The Impact of Knowledge Creation on Organizational Resilience towards Organizational Performance

The impact of Knowledge Creation on Organizational Resilience

towards Organizational Performance

Ali Alharthy

Computer Technology Department,

Madinah College of Technology, Technical and Vocational Training Corporation Riyadh, Saudi Arabia

School of Systems, Management and Leadership University of Technology Sydney

Sydney, Australia

Osama Sohaib

School of Systems, Management and Leadership University of Technology Sydney

Sydney, Australia

Igor Hawryszkiewycz

School of Systems, Management and Leadership University of Technology Sydney

Sydney, Australia

Abstract

Due to complex situations faced by many business organizations, knowledge creation has become a source of sustained competitive advantage. This study investigates the influence of knowledge creation process (KCP) for enhancing the organizational resilience capabilities namely – adoptability, agility, and innovation towards organization performance based on the balanced scorecard. Data were collected from the Saudi banks. The study results revealed KCP positively influence the organizational resilience capabilities. The results also showed that the resilience capabilities (agility and innovation) have a positive significant influence on banking performance. However, the relationship between adoptability and organization performance is not significant in the Saudi context.

Keywords: Balanced scorecard, organization resilience, knowledge creation, knowledge sharing, organization performance, PLS-SEM

1.

Introduction

Knowledge management is recognized as a primary factor in enhancing the resilience of organizations [1-3]. For example, empirical studies by [3-4] found that that knowledge management is positively and significantly associated with organizational resilience. The application of knowledge management initiatives drives financial institutions, including banks, to grow and move towards increasing business excellence [5]. Today’s banking system is not robust and resilient in the developing countries. The banking system lacks the tangible and intangible resources to make a useful contribution to a community’s economy, or might not be trusted, particularly in light of recent global recessions [6]. The banking system may need to adopt an innovative approach to the delivery of efficient services while coping with environmental changes such as global financial disorders which can overcome, as much as possible, the ever-changing competitive and uncertain global environment. New approaches or strategies are required that can successfully produce and transfer knowledge, help in the

management of skills and experience, and apply it in a way that enhances organizational performance and resilience [7]. The resilience refers to the capacity of an organization to survive, adopt, and grow in the face of uncertain conditions [8-9]. Knowledge creation and knowledge sharing processes have been shown to be a key determinant of organizational performance, organizational resilience and competitive advantage in both the public and private sectors [4-10]

With the increasing significance of developing resilience capabilities in an organization, the question as to how to develop resilient business for it to succeed and survive in uncertain environments where change demands attention becomes crucial. In this context, knowledge is recognized as a primary factor in helping organizations to have better chances of survival with adequate knowledge resources for improving the resilience capabilities [1-3]. Although, knowledge management and organizational resilience are each discussed for ensuring organizational survival and success in turbulent business environments [9, 11]. However, there is a need to investigate the role of knowledge creation process (KCP) in developing the organizational resilience capabilities, which in turn, influence organizational performance. Therefore, the aim of this study is to examine the relationship between KCP, organizational resilience, and organizational performance in the Saudi banking sector. Following the main aim, the research question this study address is: What is the impact of knowledge creation process on organization resilience towards organization performance?

The remainder of this paper is structured as follows. Section 2 provides a theoretical background and presents research model with hypotheses, followed by research methodology in Section 3. Section 4 presents the findings of the study. Finally, section 5 presents discussion and conclusions with limitations and direction for further research.

2.

Literature Review and Research Model

Nonaka and Takeuchi [12-13] proposed a SECI framework of knowledge creation, which included four processes: socialization, externalization, combination, and internalization. According to Nonaka and Takeuchi [13], organizational knowledge creation is based on two dimensions. The first dimension is related to the interaction between explicit and tacit knowledge. The second dimension relates to the conversion of knowledge from individuals to groups and further to the organization. The two dimensions are related to four processes - socialization, externalization, combination, and internalization [12-16].

Socialization is a process that focuses on tacit to tacit knowledge linking throughsharing experiences among individuals to create shared mental models and technical skills. When interacting with other people, individuals can obtain tacit knowledge through imitation, observation, and mentor as well as active practice. Externalization is the initial step in having tacit knowledge transformed into explicit knowledge. Considering a process improvement perspective, externalization practices enable people to express their tacit concepts and ideas explicitly. The combination process involves the utilization of social processes in combining various parts of explicit knowledge that information systems or individuals hold. The exchange and combination of explicit knowledge among individuals take place via exchange mechanisms such as telephone conversations, meetings and emails. Internalization is the process of dealing with the transformation of explicit knowledge into tacit knowledge. Internalization involves individuals absorbing tacit knowledge through organization and group explicit knowledge.

Although each of these modes might create knowledge independently, the organizational knowledge creation processes only happen when all the four modes are dynamically interacted and organizationally managed. The appropriate application and management of the SECI framework in organizations have had more opportunities for creating and sharing knowledge in practice [14-15].

2.2. Organization Resilience

The concept of resilience, originating from the Latin resilire - ‘to leap back’ can be found in a wide variety of academic disciplines such as ecological science, psychology, systems engineering, organizational sciences, economics, disaster management, management, security, and supply chain management [17-18]. In the organizational context, Zaato and Ohemeng [19] define organizational resilience as “the capability of an organization to anticipate key events from emerging trends, constantly adapt to change, and rapidly bounce back from disaster, when it occurs”. Vossen [20] has identified three major characteristics that contribute to the resilience of the organizations: adoptability, innovation, and flexibility.

This study leads us to identify innovation, agility, and adoptability as the key resilience capabilities [21- 24]. Adoptability is described as the capability of an organization to continuously adapt and adjust to changes in the face of change environments while innovation is the ability to offer a variety of innovative products and services rapidly; whereas agility is the ability of an organization to continually sense the business environment for threats and opportunities and respond quickly and successfully.

2.3. Organizational Performance

Kaplan and Norton [25-26] observe that financial measures cannot be considered as the only indicators of how well a business organization is performing. Organizations can only perform well, if all the system components, people, operations, customers, management, and partners are integrated and interconnected [27]. Furthermore, the organization future performance can be predicted in a more efficient way if non-financial measures are also employed in the organizations’ performance measurement [27]. It is critical to use a tool that can measure organizational performance comprehensively. The balanced scorecard metric is a powerful measurement tool for achieving strategic planning and alignment as it integrates both financial and non-financial aspects of organizational performance [25 – 26, 28].

A balanced scorecard compared with traditional financial measurements is a complete measure of organizational performance. It includes four perspectives: the financial perspective, the customer perspective, internal business process perspective, and the learning & growth perspective. According to Huang [28], organizations can link long-term strategic objectives to short-term actions by combining financial and non-financial measures, which in turn, will enable their managers to consider various reciprocal relationships and causal effects.

In the context of this research study, the concept of Kaplan and Norton’s [25] balanced scorecard adopted to measure organizational performance since it enables a thorough evaluation of organization performance, using both the perspectives of financial and nonfinancial. Figure 1 shows the research model. As discussed in above, sections knowledge creation process is a related to various aspects of organizational resilience and performance in specific contexts, such as in business [29].

2.4. Hypotheses Development

Knowledge creation process and adoptability

Several studies explore the relationship between knowledge management and adoptability. Such as [1-3] have investigated the relationship between knowledge creation process and adoptability. The findings of previous research (such as [1-3]) suggest that knowledge creation process have a positive influence on organizational adoptability. Therefore, we hypothesize H1. There is a strong relationship between knowledge creation process and adoptability in Saudi banks.

Knowledge Creation process and Agility

The knowledge creation process renders a greater reach and richness in more knowledge, which enables agility capability in the organization [30]. There is wide support in the literature that agility capability becomes stronger with greater knowledge influence and abundance promoted by knowledge creation process [10, 30]. The findings of previous research (such as [10, 29-30]) revealed that knowledge creation has a positive influence on its agility capability. Therefore,

H2. There is a strong relationship between knowledge creation process and agility in Saudi banks.

Knowledge creation process and Innovation

Constant knowledge creation process enables recognizing opportunities and formation of new ideas that lead to innovation [31]. The knowledge based on new concepts and ideas paving the way for innovation [31]. Rafaey [32] found that the knowledge creation process has a positive effect on innovation. Such as the process of socialization is connected to the novelty of an idea. H3. There is a strong relationship between knowledge creation process and innovation in Saudi banks.

Organizational Resilience and Organizational Performance

In management literature, it has been indicated that resilience capabilities influence organizations’ performances [9, 33]. To survive, organizations are required to have the ability to adapt to their ongoing changing environments, but the capability of an organization to adopt can have various effects on their performance [34]. Chakravarthy [35] pointed out that there is a close relationship between the company's ability to cope with high levels of complexity and its high adoptability, which increases its chances of survival in the long term.

H4. There is a strong relationship between adoptability and organizational performance of Saudi banks.

Agility is strongly linked to competitiveness and resilience has a strong link with the profitability of an organization. According to McCann et al. [36], the volatile behavior of the environment can be restricted if the organization is agile and resilient. Agility can enhance an organization’s competitive actions and control market risk and unpredictability [30]. Oh and Teo [23] stated that building organizational resilience as a strategic option can be achieved by enhancing the innovation and agility capabilities which gives the organization an option to pursue new opportunities that will improve their performance when the environment calls for them.

H5. There is a strong relationship between agility and organizational performance of Saudi banks.

Previous studies have indicated that innovation has a positive impact on the performance of an organization, both financial and non-financial [37]. Saunila et al., (2014) found that an innovation capability is significantly correlated with organizational performance. Therefore, we hypothesize

H6. There is a strong relationship between innovation and organizational performance of Saudi banks.

3.

Research Methodology

This study uses a survey method for data collection. In this study, previous research validated survey instruments were revised and used in order to ensure the content validity and to confirm the measures are adequate and representative. Furthermore, an expert was used to examine whether the complete survey instrument adequately measures each construct. The knowledge creation process based on Kaplan and Norton [25-26] and items were modified from Song et al. [39]. In this study, we conceptualized organizational resilience to be measured in terms of three capabilities: Adoptability, agility, and innovation. Adoptability capability was derived from [4], whereas the innovation and agility capabilities derived [23, 40]. The organizational performance was derived from [41]. Appendix A shows all items used in the study.

The survey was originally developed in English. The questionnaire was checked for wording and grammar by an academic who is a native English speaker and has had years of experience in this survey development. Though, it was required to translate the scales into Arabic to be surveyed in Saudi Arabian Banks. In order to maintain a high quality of translation to ensure the functional equivalence between the English and Arabic items, a forward translation procedure with subjective evaluation was performed. The final English/Arabic version was then used in the pilot test involving 10 participants whose first language was Arabic. The online survey was administered using the web-based software called Qualtrics. All the respondents were recruited from selected banks with the help of department HR managers. Data collection lasted from December 2016 to March 2017. 300 participants were contacted and with 240 completed the online survey. After removing the missing data, 210 surveys were used for the data analysis.

Variance-based structural equation modeling (SEM) statistical technique, such as Partial Least Squares (PLS) path modeling using SmartPLS 3.0 [42] was conducted to test the research model. Partial Least Squares (PLS-SEM) approach does not require a large sample size, does not require normality and subsequently works without distributional assumptions and with nominal, ordinal and interval-scaled variables [43-44]. PLS-SEM is now a preferred analysis technique in information systems and business research. Henseler et al. [45] proved that PLS-SEM performs better than CB-PLS-SEM in finding the true model.

Furthermore, PLS-SEM allows both formative and reflective variables to be tested together [43-44], which is the case in this study. In our research model, ‘organization resilience’ (adoptability, agility, and innovation) is modeled as reflective indicators. Whereas ‘knowledge creation process’ and ‘organization performance’ are modeled as a formative because it is a multidimensional construct. The ‘knowledge creation process’ covers various referent group socialization, externalization, combination, and internalization, while ‘organization performance’ consists of the financial perspective, the customer perspective, internal business process perspective, and the learning and growth perspective.

4.

Findings

A sample of 210 responses was used for data analysis. Most of the participants are male 120 and 90 are female. The distribution of the gender shows fairly representative of the population of employees in the selected Saudi banks. The largest age group 45% of the participants are in

the range of 26-35 years. 45% of participants had the bachelor’s level of education. Almost half of the respondents 50% had more than 5 years of work experience. Finally, concerning the participant’s job responsibilities, the majority of the participants 39% work in human resource department.

4.1. Measurement Model Assessment

The reliability and validity of the measurement models were assessed by internal consistency, convergent validity, and discriminant validity. Internal consistency is measured using Cronbach’s alpha (α), which denotes the degree to which responses are consistent across the items within a single measurement scale. The generally accepted Cronbach’s alpha value is 0.70 [43]. As shown in Table 1, the results show that all Cronbach’s alpha (α) score was above the acceptable level of 0.70. Moreover, convergent validity is measured using average variance extracted (AVE) and the composite reliability (CR). Convergent validity is established if the composite reliability (CR) value is more than the AVE and all the AVE are greater than 0.50 [43-44]. Discriminant validity measures whether a factor is different from all other factors; the square root of individual AVE should be more than any correlation between the latent variable. To demonstrate the reliability of the latent variable, the loadings of individual indicator for each factor exceeded 0.70 values and were significant at p-value < 0.05. The composite reliability (CR) coefficient, which is similar to the Cronbach’s alpha (CA) coefficient, is also used for assessing the internal consistency of a measure. In order to demonstrate internal consistency, the CR should be 0.70 or greater [51]. In this study, as shown in Table 1, all the composite reliability (CR) is greater than their corresponding average variance extracted (AVE) and the entire AVE meets the required minimum of 0.50 thereby establishing convergent validity.

“Knowledge creation process” and “organization performance” is a formative construct that cannot be analyzed in this procedure based on the Hair et al. [43-44] recommendation for formative measurement model. However, to determine the reliability of formative construct, the variance inflation factor (VIF) value was less than 5, which shows no multicollinearity.

Table 1. Reliability and Discriminant Validity

CR C-alpha AVE Adp Agl Innv KCP OP

Adoptability (Adp) 0.84 0.72 0.65 0.80 Agility (Agl) 0.82 0.74 0.69 0.61 0.83 Innovation (Innv) 0.84 0.71 0.63 0.56 0.54 0.79 Knowledge Creation Process (KCP) NA NA NA 0.60 0.52 0.55 1 Organization Performance (OP) NA NA NA 0.50 0.66 0.56 0.70 1

Notes: AVE: Average Variance Extracted, C-alpha: Cronbach’s alpha CR: Composite Reliability, Diagonal elements are the square root of AVE.

4.2. Structural Model Testing

The structural model testing is performed to test the proposed hypotheses. The significance of the path coefficient was determined using with the bootstrapping technique. A 5% significance level was employed for two-tailed test and the acceptable values are t >1.96 at p < 0.05, t > 2.576 at p < 0.01, t > 3.29 at p < 0.001. The R² value was used to measure the percentage of the variance explained by the dependent constructs in the structural model. R² values of 0.75, 0.50, or 0.25 for endogenous latent variables in the structural model can be described as substantial, moderate or weak, respectively [43]. Table 2 shows the path coefficient mean, standard deviation, t-statistics, and p-value for each of the proposed hypotheses. Figure 2 shows path testing.

Table 2. Structural Model Path Coefficients results Sample Mean STDEV T Statistics P Values

H1 Knowledge Creation Process -> Adoptability 0.61 0.04 15.02 0.00

H2 Knowledge Creation Process -> Agility 0.72 0.03 23.39 0.00

H3 Knowledge Creation Process -> Innovation 0.75 0.03 24.18 0.00

H4 Adoptability -> Organization Performance 0.03 0.05 0.54 0.59

H5 Agility -> Organization Performance 0.22 0.07 3.21 0.00

H6 Innovation -> Organization Performance 0.57 0.07 8.96 0.00

Notes: StDev: Standard deviation; *Significant at 0.05 level **, Significant at 0.01 level, *** Significant at 0.001 level

Fig. 2. Path testing

The results show that knowledge creation process has a significant positive effect on organization resilience (adoptability, agility and innovation). Therefore, H1 to H3 are supported. Concerning the relationship between the organization resilience and organization performance, agility and innovation have a positive effect on organization performance. Therefore, H4 and H5 are supported. However, H1 is not supported by the data, which means the relationship between adoptability and the organization performance is not significant. However, R2 _{of the adoptability factor is 0.37, this means variance in adoptability is 37%} towards organizational performance in Saudi banks. In addition, R2 _{of the agility, innovation} and the organization performance are 0.51, 0.56 and 0.59 respectively.

Importance-performance map analysis

Importance-performance map analysis (IPMA) was also conducted for generating additional findings and conclusions for managerial actions. The IPMA is explained in detail by Ringle and Sarstedt [46]. Performing an IPMA requires determining a targeting factor, such as organization performance in our PLS path model. The performance of each factor measured on a scale from 0 to 100. The closer the value to 100 the higher the performance of the factor. All total effects (importance) larger than 0.10 are significant at the p ≤0.10 level. Table 3 and Figure 3 presents

the IPMA results of all the predecessors of the target construct “organization performance”. The highest importance towards “organization performance” is “knowledge creation process” factor as indirect predecessor followed by “innovation” as a direct predecessor. This means that the target construct “organization performance” would increase by 0.61 total effects of “knowledge creation process” and 0.59 total effects of “innovation”.

Fig. 3. IPMA analysis of the target construct (organization performance)

Table 3. IPMA analysis of the organization performance factor

Factors Performance Total Effects (Importance)

Adoptability 47.73 0.02

Agility 61.90 0.21

Innovation 61.56 0.59

Knowledge Creation Process 62.96 0.61

5.

Discussion and Conclusion

The results show that KCP enhances the resilience capabilities, which in turn contribute to improving the organizations’ performance in the Saudi banking sector. This is because Saudi banks encourage positive social interactions among their employees to facilitate knowledge creation and sharing. The findings indicate that KCP plays a key role in organizational resilience. Therefore, organizations should promote knowledge creation and sharing practices so that they can constantly adapt to change and uncertainty in the ever-changing environment. These findings confirmed previous research findings on the role of knowledge creation processes on organizational agility, adoptability and innovation [29, 31, 47].

Furthermore, previous research suggests the resilience-enhancing practices have the potential to contribute to individuals’ psychological capital, attitudes and behavior, and to organizational performance both during turbulent circumstances and during periods of relative calm [48 – 49]. Such a finding suggests that an organization’s authorities should include formal resilience training in their daily practices to improve their organizations’ overall performance. However, the study findings did not support the relationship between adoptability and organization performance. This means the incapability of Saudi banks to continuously adapt and adjust to changes in the face of the ever-changing environment. Alabdan and Callen [50] argued that the lack of knowledge management initiatives and practices in the Saudi banking industry might face barriers such as a lack of learning, technology, and leadership, which might inhibit their performance.

The findings also provided some practical implications for executives and decision-makers to enhance organizational performance and organizational resilience through KCPs in the banking sector. The results of this study may help bank managers modify their approach to knowledge management practices if they use the insights of this research and increase the outcome of their organizations by focusing on the relationship between KCPs and organizational resilience and organizational performance. The practical implications also extend to business where it is recommended that changes be made to their market strategies to improve their organizational resilience and performance.

However, this study also some limitations like most survey research that may consider as an opportunity for future research. The study targeted selected Saudi banks. Therefore, this may have implications for generalizing the results of this study. Moreover, the larger sample size could have been more useful for assessing the reliability of the results. This study identifies KCP as a crucial factor for enhancing the organizational resilience capabilities, while other factors may contribute to increased organizational resilience. In addition, the sample used in this study may not adequately reflect the measured attributes of the population. The survey research is concerned about the impact of various biases (such as selection and response etc.).

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Appendix A: Questionnaire

Factors

Items

References

Socialization

During discussion, I try to find out others’ opinions, concepts, thoughts or ideas

[25-26] Externalization

Our team develops new ideas through constructive dialogue by using figures and diagrams.

Combination

During the discussion, I tend to help organize ideas and make conclusion to facilitate the discussion

Internalization

After hearing a new idea or concept, I tend to compare it with my experience to help me comprehend the meaning.

Adoptability

The bank that I work for, its services conform to the regulatory standards.

[4, 23, 40] The bank that I work for its service delivery is in line with our

customers’ needs.

Agility

We respond quickly to dynamic business. We react rapidly to competitors' market actions.

Innovativeness

We provide unique products and services to our customers. We offer new customer support services.

Financial Perspective

The bank that I work for its net income has increased.

[41] Internal

Business Process Perspective

The bank that I work for has developed policies and procedures to increase customer satisfaction.

Customer-Related Perspective

The bank that I work for, has improved the number of services/products that it provides to customers.

Learning & Growth Perspective

The bank that I work for provides training that is linked to bank goals and objectives.