtechnology to search and obtain therequired knowledgeWe are able to proactively share their knowledgeWe already equipped with the ability to recordand store various knowledge (or techniques)We are already equipped with the ability to filterknowledgeWe are already equipped with the ability tomethodically classify and summary knowledgeWe are already equipped with the ability totransfer organizational knowledge to individualsOur company is already equipped with the abilityto retrieve knowledge from individuals into theorganizationWe are already equipped with the ability to applytheir knowledge to develop new products/servicesWe are already equipped with the ability to applyknowledge to improve work efficiencyOur company is already equipped withthe ability to apply knowledge to adjuststrategic directionWe are already equipped with the ability to useknowledge to solve problems

Knowledgeprotect

Our company is already equipped with the abilityto apply knowledge to face challenges from thecompetitorsOur company has clearly pointed out whichknowledge should be strictly protectedWe are already equipped with the abilityto apply information technology to preventany inappropriate knowledge accessingOur company has establishedan incentive scheme as an effective way to protectknowledgeOur company has established an effectiveprotective policies and procedures to preventknowledge theftOur company has establishedan effective protective policies andprocedures to prevent knowledge from anyinappropriate accessOur company has established an effective policiesand procedures to prevent knowledge from anyinappropriate usageWe are already equipped with the concept ofknowledge protection

Table II.Measurements of

KM capability

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significant level (**po0.01). Thus, KM capability had significant positive correlationwith dynamic capability. The correlation coefficient between KM capability andorganizational performance is 0.685, which is again a highly positive correlation.In terms of knowledge transfer and knowledge protect, their correlation coefficientswith the organizational performance are as follows: 0.618 and 0.615, respectively. Theresult shows that all measured items had a strong correlation and reached a significantlevel (**po0.01). Thus, KM capability had a significant positive correlation with

Factors Measurements Sources of previous research

Sensingcapability

We frequently scan the environmentalchanges to identify new businessopportunities

Luo (2000), Zahra and George (2002), Sherand Lee (2004), Wang and Ahmed (2007),Pavlou and El Sawy (2011)

We periodically review on howenvironmental changes influence oncustomerWe frequently review our products toreassure that they fulfill our customerdemandWe put a lot of efforts on the functions ofour new and existing products

Integratingcapability

We periodically absorb new informationand knowledgeCompared with other companies in thesame industry, we possess better learningabilityWe are able to integrate individualcapabilities to become organizationalcapabilityWe are able to thoroughly understand theresponsibility of each staffWe are able to clearly understand whopossess technique and knowledge relevantto our workWhen encountering unexpectedcircumstances (environmental changes),we are able to cope with themWe are able to succeed interacting andcollaborating with staff from otherdivisionsCompared with other companies in thesame industry, we possess betterintegrating capabilityOur output are synchronized with theoutput generated by other staffThe resource deployment in theorganization is appropriateOur expertise and work processes arecompatibilityCompared with other companies in thesame industry, we possess bettercommunication skills and coordinatingcapability

Table III.Measurements ofdynamic capability

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organizational performance. The correlation coefficient between dynamic capabilityand organizational performance is 0.770, showing a highly positive correlation. Thecorrelation coefficients of both dynamic capability factors – sensing capability andintegrating capability – with organizational performance are 0.708 and 0.733,respectively. The results show that all dynamic capability factors had a strongcorrelation and reached a significant level (**po0.01). Thus, dynamic capability had asignificant positive correlation with organizational performance.

5.2 Simple-regression analysisThe simple-regression analyses for KM capability on dynamic capability, dynamiccapability on organizational performance, and KM capability on organizationalperformance are shown in Table VII. The b values, p-value and adjusted R2 for KMcapability on dynamic capability are 0.834, 0.000 (**po0.01), and 0.662, respectively. Theresults show that KM capability will have a significant effect on dynamic capability.Consequently, the research result favored H1, and indicates that the degree of KMcapability will have a positive effect on the degree of dynamic capability. Hence, H1 isproven valid. The b values, p-value, and adjusted R2 for dynamic capability onorganizational performance are 0.897, 0.000 (**po0.01), and 0.592, respectively. This resultshows that dynamic capability will have a significant effect on organizational performance.Consequently, the research result favored H2, and suggests that the degree of dynamic

Factors MeasurementsSources of previousresearch

Financialperformance

Our sales amount is very high Lee and Choi (2003), Maltzet al. (2003), Tippins andSohi (2003), Im andWorkman (2004), Shang andMarlow (2005), Bolat andYilmaz (2009)

Our profit rate is very highOur revenue is very highOur return on investment is very high

Non-financialperformance

Our company is able to grasp the right timingfor launching new products or servicesOur company is equipped with the abilityto develop high-quality new productsThe launch speed of new products is faster thanother companies in the same industryThe degree of automation operation is much higherthan other companies in the same industryOur company is able to adjust or change ourmanagement process based on the marketcompetitionOur company is able to retain outstanding staffOur company is active in nurturing staff’s leadershipOur company puts high value on our staff’ssatisfaction on our corporate measuresOur company has an excellent staff welfare policyOur company possess comprehensive plans for ourfutureOur company vigorously invest on the developmentof new marketOur company vigorously invest on the developmentof new technology

Table IV.Measurements of

organizationalperformance

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capability will have a positive effect on the degree of organizational performance. Hence,H2 is proven valid. The b values, p-value, and adjusted R2 for KM capability onorganizational performance are 0.817, 0.000 (**po0.01), and 0.467, respectively, and showsthat KM capability has a significant effect on organizational performance. Consequently,the research result favored H3, which means that the degree of KM capability will have apositive effect on the degree of organizational performance. Hence, H3 is proven valid.

5.3 Multiple-regression analysisThe multiple-regression analyses for knowledge transfer and knowledge protect ondynamic capability, sensing capability, and integrating capability on organizationalperformance, and knowledge transfer and knowledge protect on organizationalperformance are shown in Table VIII. The b values for knowledge transferand knowledge protect on dynamic capability are 0.627 and 0.218, respectively.

Constructs ItemsConvergent validity(item to total correlations) Reliability (Cronbach’s a)

KM capabilityKnowledge transfer 14 0.770;0.774;0.738;0.807;0.758; 0.960 0.962

0.793;0.798;0.799;0.743;0.696;0.769;0.766;0.776;0.772

Knowledge protect 7 0.693;0.822;0.850;0.928;0.923; 0.9530.898;0.733

Dynamic capabilitySensing capability 4 0.825;0.855;0.847;0.791 0.921 0.957Integratingcapability 12 0.712;0.752;0.745;0.726;0.752; 0.950

0.690;0.777;0.820;0.662;0.728;0.683;0.788

Organizational performanceFinancialperformance 4 0.853;0.908;0.879;0.801 0.944 0.965Non-financialperformance 12 0.745;0.798;0.777;0.789;0.747; 0.963

0.683;0.815;0.775;0.776;0.791;0.811;0.827

Table V.Reliability resultsfor each construct

Knowledge transfer Knowledge protect KM capabilityDynamic capability

Correlation coefficient 0.786** 0.652** 0.815**p value 0.000 0.000 0.000

Organizational performanceCorrelation coefficient 0.618** 0.615** 0.685**p value 0.000 0.000 0.000

Sensing capability Integrating capability Dynamic capabilityOrganizational performance

Correlation coefficient 0.708** 0.733** 0.770**p value 0.000 0.000 0.000

Note: **po0.01Table VI.The correlation analysis

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The b values for sensing capability and integrating capability on organizationalperformance are 0.363 and 0.530, respectively. The b values for knowledge transfer andknowledge protect on organizational performance are 0.459 and 0.345, respectively. Allvariables showed a positive significant relation. The adjusted R2 are 0.668, 0.604, and0.474, respectively. The explained variation for all variables are higher. Therefore, itmeans that knowledge transfer and knowledge protect will have significant effects ondynamic capability; sensing capability, and integrating capability will have significanteffects on organizational performance, and knowledge transfer and knowledge protectwill have significant effects on organizational performance.

Table IX presents the multiple-regression analysis for KM capability and dynamiccapability on organizational performance. The b value, Beta value, t-value and all othervalues achieved the positive level. The b values for model one in Table IX are 0.203 and0.735, respectively. The model is y ¼ 0:148þ 0:203X1 þ 0:735X2 þ e, (where y isorganizational performance, x1 is KM capability, x2 is dynamic capability). Allvariables showed a positive significant relation. The adjusted R2 is 0.600 and theexplained variation for all variables is higher. Therefore, it means that KM capabilityand dynamic capability will have significant effects on organizational performance.

Variable b SE Beta t-value p-value

Dynamic capabilityKM capability 0.834 0.039 0.815 21.308 0.000**Adjusted R2 0.662Organizational performanceDynamic capability 0.897 0.049 0.770 18.321 0.000**Adjusted R2 0.592Organizational performanceKM capability 0.817 0.057 0.685 14.255 0.000**Adjusted R2 0.467

Note: **po0.01

Table VII.The simple-regression

analysis

Variable b SE Beta t-value p-value

Dynamic capabilityKM capability

Knowledge transfer 0.627 0.048 0.618 12.948 0.000**Knowledge protect 0.218 0.037 0.280 5.869 0.000**

Adjusted R2 0.668Organizational performanceDynamic capability

Sensing capability 0.363 0.059 0.373 6.188 0.000**Integrating capability 0.530 0.069 0.463 7.676 0.000**

Adjusted R2 0.604Organizational performanceKM capability

Knowledge transfer 0.459 0.071 0.388 6.464 0.000**Knowledge protect 0.345 0.054 0.381 6.340 0.000**

Adjusted R2 0.474

Note: **po0.01

Table VIII.The multiple-regression

analysis

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5.4 Testing the mediating effects of dynamic capabilitiesThe simple-regression analysis for KM capability on organizational performance anddynamic capabilities are shown in Table VII. The multiple-regression analysis for KMcapability and dynamic capabilities on organizational performance is shown in Table IX.As indicated in these tables, the b value, Beta value, t-value and all other values achieveda positive level. Based on Tables VII and IX, it was found that the standardized coefficientof KM capability on organizational performance was 0.685. The standardized coefficient ofKM capability and dynamic capabilities on organizational performance was 0.203 and0.735. The path coefficient for KM capability on organizational performance decreasedfrom 0.685 to 0.203, showing that dynamic capabilities had a partial mediating effect onKM capability and organizational performance. Furthermore, this implies that theinfluence of KM capability on organizational performance during the process willpartially affect dynamic capabilities and then in turn, will affect the organizationalperformance.

5.5 Path analysisThis research applied path analysis to investigate the influence of KM capability anddynamic capabilities on organizational performance. The results of the path analysisshow that the value of direct impact of KM capability on organizational performance is0.685; while the value of direct impact of KM capability on dynamic capability is 0.815,and the value of direct impact of dynamic capability on organizational performance is 0.770.Hence, the indirect impact of KM capability on organizational performance is0.815� 0.770¼ 0.628. The total value of KM capability on organizational performanceis 0.685þ 0.815� 0.770¼ 1.313. Based on the results showing the values of both directand indirect impact of KM capability on organizational performance, KM capability anddynamic capability possess significant influence on organizational performance.Therefore, if a firm would like to enhance its organizational performance, it not onlyhas to improve its KM capability but should also invest in dynamic capability so that it ispossible to effectively enhance overall performance.

6. Discussion and implicationThe results of this study indicate that KM capability is significantly associated withthe degree of dynamic capability and organizational performance. According to theresult of the Pearson’s correlation analysis (Table VI), there is a significant positivecorrelation between KM capability with dynamic capability and organizationalperformance. Moreover, the factors of KM capability show a significantly positivecorrelation with dynamic capability and organizational performance. This means thatif the KM capability factors knowledge transfer and knowledge protection are superior,

Organizational performanceVariables b SE Beta t-value p-value

KM capability 0.203 0.086 0.170 2.374 0.018**Dynamic capability 0.735 0.084 0.631 8.796 0.000**Adjusted R2 0.600

Note: **po0.05

Table IX.Multiple-regressionanalysis for KMcapability and dynamiccapability onorganizationalperformance

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it can significantly enhance dynamic capability and organizational performance. Thisstudy further found that the b value of knowledge transfer is more than the knowledgeprotection, particularly shown in Table VIII. This implies that the knowledge transfercan effectively enhance dynamic capability and organizational performance thanknowledge protection. Thus, an enterprise endeavor to attract and encourage theiremployees to participate in knowledge transfer and knowledge protection activities, aswell as enhance their dynamic capability and organizational performance, particularlyknowledge transfer. For example, in knowledge transfer, an enterprise shouldencourage their employees to proactively retrieve, filter, store, transfer, and shareknowledge from individuals to the organization (Coakes et al., 2010). Furthermore, afirm should allow their employees to equip themselves with the ability to apply theirknowledge to develop new products/services, solve problems, and improve workefficiency; while in knowledge protection, an enterprise should established an incentivescheme as an effective policy to protect knowledge and prevent any inappropriateaccess and usage.

On the other hand, this study also found that dynamic capability is significantlyassociated with the degree of organizational performance. According to the result ofthe Pearson’s correlation analysis (Table VI), there is a significant positive correlationbetween dynamic capability and organizational performance. This implies that if thedynamic capability factors – sensing capability and integrating capability – aresuperior, organizational performance is significantly enhanced. This study furtherfound that the b value of integrating capability is more than sensing capability,particularly shown in Table VIII. This means that the integrating capability hasthe potential to significantly enhance organizational performance than sensingcapability. Thus, an enterprise should strive to enhance employees’ sensing capabilityand integrating capability, as well as increase organizational performance, andparticularly integrating capability. For example, regarding sensing capability, anenterprise should frequently survey market trends and new technologies to seize newopportunities and dedicate resources toward the functions of new and existingproducts/service to reassure that their products/service can fulfill customerrequirements. For integrating capability, an enterprise should clearly understandwho possesses techniques and knowledge relevant to their work and incorporateindividual knowledge into the unit’s new operational capabilities, as well as orchestrateand deploy tasks, resources, and activities.

Based on the results of the path analysis, it was found that KM capabilitypossesses direct influence to enhance organizational performance; moreover,dynamic capability is also indirectly interrelated in terms of enhancingorganizational performance. This shows that when a firm possesses better KMcapability, it is enabled to rapidly generate new production processes which leadto new products and services in order to cope with changes in the externalenvironment, as well as enhance the firm’s market value and organizationalperformance. In other words, valuable, rare resources, and capabilities do not assurea firm’s ability to develop a competitive advantage or create value; rather, firmsshould be able to manage them effectively. This means that a firm can createvalue by recombining existing resources and capabilities (Landroguez et al., 2011).Thus, a firm should rely on its KM capability to enhance dynamic capability sothat it can eventually enhance its overall performance. On the contrary, if a firmlacks KM and dynamic capabilities, it will be difficult to acquire and maintainstable, high profits.

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7. ConclusionsDespite the widespread belief that KM capability enhances organizational performanceand dynamic capability increases organizational performance, researchers have attemptedvery little theoretical work on the development of nomological relationships among KMcapability, dynamic capability, and organizational performance (Cui and Jiao, 2011; Liyunet al., 2008; Weerawardena et al., 2007). In other words, systematic empirical investigationsof these relationships are scarce. As such, this study investigated the relationships amongKM capability, dynamic capability, and organizational performance. The results indicatethat dynamic capability is an important intermediate organizational mechanism throughwhich the benefits of KM capability are converted into performance effects at thecorporate level. That is, KM capability enhances the dynamic capability of organizations.While dynamic capability, in turn, increases organizational performance and providescompetitive advantages.

Grant (1996b) indicated that if firms want to enhance organizational performance, itis not knowledge itself that is important, but rather the firms’ capacity to apply thisknowledge effectively in order to create new knowledge. That is to say that knowledge,along with the ability to create and utilize it, is the primary source for firms to establishand enhance sustainable competitive advantage (Nonaka and Takeuchi, 1995). On theother hand, Evers (2011) assumed that an enterprise is required to establish unique anddynamic competencies which are generated through unique knowledge-intensiveassets. Zheng et al. (2011) further explained that a firm can continually renew theirknowledge base through its dynamic capabilities so that it is possible to respond tochanging environments. As mentioned above, in order to enhance organizationalperformance, enterprises would benefit from implementing KM capability anddynamic capability simultaneously.

This research applied a purposive sampling method and obtained a slightlyinadequate number of respondents. Therefore, it is suggested that future researchshould apply a random sampling method to collect more responses and increase thegeneralizability. On the other hand, a regression analysis method was applied tosimplify the research framework and to investigate the relationship among KMcapability, dynamic capability, and organizational performance. Hence, it might bemore difficult to explain the overall model of this research. It is suggested that futureresearchers should apply the structural equation model to further verify the model inorder to simplify the elaboration of the research structure.

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Further reading

Ipe, M. (2003), “Knowledge sharing on organizations: a conceptual framework”, Human ResourceDevelopment Review, Vol. 2 No. 4, pp. 337-359.

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About the authors

Dr Shu-Mei Tseng is an Associate Professor in the Department of Information Management atthe I-Shou University, Taiwan, R.O.C. Her works have been published in International Journal of

Information Management, Journal of Knowledge Management, Expert Systems with Applications,Industrial Management and Data Systems, and Management Research News. Her current researchinterests include knowledge management, customer relationship management, informationtechnology management, and service quality management. Dr Shu-Mei Tseng is correspondingauthor and can be contacted at: y97576@isu.edu.tw

Pei-Shan Lee is a Graduate Student at the Department of Information Management, I-ShouUniversity in Taiwan.

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