Characterizing knowledge management in
the small business environment
Kuan Yew Wong and Elaine Aspinwall
Kuan Yew Wong is a Doctoral
Student at the School of
Engineering, Mechanical and
Manufacturing Engineering,
University of Birmingham, UK
(kxw281@bham.ac.uk).
Elaine Aspinwall is a Senior
Lecturer at the School of
Engineering, Mechanical and
Manufacturing Engineering,
University of Birmingham, UK
(E.Aspinwall@bham.ac.uk).
`` Knowledge, if properly harnessed and leveraged, can
propel organizations to become more adaptive,
innovative, intelligent and sustainable
PAGE 44
| JOURNAL OF KNOWLEDGE MANAGEMENT
Abstract Most of the literature on knowledge management (KM) and its application has, until
recently, been centered on large organizations. Pertinent issues in small businesses have to a
large extent been neglected. However, small businesses do not necessarily share the same
characteristics and ideals as large ones. There are certain unique features of small businesses
that need to be understood before KM is implemented in their environment. This paper aims to
redress some of this imbalance in the literature by putting KM into the context of small
businesses. It looks at their characteristics, their advantages and disadvantages, their strengths
and weaknesses, and their key problems and issues, all associated with KM. Recognition of all
these elements is crucial in order to provide a well-suited KM approach for small businesses.
The paper culminates with recommendations that will provide important insights to help them
accomplish this.
Keywords Knowledge management, Small enterprises, Small- to medium-sized enterprises
Introduction
Knowledge management (KM) is an emerging ®eld that has become one of the most frequently
discussed topics in the business literature. It deals with the management of knowledge related
activities (Wiig, 1997; Civi, 2000) such as creating, organizing, sharing and using knowledge in
order to create value for an organization. It is promoted as an essential cornerstone for
companies to develop sustainable competitive advantage and to remain at the forefront of
excellence in a level playing ®eld market. Knowledge, if properly harnessed and leveraged can
propel organizations to become more adaptive, innovative, intelligent and sustainable.
Therefore, it has become necessary for practitioners, managers, academics and researchers
to address its management.
Almost all the discussions on KM and its related issues have concerned large organizations,
with little attention being paid to the small business sector (McAdam and Reid, 2001). This
situation has prevailed because large organizations generally have more knowledge assets and
''
| VOL. 8 NO. 3 2004, pp. 44-61, ã Emerald Group Publishing Limited, ISSN 1367-3270 DOI 10.1108/13673270410541033
intangibles to be managed and hence, a predominant focus on them seems appropriate. In
addition, most large corporations comprise many different business units, which can be
scattered across different countries and locations and thus, they need to implement a KM
system to facilitate the sharing and transfer of knowledge across their various sites. Despite this
fact, it should not be inferred that the thrust for KM is driven by the size of the operation and
thus, small businesses do not need it. As asserted by Moran (1999), ``in small and medium
enterprises, as in big global corporations, staff need appropriate and up to date knowledge . . ..
They need to know what their colleagues know and to be connected with them to share
knowledge. And like large corporations, SMEs need ways of remembering what they know''.
In addition, it is crucial to note that small businesses should not be seen as less important and
in¯uential than large ones, although the term ``small'' may imply this. Small businesses have
their own roles to play in the economy, as do large organizations. Both are crucial to the
economic growth of a nation and they actually complement each other in the business chain.
Therefore, not only do large organizations need to improve themselves through KM in their
pursuit for excellence, but so also should small ones. KM should be considered just as
important for them as it is for large organizations and hence, it is appropriate that they receive
adequate attention in its discourse and discussion.

Stemming from the exclusive focus of KM issues in large organizations is the emergence of
various approaches and developments in the area. However, assuming that these are suitable
for small businesses and are readily transferable to them may be an over simplistic view without
a proper understanding of their characteristics and the environment in which they operate. Like
other management aspects, the KM issues that small businesses face will not simply be a
scaled-down version of large companies' experiences (Sparrow, 2001). Small businesses are
more than ``little large businesses'' and have certain distinct characteristics and features that
distinguish them from their larger counterparts. These may determine the way in which they will
conduct KM in their organizations, and so it is crucial to understand small businesses before
attempting implementation.

This paper aims to provide a more comprehensive perspective of KM in small businesses.

First, it examines their inherent characteristics and features. The advantages they have in
accomplishing KM and the disadvantages that may impede their efforts will then be
investigated. The impact of their size on the performance of key KM processes (i.e. creation to
application) will also be discussed by examining their respective strengths and weaknesses. In
addition, key problems and issues associated with KM in small businesses will be highlighted.
Finally, the paper culminates with important insights and recommendations, which in the
authors' opinion will help to strengthen the foundation of KM implementation in the small
business environment.

Small business de®ned

One important issue to address when writing about small businesses is to de®ne them clearly
and to differentiate them from big businesses. However, the former remains a contentious and
challenging task because there are various de®nitions in the literature, some of which are being
frequently amended. As agreed by OECD (2002) and Storey (1994), there is no single, distinct
and uniformly acceptable de®nition of a small ®rm. Qualitatively, it can be de®ned as an
independent business, managed by its owner or part-owners and having a small share of the
market (Bolton, 1971). In this paper, a small business is treated as a small and medium
enterprise (SME) and is taken to be an organization which employs less than 250 employees, as
adopted by the European Union (CEC, 1996), the Department of Trade and Industry, UK (DTI,
1999) and the Small Business Service, UK (SBS, 2000). Note that other de®nitions have been
used in the USA (SBA, 2003) and in Japan (SMEA-METI, 2003). For instance, the US considers
small ®rms to include those with less than 500 employees.
SMEs actually account for a majority of the enterprises in many countries and world economies
(OECD 2002). At the beginning of this century, there were almost 19 million in the European
Union, representing 99.8 percent of all enterprises, while in the USA, they accounted for over 99

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 percent of businesses and in Japan, the ®gure was almost the same (OECD, 2000). Besides
being a major constituent of many countries, small businesses also play a central role in
industry. In Japan, the chusho kigyo (small- and medium-sized ®rms) for example, were critical
in the growth of the country's machine industry (Whittaker, 1997). In essence, small businesses
perform certain roles and functions in the economy that underpin the growth of a nation:
J They provide opportunities for individuals, who may be less suitable for employment in large
organizations, to set up their own business and become entrepreneurs. For many, this is a
route to expressing their skills and abilities, and a preferred way of working.
J They are important for contributing towards employment growth and providing new job
opportunities for the majority of the population. This is apparent from the various statistics
provided in OECD (2000, 2002), SBS (2000), DTI (1999), Robertson (1996), Storey (1994)
and Howard (1990). For example, as reported by OECD (2000), SMEs accounted for an
estimated two-thirds of all European Union employment and in the US they provided
employment for over half of all private sector workers.
J They are also a source of innovation (Thompson and Leyden, 1983; Acs, 1996) in new
products, services, processes and work practices. According to OECD (2002), small
businesses created as much as one-half of all innovations in the USA and their contributions
to innovation were still growing.
J They also contribute to the economy by supplementing the variety of products and services
offered. They often operate in niche and speci®ed markets, which are not expedient for large
®rms to enter. Hence, they are able to provide something marginally different from the more
standardized products and services offered by large companies (Storey, 1994).
J In the manufacturing sector particularly, many small ®rms act as specialist suppliers of parts,
components and subassemblies and as subcontractors to large companies (Whittaker,
1997; Howard, 1990; Cross, 1983). They actually act as the foundation of the manufacturing
economy that supports the prosperity and success of large organizations. The ef®ciency of
large companies will be shaped by small ®rms because their performance is directly hinged
upon them.
J Most large companies are inclined to drive up the prices of their strong-held products in order
to increase their pro®t margin. Small ®rms come into play in this situation by providing
healthier competition and a check on monopolies and market powers (Cross, 1983; Brock
and Evans, 1986). In this way, they help to ensure that the economic system, as a whole, is
working ef®ciently.
Thus, SMEs are important in the economy and their competitiveness is indispensable to a
country's growth and success. In short, OECD (2000) stated quite aptly that ``productivity
growth is fuelled by competitive processes in industry which, to a large extent, build on the birth
and death, entry and exit of smaller ®rms''. Having outlined the roles and the signi®cance of
small ®rms, the next section will discuss the importance of KM to SMEs.

Why small businesses need KM?

As an integrative concept, KM is perceived to have the potential to enable organizations to face
the complexities and changes enveloping them in the knowledge-based economy. The reasons
why SMEs need KM can be traced back to a ``pull'' and ``push'' perspective. The former
identi®es the potential bene®ts or improvements, which are crucial for small businesses while
``push'' deals with the external or environmental thrusts that push them to the forefront of KM.
From a ``pull'' perspective, a great deal has been mentioned in the literature about how
knowledge, which is viewed as a key resource (Davenport and Prusak, 1998; Drucker, 1993)
and strategic asset (Bollinger and Smith, 2001; Meso and Smith, 2000) can contribute to the
improved performance of organizations. Some of the more widely cited potential bene®ts of KM
include, amongst others, improved competency (uit Beijerse, 1999; Skyrme and Amidon,
1997), ef®ciency (Jarrar, 2002; uit Beijerse, 1999; Skyrme and Amidon, 1997), decision making
(Jarrar, 2002; Frey, 2001; uit Beijerse, 1999), learning (Civi, 2000; uit Beijerse, 1999), innovation,
responsiveness to customer and knowledge sharing (Jarrar, 2002; Skyrme and Amidon, 1997).

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`` Knowledge seems to be the essential survival weapon
for SMEs.
''
Although the bene®ts derived from embracing KM tend to be different, they all point in the same
direction, towards ``improvement'' and ``value creation''. In the context of SMEs, these issues
are even more critical because they often operate under dif®cult conditions and are subjected to
pressures from large companies and customers. Therefore, SMEs must realize that managing
their knowledge assets and intangibles are vital because it provides a way for them to leverage
most, if not all of the bene®ts listed above.
From a ``push'' perspective, there are some issues that deserve to be highlighted. First,
competition in any of the world's economy is intensifying and this competitive pressure will
certainly be more strongly felt by SMEs. This is because they constitute the majority of business
establishments in the economy. So, competition between them would be more intense
compared to that between large corporations, which is always a ``one to one'' or ``one to few''
competitor scenario. At the same time, some small ®rms are also competing directly with many
large corporations. With the advent of globalization, SMEs are increasingly forced to operate in
a highly competitive market. While they will continue to focus on domestic markets, some of
them are becoming increasingly internationalized and globalized (OECD, 2000). Coupled with
market liberalization and deregulation, SMEs that are competing directly in the ``global village''
would invariably be exposed to intense competition.
In view of this, knowledge seems to be the essential survival weapon for SMEs. This is because
organizational knowledge, as suggested by Bollinger and Smith (2001) and Meso and Smith
(2000) is a strategic asset which is valuable, rare, non-substitutable and inimitable by
competitors, and is what gives a ®rm a sustainable competitive advantage. Knowledge, if
properly harnessed and leveraged by SMEs will enable them to stand out in the competition and
outperform their rivals, thus maintaining their competitive edge. Small ®rms, however, are
constrained by their resource scarcity (OECD, 2002; Welsh and White, 1981) and there is no
way that they can compete with large companies in terms of tangible resources such as capital,
labor, equipment and physical commodities. Above all, an intangible asset such as knowledge
is an invaluable resource that can be utilized by small ®rms. The competitiveness of SMEs will
depend increasingly on the quality of the knowledge they apply to their business processes and
the amount which is embedded in their outputs. Essentially, prosperity in the twenty-®rst
century will be dependent on their ability to establish a mechanism that enables them to
continuously acquire, share and apply knowledge.
The drivers for KM in SMEs may also be shaped and triggered by large organizations, many of
which are beginning to become knowledge-based and soon, this effect will cascade down to
small businesses. Just as has happened with quality standards, it is likely that large companies
will demand that their suppliers (which are mostly SMEs) have certain knowledge infrastructures
in place (Finn and Phillips, 2002). Since many large companies are already working with a KM
system in their daily operation, their tiers of suppliers will soon need to institutionalize similar
systems in order to facilitate the transfer and sharing of knowledge across the supply chain.
Large knowledge-based companies are in the throes of increasing the value of knowledge
embedded into their products, services and offerings. In turn, they will also require their vendors
to provide them with knowledge intensive parts and components, so that at the end of the day,
more knowledge can be accumulated into the ®nal product. As large companies are
streamlining and reducing their numbers of vendors, their criteria for choosing them could
include whether they have a KM system or not. Besides this, what can be seen in the business
landscape nowadays is the formation of linkages and alliances. Small companies are starting to
develop formal or informal networks with other companies and to get involved in other kinds of
partnership such as strategic alliances and cross-border merging. In order to enable such
networks to be successful, SMEs need to have some KM system compatibility with their
partners so that useful knowledge can be easily accessed and shared.

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 Knowledge management in small businesses
KM studies in the small business environment are relatively scarce in the literature. Most of the
publications have centered on case studies conducted in small companies in order to examine
their perception towards KM and their practices and developments in the area. McAdam and
Reid (2001) compared the perception of KM in both large organizations and SMEs. The main
®nding from their study indicated that while KM understanding and implementation was
developing in large organizations, SMEs suffered from certain drawbacks. They appeared to
have a more mechanistic view and a limited vocabulary of knowledge, less systematic
approaches for embodying and sharing knowledge and their perceived bene®ts of KM were
targeted towards the market rather than towards the improvement of internal ef®ciency. Their
study therefore re¯ects a need to further develop a proper understanding of KM within the SME
sector.
uit Beijerse (2000) analyzed 12 innovative Dutch SMEs (although one of them, in fact, had 550
employees) from the industrial and business service sectors to determine the extent to which
KM was being practiced. In particular, he reported on KM practices at the strategic (strategy),
tactical (structure and culture) and operational (systems and instruments) level. He concluded
that various types of KM instruments were found at the operational level but interestingly, hardly
any formal and systematic KM policy was formulated at the strategic and tactical levels. In
another study of three small businesses operating in Singapore and Australia, Lim and Klobas
(2000) concluded that differences were apparent in the value placed by small and large
organizations on systematic KM practices, especially in the adoption of computer-based
knowledge storage systems. Hence, they agreed that the greatest need for small businesses
was to build an effective knowledge repository. They also pinpointed that for the most part,
small businesses lacked an understanding of KM processes and were just beginning to
understand how KM might assist them.
A longitudinal study of organizational learning in the small business sector of the UK economy,
was conducted by Matlay (2000a,b). In essence, he found that learning did occur in the majority
of small businesses but only a minority of them managed knowledge in a proactive and strategic
manner to enhance their competitive advantage. Wickert and Herschel (2001) examined some
of the unique KM issues facing smaller ®rms in German industry and suggested techniques that
could be employed to acquire and retain knowledge. They highlighted the problems of both key
employees leaving companies and of succession. However, they only covered these issues
very broadly and the remaining part of their study was concerned with an in depth discussion of
the techniques for acquiring and retaining knowledge in an organization.
The ®ndings of a qualitative study to explore the KM features of SMEs were reported by
Sparrow (2000, 2001). He highlighted the need to recognize the different ``mental models'' of
individuals and to share their personal understanding in the development of KM processes. He
also stated that the development of a knowledge-based system in smaller businesses should
be based on the fundamental understanding of its role and basic principles, and that work
related to KM should recognize the holistic nature of SMEs' management and knowledge
projects. Other studies that have been published include one by Frey (2002), who reported on
his successful experience of building a KM initiative in a small ®rm and Shelton (2001), who
discussed his experience as a facilitator in helping a small business owner to share knowledge.
The following two important points can be drawn from the review of KM literature in the small
business setting:
(1) small businesses generally lack a proper understanding of KM ± mostly in terms of key
concepts; and
(2) small businesses have been slow in adopting formal and systematic KM practices ± it does
not feature highly as an important agenda in most of them.
These points show that greater efforts are indeed needed to assist SMEs to embrace KM.
However, without a proper perspective and understanding of their features, it is dif®cult to
suggest a way forward. Their very size may shape the way in which they conceive and conduct
KM in their organizations. As evident from the above review, no attempt has been made to

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| VOL. 8 NO. 3 2004
`` Small businesses generally lack a proper understanding
of KM ± mostly in terms of key concepts.
''
systematically characterize a small business with regard to KM. More precisely, few studies
have been devoted to research on their advantages and disadvantages in implementing KM,
their strengths and weaknesses in performing key KM processes, and their associated key
problems and issues in accomplishing KM. This paper helps to bridge the gap in the literature
by addressing these elements. Only through a proper understanding and awareness of these
elements will any KM initiative be better implemented in SMEs.

Characteristics of small businesses

Before attempting to characterize KM in SMEs, it is appropriate at this point to ®rst understand
their inherent characteristics. Essentially, a proper understanding of a small business will lead to
a better comprehension of its KM issues. Ghobadian and Gallear (1997) listed some major
features of SMEs with regard to aspects such as structure, behavior, processes and
procedures. Adopting their work together with those of Yusof and Aspinwall (2000), Spence
(1999), Haksever (1996), and d'Amboise and Muldowney (1988) enabled the authors to compile
a list of characteristics for SMEs in areas which can have a direct bearing on the design and
implementation of KM. As can be seen in Table I, these have been categorized as ownership
and management, structure, culture and behavior, systems, processes and procedures,
human resources, and customers and market.

Advantages and disadvantages in knowledge management implementation

Ownership and management
The managers of SMEs are often the owners who oversee every aspect of their operation and
business. Decision-making is generally centralized and the ultimate power of control lies in
their hands. There are also fewer layers of management and decision makers in small ®rms,
implying that the decision making chain is often shorter (Ghobadian and Gallear, 1997). This
gives an advantage to the owner-managers to ®rmly declare a need to implement KM in the
organization. This means that the owner-managers themselves can actually be the main engine
for change in the organization, provided that they recognize the importance and potential
of KM.
SMEs are less hierarchical with fewer levels of bureaucracy in the vertical direction. This means
that top management is nearer to the operational functions. Thus, the owner-managers are
often said to be close to the point of delivery and enjoy a high degree of visibility in the
organization (Ghobadian and Gallear, 1997). As such, they are likely to have a deeper and
broader understanding of key knowledge related issues in the organization, making them more
ready to underscore the importance of implementing KM. Such conditions also provide them
with a better opportunity of becoming role models and to set good examples by showing the
desired values and behaviors needed for creating, sharing and applying knowledge.
However, it is often more dif®cult for owner-managers to recognize and acknowledge the need
for KM. They often focus their attention on core business processes, at the expense of other
issues. They are busy with their day to day operations and especially in smaller companies, they
are frequently constrained by time as they have to take care of every aspect of their business.
As asserted by Spence (1999), they are usually ``®re ®ghting'' ± simply dealing with urgent tasks
for the day-to-day survival of their enterprise. Thus, it is reasonable to expect that they will have
little time to re¯ect on strategic issues, such as KM. Generally, a short-term rather than a long-
term management perspective is the norm. For larger companies, it is more likely that top
management has more time to think about and be involved in KM since some of the roles and
responsibilities can be distributed to lower level managers.
In addition, most owner-managers of micro and small ®rms lack managerial skills and
competence (Haksever, 1996) as they normally have little formal management training. Most of

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 Table I Characteristics of small businesses

Ownership and management

Mostly started, owned and dominated by entrepreneurs
Owner is the manager at the strategic apex
Centrality of decision making ± few decision makers
Directive and paternal management style more prevalent
Top management highly visible and close to the point of delivery
Modest management skills and competency
Structure
Simple and less complex structure
Flat structure with few layers of management and hierarchy
Flexible structure and information ¯ows
Multi-tasked owner-managers
Division of activities limited and unclear
Low degree of specialization ± more generalist
Culture and behavior
Uni®ed culture
Organic and ¯uid culture
Departmental/functional mindset less prevalent ± corporate mindset
Very few interest groups
Operations and behavior of employees in¯uenced by owner-managers' ethos and outlook
Results oriented
Systems, processes and procedures
Simple planning and control system
Informal evaluation and reporting system
Flexible and adaptable processes
Focus on operational processes ± less focus on strategic processes
Activities and operations are less governed by formal rules and procedures
Low degree of standardization and formalization
Mostly people dominated
Human resources
Modest human resources
Modest know how with less expert professionals
Employees are more versatile
Training and staff development is likely to be ad hoc and small scale
Closer and informal working relationship
Low incidence of unionization
Low degree of resistance to change
Customers and market
Normally dependent on a small customer base
Mostly local and regional market ± few international
More frequent and closer contact with customers
Many know customers personally and socially

them seem to have a sound knowledge of the products and services they produce, but
generally, they lack the required skills for effective business management. There is little wonder
that most owner-managers of small ®rms do not understand the true concepts of KM as is
evident from the literature review presented earlier. Their lack of skills and competence may
hinder them from understanding what is required for implementing KM and how to accomplish
it. Since they have inadequate skills, some of them may also curtail growth efforts so that they
feel comfortable in their ability to manage their company (Collinson and Quinn, 2002).
Structure
In terms of structure, SMEs have distinct advantages when it comes to implementing KM. They
have a simple, ¯atter and less complex structure, which will facilitate a change initiative across
the organization since functional integration both horizontally and vertically is easier to achieve
and fewer complications will be encountered. The communication line is often shorter and
direct, thus allowing a faster discourse on KM issues within the organization and enabling

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owner-managers to disseminate their plans in a more timely manner. In contrast, large
companies have a bureaucratic structure, which make them less ¯exible and agile, and hence, it
is always slower for them to incorporate any new initiative. As stated by Moran (1999), SMEs are
at an advantage over large companies in this respect, because they do not have to overcome
hierarchical structures that foster secrecy rather than openness.
One of the disadvantages that may confront small ®rms, however, is the low degree of
employees' specialization in their jobs. There seem to be more generalists in small ®rms who
perform a variety of tasks. Low specialization may result in a lack of thorough comprehension of
a speci®c task. Normally, individuals need a profound understanding of their processes before
they can perform certain functions required in implementing KM such as identifying the
knowledge assets, surveying and mapping the knowledge landscape and determining key
knowledge requirements. Too broad a generalist functional view may not be useful in this
respect. In essence, a low degree of specialization may lead to inadequate expertise in
implementing KM in an organization.
Culture and behavior
A uni®ed culture with fewer interest groups is more salient in SMEs. The small number of
employees is often tied to a commonly shared value and belief that underlies their behavior and
actions. They usually have a corporate mindset, which emphasizes the company as a single
entity rather than a departmental or functional one. Generally, their culture appears to be more
organic and ¯uid than that of large corporations (Ghobadian and Gallear, 1997). As such, a
uni®ed culture can provide small ®rms with a strong foundation for change, such as
implementing KM. With a corporate mindset, employees may understand more easily what the
company is trying to achieve from KM. Arguably, with an organic and ¯uid culture, it will be
easier to achieve cultural change in the small business environment (i.e. fostering a knowledge
sharing culture).
Despite these advantages, culture is easily shaped and affected by the personality and outlook
of the owner-managers since they have a strong dominance in the ®rm. An owner-manager
who is both dictatorial and not committed can be problematic when implementing new
initiatives (Yusof and Aspinwall, 2000). On the other hand, one with a personality that hoards
knowledge, controls every aspect of his/her business, discredits trust and punishes mistakes
may well impede the building of a knowledge friendly environment. Thus, the owner-manager
can also become the main obstacle in the accomplishment of KM.
Systems, processes and procedures
Most SMEs have simple systems and less red tape in place, since their operations are small
scale and less complicated than those of large companies. Their systems are in the main,
people dominated and their processes are often more ¯exible and adaptable to the changes
taking place around them (Ghobadian and Gallear, 1997). Small ®rms are therefore, more
adaptable than large ones when it comes to implementing new initiatives, as they are less likely
to be ``locked in'' to their existing processes and systems. Large companies often cope with
complex systems and processes, which makes them more rigid and slower when it comes to
abandoning them.
In contrast, most of their activities and operations are governed by informal rules and
procedures. There is less formalization and standardization in their work (Spence, 1999;
Ghobadian and Gallear, 1997). Such phenomena may inhibit the implementation of a formal
and comprehensive KM system. Inherently, small ®rms may also resist the introduction of too
prescriptive a KM program. Employees may be reluctant to capture and store their knowledge
formally and knowledge sharing programs may be conducted haphazardly. In addition, the lack
of formal procedures may hinder the ef®cient working of a KM system or program, even though
it is implemented.
Human resources
SMEs obviously comprise fewer employees than their larger counterparts. This certainly gives
them a distinct advantage since it is easier to get all the employees together to initiate and

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 implement a change (Axland, 1992). In addition, employees normally know each other more
intimately and have face-to-face contact with one another, so there is a greater likelihood that
support for KM is obtained more easily. Collaboration among employees is often better, making
it easier to organize a KM initiative.
The lack of human resources, however, may be a stumbling block to implementing KM. Staf®ng
constraints mean that the appointment of multiple new roles and positions for KM is less
practical. In addition, small ®rms may lack highly educated and experienced employees or
expert professionals to initiate such a program. As reported by OECD (2002) a signi®cant share
of SMEs do not have the personnel with the appropriate information and communication
technology skills. Jeffcoate et al. (2000) agreed that most SMEs have limited knowledge about
computers and technology. Generally, they also invest less in employee training as they
normally do not have speci®c funds and budgets for such an activity, as opposed to large
organizations that have the resources to develop customized training and educational
programs. Lack of training can result in employees not having the necessary skills to manage
knowledge or to use a KM system.
As is apparent from this discussion, small ®rms have both advantages and disadvantages when
it comes to implementing KM. These are summarized in Table II. Their in-built advantages
should be put to good effect, while at the same time they should be prudent about their
disadvantages so that KM can ¯ourish.

Table II Advantages and disadvantages of small businesses in KM implementation

Advantages Disadvantages

Ownership and management
Structure
Culture and behaviour
Systems, processes and
procedures
Human resources
J Decision-making and control is mostly
centralized ± owner-managers can readily
declare a need for KM and be the main driver
for KM
J Close to the bottom line and highly visible ±
owner-managers have a deeper understanding
of knowledge issues. More ready to emphasize
the importance of KM. Better chances to set
good examples
J Simple structure ± easier to implement a
change. Less complexities and easier to
achieve functional integration
J Shorter and more direct communication ±
faster implementation of KM
J Uni®ed culture ± provides a strong foundation
for change
Corporate mindset ± easier to understand what
the company is trying to achieve from KM
J Organic and ¯uid culture ± easier to achieve
cultural change (i.e. fostering a knowledge
sharing culture)
J Simple, people dominated systems and ¯exible
processes ± more agile in implementing new
initiatives
J Fewer employees ± faster to get all of them
together to initiate a change
J Intimate relationship ± better for gaining
support for KM
J Better collaboration ± easier to organize a KM
initiative
J Dif®cult for owner-managers to recognize the
need for change ± high focus on core
operational activities, always ®re ®ghting, busy
and no time to think about strategic issues
J Lack of managerial skills and competence may
hamper the successful implementation of KM
J Low degree of specialization may result in
inadequate expertise for implementing KM
J Authoritative, uncommitted and knowledge
unfriendly personality of owner-managers can
be problematic in implementing KM
J Less formalization and standardization ±
employees may resist the introduction of a
formal KM program
J Lack of formal procedures may impede the
ef®cient working of a KM system
J Staf®ng constraint ± hard to assign dedicated
staff to implement a KM initiative
J Lack highly educated employees or expert
professionals to initiate a KM program
J Lack of training can result in employees having
less skill in managing knowledge or using a KM
system

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Strengths and weaknesses in knowledge management processes
Creating and acquiring knowledge
In order to improve its competitive advantage, an organization should have processes which
acquire new knowledge for it to apply. One of the ways to achieve this is to create, generate,
develop, build and construct knowledge internally. These terms, which are relatively similar in
meaning, refer to the process of deriving new and useful insights and ideas. Internally,
knowledge may be created through conducting research and development or via individual
learning.
Most SMEs tend to have severe limitations when it comes to such processes. All too often, they
do not have a research and development department, nor dedicated research personnel. Most
of them cannot afford or are unwilling to commit resources to conduct research since their
investments are largely targeted on their core operational processes. Experimenting with new
ways of doing things as a key part of knowledge creation is also hard to justify, as they cannot
afford the time for trial and error activities. As reported by McAdam and Reid (2001), the
construction of new knowledge in SMEs is less advanced than in large companies.
In terms of learning, small ®rms possess weaknesses. The crucial role that owner-managers
play in the daily operation of their ®rms often yields a signi®cant share of learning and
development at their level (Matlay, 2000a). This is especially so in the case of micro enterprises,
in which the owner-managers tend to be the bene®ciary of the learning process, and not the
employees. Learning at the employees' level may well be sti¯ed if most of the knowledge and
skills are held by the owner-managers. Organizational learning needs to occur at all levels and
functions of an enterprise in order to promote a good knowledge creation culture. Besides this,
most small ®rms will rely more on informal rather than formal learning programs due to their lack
of resources. As Matlay (2000a, 1997) stated, learning in this type of ®rm is mostly incidental
and reactive.
If organizations have neither the ability nor the capacity to develop knowledge themselves, an
alternative is to acquire it from external sources. This is likely to be the case in small ®rms. One
way is to hire or employ individuals with the required knowledge or to purchase knowledge
assets such as patents, research documents or other intelligence. Small ®rms can also acquire
external knowledge through other means such as searching (Huber, 1991; Lee and Yang,
2000), adopting it from other sources (Bhatt, 2000) or obtaining it from knowledge driven ®rms.
Small ®rms are heavily reliant on such approaches and usually, they will not face major
dif®culties in doing so. However, due to their resource constraints, they may not always carry
out such approaches formally and systematically. For example, some small ®rms have reported
that the allocation of resources for regular and systematic environmental scanning is hard to be
justi®ed (Lim and Klobas, 2000). Thus, most managers are likely to search for knowledge and
information when the need arises and are more selective in their search.
In terms of acquiring customers' knowledge, small ®rms appear to be in an advantageous
position. Their managers and employees tend to have close and direct contact with customers
and some may know them socially and personally (Haksever, 1996). Thus, a stronger
knowledge channel can be fostered which will improve their ability to capture customers'
knowledge in areas related to their needs, preferences and even their businesses. A close
proximity to clients will enable a more direct and faster knowledge ¯ow. In addition, the potential
of close contact with customers and possibly other organizations, will also allow them to obtain
information such as competitors' actions and behavior, market trends and other developments.
In contrast, large ®rms tend to have indirect contact with customers as they mostly rely on large
scale surveys and consulting ®rms to provide them with relevant customers' knowledge. There
are fewer chances of communicating with customers and capturing ®rst hand knowledge from
them. Moreover, the diverse and enormous customer bases of large ®rms make the process of
acquiring their knowledge slower and more complex.
Organizing and storing knowledge
This phase of the KM process deals with the structuring and storing of knowledge that has been
created or acquired in ways that make it more formalized and accessible. It may include

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 `` Resource scarcity is arguably the most acute problem
faced by SMEs.
''
processes such as documenting, codifying, externalizing, compiling, representing, classifying,
categorizing, validating and updating knowledge.
In the context of SMEs, the communication culture is usually verbal, informal and ``in the
corridor'' type (Dalley and Hamilton, 2000). No doubt, there are occasions when com-
munication between key people takes place formally and regularly but tends to be social in
nature. Knowledge tends to be passed on without any associated records or documentation
because of their informal communication culture. Coupled with their less formal working
systems and procedures, documentation of key knowledge is rare and it is normally not
properly stored in a readily retrievable format for future use. Most small ®rms may feel that it is
not feasible to establish a formal system for codifying, organizing and storing knowledge
because they are always busy with their daily routines. Building and maintaining a knowledge
repository demands substantial effort and hence, they are likely to resist this. They need to react
rapidly in their working environment and it may well be considered a waste of time for them to
codify their know-how.
SMEs have less resources and capacity to maintain a knowledge repository to the same depth
and breadth as large organizations. Compounded with their limited ®nancial budget, they may
ignore the need for organizing and storing knowledge. As such, it is not surprising that most
knowledge is kept in the heads of the owner-managers or a smaller proportion may reside in the
heads of other employees. In micro companies, the memories of the owner-managers seem to
be their main knowledge repository and storage. With the absence of a system to collect and
store knowledge, there is an inherent danger that most of it will be lost if key employees leave
the company. Nonetheless, with the passage of time, it will only remain as anecdotal
information in the minds of the owner-managers or be subjected to organization amnesia if it is
not externalized.
Arguably, small ®rms possess considerable weaknesses in this knowledge management
process. Perhaps the only strength they have is that there are less knowledge assets in the
companies and therefore, the process of organizing and storing knowledge may be easier. As
mentioned earlier, they have fewer employees and most of them know each other well.
Individuals have a better idea of the level of expertise and know-how of their colleagues, and
who to consult if they need certain information. Therefore, it is simpler for small ®rms to organize
tacit knowledge (i.e. pro®ling employees or setting up a corporate listing of employees who are
knowledgeable in a particular area), but not explicit knowledge, since they lack time, ®nancial
resources and formality in their systems and procedures.
Transferring and sharing knowledge
Once knowledge has been properly organized and stored, efforts should be undertaken to
make it widely available to those who need it. Knowledge that is kept solely in an individual's
private domain is of little value to an organization as a whole. This is where the processes of
sharing, transferring, disseminating and distributing knowledge come to the forefront in KM.
As stated earlier, communication is likely to be faster in small ®rms due to their ¯at structure and
low level of bureaucracy. Two-way communication is the norm and employees are often in
close contact. This offers a strong foundation for building knowledge channels and linkages
with each other. It is also easier to spread information and knowledge around say, 100
employees than 1,000. All these attributes are key levers and ingredients for ef®cient knowledge
transfer. Although such attributes cannot ensure that knowledge will be transferred from one
individual to another, they do increase its probability. Therefore, SMEs have a great advantage
in this respect, since their environment is likely to be conducive to transferring and
disseminating knowledge.

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As one of the essential goals of KM is to involve everyone in the organization to develop a mutual
community for knowledge sharing, voluntary participation for such behavior is hard to gain.
Regardless of whether a company is large or small, employees tend to hoard knowledge and
are unwilling to share it because by doing so could impact their importance. This is more so, in
the case of owner-managers, who are the major source of knowledge across a range of
company's activities and who tend to exert control on every aspect of their business. There is
evidence to suggest that they tend to limit the sharing of knowledge for fear of losing this
control. They may resist providing knowledge (Gorman et al., 1997) by deliberately avoiding
training and development opportunities for employees in certain areas pertinent to their own
personal expertise (Sparrow, 2001). Some owner-managers may prefer their employees to
acquire ®rm-speci®c knowledge and control their learning as they fear that their competitors will
poach their key personnel (Matlay, 2000a). In such ®rms, knowledge sharing is mostly bounded
to those areas determined by the owner-managers. Thus, their management style can have far
reaching implications on the transfer and sharing of knowledge in the small business
environment.
From an inter-organizational perspective, small ®rms also share knowledge with both large
organizations and other knowledge driven companies. With the rapid expansion of high
performance technology, they can share design and production knowledge electronically, and
come together virtually to explore new opportunities and build new capabilities. This will
certainly enable small ®rms to access a greater domain of explicit knowledge. Where the
relationships with external ®rms are suf®ciently longitudinal, there is also the opportunity to
transfer tacit knowledge, which may not otherwise be achievable. In this vein, knowledge in
smaller organizations tends to be more tacit than in large ones. However, tacit knowledge itself
can reduce the absorptive capacity of the receivers because it is often ``taken for granted, as
self-evident, and is dif®cult to replace by new knowledge on the basis of rational argument''
(Nooteboom, 2001). This means that small ®rms have a lesser degree of absorptive capacity in
knowledge transfer. This is best explained by the phenomenon that it is often hard to convince
small ®rms to adopt new technology and innovation which could probably bene®t them. Due to
their lack of absorptive capacity, the advantages to be obtained from joint collaboration with
large organizations can be rather one sided, with large ones gaining most of the bene®ts from
such knowledge sharing activities (Nooteboom, 2001).
Using and applying knowledge
This process is concerned with incorporating knowledge into the organization's products,
services and practices. In general, organizations need to exploit, utilize and apply knowledge in
their outputs, processes and practices in order to derive value from it. As stated by Bhatt (2001),
applying knowledge means making it ``more active and relevant for the ®rm in creating values''.
If knowledge is not used to its fullest, it will be an enormous waste of resources.
The effective utilization and application of knowledge are dependent on factors such as a clear
understanding of roles, an opportunity to use it, a need to take action, and an awareness of the
bene®ts to be gained from its application. In a small ®rm, employees usually have a strong
feeling about the importance of their roles since there are fewer employees and the success of
the company is dependent on them to a large extent. They usually therefore, have a corporate
mindset that puts the company ®rst. As such, they are more likely to be committed to applying
their knowledge to the company's products, services and processes, because they know that
the success of the company will directly affect them. In addition, individuals can more readily
see the results of what they do. This is because the feedback loop is very much shorter in small
®rms than in large ones, which can motivate employees (Struebing and Klaus, 1997). Such a
condition may instigate the employees to utilize and apply their knowledge in order to realize its
value.
However, the experience and judgment of owner-managers still play an important role in the
process of applying knowledge. Many managers started at the bottom and have worked
upwards the ``hard way'', usually through learning-by-doing and so, believed strongly in their
own experience and opinion. Conversely, knowledge derived solely from the theory, or from a
textbook, which may be impractical in nature, is normally belittled by them (Dalley and Hamilton,

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 2000). Therefore, they usually depend on their personal experience, opinion and ``own world
view'' when it comes to making key decisions and utilizing knowledge. However, such an
approach is sometimes inaccurate and may lead to the wrong decision or action being taken.

Key problems and issues

Summarizing the discussions presented thus far, resource scarcity is arguably the most acute
problem faced by SMEs. In the broadest sense, they suffer from a lack of ®nancial and human
resources, time, technical expertise and knowledge. They generally have limited cash ¯ow and
sources of ®nance (Keasey and Watson, 1993). Typically, they have restricted ®nancial reserves
to invest in long-term programs or other projects which may not be viewed as important to
them, such as KM. With limited human resources, the assignment of dedicated staff to KM is
hard to achieve. Time constraints and administrative pressures often make it hard for them to
devote their time to KM issues. They also lack the knowledge and expertise (technical and
managerial) to deal with them. All these aspects need to be borne in mind when developing a
KM approach for small businesses.
Another key issue of KM related to SMEs is the ``loss of knowledge''. Many authors have
agreed that this loss through the employees leaving the company is an alarming issue for small
businesses (Wong and Radcliffe, 2000; Kimpeler, 2001; Wickert and Herschel, 2001; Finn and
Phillips, 2002). Small businesses are highly susceptible to loss of employees due to, for
example, frustration with the low level of remuneration and limited opportunity for career
progression. Frequently, employees leave to work for competitors' ®rms or larger ones who are
able to offer them a higher salary and a better prospect. There is a tendency to only use small
®rms to acquire skills, and then to move to larger ones later (Penzer, 1991). Thus, it is not only
hard for small businesses to employ top level and highly educated personnel, but also to retain
them.
Notably, when key employees leave a company, they will take with them all their accumulated
and valuable knowledge unless it is captured, codi®ed and shared. Such a brain-drain will pose
a signi®cant threat to the operation of small ®rms if they are unable to retrieve the necessary
knowledge. In addition, they could face dif®culties in ®nding a replacement who has similar
knowledge and experience. All too often, a successor will have to learn everything from scratch
and re-acquire the knowledge of his/her predecessor. This may lead to inef®ciency, reinvention
of the wheel and duplication of effort, which will undoubtedly jeopardize a company's
performance.
Small businesses will also endure a greater risk from the occurrence of knowledge loss
compared to large organizations. This is because most of the key knowledge is held in the
heads of a few people, speci®cally the owner-managers. If they are not around or away, the
whole business could be in peril. Likewise, if an employee becomes sick, his/her knowledge will
not be available to the company and this can be threatening to a small ®rm which depends on
each and every employee (Wickert and Herschel, 2001). Conversely, large companies may be
less vulnerable to the effect of knowledge loss since they have a more hierarchical organization
structure and a larger number of key employees on whom to depend.

Managerial implications for small businesses

A ``blanket'' approach towards KM implementation is not feasible in small businesses.
Knowledge mapping, conducting gap analysis, determining key knowledge requirements,
planning a knowledge management strategy, acquiring and collecting knowledge, to name but
a few, are associated activities that need to be performed. All these require a considerable
amount of management and employees' time. If a physical knowledge infrastructure for storing
and transferring knowledge is to be built, again it will be a drain on resources, as would be, say,
a training program on the use of the system. Clearly, small businesses could ill afford such an all
out approach to KM. It is therefore important that they start with a small-scale project,
implement one thing at a time and progress from there. KM should be implemented at a rate
which is commensurate with their levels of resources and their capacity. In other words, it
should be carried out progressively, depending on their needs and capabilities. It is crucial to

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priorities their KM tasks and programs, so that they can pursue those which are more important
®rst and delay others which have less importance.
``Focus'' is also a keyword for SMEs. They need to focus their attention and select a key
business area or process in which to initiate KM. As a starting point, they should select an area
within the organization that needs it most. Alternatively, they can start with an area that can yield
direct business bene®ts, has a higher degree of success, can be implemented faster and where
results can be seen quickly. The purpose here is to avoid losing con®dence in KM if results are a
long time in coming. Owner-managers are eager to see positive outcomes from their efforts in
order to ensure that their investments are worthwhile. If the initial project is successful, it will
certainly create trust and goodwill which will further spur their willingness to expand the KM
program.
As with other change initiatives, it is of prime importance to have a realistic expectation
(Struebing and Klaus, 1997). Implementing KM is a long-term strategy and will not give
wonderful results overnight. In fact, greater tangible results may only be visible in the long run.
The main objective of all businesses, whether large or small, is to improve their bottom line, i.e.
gain quick pro®ts, increase sales and reduce operational costs. However, such short-term
goals should be linked to the long term ones in order to ensure their sustainability in the long
run. SMEs may see the results of KM sooner than large companies, if it is implemented properly.
In addition, they need to be realistic and not expect KM to improve every aspect of their
business or to solve all their problems. In fact, they should not fall into the trap of believing that it
is a remedy for all problems. KM may help companies to prevent costly mistakes and
duplication of effort, enable them to act more intelligently and solve customers' problems faster,
but it is unrealistic to expect it to increase their pro®t margin in the short term.

The knowledge loss problem of small businesses gives rise to the need for a proper codi®cation,
storing and sharing process to be installed. Knowledge that resides in the heads of its
employees is the key to the performance of an organization. In order to reduce the adverse
effect of knowledge loss, organizations should have a mechanism in place to capture, codify,
articulate and make their employees' knowledge explicit. It should be converted into a form
which can be explicitly stored and readily retrievable, so that when employees leave a company,
their knowledge remains. Requiring employees to write a simple report to summarize their
®ndings, experience and lessons learnt when dealing with a particular project is a useful way to
achieve this. At a higher level, a simple knowledge repository or database can be developed to
store the knowledge and make it accessible to others.

In addition, employees need to pass on their knowledge and share it with others in order to
ensure the viability of the organization. Cross-functional training, job rotation and apprentice-
ships are perhaps some of the cheapest and most effective ways to share knowledge. Such
methods enable tacit knowledge to be passed on, resulting in employees having additional
knowledge of other jobs which may not be part of their daily routines. If an employee is absent
or on leave, other employees will be able to cover his/her job. Other methods to share
knowledge may include community-based discussion forums, project teams, sharing sessions,
work presentations and networking. In short, small businesses should start to identify who has
what knowledge and proceed to codify and share it before the effect of knowledge loss kicks in.
In order to reduce the impact of employee turnover, retaining employees to continue working for
an organization is also critical. Although SMEs are generally unable to offer salaries
commensurate with their larger counterparts, other human resource management strategies
can be utilized. Small ®rms should ensure that their employees have suf®cient scope for
personal development and career advancement. It is crucial to ensure that employees are
satis®ed with their job and have pride of workmanship. Offering non-®nancial incentives,
recognizing employees' contributions, fostering esprit de corps, empowering, giving freedom to
apply ideas and providing work challenges may outweigh the importance of other tangible
offerings. If SMEs are to manage their knowledge effectively, they need to properly manage their
most important asset, their people.

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 Owner-managers need to have a long-term view of the whole KM process. Although they are
constantly under pressure, they need to realize the importance of devoting time to KM if the long
term viability and success of their company is to be assured. A solution would be for them to
relinquish some of their control and start delegating jobs to others. More importantly, they need
to give a strategic focus to KM, i.e. viewing it as ``strategic knowledge management''. It should
be given an important role in the operation of the company and be embraced as a source of
sustainable competitive advantage. The execution of KM processes and behavioral patterns
that support it should be proactively encouraged and promoted.
Owner-managers should also change from being a keeper of knowledge to being its provider
and disseminator. If this is not done, the KM path will be dif®cult for small businesses. In fact,
they are also the ideal people to create a situation for sharing knowledge and to encourage
exchanges of experience within the organization. However, these things are always easier said
than done. Management development and training will be required to increase their awareness
of KM. Local support agencies such as The Training and Enterprise Councils (TECs) and Local
Enterprise Councils (LECs) can provide such programs.
It is also important to note that KM is not necessarily an unaffordable luxury for SMEs. It all
depends on the choices and needs of the individual company. With the advent of the Internet,
KM has indeed surpassed the high cost paradigm and companies of all sizes can now use it to
acquire and share valuable information without undue expense (Moran, 1999). ``Knowledge
management isn't just for big companies anymore'' (Caggiano, 1999). Small ®rms can always
start with a small KM system which is simple, easy to use and cost ef®cient to implement and
maintain. A formal KM system central to their daily operation will improve their capability to
codify, store, share and retrieve knowledge and information. Such a system can be as simple as
a knowledge repository that allows users to add and retrieve documents or those integrated
with knowledge sharing applications. In the absence of dedicated personnel, employees who
use and manage the KM system will be busy performing many other tasks. Therefore, it is
crucial that the operation of the KM system can be readily integrated into their daily routines, so
that they will feel that using it is just part of their job (Lim and Klobas, 2000).

Conclusions
KM has become the new route to sustainable competitive advantage and it is crucial for large
and small companies alike, to embrace it. To date, research in this discipline has to a large
extent, focused upon large and international corporations and so, most of the approaches
have been drawn from this sector. However, small businesses are different not only in size, but
also in characteristics, ideals and needs from large ones. These variations do not only imply that
KM in small businesses may be different from large companies in scope and scale, they may
also in¯uence how it will be carried out.
There are certain unique characteristics which form the core of small businesses. Awareness,
understanding and sensitivity to their situation are crucial before KM is implemented in their
environment. A clear understanding of their inherent features will help to provide a more optimal
approach to KM. This paper has characterized the principle of KM from a small business
perspective. It has discussed their associated advantages and strengths, and also assessed
their limitations and weaknesses in implementing KM. Generally, small businesses appear to be
in an advantageous position to implement such a program. Arguably, the most serious limitation
or problem they may face is a shortage of resources. Broadly speaking, they lack time, ®nancial
and human resources as well as knowledge and expertise.
In summary, the fundamental principles of KM apply to organizations of any size, but the vast
resources associated with its implementation in large companies are not available in small ones.
In order to better re¯ect their ideals, features and needs, the authors feel that the notion of KM
should be rede®ned, to meet the circumstances in which it operates. The authors suggest that
KM in the small business sector be de®ned as:
``The management of knowledge-related processes or activities, based on realistic
resources in order to create competence, value and continual success for the
organization''.

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| VOL. 8 NO. 3 2004
With such a de®nition, practitioners and managers will have a better understanding of the needs
of small businesses and will not vaguely follow what large organizations are doing. Having
presented the basis for KM implementation in the small business environment, the next stage of
this research is to construct a suitable approach that will consider the points raised here.

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