International Journal of Production Research, 2015

Vol. 53, No. 8, 2489–2505, http://dx.doi.org/10.1080/00207543.2014.975856

The influence of different knowledge workers on innovation strategy and product development
performance in small and medium-sized enterprises
Andrew Kacha*, Arash Azadeganb and Stephan M. Wagnera
a
Department of Management, Technology, and Economics, Swiss Federal Institute of Technology Zurich, Zurich, Switzerland;
b
Department of Supply Chain Management, Rutgers University, Newark, USA
(Received 28 January 2014; accepted 30 September 2014)

Despite significant interest on the topic of knowledge workers, the understanding of how they influence certain aspects of
firm innovativeness remains limited. In particular, while different types of knowledge workers exist, their particular syner-
gistic effects on new and improved product development within smaller firms has received less attention. Drawing on the
knowledge-based view (KBV), we posit that innovation strategy plays an instrumental role in linking the effects of
knowledge workers, thereby leading to greater product development outcomes from different types of knowledge workers.
Moreover, some suggest that beyond a certain point, there is a diminishing return to increasing the proportion of knowl-
edge workers in an organisation; however, the basis of this finding is within larger firms. This study investigates whether
high-level (e.g. engineers and scientists) and low-level (e.g. technicians and machine operators) knowledge workers exert
varying effects on performance in terms of new and improved product development. Data from 205 small and medium-
sized high-tech manufacturing firms provide support that distinguishing among types of knowledge workers is important
given that they impact new and improved product development differently. Furthermore, innovation strategy plays a
synergistic role, positively mediating the effects of different types of knowledge workers on innovation outcomes.
Keywords: knowledge workers; innovation strategy; product development; small and medium-sized enterprises

1. Introduction
Knowledge workers are fundamental drivers of product development activities (Smith, Collins, and Clark 2005; Kowtha
2008). With their acquired skills, knowledge workers can address current customer expectations, and their functional
expertise helps create solutions to future demands (Forrester 2000; Davenport, Thomas, and Cantrell 2002). In addition,
knowledge workers’ importance continues to escalate, especially as products grow increasingly complex, necessitating
interactions with functions other than product development, such as manufacturing and quality management (Song and
Montoya-Weiss 1998; Hall and Andriani 2003). Faster product life cycles also increase the need for technologies and
processes that can keep pace with accelerated product creation (Meyer and Utterback 1995; Calantone and Di Benedetto
2000). Therefore, knowledge workers involved in operations, engineering and quality management play increasingly
active roles.
However, knowledge workers are not homogeneous and their contribution to product development performance can
vary based on their specialised backgrounds, expertise and responsibilities (Sethi 2000; Revilla and Rodriguez 2011). While
the extant literature on knowledge workers contains numerous studies surrounding the topic of cross-functional collabora-
tion and integration, few studies explore the effect of different types of knowledge workers and the collaborative influence
they exert on new product development (NPD) and improved product development (IPD) performance within smaller firms.
Furthermore, innovation strategy exerts powerful influence on performance, leading to more proficient product develop-
ment outcomes (Cooper 1987; Li and Atuahene-Gima 2001; De Clercq, Menguc, and Auh 2009). Innovation strategy is a
culmination of a firm’s policies and management philosophies, directing efforts towards developing products in line with
the firm’s overall strategy. Examining the relationship between knowledge workers and innovation strategy provides impli-
cations and insight regarding strategy development within smaller firms.
The current study aims to address such gaps by focusing on small and medium-sized enterprises (SMEs), whose lim-
ited resources and liabilities of smallness make investment decisions challenging (Freel 2000; Javalgi and Todd 2011).
If product development varies with different knowledge worker types, selection, retention and training decisions for such
workers should have particular significance for resource-constrained SMEs. Additionally, unlike their larger counterparts,

*Corresponding author. Email: akach@ethz.ch

© 2014 Taylor & Francis

2490 A. Kach et al.

SMEs are more likely to implement innovative strategies consistent with decentralised decision-making processes, driven
by cross-collaborative efforts between engineers and technicians, and less likely to implement formal control systems
(Freel 2000).
To explain these relationships, we refer to the knowledge-based view of the firm (KBV) which considers knowledge
as the firm’s most strategically significant resource (Grant 1996b). Since knowledge-based resources are often hard to
imitate and are socially complicated, firms’ integration capabilities in using the diverse specialised knowledge of their
workforce become major determinants of sustained competitive advantage (Eisenhardt and Santos 2000). Those that can
effectively integrate and apply varied specialised knowledge are able to enhance their product development performance
(Grant 1997).
The empirical examination of these questions involves survey data from 205 UK high-tech manufacturing SMEs.
Structural equation modelling (SEM) supports the exploration of the effects of different types of knowledge workers on
NPD and IPD performance, respectively. The tests also consider the role of innovation strategy and a potential diminish-
ing return relationship between knowledge worker types and product development performance. Accordingly, this study
attempts to make two primary contributions to knowledge management and innovation. First, it provides a theoretical
and empirical justification for distinguishing knowledge worker types. Clarifying the reasoning underlying how different
types affect product and process development performance should be important for decision-makers and academics.
Second, this study highlights the effects of knowledge workers on product development within SMEs rather than
large firms. Recent literature has suggested diminishing returns with increasing numbers of knowledge workers (Hitt
et al. 2001), because too many actors on the innovation stage can make knowledge sharing difficult and eliminate any
benefits (Lechner, Frankenberger, and Floyd 2010; Al-Laham, Tzabbar, and Amburgey 2011). However, such evidence
comes from studies of larger firms; whether and how the diminishing returns argument applies to smaller firms is unex-
plored.
The next section develops the theoretical basis for this study and outlines the association between knowledge worker
types and product development performance in SMEs. Then, this study examines the role of innovation strategy in
directing and streamlining knowledge workers’ contributions using SEM. After detailing a series of robustness tests to
confirm the results, the concluding discussion provides several key implications.

2. Knowledge workers and product development

Knowledge workers possess valued proficiency in certain subject areas, which grants them the capability to create, com-
municate and facilitate new ideas (Fawcett and Myers 2001; Davenport 2005). Their proficiency provides a rich pool of
unique skills that can enhance product development efforts. However, the distinct experiences, background and training
of knowledge workers suggest varying contributions to product development performance (Davenport, Thomas, and
Cantrell 2002; Kach, Azadegan, and Dooley 2012). The KBV considers firms as heterogeneous bundles of knowledge
assets (Kogut and Zander 1992). Related to our research questions, KBV suggests that as a result of their distinct expe-
riences, knowledge workers affect the firm’s innovation outcomes differently. Moreover, these differences may affect the
firm’s ability to direct and integrate knowledge in generating innovations.
Prior literature distinguishes knowledge workers in manufacturing into two categories (Dahooie, Afrazeh, and
Hosseini 2011). The most commonly recognised knowledge workers act as support staffs in developing new processes,
systems and techniques that enhance firm capabilities (Elmes and Kasouf 1995); these workers include plant engineers,
quality managers and operations managers, or high-level knowledge workers (HKWs). The second group of knowledge
workers is directly involved in the daily routines of the manufacturing floor. This group, which includes quality
assurance technicians, maintenance technicians and skilled machine operators, relies on vocational skills and focuses on
continued production operations. This type represents low-level knowledge workers (LKWs). We acknowledge that
high-level and low-level knowledge workers do not constitute the entirety of an organisation’s workforce. Other
positions include skilled and unskilled manual labourers, clerical and administrative employees are also considered to be
knowledge workers. However, these other positions, while contributing value to the firm, are rarely involved in the
innovation of new products or processes directly.
LKWs and HKWs are distinct in many dimensions including (1) training, (2) responsibilities and (3) work environ-
ments (Gutrel 1984; Bechky 2003). In general, the educational training of LKWs features less mathematics and science
and more applied technology courses and hands-on training than that for HKWs (Gutrel 1984). Whereas HKWs rely
mostly on conceptual understanding, LKWs depend on their ability to combine abstract concepts with hands-on profi-
ciency (Bechky 2003). The professional roles for HKWs provide them with a broader perspective on the operations and
strategic goals of the organisation. In contrast, LKWs use their vocational ability to resolve urgent issues, often on the
 International Journal of Production Research 2491

factory floor (Gottfredson 2002). These roles lead LKWs to focus on identifying problems and improving operations
through incremental steps that prevent future breakdowns, defects or malfunctions. Accordingly, the influence of HKWs
and LKWs on product development performance should differ.

2.1 LKWs, innovation strategy and product development performance

Product development programmes aim to develop either new products or improved products (Damanpour and
Gopalakrishnan 2001). First, NPD requires substantial and intensive utilisation of knowledge (Zhang, Di Benedetto, and
Hoenig 2009), and NPD programmes are highly structured and systematic, demanding the involvement of a broad array
of knowledge workers (Laursen and Salter 2006; Gloor et al. 2008). Second, IPD programmes refine and enhance
existing products and techniques (Song and Montoya-Weiss 1998; Garcia and Calantone 2002; Un and Cuervo-Cazurra
2005), which implies relatively narrower and more specific knowledge resource needs (Linderman, Schroeder, and
Sanders 2010), such that the streamlined programmes are less taxing (Garcia and Calantone 2002).
These definitions suggest the potential for different effects of different types of knowledge workers. In particular,
LKWs’ responsibilities require a combined use of dextral and conceptual effort (Drucker 1999), such as providing
hands-on skills to maintain equipment and process technologies. Maintenance technicians can help reduce downtime,
limit costs and increase equipment productivity through the manual completion of complicated, technical tasks
(Waeyenbergh and Pintelon 2002; Alsyouf 2007). A quality assurance technician organises and conducts quality
control training, maintains quality performance reporting systems and works with suppliers to improve their quality
(Anand 1999).
In addition, LKWs within SMEs typically bridge the gap between product development and plant personnel (Bechky
2003), serving as knowledge transfer conduits for communicating directives to the factory floor and feedback to deci-
sion-makers (Riege and Zulpo 2007). Thus, a greater number of LKWs might facilitate better communication of objec-
tives and greater feedback on their effectiveness. As such, they might establish broader support for product development
efforts, which in turn should enhance SME success probabilities (Kratzer, Gemünden, and Lettl 2008). For example,
machine operators and maintenance technicians can troubleshoot production start-up issues and thus accelerate the time
to full-scale commercialisation (Susman and Dean 1992), and quality assurance technicians can conduct in-house prod-
uct testing in a controlled laboratory atmosphere before full-scale production.
These trends and observations suggest that LKW can influence firm specific patterns of innovation behaviour. The
specialised knowledge of LKWs acts as building blocks in enhancing an SME’s ability and predisposition to innovate
for at least two reasons. First, LKWs provide the firm with a larger pool of tacit knowledge stock (Kyriakopoulos and
De Ruyter 2004), which can be applied towards generating alternative directions (i.e. perspectives) for the firm’s strat-
egy. Second, LKWs provide hands on and practical proficiencies that may be absent from that of other employees. In
sum, the profile of the modern LKW suggests that their skills and creativity can directly influence smaller firm’s innova-
tion strategy. Thus:

H1: Greater proportion of LKWs in an SME workforce is associated with a more prominent innovation strategy.

Such specialised knowledge and practical experience can help validate product development initiatives (Kukla 1983;
Sohal et al. 2001). A well-versed maintenance technician can modify existing machinery to produce a new or improved
product more easily (Deivanayagam 1992); LKWs also can help define the scope of product development efforts and
reduce knowledge gaps across functions (Langowitz 1988; Hoopes and Postrel 1999). If machine operators develop
alternative solutions that help the same machine produce improved product versions, the manufacturer’s product devel-
opment efforts improve.
These valuable characteristics have not gone unnoticed; many LKWs are involved in matters beyond production rou-
tines, and the focus of maintenance activities often shifts to preventive strategies that incorporate the effects of technol-
ogy and process trends (Waeyenbergh and Pintelon 2002; Dowlatshahi 2008). Whereas quality assurance departments
once conducted only post-production inspections, today they engage proactively in solving and preventing quality-
related problems (Addey 2004).
Thus, an increase in the proportion of LKWs seemingly would provide practical expertise that might enhance prod-
uct development performance. By facilitating the transfer of knowledge across organisational functions, additional
LKWs also might help incorporate the intricacies of the manufacturer’s operations into product development efforts.
These effects are of particular importance to SMEs, whose limited resources require the efficient use of their human
capital.
2492 A. Kach et al.

H2: Greater proportion of LKWs in an SME workforce is associated with (a) higher IPD performance and (b) higher NPD
performance.

2.2 HKWs, innovation strategy and product development performance

The responsibilities and expertise of quality managers, process and manufacturing engineers, and operations managers
directly affect product development efforts. Process and manufacturing engineers can ensure that new product designs
are easily incorporated into the company’s existing operating systems. With knowledge of production capabilities and
personnel resources, production managers can smooth out issues during the conceptualisation, ramp-up and testing of
NPD phases (Womack, Jones, and Roos 1990) or suggest how to accommodate the schedule of existing equipment, use
fewer parts or assemble and test products more easily (Boothroyd and Dewhurst 1988). Quality managers might make
suggestions about keeping products in compliance with the firm’s internal and external quality expectations (Chen
2005). Because these responsibilities link directly to product development performance, products developed with
HKWs’ expertise should perform better.
The nature of HKWs’ expertise also requires them to contact external professionals. By interfacing with the scien-
tific community, engineering and quality management professionals learn new technological and innovation abilities and
obtain the benefits of new knowledge spillovers (Perkmann and Walsh 2007; Gupta et al. 2009).
It is plausible to consider that HKWs can directly influence SME’s innovation strategy. We consider the HKW to act
as building blocks in enhancing a firm’s ability to innovate and the predisposition towards innovation. First, HKWs pro-
vide a rich pool of specialised knowledge stock to tap into, which enhances the scope (i.e. the extent of available spec-
ialised knowledge) of knowledge integration (Grant 1996b). Second, the broad-based conceptual knowledge of HKWs
provides unique perspectives that may not be available from other employees of the firm and therefore enhances the
flexibility (i.e. extent of available alternative solutions from the specialised knowledge) of integration (Grant 1996b).
Therefore:

H3: Greater proportion of HKWs in an SME workforce is associated with a more prominent innovation strategy.

HKWs should provide more access to functional knowledge sets that increase the firm’s ability to integrate a broader
array of solutions and new knowledge patterns, which in turn can lead to better product development. By employing a
larger pool of HKWs, firms can encourage more interaction between product development and other manufacturing
departments, increasing the chances of considering various aspects and thus reducing possible mishaps (e.g. Nihtila
1999; Swink and Calantone 2004; Boyle, Kumar, and Kumar 2006). This matter is particularly valid for SMEs, with
their less bureaucratic, more open organisational structure, which supports easier transfer of knowledge across functions.
In particular, integration of engineers, designers and project managers provides greater transparency about operations
and bolsters communications (Nooteboom 1994).

H4: Greater proportion of HKWs in an SME workforce is associated with (a) higher IPD performance and (b) higher NPD
performance.

2.3 Innovation strategy as an enhancing mechanism

Knowledge workers’ expertise may function as building blocks to enhance an SME’s predisposition and ability to inno-
vate, but without an underlying plan, the appropriate use of the building blocks is unclear. As Grant (1996a, 378) notes,
‘[s]pecialized knowledge cannot, on its own, provide a basis for sustainable advantage’. Rather, the ability to integrate
these specialised knowledge sets ensures long-term success. An innovation strategy can be instrumental in the link
between knowledge workers and product development efforts, especially in SMEs, for which misdirected efforts are
particularly costly (Eisenhardt and Tabrizi 1995).
An innovation strategy refers to a firm’s policies and management philosophies that direct efforts towards developing
products in line with the firm’s overall strategy. Developing such a strategy requires practices that encourage knowledge
workers’ creativity and motivation (Janz, Colquitt, and Noe 1997). According to Mintzberg (1978), a firm’s innovation
strategy relies on (1) direction and vision, which provide the perspective for innovation efforts; (2) a plan that combines
the means to accomplish the direction; (3) the position, or efforts and decisions deemed appropriate for the direction;
and (4) the pattern of actions that demonstrate commitment to the direction. Each aspect carries implied benefits for
product development. Directions, including the establishment of strategic objectives, highlight the importance of product
development efforts for the organisation. Practices that integrate a broader span of knowledge improve knowledge
 International Journal of Production Research 2493

integration efforts. Innovation strategy thus can combine knowledge workers’ specialised knowledge in the form of
product improvement efforts. The planning element provides outlines to guide product development efforts (Cooper
1987; Ramamurthy 1995). Patterns and positions help justify the organisation’s continuing efforts and corroborate
investments of time and effort (Gilbert 1994). Finally, fostering routines, such as cultural practices that include knowl-
edge workers in product development efforts, help enhance the development of new knowledge among workers
(Brockman and Morgan 2003).
In combination these distinct aspects direct, motivate and integrate LKWs’ and HKWs’ specialised knowledge into
firms’ product development efforts. Innovation literature highlights the importance of innovation strategy as an enabler
of performance and provider of guidance for action (Song and Dyer 1995; Griffin and Page 1996; De Clercq, Menguc,
and Auh 2009). For SMEs, whose limited resources must be directed carefully to enable a competitive stance in relation
to larger, more resourceful counterparts, innovation strategy facilitates the leveraging of knowledge workers’ heteroge-
neous specialised knowledge. Without an innovation strategy, the effects likely diminish significantly.

H5: More prominent innovation strategy in SMEs positively influences the association of (a) LKWs with IPD performance and
(b) HKWs with IPD performance.

H6: More prominent innovation strategy in SMEs positively influences the association of (a) LKWs with NPD performance
and (b) HKWs with NPD performance.

2.4 Curvilinear effects of knowledge workers on innovation performance

Research suggesting diminishing returns from increasing numbers of knowledge workers (Hansen, Podolny, and Pfeffer
2001; Hitt et al. 2001) claims that the presence of too many knowledge workers creates unnecessary density in the
shared information network. The ‘crowding’ effect lowers the quantity and quality of knowledge shared, such that the
information shared is redundant. Crowding decreases the diversity of information shared, yet diversity is a key require-
ment of greater creativity and innovation. These theoretical explanations and empirical evidence from large firms suggest
that a continual increase in the number of knowledge workers, beyond a specific saturation point, is unjustified
(Lechner, Frankenberger, and Floyd 2010; Plaza, Ngwenyama, and Rohlf 2010).
Multiple explanations suggest why the aforementioned diminishing returns argument may not apply to SMEs. First,
the number of actors involved in the exchange of knowledge in SMEs is limited, so the chances that additional knowl-
edge workers cause the shared information to become redundant or diminish in diversity seem remote. Second, SMEs’
organisational structure tends to be less bureaucratic and hierarchical than that of large firms (Carson et al. 1995). An
open organisational structure supports easier transfer of knowledge across functions and creates more transparency,
which can discourage knowledge hording (Nooteboom 1994). These inherent characteristics of SMEs suggest that the
chances of significant, negative curvilinear effects on innovation performance from adding knowledge workers are not
likely.

H7: The relationship between (a) LKWs and IPD performance and (b) HKWs and NPD performance will be most
appropriately captured by linear models.

3. Method
3.1 Sample and data
The data comes from the Economic and Social Research Council at the University of Cambridge, as part of a large-scale
research programme on manufacturing competitiveness. The data-set includes responses to a postal survey from 205
high-technology UK manufacturing SMEs, all with fewer than 250 employees – congruent with the European standard
for SMEs. Industries represented within the sample include chemical products (10.2%), rubber and plastics (2.9%),
machinery manufacturers (5.9%), computers (5.4%), electric motors and generators (9.3%), electrical equipment (6.8%),
communications equipment (22.4%), medical devices (27.8%), aerospace (2.4%) and specified other (6.8%). The survey
covers general characteristics and strategic objectives of the firms and their innovations, manufacturing production and
competitive capabilities. The survey instrument uses objective performance measures related to new and improved prod-
ucts as proportions of sales. Objective measures also refer to the number of LKWs and HKWs and product life cycle
(in months) for the firms’ major products (see also Appendix 1).
2494 A. Kach et al.

3.2 Predictor, criterion and control measures

3.2.1 LKWs and HKWs
The measures of LKWs and HKWs use the ratio of the number of LKWs and the number of HKWs to total employ-
ment for each organisation. The percentages of LKWs and HKWs both range from 0 to 50%. This criterion was not
pre-determined; instead, respondents did not report values above 50% for either category.

3.2.2 IPD and NPD performance

Prior research measures product development performance in terms of contributions to the firm’s sales or profits (Im
et al. 2003; Zhang, Di Benedetto, and Hoenig 2009). Similarly, the current study captures IPD performance as the per-
centage of the firm’s total sales from IPD and NPD performance as the percentage of the firm’s total sales from new
products, both for the past three fiscal years. The use of continual manifest variables in place of scalar measures
eliminates the need to develop multi-scale items in the SEM (Hair et al. 2010).

3.2.3 Innovation strategy

Because innovation strategy reflects the influences of several factors, the measurement requires the collection of multiple
formative factors; namely, strategic plan, strategic position and strategic pattern of behaviour (Mintzberg 1978 (see
Appendix 1)). The measure of the firm’s strategic plan uses three scaled questions pertaining to the importance of new
product and new process introductions for the firm’s performance objectives and competitive capability. To capture stra-
tegic position, two ordinal questions asked whether the firm was a leader, follower or neither in terms of product and
process innovativeness compared with competitors. Finally, the measure of the firm’s strategic pattern of behaviour uses
three scaled questions about the extent of innovativeness (i.e. new to industry, new to firm, neither or both) of new
product, process and distribution systems introduced by the firm in the past three years. In turn, innovation strategy is a
multidimensional first-order reflective, second-order formative measure, such that the observed indicators are reflective
on each dimension of strategy which in turn causes the construct (Edwards and Bagozzi 2000). Following the four-step
validation process for testing formative constructs (Diamantopoulos and Winklhofer 2001), a group of eight academics
and practitioners assessed content and indicator specification. The test of multicollinearity relied on a check of the vari-
ance inflation factor (VIF) of each indicator, with a threshold of 10 for item elimination (Diamantopoulos and
Winklhofer 2001). The highest value was 1.63 (strategic plan). In support of external validity, the composite measure
behaved as predicted in a theoretical framework with other variables, as the hypotheses tests reveal.

3.2.4 Control measures

Several variables may have important effects on the relationships. Firm age may be influential. Firms with greater matu-
rity also may have more established collaborative relationships that influence their ability to tap into and exploit external
knowledge to support innovative capabilities (Salimath, Cullen, and Umesh 2008). Likewise, firm size is a frequently
considered influence on firm-level innovation and performance (Wagner 2010). Large organisations have more resources
to develop new innovations or collaborate with outsiders, whereas SMEs’ financial challenges often induce resource and
capacity constraints on new product innovation. The firm size measure uses number of employees within the organisa-
tion, which was observed under a normally distributed range from 7 to 240 employees. In addition, the extent of devel-
opment of new and improved products depends on product life cycles and the level of R&D intensity (Ettlie and Pavlou
2006). Thus, the study also controls for these possible influences on product development output. All four controls
appear in the SEM as exogenous variables.

3.3 Measurement adequacy

First, Harman’s one-factor test investigated potential single-respondent bias (Podsakoff and Organ 1986), including all
measures of independent and dependent variables, in an exploratory factor analysis to verify whether a sizable amount
of method variance exists. These data indicated that the first factor accounted for only 21% of the variance, and the
loadings for all the other factors (eigenvalues > 1.0) were consistent with theory, suggesting no notable common method
bias concerns.
Second, as in Koufteros, Rawski, and Rupak’s (2010) study, a discriminatory analysis split the sample between two
randomly assigned groups, so tests could check for any differences between the variables in each group using the
 International Journal of Production Research 2495

Kolmogorov–Smirnov test (Siegel and Gastellan 1988). No significant differences arose between the samples; therefore,
the two groups likely came from the same sample population, in support of the robustness of the findings.
Third, all skewness values for the variables detailed within our study were below standard values (±2.99) that repre-
sent a deviation from normality (Hair et al. 2010). All of the kurtosis values were within the allowable range (±2.99)
with the exception of two of our control variables. R&D expenditure and product life cycle exhibited leptokurtosis with
values of 10.30 and 6.32, respectively. The tighter spread of R&D expenditure is not surprising given that the firms are
of similar size and from the high-tech industry. Additionally, the same logic can be applied to product life cycles given
the nature of the high-tech industry.

4. Results
4.1 Model fit
Table 1 presents the means, standard deviations and correlations for each of the variables. To evaluate the appropriate-
ness of latent models, Anderson and Gerbing (1988) suggest a two-step process with confirmatory factor analysis (CFA)
and SEM. As the suggested methodological approach for estimating mediating models (Holmbeck 1997; Hair et al.
2010), SEM can examine direct, indirect and total effects of proposed relationships (Tan 2001). Baron and Kenny’s
(1986) traditional three-step method through hierarchical linear regression has been commonly used to test mediation
hypotheses; however, recent literature has provided evidence that this approach contains several limitations (James,
Mulaik and Brett 2006; Stone-Romero and Rosopa 2010), suggesting that complicated mediation models are better
understood through SEM approaches (Gonzalez-Benito et al. 2012). More specifically, among other limitations of Baron
and Kenny’s approach, this procedure (1) works well when testing simple mediation models (e.g. containing an anteced-
ent X, a dependent variable Y and a mediator M) but its capability is insufficient for testing complex models that contain
multiple antecedents and mediation effects; (2) assumes perfectly reliable measures; and (3) requires significant effects
between X and Y even though this condition is frequently not met even when mediating effects exist due to insufficient
statistical power from opposite direct and indirect effects of X which cancel each other out (Zhao, Lynch and Chen
2010). Recent studies also reveal through bootstrapping that serious mediation underestimations are possible with hierar-
chical regressions (Cheung and Lau 2008).
The CFA and SEM analyses relied on Amos 20 (Blunch 2008; Byrne 2010), specifically the maximum likelihood
procedure (Arbuckle 2011), which can test a measurement model by including all variables and relying on generally
acceptable goodness-of-fit indexes (Bollen 1989; Kline 2005): chi-square (χ2), difference in chi-square (χ2/df), incremen-
tal fit index (IFI), Tucker–Lewis index (TLI), comparative fit index (CFI), standardised root mean square residual
(SRMR) and root mean square error of approximation (RMSEA). The fit indexes for the measurement model were as
follows: χ2 = 72.8, df = 15; χ2/df = 4.85, p < .001; IFI = .980; TLI = .986; CFI = .981; SRMR = .014; and
RMSEA = .011. Figure 2 depicts the causal model, for which the fit indexes demonstrated a good fit with the data:
χ2 = 24.8, df = 26; χ2/df = .954, p < .437; IFI = .983; TLI = .974; CFI = .981; SRMR = .052; and RMSEA = .012. Two
particular elements are noteworthy. First, innovation strategy was a formative measure with a single-factor disturbance

Table 1. Means, standard deviations and correlations.

Variable M SD 1 2 3 4 5 6 7 8

1 Firm age (Control) 33.0 25.4

2 Firm size (Control) 54.8 71.9 .058
3 Product life cycle (Control) 78.0 63.7 .152* −.080
4 R&D intensity (Control) 5.40 12.2 −.027 .280** −.059
5 Low-level knowledge workers 12.4 14.1 −.093 −.081 −.092 −.066
6 High-level knowledge workers 10.6 16.7 −.091 −.061 .002 .419** .013
7 Innovation strategy .000 .873 .036 .065 −.017 .213** .156* .287**
8 Improved product development 20.7 21.7 −.043 −.044 −.055 −.070 .188** .034 .197**
performance
9 New product development performance 20.3 22.9 −.136 −.087 −.118 .352** .027 .344** .298** −.067

Notes: n = 205.
**p < .01 (two-tailed); *p < .05.
2496 A. Kach et al.

instead of measurement errors for each of the nine indicators (Kline 2006). Second, all four control variables entered
the causal model as exogenous variables with links to performance (Figure 1).

4.2 Hypotheses tests

Figure 2 and Table 2 depict the positive and significant link between LKWs and innovation strategy (β = .145, p < .05),
in support of H1, as well as the SEM results that indicate a positive and significant link between LKWs and IPD perfor-
mance (β = .205, p < .01), in support of H2a; however, the relationship between LKWs and NPD performance was
found to be insignificant, failing to support H2b. The direct effects also reveal positive and significant links between
HKWs and innovation strategy (β = .211, p < .01), in support of H3, and between HKWs and NPD performance
(β = .209, p < .01), in support of H4b; however, the relationship between HKWs and IPD performance was found to be
insignificant, failing to support H4a.
In statistical terms, H5a and H5b predict that innovation strategy mediates the relationship between LKWs and IPD
performance and between HKWs and IPD performance, and H6a and H6b predict that innovation strategy mediates
these effects on NPD performance. The mediation hypotheses receive support if the mediated link model continues to
be significant after the addition of direct paths from LKWs and HKWs to IPD and NPD performance to the model,
though model fit does not significantly improve. As Table 3 shows, the fit for models 2–5 differ significantly from that
for the full mediation model, and model 2 attains the best fit indexes of all models considered. Parsimony rules (Bollen
1989) suggest that the partially mediated model 2 best represents the data, in support of H5a and H5b as well as H6a
and H6b. The direct and indirect effects between variables appear in Table 2, and significant hypothesized relationships
in Figure 2.
The SEM approach (James and Brett 1984) requires a test of a model that compares the proposed relationships with
a series of alternative models (Table 3). In addition to the alternative linear models, a series of curvilinear models under-
went analyses. Hypotheses that imply a relationship between variables generally entail a linear rather than curvilinear
relationship (Cummings 1982); hypotheses predicting multiplicative interactions should lack quadratic or higher order
effects (Ganzach 1997). A full test requires consideration of alternative functional forms (Edwards 2008) in terms of dif-
ferences in model fit and variance explained.
To estimate the effect of including the hyperbolic main effects, the study followed Agustin and Singh’s (2005)
hierarchical SEM modelling procedure. Quadratic variables for HKWs and LKWs were imputed into our linear
model, followed by the mediating variable. Including the quadratic terms incrementally with only linear terms did
not yield any significant improvements (Δχ2 = 37.3, df = 28, p < .006), nor did including the mediating term in tan-
dem with the linear and quadratic variables result in a significant improvement to the best fit model (Δχ2 = 28.4,
df = 26, p < .005). The relationships between knowledge workers and product performance reveal little distinction
in the linear and curvilinear models. The curvilinear output displays slightly positive U-shaped curves, contrary to

Figure 1. Proposed model.

Notes: H5a, b and H6a, b are mediating effects.
 International Journal of Production Research 2497

Figure 2. Significant hypothesized relationships.

Notes: n = 205. **p < .01. *p < .05.

Table 2. Direct, indirect and total effects of knowledge workers on innovation strategy and product development performance.

New product
Improved product development performance
Innovation strategy development performance
Direct Indirect Total Direct Indirect Total Direct Indirect Total

Low-level knowledge workers .145* – .145* .205** .038* .243** ns .050* .050*
High-level knowledge workers .211** – .211** ns .085* .085* .209** .112** .321**
Innovation strategy – – – .157* – .157* .232** – .232**

Notes: n = 205; SEM pathway coefficients are shown, only values with significance are shown; controlling for firm size, firm age,
product life cycle and R&D intensity.
**p < .01; *p < .05.

the negative curvilinear effects predicted in prior literature. Therefore, H7a and H7b are supported; curvilinear
models seem inappropriate for understanding the impact of LKWs and HKWs on IPD or NPD performance for
SMEs.

4.3 Robustness tests

Follow-ups tests were conducted to provide further evidence for the validity of the findings. First, the outcome
variables suffer from a bounded nature; that is, the performance variables captured the percentage of sales from
new and improved products, which are continuous but also could be bound by limits and not normally distributed.
A follow-up test of the results used Mplus 5.21 statistical software, which supports simultaneous assessments of
normally and non-normally distributed dependent variables in a single multivariate model (Muthén and Muthén
2010). Finney and DiStefano (2006) suggest applying the robust estimator WLSMV (weighted least squares parame-
ter estimates with mean and variance adjusted chi-square) (Muthén and Muthén 2010), which relies on the asymp-
totically distribution-free estimator (Browne 1984) and makes no assumptions of normality, such that ‘variables that
are kurtotic have no detrimental effect’ (Finney and DiStefano 2006, 278). The SEM test models conducted in
Mplus produced similar fit indexes and model characteristics; thus, the treatment of the dependent variables did not
affect the results.
Second, a naive bootstrapping procedure served to estimate the bias-corrected confidence intervals and standard
errors for all mediation testing and models (Shrout and Bolger 2002). This approach offers conclusions regarding full,
partial or no mediation role of an innovation strategy, according to the confidence interval criteria (Holmbeck 1997;
Shrout and Bolger 2002). Additionally, Sobel tests were conducted utilising the Preacher and Hayes’ (2008) PROCESS
2498 A. Kach et al.

Table 3. Comparison of alternative linear SEM.

Model and structure χ2 df Δχ2 ρa IFI TLI CFI SRMR RMSEA

1 LKW → IS → IPDP 36.0 28 – .005 .778 .627 .738 .062 .053

LKW → IS → NPDP
HKW → IS → IPDP
HKW → IS → NPDP
LKW → IPDP
HKW → NPDP
2 LKW → IS → IPDP 24.8 26 11.2** .437 .983 .974 .981 .052 .012
HKW → IS → NPDP
3 LKW → IS → IPDP 25.2 25 10.8** .365 .973 .946 .968 .056 .017
HKW → IS → IPDP
HKW → IS → NPDP
4 LKW → IS → IPDP 29.4 25 6.6 .382 .970 .945 .965 .056 .018
LKW → IS → NPDP
HKW → IS → NPDP
5 LKW → IS → IPDP 26.3 24 9.7* .343 .961 .911 .948 .052 .022
LKW → IS → NPDP
HKW → IS → IPDP
HKW → IS → NPDP

Notes: n = 205; the variable identifiers are as follows: LKW = low-level knowledge workers, HKW = high-level knowledge workers,
IS = innovation strategy, IPDP = improved product development performance, NPDP = new product development performance; model
1 is the partially mediated model; model 5 is the full mediation model; model 2 is the model with the best fit; all other models are
alternatives.
a
p-close for model probability
**p < .01; *p < .05.

Table 4. Path estimates and statistics for final model.

Standardised Bootstrap
Model paths
a
Estimate B-estimate (SE) B-lower 95% CI B-upper 95% CI M SE Bias

Direct effects
LKW → IS* .145 .145(.064) .017 .269 .145 .004
HKW → IS** .211 .210(.054) .079 .326 .210 .003
LKW → IPDP** .205 .203(.080) .041 .375 .202 .005
HKW → NPDP** .209 .204(.088) .028 .393 .203 .005
IS → IPDP* .157 .159(.069) .023 .269 .162 .004
IS → NPDP** .232 .231(.095) .043 .427 .232 .007

Indirect effects via LKW

IS → IPDP* .038 .037(.025) .003 .084 .036 .001
IS → NPDP* .050 .051(.025) .017 .103 .052 .002

Indirect effects via HKW

IS → IPDP* .085 .084(.038) .023 .146 .081 .002
IS → NPDP** .112 .112(.035) .064 .179 .109 .002

Notes: n = 205; the variable identifiers are as follows: LKW = low-level knowledge workers, HKW = high-level knowledge workers,
IS = innovation strategy, IPDP = improved product development performance, NPDP = new product development performance;
B = bootstrapped, CI = confidence interval; model fit statistics: χ2 = 24.8; df = 26; χ2/df = .954; TLI = .974; CFI = .981; SRMR = .052;
and RMSEA = .012; normal 95% CIs are computed using the estimated ± 2 × SE; percentile 95% CIs for bootstrap distributions are
defined using the values that mark the upper and lower 2.5% of each distribution.
a
Maximum likelihood estimates (also in Figure 2 and Table 2).
**p < .01; *p < .05.

script package in order to provide further reliability for the mediation pathway coefficients through the z-value = a × b/
SQRT(b2 × sa2 + a2 × sb2) equation. Raw unstandardised regression coefficients and standard errors were entered. Results
showed significant z-value statistics p < .05 for all of the mediation pathways (Table 4).
 International Journal of Production Research 2499

Third, additional evidence of robustness stems from running the causal model in hierarchical linear regression, which
provides a check of the variance explained by the control variables and directionality in the proposed model. The con-
trol variables account for .7% of the variance explained in improved products and 3.6% of the variance in new products,
both insignificant at p < .05. The control variables also accounted for insignificant variance associated with LKWs and
HKWs. The test of the control variables’ influence on innovation strategy indicated that only R&D intensity had signifi-
cant, positive impacts (7.1%; p < .01), though the lack of influence associated with R&D intensity on knowledge work-
ers and product performance aligns with the theoretical bases. Consistent with studies of SMEs in high-technology
operating environments, which tend to be turbulent and uncertain, the study shows that knowledge plays a key role in
innovation strategy by enabling firms to adapt and maintain efficient problem-solving strategies for different
technologies (Eisenhardt and Tabrizi 1995).

5. Discussion
The aim of this research is to investigate the effects of different types of SME knowledge workers on product develop-
ment performance, as well as how the presence of innovation strategy affects these relationships and whether additional
knowledge workers, beyond a certain threshold, disrupt product development performance. The results reveal that addi-
tional LKWs are both positively related to IPD performance and positively and indirectly related to NPD performance
through the mediating effects of innovation strategy. Thus, SMEs with established innovation strategies can plan,
motivate and direct the efforts of their LKWs to enhance both IPD and NPD performance. In addition, HKWs have a
positive relationship to NPD, such that SMEs with additional HKWs can expect better performance. These HKWs also
are positively and indirectly related to IPD through the mediating effects of innovation strategy. With an established
innovation strategy, SMEs can better choreograph, motivate and direct the efforts of their HKWs to improve both NPD
and IPD performance. The tests for negative curvilinear results reveal no diminishing return of greater proportions of
knowledge workers on SMEs.
These findings confirm the importance of knowledge workers’ contributions to product development efforts in
SMEs, while also highlighting the distinctive nature of the effects of LKWs and HKWs. Distinctiveness is displayed in
that both groups have notably different knowledge stocks, due to the context and their unique responsibilities, educa-
tional backgrounds, and specialisation. On their own accord, the application of knowledge workers knowledge stocks
differs dependent upon their role within the organisation. As such, KBV suggests that organisations can experience dif-
ferent innovation capability and innovation performance as a result of employing and strategically integrating different
knowledge workers. The training, responsibilities and work environments of each type form paradigms that are distinct
in terms of learning and creativity (Gutrel 1984; Bechky 2003). In general, the educational training of LKWs features
less mathematics and science and more applied technology courses and hands-on training than that for HKWs (Gutrel
1984). Whereas HKWs rely mostly on conceptual understanding, LKWs depend on their ability to combine abstract
concepts with hands-on proficiency (Bechky 2003). The professional roles for HKWs provide them with a broader per-
spective on the operations and strategic goals of the organisation. In contrast, LKWs use their vocational ability to
resolve urgent issues, often on the factory floor (Gottfredson 2002). These roles lead LKWs to focus on identifying
problems and improving operations through incremental steps that prevent future breakdowns, defects or malfunctions.
Accordingly, the influence of HKWs and LKWs on product development performance should differ.
The results also confirm the significant contribution of innovation strategy to product development performance, by
directing the skills and experience of knowledge workers. Without an innovation strategy, the benefits of additional
knowledge workers might be much less. An innovation strategy also helps extend the effects of additional knowledge
workers to a broader range of product development efforts. That is, the direct influence of knowledge workers seems
specific to the development of either new or improved products, but an innovation strategy helps ensure that knowledge
workers influence both types.

6. Contributions
This study makes several contributions. First, the insight into how different forms of human capital can enhance both
NPD and IPD performance in SMEs expands literature that focuses on the general contributions of knowledge workers.
The costs associated with hiring, training and paying knowledge workers constitute a significant percentage of the costs
incurred by manufacturers, especially SMEs that suffer liabilities of smallness. The SMEs that focus on new products
should work to recruit additional HKWs, whereas those that focus on developing improved products or product exten-
sions should employ more LKWs. This latter finding may be less apparent in SMEs’ human resource and training plans.
2500 A. Kach et al.

However, the choreography of the hiring, training, promotion and general development of knowledge workers should
align with the focus of the firm’s product development efforts.
Second, this article reports the first large-scale empirical study of the mediating effect of innovation strategy among
SMEs. The generally better channels of communication and less bureaucratic tendencies of SMEs enable knowledge
workers to exert greater influences on strategic planning and decision-making processes. The SMEs that develop with
prospective plans and policies, facilitate positive change and provide guidance to knowledge workers can better leverage
employees’ skills and creativity (Parsons 1991). A clear product development strategy also helps SMEs involve knowl-
edge workers more effectively, minimising downtime and costs (Santos-Vijandea and Álvarez-González 2007). For
SMEs in particular, a strong innovation strategy helps bolster product development activities and provides greater finan-
cial returns, which then reinforces their ability to be innovative.
Third, innovation strategy was measured from a multifaceted perspective, comprised of a strategic plan, position and
pattern. We observe in this study that both types of knowledge workers influence innovation strategy as a whole; yet,
there are differences between the two types regarding how this takes place. For example, engineers and designers engag-
ing in the creation of a new prototype may influence the planning, positioning and pattern of the strategy from a differ-
ent vantage point than quality technicians who are focused on improving the manufacturing process. Thereby,
understanding innovation strategy from this multifaceted perspective allows for a more complete depiction of how
knowledge workers play a role in shaping firm decision-making processes at the innovation level.
Fourth, our findings fall in line with that of Zhang Di Benedetto, and Hoenig (2009), who suggest for the firm’s
knowledge utilisation to partially mediate its product development efforts. However, our findings suggest that, despite
its significance, innovation strategy (i.e. the firm’s predisposition towards innovation), has an impact that is of secondary
importance. Our findings confirm the thoughts posited by some KBV theorists (e.g. Felin and Hesterly 2007) that much
of the performance benefits from knowledge workers are attributed directly to the number of professionals and that the
organisational factor plays a minor role. Moreover, our results confirm past observations related to individual contribu-
tions to organisational creativity (Amabile 1988; Oldham and Cummings 1996; Azadegan, Bush, and Dooley 2008). In
this study, for both types of knowledge workers, a large proportion of the association with product development perfor-
mance was with number of professionals versus organisational innovation strategy.

7. Limitations and further research

The results should be considered alongside their limitations. First, secondary data validated the hypotheses. The limita-
tions of secondary data generally revolve around the issue of validity (Babbie 2004) and whether the variables might
measure something other than intended. This concern was not an issue for this study because the intent of the original
research was in line with the research questions on manufacturing firms and their product development strategies. Sec-
ond, the data came from single respondents, which may be a source of measurement bias (Wagner, Rau, and Lindemann
2010). Except for innovation strategy, the variables relied on objective firm data, dismissing any possibility of respon-
dent bias. This study also attempted to reduce bias by using CFA (Podsakoff et al. 2003) and Harman one-factor tests,
which provided satisfactory results. Third, for purposes of understanding the curvilinear effects of greater proportions of
knowledge workers on NPD and IPD performance, sales figures were used. Using profit levels instead may provide a
better understanding of the impact of increasing the knowledge workers mixture, given that profit margins may shrink
as additional funds are dedicated towards innovation endeavours. Lastly, this study focused on knowledge workers who
seem imperative for product development in a manufacturing arena. Other types of knowledge workers could be just as
important for various contexts and industries. Further research might include marketing, sales, human resources and
accounting personnel, for example.

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Appendix 1. Variables and their operationalisation

Low-level knowledge workers (LKW) (objective manifest variable)

What percentage of the workforce is employed as technicians and lower professionals?

High-level knowledge workers (HKW) (objective manifest variable)

What percentage of the workforce is employed as technologists, scientists and higher level professionals?

Innovation strategy (IS) (multidimensional latent variable)

Strategic plan (VIF = 1.63)
How important has the following been as performance objectives for your firm? (five-point scale: 1 = insignificant, 5 = crucial
objective):
 Launching new products (item loading = .83)
How important have the following been as elements of the competitive capability of your firm? (five-point scale, 1 = not
important, 5 = critically important):
 New product introduction (item loading = .91)
 Newly introduced production processes (item loading = .67)
Strategic position (VIF = 1.16)
In relation to your principal product how would you describe your competitive stance? (leader = 2, follower = 1):
 Product innovation (item loading = .63)
 Technology/process innovation (item loading = .58)
Strategic pattern (VIF = 1.25)
Has your firm introduced any innovations in products or in their processes of production or distribution during the last 3 years?
Please circle the appropriate answers in each row (new to firm and industry = 3, new to firm only = 2, no to both = 1):
 Technologically new or significantly improved manufactured product (item loading = .60)
 Technologically new or significantly improved manufactured process (item loading = .76)
 Technological improvements in supply, storage or distribution systems (item loading = .73)

Improved product development performance (IPDP) (objective manifest variable)

What percentage of your firm’s total sales in the last financial year was associated with significantly improved products introduced in
the last three years?

New product development performance (NPDP) (objective manifest variable)

What percentage of your firm’s total sales in the last financial year was associated with significantly new products introduced in the
last three years?

Control variables (objective manifest variables)

Firm age
Years since company inception
Firm size
The firm’s total number of employees
Product life cycle
Length (in months) of the firms’ principal product’s life cycle
R&D intensity
The firm’s R&D expenditures as a percentage of sales

Notes: VIF = variance inflation factor.

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