Implementation of Knowledge Management in Small and Medium

Enterprises – Malaysian Perspective

Mobashar Rehman
mubashir_rehman@yahoo.com

Ahmed Kamil B Mahmood

kamilmh@petronas.com.my

Savita K. Sugathan
savitasugathan@petronas.com.my

Aamir Amin
aamir-amin@hotmail.com

Department of IT, Universiti Teknologi PETRONAS, Tronoh, Perak, Malaysia

Abstract
Objective of the study was to have an insight about the situation of KM implementation in Malaysian Small and
Medium Enterprises (SMEs). Study was conducted in Perak state of Malaysia. 30 SMEs were approached to
participate in the study. SMEs were selected by using systematic random sampling. Critical Success Factors
(CSFs) for the implementation of KM in SMEs were analyzed. Prioritized list of 14 CSFs was produced.
Prioritization was done on the basis of R-square value (linear regression) and was cross checked by mean
value. Beside these CSFs, types of KM applications used by Malaysian SMEs were also discussed. Current level
of KM implementation by Malaysian SMEs was checked. Intention of Malaysian SMEs to implement KM in
future, number of years KM has been implemented in Malaysian SMEs and projected duration other SMEs will
take to implement KM were also among the topics discussed in the paper.

Keywords: Knowledge Management (KM), Small and Medium Enterprises (SMEs), Critical Success Factors
(CSFs), Malaysia.

Introduction
Knowledge Management (KM) is no longer a hidden phenomenon as it has proved its value. Only thing left is
that how organizations can implement KM and what type of benefits can be obtained from implementation of
KM? KM needs some resources (financial and non-financial) to be implemented. These resources vary from
organizational magnitude to the nature of business. Large organizations have enough resources as compare to
small organizations in order to implement KM. This is one of the reasons that why implementation level of KM
is high in large organizations as compare to Small and Medium Enterprises (SMEs). Misunderstanding about
KM and its implementation is among other reasons for not implementing KM in SMEs. Earlier researchers were
of the view that KM can be similarly implemented in SMEs as in large organizations, which is wrong [1]. 

SMEs play a vital role in the economy of any country hence they should also be given greater importance just
like large organizations. Therefore, those activities should be initiated in SMEs which will benefit them not only
in short term but in long run as well and one kind of such activity is KM implementation [2]. SMEs have now
realized the importance of KM; hence scenario is changing as SMEs are emphasizing more on the
implementation of KM.

Generally SMEs can be categorized into small and medium levels on the basis of number of employees, annual
sales turnover and total assets possessed by them. It depends on the country that what criteria it will use to
categorize SMEs. Some countries use only one criterion, some use 2 and even there are countries that use all
three criteria. Malaysian SMEs are categorized into micro, small and medium enterprises by Malaysian
government. This categorization is based on number of employees and annual sales turnover companies have.

1
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These SMEs are operating in agricultural sector (including agro-based sector), manufacturing sector (including
manufacturing related services) and service sector (including ICT sector). Table 1 & 2 provides a summary of
Malaysian categorization of SMEs.

Table 1: Categorization of Malaysian SMEs (based on number of employees)

  Primary Manufacturing Service Sector
Agriculture (including Agro-based) & MRS* (including ICT**)

Micro > than 5 > than 5 > than 5

Small Between  Between 5-50 Between 5-19
5-19
Medium Between 20-50 Between  Between 20-50
51-150
Table 2: Categorization of Malaysian SMEs (based on annual sales turnover (all figures in RM 000))
Primary Agriculture Manufacturing Service Sector
(including Agro-based) & MRS* (including ICT**)

Micro > than 200 > than 250 > than 200
Small Between 200 & > than 1,000 Between 250 & > 10,000 Between 200 & > 1,000

Mediu Between 1,000 & 5,000 Between 10,000 & 25,000 Between 1,000 & 5,000
m
( MRS: Manufacturing-Related Services
*

ICT: Information and Communication Technology)

**

This study is the continuation of those studies which emphasized on the Critical Success Factors (CSFs) for the
implementation of KM in SMEs. Beside this, study will give an overview about the current and future status of
KM implementation in Malaysian SMEs.

Literature Review
KM has proved its importance by showing that growth of a firm and implementation of KM are directly
proportional to each other [3]. Similarly, growth of a firm in terms of financial performance and innovation are
linked to KM implementation. Higher the implementation of KM, higher will be the performance of company in
financial terms and innovation [4]. KM is the key to success for an organization but it is hard to measure it [5].
KM is all about managing the knowledge (expertise and skills of employees) therefore, among different reasons
for the success of SMEs, one is that they are managing their knowledge [6]. 

KM is not only important for large organizations but has almost same significant for SMEs which makes it a
key to success [7]. World economy is moving from industrialization to knowledge base economy therefore, KM
will be the only difference between a better performing and a poor performing organization [8]. KM helps an
organization to succeed by building better customer relationship and improving innovation [9]. 

SMEs are similarly important for a country’s economy as are large organizations. Because they provide job
opportunities to majority of the population of a country plus SMEs bring innovation (product and process) as in
[10], which is very important for economy of any country.  Irrespective of the size and nature of an
organization, KM is important for the success of an organization. Study showed many clues that how KM
helped Finnish SMEs to be more dynamic. SMEs can improve their performance by considering KM carefully
[3]. 

When we talk about the implementation of KM then there are certain factors which are important. These factors
are known as Critical Success Factors (CSFs). They are also called Key Result Areas (KRAs) and Key Success
Factors (KSFs) [11]. Generally speaking, those factors which are helpful in the successful implementation of
any project, activity, process or business are known as CSFs, KRAs or KSFs. Or we can say, those factors on
which project, activity, process or business relies for successful completion. From implementation of KM, we
mean those ‘practices and activities’ on which implementation of KM is dependent [4]. “Areas in which results,
if they are satisfactory, will ensure successful competitive performance for the organization,” as was in [12].

Beside other resources, financial resource is an important reason for SME to not implement KM as they lack this
resource [13]; [14]. On the other hand, SMEs are mostly family owned businesses which is another hindrance in
the implementation of KM. Owners of small businesses do not encourage their employees to share their
knowledge nor they do it by themselves. SME owners don’t trust their employees in a sense that their
employees will leave them as soon as they will find a better opportunity. This will lead to knowledge loss for
their organization. Higher employee turnover in SMEs also supports this phenomenon. This is one of the
reasons why SME owners consider knowledge sharing as a threat but at the same time by blocking outflow of
knowledge in this manner they are ruining the opportunity of getting new knowledge.

3. Research Methodology
Study was conducted in the Perak state of Malaysia. 30 SMEs were approached to participate in the study. 15
SMEs were from service sector and 15 from manufacturing sector. Simple random technique was used for
sampling so that every SME on the list (Malaysian SME's list) should have equal probability of selection. Type
of SMEs approached from service sector includes ICT, distributors, hotels, marketing companies, management
consultants and travel agencies. SMEs approached from manufacturing sector include stationary manufacturers,
door manufacturers, rubber products and plastic packaging manufacturers. Questionnaire method was used as
survey instrument. Questionnaire was measured on 6-likert scale to remove the ambiguity of mid value ‘neither
agree nor disagree’. Questionnaire was directed to top management of the companies to get a more realistic
view. Reason for selecting top management was that one of the aims of the study was to predict the future of
KM in Malaysian SMEs. Top management is the only appropriate option to get response on that because they
are the ones who know where to take the company in future, what to implement and what not?

Respondents were asked to rank all fourteen factors from 1-14. One as most important and fourteen was least
important. After data collection, results obtained from respondents were analyzed by the authors with the help of
R-square value and were cross checked by weighted average method. R-square is used to see that whether any
relationship exists between dependent and independent variables? Value of R-square in this was used as criteria
for measuring significance of each factor. Higher the relationship, association or variance between two variables
(dependent and independent), greater the value of R-square will be. All CSFs were treated as independent
variables and ‘implementation of KM’ (which was measured by asking questions relevant to KM usage) was
used as dependent variable.

Various authors have suggested many CSFs in their studies. Following CSFs have been analyzed in this study.

Understanding of KM: One of the most important CSF which was and is being ignored by authors. Without
proper understanding of KM how one can implement KM and get benefit from its implementation? Top
management is considered as the top most important CSF by other authors but what if top management doesn’t
have the proper understanding of KM? Will they pursue implementation of KM without proper knowledge?

Top management support:  Without proper and full support of top management, nothing can be implemented in
any organization. Top management support is important for the implementation of KM because its
implementation requires financial and non-financial resources which can not be obtained without the consent of
higher management in an organization.

Knowledge friendly culture: Culture plays an important role in the implementation of KM. Culture itself
consists of many components but here we will talk only about knowledge sharing (friendly) culture because we
are dealing with KM. Knowledge sharing is a crucial component of culture for KM implementation.

Financial resources: Without appropriate financial resources, nothing can be implemented in an organization.
Financial resources are important for KM implementation because IT equipments and other expenses are
required to implement KM.
IT infrastructure (IT tools): IT is the key enabler for KM. Without proper IT tools and technology, KM’s
implementation seems to be impossible.
Communication between all levels of management: Communication between all levels of management (top,
middle and first line) is essential for proper knowledge sharing and to increase the confidence of employees.
Training and education of employees: Training and educating employees, including top management, will be
helpful in the proper implementation and utilization of KM.

Hiring and retaining of knowledgeable employees: Employees are the ones who should have aptitude towards
KM and knowledge sharing. If employees are not into KM implementation and knowledge sharing then how
they will be helpful in its implementation. Therefore, proper hiring and retaining of employees plays an
important role in the implementation of KM.

Rewards to encourage KM practices: Employees behavior can be changed by providing them rewards (intrinsic
and extrinsic). If employees are not motivated towards implementation of KM then their behavior can be
changed by providing certain type of rewards to them.

Measuring effectiveness of KM: Implementing any strategy and then not measuring it is by no means an
intelligent work. If KM is not measured then how organizations will judge that whether the performance of the
organization increased or not? Purpose of implementing KM is fulfilled or not and how our objectives and goals
are being met by the implementation of KM? Therefore, there should be proper criteria for measuring KM
implementation and its benefits.

Organizational infrastructure: Organizational infrastructure is another important factor for the implementation
of KM. Large organizations usually have organizational infrastructure whereas SMEs still lack in this field. This
is another reason that why SMEs are lacking in the field of KM implementation.

Core values of a business: Core values of any business include vision and mission statements. These are the
reasons why a business exists. If organizations have KM or KM related activities in their vision and mission
then implementation of KM will be much easier because almost all organizations do care about their vision and
mission. This can be another factor for the implementation of KM.
Strategy for KM: Proper strategy should be planned before implementing KM. Many projects fail just because
management does not have any specific strategy or they don’t strictly follow the planned strategy.

Systematic KM process and activities: All the process and activities of the organization should be linked to KM;
otherwise, there will be no effective utilization of KM.

Table 3 shows the detail about the service sector SMEs which were approached to participate in the study. Table
gives an overview about category of companies’ (type of business it’s involved in) surveyed, total number of
companies surveyed from the same business area, level of SME (micro, small and medium) and the number of
employees in those SMEs working as full time employees. Total 15 SMEs from service sector were asked to
provide the feedback. Those SMEs include hotels (2 SMEs of small level), marketing companies (2 SMEs of
small level), management consulting companies (4 SMEs of medium level), Information and Communication
technology (ICT) (5 SMEs of medium level), distributors (1 SME of micro level) and travel agent (1 SME of
micro level) were the different types of SMEs which participated in the study. Effort was made to include all
types (different in nature of business) and all levels (micro, small and medium) of SMEs so that the results of
study can show accurate picture of KM situation in Malaysian SMEs. 4 companies were small sized SMEs, 9
were medium and 2 were micro level SMEs.

Table 4 shows the category (business in which organizations are involved), number of SMEs from a particular
business area, SME type and the number of full time employees working in those organization. 

Table 3: Service sector based Malaysian SMEs

Category Number of SMEs SME Type Employee
Surveyed
Hotels 2 Small >=5 & <= 19
Marketing 2 Small >=5 & <= 19
Management 4 Medium >=20 & <= 50
Consultancy

ICT 5 Medium >=20 & <= 50

Distribution 1 Micro <=5
 Travel Agencies 1 Micro <=5

Table 4: Manufacturing sector based Malaysian SMEs

Number of SMEs
Category SME Type Employees
Surveyed
Disposable Plastic Packaging 3 Medium >=51 & <=150
Rubber Products 5 Medium >=51 & <=150
Door Manufacturer 6 Small >=5 & <=50
Stationary 1 Micro <=5

Total 15 SMEs from manufacturing sector were asked to provide the feedback. Businesses in which those SMEs
were involved include manufacturing of disposable plastic packaging material (3 SMEs of medium level),
manufacturers of rubber products (5 SMEs of medium level), door manufacturers (6 SMEs of small level) and
stationary manufacturers (1 SME of micro level). 8 companies were medium sized SMEs, 6 were small and 1
was micro level SME.

4. Results and Discussion

CSFs were first ranked on the basis of R-square value. Higher the value of R-square means more are the chances
that variance in the dependent variable will be caused by independent variable. At the same time, P-value was
used to see the significance of relationship between independent variable (14 CSFs) and dependent variable
(implementation of KM). Understanding of KM as a CSF had value of R-square equivalent to .902 and p-
value .000, which means that understanding of KM and implementation of KM has a very strong relationship.
Higher value of R-square showed that 90.2% variance in the implementation of KM can be predicted by
understanding of KM. Based on this value of R-square which is positive we can predict that higher the
understanding of KM, higher will be the implementation of KM positively and vice versa. Top management
support had a value of R-square equivalent to .836 and p-value .000, which means that top management support
is another important factor for the implementation of KM. It also proves the point that without top management
support, KM can not be implemented in any organization. At the same time, understanding of KM has more
significance as compare to top management support (based on R-square value). This shows that top
management also needs understanding of KM to pursue its implementation. Knowledge friendly culture is
among top three CSFs for the implementation of KM with R-square value of .805 and p-value of .000. Without
proper financial resources, anything can not be pursued in an organization. Because at the end what matters
most are financial numbers. All other resources are dependent on financial resources. Financial resources had
value of R-square equal to .778 and p-value .000. This shows that implementation of KM is highly dependent on
financial resources beside other resources.

IT is one of the key enablers of KM, therefore it has a very positive and significant impact on the
implementation of KM. Value of R-square for IT tools (IT infrastructure) is .763 plus p-value is .000 which
proves its significance as a CSF. Communication between all levels of management is also important for KM
implementation. Until and unless, everybody knows about KM, it can not be implemented. That is possible only
through communication. Talks about KM should be organized; KM seminars and informal meetings for
knowledge sharing should be conducted in the organization at regular intervals. Value of R-square for
communication between all levels of management was .720 with p-value of .000. Training and educating
employees about KM, future of KM and benefits of KM implementation should be provided. This will help
employees in foreseeing their career more towards KM related activities. Value of R-square for training and
education was .701 and p-value .000. Hiring those employees which are oriented towards KM related activates
will be helpful for organizations in implementing KM, thus showing a value of .693 and p-value 
.000. Rewards are also important to change the behavior of employees towards KM and are considered as CSF
for KM implementation having R-square value of .685 with p-value of .000. Other CSF includes measuring
effectiveness of KM (R-square value = .672, p-value .000) because without proper measuring methodology,
how management can see that whether the purpose of implementing KM is fulfilled or not? Organizational
infrastructure (R-square value = .608, p-value .000) proves its significance. Core values of business which
include mission and vision statements had a value of R-square = .594 and p-value of .000. Proper strategy for
KM implementation (R-square value = .570, p-value .000) and systematic KM processes and activities (R-
square value = .545, p-value .000) were among the least CSFs for implementing KM.

4.1Prioritization of CSFs on the basis of R-Square value

Understanding of KM .902 (90.2 %)
Top management support .836 (83.6 %)
Knowledge friendly culture .805 (80.5 %)
Financial resources .778 (77.8 %)
IT infrastructure (IT tools ) .763 (76.3 %)
Communication between all levels of management .720 (72.0 %)
Training and education of employees .701 (70.1 %)
Hiring and retaining of knowledgeable employees .693 (69.3 %)
Rewards to encourage KM practices .685 (68.5 %)
Measuring effectiveness of KM .672 (67.2 %)
Organizational infrastructure .608 (60.8 %)
Core values of business .594 (59.4 %)
Strategy for KM .570 (57.0 %)
Systematic KM process and activities .545 (54.5 %)

Table 5 provides a prioritized list of CSFs based on the mean value. Smaller the mean value of a CSF, higher its
priority will be. Priority of CSF was judge both by R-square value and mean value to see the accuracy of results.
There are differences over few of the CSFs whose priority varies according to R-square and mean value. Top
management support has the top priority as CSF for implementing KM with mean value of 2.07. Knowledge
friendly culture has mean value of 3.33 and is second most important factor for implementing KM. Financial
resources have 3 priority based on mean value (3.63). IT tools having mean value of 5.77 are among top 5
rd

CSFs for implementing KM. Communication between all levels of management is another important factor for
KM implementation with mean value of 6.33.

Table 5: Prioritization of CSFs on the basis of mean value

Variable Name Mean
Value
Top management support 2.07
Knowledge friendly culture 3.33
Financial resources 3.63
IT infrastructure (IT tools) 5.77
Communication between all levels of management 6.33
Training and education of employees 6.73
Hiring and retaining of knowledgeable employees 7.63
Strategy for KM implementation 8.57
Rewards to encourage KM practices 8.73
Systematic KM process and activities 8.93
Core values of business 8.97
Measuring effectiveness of KM 9.73
Organizational infrastructure 10.37

Other CSFs includes training and education (mean value of 6.73). Hiring and retaining of knowledgeable people
(mean value of 7.63), proper strategy for the implementation of KM (mean value of 8.57), and rewards to
encourage KM behavior among employees (mean value of 8.73). Systematic KM process and activities (mean
value of 8.93), Core values of business which includes vision and mission statements of the business (mean
value of 8.97). Measuring effectiveness of KM implementation (mean value of 9.73) and organizational
infrastructure (mean value of 10.37).

There are difference between prioritized list produced by R-square value and mean value. It is due to the fact
that the list produced from mean value does not contain any audit questions. Respondents were asked to directly
rank the factors whereas, when R-square was used to rank the factors, audit questions were also included in the
test to gat more accurate results.

Table 6 provides a prioritized list of type of applications being used by Malaysian SMEs. Respondents were
asked to provide feedback on the type of application they were using in their organizations. Respondents were
given the option of choosing more than one applications at a time. 
Number of times each option was chosen, is represented by ‘frequency’ in table 2. 24 SMEs were using KM to
promote friendly knowledge sharing behavior in their organizational culture whereas, 21 were using some sort
of database to store knowledge at one place. 2o SMEs were using tools to capture new knowledge. 17 were
using KM tools to enhance the knowledge of their employees. Intranet and internet was being used by 12 SMEs
for knowledge sharing purpose. 11 SMEs were using KM tools to identify opportunities and threats for the
organization. 10 SMEs were using KM tools to measure it. Another 10 companies were maintaining KM
infrastructure and 8 were using KM to help them in planning strategies.

Table 6: Types of KM applications being used by Malaysian SMEs

Frequenc Application usage

y
24 Friendly knowledge sharing culture
21 Using tools (i.e. database) to store knowledge
20 Using tools to capture new knowledge
17 Building and maintaining employees’ expertise and skills
12 Using intranet and Internet to share information
11 Identifying opportunities and threats
11 Providing incentives to knowledge management promoters in organization
10 Tools to measure KM
10 Maintain knowledge Infrastructure
8 Developing strategies for KM

Figure 1 shows the level of KM implementation in SMEs. This is the combined analysis for service and
manufacturing sector (30 SMEs). Out of 30 SMEs, half had the level 4 (using tools like databases, Enterprise
Resource Planning (ERP), Inventory Management, Customer Relationship Management (CRM))
implementation of KM, 11 had 3 level (using tools for Email, Internet Browsing, Video Conferencing, intranet,
rd

file sharing, creating websites, e-commerce, VoIP) of KM implementation, 3 had 2 level (using tools like PCs
nd

with Microsoft Office, Star Office) of KM implementation and one SME had level 1 (using only land line
phones or mobiles) KM implementation.

SMEs which were having level 4 KM implementation were the ones who had actually implemented KM. SMEs
having 3 level of KM implementation were using tools which are basically important for knowledge sharing
rd

and to store knowledge. Those SMEs which were having level 2 KM implementation were using IT tool (PCs,
Microsoft/Office Office) for day to day storage of records and in actual were using KM (only storage of daily
transactions) to a very minimum level. SME having 1 level of KM implementation was using only land line
st

phone or mobile phone so we can say that one of the tools for KM implementation was being used for
communication but no other application of KM implementation.

Out of 30 SMEs in figure 2, 20 said that they will increase their investment in future for KM implementation,
whereas 6 said that they do not want to implement KM and 4 SMEs haven’t decided yet to implement it or not.

Figure 1: Current Level of KM implementation by Malaysian SMEs

If we do the combined analysis of Fig 1&2, we can see that majority of the SMEs have already implemented
KM and many of them are also convinced to invest more in KM. From this we can analyze, that in future we
will see the growth in implementation level of KM in Malaysian based SMEs.
Figure 2: Intention of Malaysian SMEs to implement KM in future

Out of 30 SMEs who participated in the research, 25 had already implemented KM so they responded to this
question only. Figure 3 shows that 6 SMEs were using KM from last 1-3 years, 10 were using from 3-5 years
and 9 SMEs had implemented KM for more than 5 years. This shows that implementation of KM is considered
as a healthy sign by Malaysian SMEs as they are considering its implementation as important factor for their
growth.
 
Figure 3: Years of KM implementation in Malaysian SMEs

Figure 4: Future of KM in Malaysian SMEs

From 30 SMEs who responded to questionnaire, twenty companies are planning to implemented KM so they
responded to this question only. According to the analysis of figure 4, regarding the future of KM in Malaysian
SMEs, 3 companies said that they will implement KM in next 1-3 years, 10 have the inclination towards its
implementation in 3-5 years and 7 said that they will implement KM in more than 5 years. Therefore, one can
predict on the basis of these feedbacks that in next 1-5 years, KM implementation will grow in Malaysian
SMEs.

Conclusion

SMEs where KM is already implemented are trying to enhance their investment in KM applications, whereas
those SMEs which haven’t implemented KM yet, are in the process of implementing it. This is due to the
benefits which SMEs can get from implementing KM. Cost effectiveness, time saving, innovation and quick
decision making are the most common type of benefits which SMEs can get.

Study was conducted in Malaysia in which 30 SMEs were analyzed. CSFs for the implementation of KM were
analyzed. Prioritized list of these CSFs was produced based on the importance each CSF has while
implementing KM.  Values of mean square and R-square were used to prioritize CSFs. Analyzed CSFs includes:
understanding of KM, top management support, knowledge friendly culture, financial resources, IT
infrastructure, communication between all levels of management, training and education of employees, hiring
and retaining of knowledgeable employees, rewards to encourage KM practices, measuring effectiveness of
KM, organizational infrastructure, core values of business, strategy for KM and systematic KM process and
activities.

Beside the significance of above mentioned CSFs, KM implementation level by Malaysian SMEs was analyzed.
Implementation of KM was divided to four sub-levels. SMEs intention to implement KM in future, duration of
KM implementation and future of KM in Malaysian SMEs were also discussed in the study.

Results of the study can be enhanced and generalized by increasing the number of SMEs and testing the CSFs
mentioned in this study in another domain.

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