Business Process Management Journal

Knowledge acquisition and product innovation flexibility in SMEs

Ying Liao Jane Barnes
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Ying Liao Jane Barnes , (2015),"Knowledge acquisition and product innovation flexibility in SMEs", Business Process
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 Introduction

As today’s firms’ face a number of trends such as outsourcing and mass customization, they

are forced to find flexible ways to respond to uncertainty and meet customer demand

effectively and efficiently. This is especially true of small and medium sized entities (SMEs)

which often depend upon the ability to adapt quickly to customer need as a means of survival.

Product innovation flexibility is more and more recognized as crucial to building a

sustainable competitive edge in an increasingly turbulent marketplace (Lummus et al. 2003;

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Liao et al., 2010).

The innovation process is associated with a variety of problem-solving activities when

people from different functions and organizations interact and engage with each other in a

dynamic environment. The search for solutions typically requires the simultaneous use of

different input factors. Given that innovation is a cross-functional and knowledge-intensive

process, knowledge is seen as a particularly important resource to dynamic capabilities in

product innovation. With product innovation complexity, rapid technology development, and

customer expectations dramatically changing, evolutionary models of the innovation process

have highlighted the importance of managing external knowledge as a valuable source of new

knowledge that can complement a firm’s own (Segarra-Cipres et al., 2012; Su et al., 2009).

Evolutionary models of the innovation process suggest the potential importance of inter-firm

networks as sources of new knowledge to an enterprise’s own (Love and Roper, 1999: 44).

Managing external knowledge is recognized as the process of capturing, developing, sharing,

and effectively making the best use of external knowledge. Previous literature has identified

many key aspects to external knowledge management such as acquisition, collaboration,

1
 integration and experimentation (Leonard, 1995), and knowledge acquisition, innovation,

integration, protection and dissemination (Lee and Yang, 2000). Gold et al. (2001) suggested

four dimensions of the process to effectively manage external knowledge including acquiring

knowledge, converting it into useful form, applying or using it, and protecting it. Knowledge

acquisition has always been identified as the first activity in the broad set of knowledge

management activities. Therefore, it is important to understand effective knowledge

acquisition to incorporate external knowledge into the firm and facilitate the operation of the
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innovation process. Thus, this paper will examine knowledge acquisition, which enables a

firm to acquire and internalize external knowledge resources.

SMEs are generally characterized as having the ability to respond faster to changing

needs which has significant implications for innovation. However, SMEs face challenges of

lack of knowledge, skill, and people, etc. Unlike large firms, SMEs with limited financial

resources and insufficient managerial infrastructure, tend to rely less on costly R&D

investment for innovation activities (Jones and Craven, 2001; Lim and Klobas, 2000). SMEs

also don’t have abundant resources available for human capital development, which enables

R&D personnel to self-generate new knowledge. The resource-based view (RBV) posits that

competitive advantage derives from difficult-to-imitate capabilities embedded in the network

(Dyer and Singh, 1998; Lane and Lubatkin, 1998). Consequently, external knowledge

acquisition may serve a great function in innovation for SMEs. Although it is even more

important for SMEs to have effective knowledge acquisition in order to exploit new

technology and access new knowledge and markets, research in this area tends to be

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 concentrated on larger firms and the literature on the link between knowledge acquisition and

innovation performance in SMEs is lacking (Davenport, 2005). This paper will fill that gap.

In addition to this contribution, our study makes several other contributions to the

literature. Although a growing body of studies has shown increased interest in knowledge

acquisition as an important strategic tool to create a sustainable competitive edge in the

supply chain, the literature has a dominant external orientation focusing on the effect of

knowledge acquisition on competitive advantages that are visible to customers such as fast
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delivery, technological distinctiveness and number of new products launched per year (Zhou

and Li, 2012; Sullivan and Marvel, 2011; Yli-Renko et al., 2001). Our next contribution is

that the paper will focus on the process perspective of a firm’s ability to make changes in the

product innovation process and efficiently and effectively launch new products in response to

changes in the business environment instead of just visible outputs to the market.

Finally, practitioners have reported that successful knowledge acquisition is difficult

(Murray and Chao, 2005). We focus on knowledge acquired at the firm level through the

social processes between the focal firm and its suppliers. This study will provide implications

for small businesses to invest in the factors that facilitate external business knowledge

acquisition.

In the following section, we present the conceptual model and theoretical background,

followed by the research hypotheses. In subsequent sections, the methodology, measurement

and statistical analyses are presented, followed by a discussion of the results, and

implications for practitioners. Finally, limitations of the study and suggestions for further

research are presented.

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 Theoretical background and conceptual framework

The importance of knowledge and knowledge-related capabilities as providing a competitive

advantage gets its origins in the resource-based view (RBV) (Acedo et al., 2006). Recent

research on operations and supply chain management has come from an RBV perspective by

studying knowledge as a basis of core competencies, especially the capability of innovation

from investment in knowledge management (Iwata et al., 2006; Kodama, 2005). The
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knowledge-based view (KBV) is an extension of the RBV and suggests that knowledge can

be a source of competitive advantage (Kogut and Zander, 1992; Grant, 1996). For instance,

innovation can result from new combinations of knowledge and other resources (Kogut and

Zander, 1992). Acquiring knowledge through external sources has become an emerging

trend in innovation. In a case study on Konya Automotive supply industry, for example,

family owned businesses responded that both machinery and equipment and parts suppliers

are the major knowledge source of innovative activities (Mercan and Tunen, 2011). The

acquisition of external knowledge will enhance a firm’s ability to exploit the existing

knowledge and further advance its knowledge base. Innovative firms must leverage their

knowledge acquisition capabilities to update their knowledge capital to match new

environmental conditions (Alguezaui and Filieri, 2010). There is need for a firm to

continuously explore new knowledge and exploit its existing knowledge as knowledge has

the following intangible characteristics that support a sustainable competitive advantage: it is

valuable and rare; and it has imperfect imitability, imperfect substitutability and limited

mobility (Barney, 1991; Moreira, 2009).

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 Knowledge acquisition is the first step of the knowledge management process which,

in turn, has been defined as “the process of accessing and absorbing knowledge through

direct or indirect contact with knowledge sources” (He et al., 2013, 608). This definition

reflects the nature of social interaction in knowledge acquisition. The growing attention to the

social aspects of learning and knowledge management implies that knowledge can be

understood as a collection of social practices consisting of participants containing diverse sets

of knowledge (Higgins, 2008).

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Specifically, from the supply chain perspective, the importance of inter-organizational

relationships to knowledge acquisition in product innovation can be explained by intensive

buyer-supplier social interaction involved in knowledge acquisition (He et al., 2013; Parker,

2012; Buckley et al., 2009; Yli-Renko, et al., 2001). In addition, external knowledge

acquisition can occur in a variety of ways, including hiring of technical staff and through

informal or formal collaboration and alliances (Li et al., 2010). The attributes of knowledge

determine different approaches of acquiring knowledge. Nonaka (1994) suggests that

knowledge can be explicit or tacit. It is tacit rather than explicit knowledge that gives firms a

strategic competitive advantage for two reasons: [1] it is extremely difficult for competitors

to replicate, and thus is distinct from many other resources; and [2] it is knowledge as know-

how, which provides value to the firm for the long term and enables creation of the platform

on which a firm can continuously enhance its competitive advantages (Murray and Chao,

2005). Tacit knowledge has great value for innovation (Nonaka, 1994). As the degree of

knowledge tacit-ness increases, the knowledge acquisition process becomes more socially

complex and interconnected. As the success of innovation becomes more dependent on

5
 collective and social networks it establishes outside the firm, knowledge acquisition becomes

more socially complex and interconnected. Therefore, socially-based knowledge acquisition

seems inevitable in pursuing strong innovation capability in the context of the supply chain.

Product innovation flexibility and small and medium size enterprises (SMEs)

The importance of SMEs in economic growth has been well recognized (Kaminski et al.,

2008; Maguire et al., 2007). The competitive advantage of SMEs would lie in developing

knowledge specialization, which would allow them to present greater innovation flexibility in
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dynamic business environments. Hutchinson and Quintas (2008) conducted 43 interviews

with owners or managing directors within large and small firms and concluded that SMEs

adopt informal processes to manage knowledge but often in structured and deliberate ways.

For example, individuals claim that they share interesting projects or topics at Monday

morning meetings or discuss how products can be improved with the partner. Higgins (2008)

argued that knowledge management in SMEs is more socially constructed and based on the

process of social interactions. Therefore, knowledge acquisition from a social perspective

designed to promote and facilitate the operation of the innovation process within SMEs has

been of particular interest to SMEs in practicing effective knowledge management initiatives.

Product innovation flexibility is viewed as external and customer-oriented flexibility

in which value can be captured by customers. It is defined as the ability of a firm to make

changes in the product innovation process and efficiently and effectively launch new products

in response to changes in the business environment. Product innovation flexibility enables a

range of responsive methods of acting, reacting and adapting in a complex business

environment. With flexibility in product innovation, firms have the capability to pursue an

6
 innovation strategy that can tolerate a higher risk of design changes, find better solutions with

respect to customer needs and technologies, and accommodate evolving design requirements,

all of which allow firms to better tailor their products to dynamic market conditions

(Billington and Johnson, 2005).

Although the value of niche strategy has been widely recognized for SMEs to

compete effectively against large firms, responsiveness to change is a critical survival

capability. A review of the literature suggests that a flexibility strategy does fit SMEs (Ebben
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and Johnson, 2005; Xie, 2012) as in general their structure is more flat and less bureaucratic

than large firms. In addition, fewer formal procedures and systems - typical of SMEs -

facilitate quick decision making, responsiveness, and adaptation. SMEs face greater pressure

in competition and difficulty in being responsive because they are constrained by a variety of

resources and capacity. In a study on Italian SME manufacturing, Belvedere et al. (2010)

demonstrate that weakness of SMEs in pursuing flexibility comes from lack of internal ability

to implement some best practices and technologies. Large firms have a stronger ability to

commit the necessary resources to pursuing different courses of action in response to

changes, while SMEs have to extend the source of flexibility across organizational

boundaries. Similarly, Carlsson (1989) argued that flexibility is not necessarily inherent in

small firms. Rather, it arises from the ability of small firms to develop options as a result of

using variable factors as their source of flexibility. Therefore, relative to large firms, SMEs

are more likely to achieve flexibility through supply chain relationships and collaboration.

Consequently, for SMEs, flexibility should be encouraged and enhanced by adopting an

effective supply chain strategy. There has been little research reported on this topic, resulting

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 in very limited implication support for SME business practitioners who would like to

implement a flexibility strategy in product innovation.

The enablers of knowledge acquisition consist of the subsystem comprising tools,

systems and associated work structure; and social capital, consisting of the knowledge, skills,

attitudes, and values they bring to the work environment as well as resources embedded in

networked relationships of the parties and the social structures of organizations (Coleman,

1988; Mumford, 2006). We follow Yli-Renko et al. (2001) in arguing that these components
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facilitate knowledge acquisition and exploitation by enhancing the knowledge exchange

process to create value for the firms. Our conceptual framework, illustrated in Figure 1,

focuses on both the knowledge acquisition
innovation flexibility link as well as the enablers

that will support knowledge acquisition in the context of the supply chain. The study of

organization learning has typically assumed that the “firm” gains access to valuable

knowledge through tools and information technologies. However, interactions among firms

arise from social ties with other firms and are carried out by the ongoing task of acting and

reacting in a complex social system. Therefore, our framework examines the antecedents of

knowledge acquisition, the ability with which the information is captured and transferred and

the relationship with the supplier. Our research objective is to explore the impact of these

components on knowledge acquisition and the effect of knowledge acquisition on innovation

flexibility in small and medium sized enterprises.

Information capability

Originally, information capability focused on achieving specific business purposes (e.g.,

meeting delivery dates, monitoring inventory status, and responding to customer inquiries)

8
 (Mason-Jones and Towill, 1997). Beyond the functional perspective, successful firms view

information capability - the ability to handle the flow of information within a firm - as a

strategic competence which is vital to internal integration and closely linked to sustainable

competitive advantage (Mentzer et al., 2000). We could therefore define information

capability in the context of supply chain as the scope and strength of communication

connections across the supply chain to efficiently and effectively exchange various types of

information (Daugherty et al., 2009; Grover and Malhotra, 1999). Strong information
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capability enables the integration of information in all areas along a supply chain. Such

external integration implies diverse sources and knowledge related to the development of a

firm’s capabilities and strategic assets.

Relationship quality

Relationship quality is defined as the development of common goals, norms and reciprocal

expectations regarding the trustworthiness between the parties (Yli-Renko, et al., 2001; Tsai

and Ghoshal, 1995). Research on supplier-buyer relationships suggest that inter-

organizational relationships play a fundamental role in organizational behavior (Parker, 2012;

Moreira, 2009; Lasagni, 2012). The quality of how social interaction is structured and

managed can induce or limit the sharing of ideas and strategic assets among members of a

supply chain and motivate the development of knowledge sharing mechanisms across firm

boundaries. High levels of mutual expectations and shared goals reduce the need for firms to

monitor each other, thus allowing them to invest more effort in knowledge acquisition and

exploitation.

[Insert Figure 1 about here]

9
 Hypotheses development

Knowledge acquisition and product innovation flexibility

The innovation process, comprised of interrelated activities that transform ideas to products,

is heavily dependent upon knowledge (Andreeva and Klanto, 2011). The rate of new product

introduction is a function of a firm’s ability to manage, maintain, and create knowledge

(Cohen and Levinthal, 1990). Decision making in any knowledge-intensive task such as

innovation involves ambiguity and uncertainty. The employees that make the decisions (e.g.,
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design engineers, market analysts, supply management agents, etc.) are human and human

decision-making is ‘‘bounded’’ in its ability to acquire and process information (Simonin,

1999). The knowledge acquisition process is the routine through which SMEs go in order to

create product innovation flexibility. It provides a social interaction environment that

supports the dynamic processes of knowledge exchange. It is through such mechanisms that

members of innovation teams can get extra insights for uncertainty reduction, and therefore

decisions makers are able to plan and control operations, which makes it a value-adding

system. As a result, firms can tolerate a higher risk of changes in innovation. Ancona and

Caldwell’s (1990) study on product development teams found that an increase in knowledge

acquisition led to better performance in product innovation. From a long term perspective,

according to Grant (1996), employees and their knowledge are one of the most flexible

resources a firm can access since people can change their knowledge over time. When

individuals are surrounded by rich knowledge-sharing networks, they are more active in

learning and acquiring new knowledge; therefore an individual’s ability to adapt to different

operations and business environments can be improved. To develop a firm’s innovation

10
 capability, the individual’s perception of opportunities to productively change existing

routines or resource configurations, their willingness to undertake such change and their

ability to implement these changes determine flexibility in product development processes

and outcomes. Therefore, a firm should develop knowledge acquisition processes so that

individuals are sufficiently motivated to take the initiative, encouraged to be involved in

exploitative processes built upon existing knowledge and take actions involving adaptation to

new opportunities.
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In particular, SMEs depend heavily on knowledge exploration and exploitation by

partnering with other firms in the business network due to the SMEs’ limited internal

knowledge base and capabilities (Higgins, 2008; Valkokari and Helander, 2007). That is,

SMEs can enhance their existing knowledge base and capabilities from knowledge

exploration. Liao et al. (2003) empirically investigated growth-oriented SMEs and concluded

that development of capabilities in external knowledge acquisition does improve their

internal knowledge dissemination and organizational responsiveness. According to Valkokari

and Helander (2007), strategic business networks contribute to the efficiency of knowledge

utilization in SMEs. In a study of SMEs, Moreira (2009) found that learning was used to

improve the competitive position of suppliers through strong interactive-oriented capabilities.

Because knowledge is so often experiential in nature, it is through cooperative decision

making and problem solving that a virtual knowledge community will be formed in which the

inter-firm knowledge capabilities can be developed. In summary, knowledge acquisition

facilitates the development of SMEs’ organizational routines that coordinate the learning

11
 process, and further foster innovation. Therefore, it provides a great influence on innovation

performance in SMEs.

H1: Knowledge acquisition is positively related to the product innovation flexibility of

SME’s.

Information capability and knowledge acquisition

High information capability enables intensive and effective information dissemination about

plans, requirements, and status along the supply chain so that participants can share and
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exploit existing knowledge and further create new knowledge. By effectively sharing and

quickly disseminating information, participants along the supply chain are motivated to

pursue opportunities in new and potentially effective ways. For example, by surveying

suppliers of one auto manufacturer, Perez and Sanchez (2001) report that firms who want to

understand and implement just-in-time delivery were collecting and disseminating

information from the supplier side such as production planning, quality control methods, and

the cost structure of each production stage. These technical enablers create synergies between

individuals’ knowledge that enhances or reshapes capabilities at the firm level, which will

enable the firms’ involvement in knowledge acquisition from outside the firm.

Many formal knowledge management approaches focus on technological systems-based

capabilities that are costly and are designed specifically for the larger organizations. Maguire

et al. (2007) investigated how SMEs were using information and communication technology

(ICT) to gain competitive advantage. The results indicated that SMEs view ICT as playing a

useful role in cost reduction and service quality. ICT is not utilized strategically since

managers of SMEs have more concerns about operational issues than managers in large firms

12
 (Doherty et al., 2013). In essence, there is a broad collection of ICT, and information

capability can play a variety of roles to support a firm’s knowledge management processes

such as data mining and business intelligence (Maguire et al., 2007). To apply and integrate

them into an SME’s business processes platform is not found to be widespread due to the lack

of resources and skills to do so (Maguire et al., 2007). SMEs would benefit from establishing

suitable channels for rapid search, access and retrieval of information to support collaboration

and communication across organizational boundaries. Supported by strong information

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capabilities, SMEs generally find it easier to communicate with suppliers and engage in joint

problem solving, encouraging more collaborative knowledge acquisition relationships.

Having better information capability that results in more sharing and dissemination can

therefore be an advantage for SMEs to acquire knowledge. Based on the above discussion,

we would therefore expect:

H2: Information capability is positively related to the knowledge acquisition of SME’s.

Relationship quality and knowledge acquisition

Knowledge acquisition can be regarded as a system involving a set of activities that facilitate

inter-unit knowledge exchange and creation of new knowledge (Chow and Chan, 2008). For

knowledge acquisition to work there must be reciprocity between the parties and the firm

must emphasize the interactive orientation to help the supplier capture, share and apply

knowledge (Moreira, 2009). A certain level of trust must be available when firms enter into

partnerships. Trust lies in the structure and content of the actors’ social relations. Its effects

flow from the information, influence, and solidarity that it makes available to the actor (Adler

and Kwon, 2002: 23). For example, the results from Choi et al. (2008) show that trust and

13
 reward are significant social enablers that have positive influence on knowledge sharing.

Larsen (1992) indicates that trust can also incent parties to innovate, experiment, and take

risks in sharing information. In summary, the quality of the relationship between a firm and

its suppliers should be positively associated with knowledge acquisition because it improves

the ability of the parties to exchange information and increases mutual understanding

between the parties.

Social capital is an important source for the creation of inimitable value-generating

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resources that that are inherent in a firm’s network of quality relationships (Hansen, 1999;

Wu, 2008). This is particularly true with SMEs for whom the development of shared goals

and mutual expectations may be critical to their survival (Fink et al., 2009; Zhou et al., 2007;

Schumacher, 2006). For large firms, relationship quality is not as critical to the partnership;

large firm interactions are more reliant on contracts than the interpersonal networks that can

arise between SMEs (Schumacher, 2006). Dealing with larger firms tends to be more

complex, which diminishes the ability to translate expectations into easily monitored

agreements (Fink et al., 2009). SMEs, on the other hand, rely more on cooperation and

commitment to the partnership; both parties align their behavior to the goals of the

partnership, thus strengthening the relationship quality between them (Fink et al., 2009).

Consequently, although the quality of the relationship is important to the creation of

knowledge acquisition in all firms, this relationship is more critical in SMEs. Thus, we would

expect that:

H3: Relationship quality is positively related to the knowledge acquisition of SME’s.

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 Mediating effect of knowledge acquisition

The first three hypotheses link information capability and relationship quality with

knowledge acquisition, and knowledge acquisition with product innovation flexibility.

Implicitly, this suggests that both relationship quality and information capability affect

product innovation flexibility through their effects on knowledge acquisition. Information

capability is critical to product innovation flexibility as it enables the firm to get access to

extensive information sources along the supply chain which enhance the options available to
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reduce uncertainty and to facilitate changes in design and manufacturing processes.

Transformation of a strong information capability into flexible product innovation outcome

requires an effective mechanism to internalize valued information gained from one context to

another. “Learning by doing” is the major concern in this kind of mechanism. Thus,

knowledge acquisition defined in this study conditions a firm’s ability to respond to

information quickly and translate it into diverse sets of processes.

High quality interorganizational relationships are efficient for accessing high quantity

and quality of knowledge and information. They also encourage social interaction that

supports the dynamic innovation process. Recent studies have emphasized approaches to

achieve innovation success through well-coordinated efforts of various members in the

supply chain. Jayaram et al. (2011) showed empirical evidence that the supplier’s

involvement in product design and innovation has significant positive influence on

innovation flexibility. Other studies suggested that a close relationship with suppliers also

plays a role in increasing innovation flexibility (Narasimhan et al., 2004; Sanchez and Perez,

2003). Innovation involves a great amount of tacit knowledge, which cannot be fully

15
 articulated and needs to be experienced. It is through knowledge acquisition consisting of

social interactions that firms can get access to external knowledge and extra insights in how

to use knowledge effectively for competitive advantage (Yli-Renko, et al. 2001).

Relationship quality and information capability are the building blocks that an organization

utilizes to acquire the knowledge it needs for innovation flexibility. The knowledge

management process, on the other hand, allows the knowledge that has been captured to be

utilized by a firm to adapt to changing environmental conditions. Thus, we propose the

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following:

H4a: Knowledge acquisition mediates the relationship between information capability

and product innovation flexibility.

H4b: Knowledge acquisition mediates the relationship between relationship quality and

product innovation flexibility.

Methodology

Measurement instrument development

To ensure content validity in this study, we draw heavily on literature that has dealt with

knowledge management, innovation management, and flexibility. Survey measures came

from construct definitions generated by a literature review of relevant research. All the

measurement items were on a five-point Likert and are summarized in the Appendix.

Knowledge acquisition (KA)

We developed multi-item scales of knowledge acquisition through a review of knowledge

management literature. Gold et al. (2001) view collaboration as a variety of linkages between

16
 organizations for accumulating knowledge. Following this work, we measured knowledge

acquisition using four items including the process of collaboration in inter-firm contexts such

as problem solving and supplier involvement.

Product innovation flexibility (PIF)

Several alternative measures for product innovation flexibility have been proposed in the

literature. Obvious measures capture four attributes of product innovation flexibility: (1)

range-number attribute reflected by the average number of new products introduced into
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production (Koste et al., 2004; Sethi and Sethi, 1990); (2) range-heterogeneity differentiated

by the variety of product newness (Koste et al., 2004; Ramasesh and Jayakumar, 1991); (3)

mobility attribute addresses the penalties in terms of time and costs incurred in product

development (Koste et al., 2004; Singh and Sushil, 2004); and (4) uniformity attribute

captures the degree of impact on production system performance outcomes when a new

product is introduced in the production system (i.e., efficiency, profitability, and productivity)

(Koste et al., 2004). The attributes of range have an outward-looking perspective and are

concerned with the extent to which the market requirements are satisfied. Mobility and

uniformity, on the other hand, are inward-looking factors that reflect how well the resources

are utilized in the development of flexibility capability.

Information capability (IC)

Information capability was operationalized based upon studies in information processing and

dissemination. Our study is most interested in the kind of inter-organizational information

disseminated that would enable firms to appreciate the value of information capability to a

firm’s information sharing effectiveness. The measurement scale involves the extent of speed

17
 that the information capability would allow a firm to share information about plans,

requirements, and status; and the number of ways and variety of information can be spanned

seamlessly across between organizations.

Relationship quality (RQ)

Following the work of Yli-Renko et al. (2001), we measured relationship quality with the

following three items: (1) The relationship our company has with major suppliers is

something we are committed to; (2) Our major suppliers are willing to provide assistance to
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us without exception; and (3) We are delighted with our relationships with our major

suppliers.

After items were generated through a comprehensive literature review, a pre-test was

conducted through structured interviews with four supply management professionals in the

Midwest region of the United States and three supply chain management faculty members.

By incorporating their feedback, items were modified on clarity and consistency with

construct definitions.

Large-scale data collection

The data were collected by surveys conducted over the internet (the web-based method).

Since the research focused on knowledge management and innovation in the context of the

supply chain, the sample respondents were expected to have knowledge or experience in

supply management strategies and operations. The target respondents were CEOs, presidents,

vice presidents, managers and directors in purchasing, manufacturing and supply chain

management in the following industries identified at the two-digit SIC level: Apparel and

Other Textile Products (SIC 23), Rubber and Plastics (SIC 30), Fabricated Metal Products

18
 (SIC 34), Industrial and Commercial Machinery (SIC 35), Electronic and Other Electric

Equipment (SIC 36), and Transportation Equipment (SIC 37).

We used two databases to locate our initial set of companies. Lead411 is a web-based

application suite that provides detailed company information and data. RSA Teleservices is a

leading direct marketing consulting company that provides executive contacts, outsourced

executive lists and business-to-business mailing lists. This initial set was further refined by

removing duplicated names and those names with no email address. The final target
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population consisted of 1,796 names in business with fewer than 250 employees.

An email was sent to the target population describing the purpose of the research, and

asking them to participate in the survey. Potential respondents were directed to reply to one

of the authors with a blank email, thus implying their consent to participate in the study. To

those who responded to the initial email, we sent a follow-up email with directions on how to

complete and return the survey. Of the 1,796 targeted names, 207 messages were unable to

be delivered, leaving a valid sample of 1,589. After three waves of invitation, a total of 118

respondents either agreed to participate or received the survey for completion, yielding 92

usable responses.

The response rate compares favorably with recent purchasing and operations

management papers that have used a new survey quality tool supported by the American

Association for Public Opinion Research (AAPOR) (2006). The AAPOR defined response

rate as the proportion of all cases completed to the number of eligible units contacted. In an

application to operations management, Swink et al. (2005) and Schroeder et al. (2002)

defined response rate as the number of completed interviews divided by the number of

19
 individuals who agreed to participate in the survey. Applying this methodology to our study,

we received 201 usable surveys out of 288 respondents, for a 70% response rate. Follow-up

calls to the non-respondents indicated that they did not respond either because they did not

have enough time or knowledge to complete the survey, or their company did not have supply

chain flexibility issues.

There were no significant differences found in the proportion of industry

representation between the original sample of 1,589 and the 92 respondents (

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χ 2 = 3.88, df = 6, p > 0.1 ). Since non-response bias is a continuum, ranging from fast

responders to slow responders, non-response bias was analyzed by comparing the proportion

of SIC code respondents from the initial and second wave ( χ 2 = 7.21, df = 6, p > 0.1 ) and

respondents from the second and third wave ( χ 2 = 5.36, df = 6, p > 0.1 ). Results indicate no

significant difference between the times of response.

Common method variance (CMV)

The survey required the respondents to answer questions on both the dependent and

independent variables; therefore, the common method bias may be a concern. The common

method bias was first tested using Harman’s one-factor test recommended by Podsakoff et al.

(2003). Four factors with eigenvalues above 1.0 were drawn out in an unrotated explorative

factor analysis with all measurement items of PIF, KA, RQ, and IC entered. The percentage

of variance explained by all four factors is 68.8% while the first unrotated factor accounts for

31.1% of the variance, which is not the majority of the total variance. To further test the

possibility of CMV, a confirmatory factor analysis was conducted by linking all items from

all the constructs in the study to a single factor analysis. The results of this model do not fit

20
 the data in an acceptable way). The model’s fit indices of χ2(df=119)=566.14, RMSEA=0.203,

GFI=0.53, CFI=0.41, and NFI=0.37 were significantly worse than the model when the

common factor removed and all items were assigned to their theoretical factors

(χ2(df=109)=172.66, RMSEA=0.08, GFI=0.84, CFI=0.92, and NFI=0.81). Based on these

analysis results, we concluded that the common method bias does not appear a problem.

Validity and reliability

The instruments’ validity and reliability were assessed using the 92 responses. In this study,
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content validity is ensured by using procedures of a comprehensive review of the literature

(Nunnally, 1978). Beyond assurance of content validity, convergent validity is confirmed by

examining the three conditions suggested by Fornell and Larcker (1981). First of all, all

factor loadings in confirmatory factor analysis are statistically significant at p < 0.001. The

average variance extracted (AVE) for all constructs exceed 0.50. Finally, the reliabilities for

each factor exceeded 0.70, satisfying the general requirement of reliability. Confirmatory

factor analysis was also conducted to assess the convergent validity by evaluating goodness-

of-fit statistics of the first-order factor model of innovation flexibility, supplier flexibility,

knowledge acquisition, relationship quality, and information capability (Hair et al., 1998).

First-order factor models are those in which correlations among the observed variables can be

described by a smaller number of latent variables, each of which may be considered to be one

level; these factors are termed primary or first-order factors. Several indices are used to

evaluate SEM models. Models with goodness-of-fit index (GFI), normed fit index (NFI), and

comparative fit index (CFI) scores between .80 and .90 are considered to have reasonable

model fit; models with scores of .90 or above are considered to have good model fit

21
 (Joreskog and Sorbom, 1989). Root mean square error of approximation (RMSEA) values

less than .05 indicate good fit; and values as high as .10 represent acceptable model fit (Hair

et al., 2006). The normed chi-square (χ2/df) value less than 3.0 indicates a reasonable fit and a

value less than 2.0 shows a good fit (Papke-Shields et al., 2002).

Discriminant validity measures the independence of each dimension in a construct

(Bagozzi and Phillips, 1982). It is examined with the confirmatory factor analysis. In

addition, to fully satisfy the requirements for discriminant validity, the square root of AVE
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for each construct should be greater than the correlations between the constructs and all the

other constructs.

The reliability of the items comprising each construct was examined using

Cronbach’s alpha. Reliability is an assessment of inter-item consistency. The generally

agreed upon lower limit adequate for Cronbach’s alpha is .70 or higher (Robinson and

Shaver, 1973).

Analysis and results

Measurement models

Table 1 reports descriptive statistics and the correlation matrix. On a five-point scale, the

means range from 3.48 for product innovation flexibility and 3.91 for relationship quality. All

factor intercorrelations were significantly different from 1.0 at the .01 significance level.

Table 1 also provides psychometric properties of the measurement scales. For

convergent validity, AVE values are reported along the diagonal in Table 1. They are all

above .50, suggesting adequate convergent validity for these constructs. All standardized item

factor loadings in the measurement model are above 0.70 except for items PIF1 and PIF2

22
 with marginal values at 0.68 and 0.66, respectively (Figure 2). The reliability values found

are all greater than .80, which confirms satisfactory convergent validity. Figure 2 depicts the

measurement model of this study. This measurement model was judged to have good model-

data fit with χ2 = 141.23 for 84 degrees of freedom, chi-square per degrees of freedom = 1.68

(p < .001), RMSEA = 0.087, GFI = .84, NFI = 0.81, and CFI = 0.92. All first-order factor

model fit indices meet the recommended criteria, also demonstrating good convergent

validity.
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The square root of AVE for each construct is greater than the correlations between the

constructs and all the other constructs, indicating satisfactory discriminant validity of all the

constructs. Discriminant validity is also supported by factor loadings that are all significant at

the 0.001 level. The reliability values found are all greater than .80, which are considered

good reliability (Nunnally, 1978).

[Insert Table 1 Here]

[Insert Figure 2 Here]

Hypothesis assessment

The structural equation modeling (SEM) technique was used to evaluate the research

framework. Including all 92 SME samples, all hypotheses were supported except hypothesis

2 and hypothesis 4a. Hypotheses 1, which posits that knowledge acquisition would facilitate

product innovation flexibility, is supported (β = .31, p<0.05). As expected, relationship

quality positively influences knowledge acquisition. The path coefficient of the relationship is

.32 with a p-value less than 0.01. However, the results do not support hypothesis 2, relating

23
 information capability and knowledge acquisition (γ = .17, p = 0.167). There is no

statistically important evidence to conclude that information capability would have a positive

impact on knowledge acquisition for SMEs. Figure 3 depicts the path coefficients.

[Insert Figure 3 about here]

Hypotheses 4a and 4b predicted the mediation effect of knowledge acquisition in the

relationship between information capability and product innovation flexibility, and the

relationship between relationship quality and product innovation flexibility. We followed the
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procedure suggested by Holmbeck (1997) to test the mediation effect (Table 2). To test

hypothesis 4a, model 1 examines the direct relationship between information capability and

product innovation flexibility. The results show that the relationship is significant (

β = .33, p < 0 .05 ). In model 2, the significant path coefficients between information

capability and knowledge acquisition (γ = 0.25, p < 0.1) and between knowledge acquisition

and product innovation flexibility (β = 0.31, p < 0.05) provide evidence to support hypothesis

H4a. A direct path from information capability and product innovation flexibility was added

and tested for significance in model 3. The results show that the path coefficient between

information capability and product innovation flexibility is reduced to 0.28 (p < 0.05). A

comparison was made between the fit of model 2 and model 3. The Chi-square was

2
significant ( ∆χ = 5.44, p < 0.05 ), suggesting that Model 3 has a better fit. Results

confirmed that knowledge acquisition partially mediates the relationship between information

capability and product innovation flexibility, yielding partial support for H4a.

The same approach has been followed to test hypothesis H4b (Table 2). Model 5

includes the mediator but the path from relationship quality to product innovation flexibility
24
 is constrained at zero. The model also provides an adequate fit to the data. Model 6 is

different from Model 5 in that the relationship quality to product innovation flexibility path is

not constrained. The Chi-square test indicates that Model 6’s overall fit is significantly better

2
than Model 5 ( ∆χ = 6.99, p < .01). In addition, the path coefficient between relationship

quality and product innovation flexibility is reduced from .20 (p < 0.1) in model 4 to .13 (ns)

in model 6 when the mediator is taken into consideration, and the relationship is not

significant in model 6. These results provide support for full mediation effect of knowledge
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acquisition in the relationship between relationship quality and product innovation flexibility.

[Insert Table 2 about here]

Discussion

Theoretical Contribution

Recent studies have urged a research focus on investigating the use of external sources of

knowledge to enhance the innovation performance in SMEs as they are more likely to look

outside the organization for knowledge (Lasagni, 2012; Purcarea et al., 2013; Perez-Araos et

al., 2007). In addition, research has been encouraged on the exploration of mechanisms that

facilitate the transformation of knowledge from outside a firm into internal-firm innovation

outputs and how SMEs can proactively improve these mechanisms (Alegre et al., 2013; Maes

and Sels, 2014). Responding to this call in this study, we have contributed to the literature in

several ways by examining the role that knowledge acquisition plays in creating greater

product innovation flexibility in SME’s.

First, the significant path relationship for knowledge acquisition shows that effective

mechanisms for acquiring knowledge from outside the firm plays a key role in enhancing an

25
 SME’s flexibility performance in product innovation. Firms that reported a greater extent of

knowledge acquisition, such as joint problem solving with suppliers, supplier involvement in

new product development process and collaborative planning and continuous improvement

programs with major suppliers, also reported higher levels of product innovation flexibility.

As knowledge acquisition is a complex process that includes intensive interactions with the

suppliers, SMEs are able to recognize pertinent knowledge and learning opportunities

through “learning by doing.” Also, knowledge acquisition facilitates understanding of market

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trends, technological changes, and the underlying product innovation process. SMEs should

adopt knowledge acquisition as a means of gaining insights into how they can strategically

allocate resources, exploit existing knowledge, and create new knowledge to quickly meet

customer needs in a cost-effective way.

Second, the results of this study expand previous knowledge management research in

SMEs by investigating knowledge acquisition as a relationship mediator between information

capability, relationship quality and product innovation flexibility. The partial mediation effect

of knowledge acquisition on the relationship between information capability and product

innovation flexibility empirically illustrates the importance of developing and maintaining an

effective external knowledge acquisition process in facilitating different information and

knowledge transformation methods. Strong information capability can provide a variety of

channels for transferring information and eliminating physical distance barriers. Much of the

knowledge needed and generated in product innovation process is tacit knowledge, meaning

it is essentially personal in nature. Therefore, it is more complicated and difficult to

communicate or share with others. Consequently, for SMEs, effective acquisition processes at

26
 the organizational level are necessary to create opportunities for learning and creating new

knowledge.

Results confirmed that the relationship between relationship quality and product

innovation flexibility is fully mediated by knowledge acquisition, which implies that supplier

relationship is dependent upon external knowledge acquisition to appropriately affect product

innovation flexibility. This dependency can be explained by the complex and inherently

dynamic processes of product innovation, which involves ambiguity and uncertainty. In high
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quality relationships, SMEs tend to believe that a supplier can provide valuable inputs to

reduce complexity and uncertainty in the product innovation process. It is the effective

knowledge acquisition process that facilitates a high level of interaction resulting in further

dissemination and application of knowledge at the firm level. Supply management

professionals in SMEs should realize that, although relationship quality with major suppliers

is important strategically, they must also support initiatives for effective knowledge

acquisition in order to achieve flexible production innovation.

Third, due to limited resources and capabilities, SMEs do not necessarily show

consistency in their adoption of knowledge management practices and performance

implications in the context of the supply chain. There has been growing attention to the social

network perspective in knowledge management. Particularly within SMEs, knowledge

management practices usually take place through interaction and collaboration on an informal

basis. Thus, in the context of supply chain, this research contributes to the literature by

illustrating knowledge acquisition as a collection of social practices consisting of supply

chain participants containing diverse sets of knowledge.

27
 The results also provide empirical evidence that for SMEs, quality relationship plays a

much more critical role in facilitating knowledge acquisition than information capability. As

knowledge-based competition and innovation have become key strategic issues for many

industries, our study suggests that the concept of social capital should be emphasized in

knowledge-based research on SMEs.

Practical implications

Our research also provides important managerial implications. In today's increasingly

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globalized economy, SMEs are now considered to be the major source of dynamism and

innovation and many SMEs are increasingly dependent on innovation in order to prosper, and

indeed to survive in some industries. Various studies have been carried out on the importance

of knowledge management in innovation, especially using and transferring knowledge

effectively across the organization (Kaminski, 2008; Murray and Chao, 2005). While it is

good that SMEs recognize the need to develop effective knowledge management processes,

they are disadvantaged in this area due to resource constraints.

This study shows empirical evidence that in order to build flexibility in product

innovation for long-term competitive advantage in SMEs, the emphasis should be on

developing effective processes to effectively acquire knowledge from outside the firms

through social network. An effective external knowledge acquisition process facilitates

transformation of high quality supplier relationship and information capability into

innovation flexibility.

The results indicate that supplier relationship quality is an important enabler of

external knowledge acquisition but do not indicate a significant relationship between

28
 information capability and knowledge acquisition. For SMEs, a lack of trained staff and

financing to maintain information capability has led managers to question the degree of

technological involvement for a successful knowledge management process. It is not unusual

to see failure of expensive investments in new management information systems in SMEs

(Perez-Araos et al., 2007). The insignificant relationship between information capability and

knowledge acquisition can be explained by SMEs not recognizing the strategic value of

information capabilities and only focusing on operational efficiency in SMEs. It may be

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difficult for SMEs to see the role of information capability as part of future knowledge

management initiatives. Knowledge management can be a difficult task if technology-based

processes are not fully utilized (Doherty et al., 2013). Possessing valuable technological

systems enables effective information dissemination in a supply chain but doesn’t guarantee

automatic benefits in knowledge management, and consequently effective knowledge

exploration and transfer often cannot be extracted from them. It is how the users react to a

collection of information that contributes to knowledge creation and exploitation. On the

other hand, because of their size, SMEs cannot wield more power over their suppliers through

contracts. SMEs, without that luxury, must rely more on a high quality relationship that

evolves from the interpersonal connections with their suppliers to maximize the value gained

from a buyer-supplier relationship. It is also an effective way to avoid other unnecessary

resources being tied up undertaking inefficient knowledge exploration. Consequently, it is

recommended that SMEs actively build up a long term and mutually trusted relationship that

allows them to make collaborative innovation efforts and to be responsive to environmental

changes as a team. It is critical for SMEs to have coordination and a social interaction

29
 structure so that the attitudes and values of external knowledge can be brought to the work

environment.

Limitations and future research

All research is subject to limitations. This study focuses on only one step in the knowledge

management process and is beneficial for future research to explore how other knowledge

management activities contribute to the improvement of flexibility capability in innovation

for SMEs.
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Although there was no significant relationship found between information capability

and production innovation flexibility in SMEs when testing the overall model, the

relationship was partially mediated by knowledge acquisition. This is an interesting finding

and calls for additional research. Information capability is highly dependent on information

systems (IS) and information technology (IT). IS and IT enable information visibility and

distribution in diverse ways for making operational, tactical, and strategic decisions. Not

surprisingly, SMEs are generally not taking full advantage of information capability or

exploiting business benefits (including product innovation) of IS and IT effectively because

they are lacking resources and/or skills. Our study suggests that SMEs would benefit from

assistance in the development of an effective knowledge management process. It is the

knowledge capacity that enables a firm to recognize the value of information, use necessary

information capability to search and collect information in an efficient way, and react to

information effectively in innovation process. Therefore, a possible research extension would

be to investigate other knowledge management practices that can overcome resource

constraints to transform information capability into flexible product innovation.

30
 Additional empirical study is also needed to identify contingency factors, both within

and outside the firm. For instance, it would be interesting to examine the interactive effects of

environmental uncertainty, distinct cultural factors and knowledge acquisition on product

innovation flexibility in SMEs. Lastly, different types of knowledge may hold different

implications for knowledge acquisition and other knowledge management processes, which

also deserve further attention.

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31
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39
 Information Capability
H2 (+)

Knowledge H1 (+) Product Innovation

Acquisition Flexibility

H3 (+)
Relationship Quality

Figure 1. Conceptual Framework

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 0.83 PIF1

0.72 PIF2 0.68

0.66
Product Innovation
0.54 PIF3 0.81
Flexibility
0.82
0.58 PIF4 0.76

0.81 PIF5 0.29

0.37 KA1
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0.83
0.43 KA2
0.83 Knowledge 0.22
0.72 Acquisition
0.76 KA3
0.77

0.81 KA4 0.34

0.36

0.28 RQ1
0.77
Relationship 0.23
0.20 RQ2 0.87
Quality
0.89
0.21 RQ3

0.31

0.36 IC1
0.84
Information
0.34 IC2 0.82
Capability
0.79
0.47 IC3

Chi-square=141.23, Chi-square/df=1.68, p-value<0.001, RMSEA=0.087, GFI=0.84, CFI=0.92, NFI=0.81

Figure 2. The measurement model (standardized solutions)

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Figure 3. Hypotheses Test Results

 Table 1
Descriptive statistics, inter-construct correlations, Cronbach’s alpha and average
variance extracted.

Construct Mean S.D. α IF KA RQ IC

Innovation
3.48 1.05 0.86 0.56
Flexibility (IF)

Knowledge
3.58 0.92 0.81 0.28** 0.62
Acquisition (KA)

Relationship
3.91 0.83 0.87 0.18 0.38** 0.71
Quality (RQ)
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Information
3.57 1.02 0.82 0.30** 0.25* 0.29** 0.67
Capability (IC)

Average variance extracted (AVE) is reported along the diagonal.

**p<0.01
*p<0.05
 Table 2. SEM results for mediation effect of knowledge acquisition

χ2
Model df GFI CFI RMSEA
Model 1
(IC → PIF) 31.67 19 0.92 0.96 0.086

Model 2
(IC → KA →PIF) 96.17 52 0.86 0.90 0.081

Model 3
(IC → KA →PIF & IC →PIF) 90.73 51 0.87 0.91 0.073

χ2
Model df GFI CFI RMSEA
Model 4
38.71 19 0.91 0.95 0.087
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(RQ → PIF)
Model 5
(RQ → KA →PIF) 100.26 52 0.86 0.91 0.083

Model 6
(RQ → KA →PIF & RQ →PIF) 93.27 51 0.86 0.91 0.072
 Appendix

Item Code Questionnaire Items

Product Innovation Flexibility (PIF)

We can introduce a high number of new products into production
PIF1
each year
PIF2 We have capability to design an extensive variety of new products
PIF3 We are able to develop and introduce new products in a short time
PIF4 We are capable to develop new products with low average cost
We can introduced new products into the production system
PIF5
without affecting the production efficiency

Knowledge Acquisition (KA)

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KA1 We regularly solve problems jointly with our major suppliers

We include our major suppliers in our planning and goal-setting
KA2
activities
We have continuous improvement programs that include our major
KA3
suppliers
We actively involve our major suppliers in new product
KA4
development processes

Relationship Quality (RQ)

The relationship our company has with major suppliers is
QR1
something we are committed to
Our major suppliers are willing to provide assistance to us without
QR2
exception
QR3 We are delighted with our relationships with our major suppliers

Information Capability (IC)

IC1 We have many ways to share information with our major suppliers
We can share many kinds of information (e.g., text, video,
IC2
database, etc.) with our major suppliers
We are able to exchange information with major suppliers in a
IC3
short time