People Innovation Excellence

The Impact Of Knowledge Management And Entrepreneur Knowledge On Innovation And Firm Performance

Oleh : Hendry Hartono & Yerki Teguh Basuki

Abstract—    There is lack of evidence from previous studies that examined the relationships among entrepreneur knowledge, knowledge management, innovation, and firm performance. Entrepreneur if have more knowledge form the other entrepreneurs can be more competitive among others. Literacy studies show that entrepreneur knowledge and knowledge management had significant and direct positive effect on innovation and firm performance.  Future studies needed for showing a model and factors that enhanced innovation and improved firm performance.The purpose of this paper is to propose a framework of improving the firm perforamce by enhance of the innovation, through the entrepreuner knowledge and knowledge management.

 Keywords-entrepreneurship, knowledge, management, innovation, firms performance

                                                                                                                                                               I.               Introduction

There are so many studies that examine the relationship between knowledge and firm performance, and also between knowledge and innovation. Knowledge is becoming hot topics among scientist and business communities, because knowledge probably source and driver of innovation [1]. Knowledge can be unique advantage that cannot be easily copied among competitors. Knowledge would be a great resource if firm can manage it effectively and efficiently. Entrepreneur if have more knowledge form the other entrepreneurs can be more competitive among others, also means the entrepreneur can manage their firm better than the others. Entrepreneur Knowledge (EK) is difficult to find, especially in context of how EK effected innovation beside firm performance. In this paper, we purpose a model design which measure EK affected innovation and firm performance. Entrepreneur and his organization is related, we also purpose a study of how his organization  manage knowledge, because knowledge is become more important to do [2]  and important asset in the time of global competition [3].

                                                                                                                                             II.         LITERATURE REVIEW

In the competitive environment, the entrepreneurs need to use their knowledge and skill and use them to connect existing and new technologies to their company. Successful entrepreneurs can develop their knowledge, skill and managerial capabilities [4] in order to survive in the competitive environment, and also in order to survive, they must innovate new opportunities in their industries. A successful entrepreneur constantly supplements the system of acquiring knowledge with his or her vision, therefore entrepreneurs combine their knowledge, broaden it and create new innovative ideas [3]  and organization need key individual that has power and influence who act as gatekeeper – collecting information from various sources and passing it to the relevant people (employee) who will be best able to used it capabilities [4]. It is expected that:

Entrepreneur Knowledge (EK)

Cuervo (2005) states that the role of the entrepreneur is to discover, evaluate and exploit entrepreneurial opportunities . The knowledge of entrepreneur have a role to  discover of the opportunities by involving the decisions, and often derives from former information and experiences. Thus, any entrepreneurial activity moulds the entrepreneur’s knowledge in some area (Minniti and Bygrave, 2001).

These process its by means of a learning process that the entrepreneurs develop their competencies in response to expectations about the future and past experiences (Reuber and Fischer, 1999).

The main factors of the entrepreneur action mostly by economic opportunities. ( Kirzner 1973), and making use of information advantages. The entrepreneurship is based on spontaneous learning (Kirzner, 1979). Similarly, argue that entrepreneurship has to be understood as a learning process and that any theory about this phenomenon requires a theory of learning. Deeply learning process and understanding the theory  (Minniti and Bygrave : 2001), allows the entrepreneur to combine new items of information and to determine new relations between them.

Learning process as a vital and crucial entrepreuneurial process aspect in entrepreneurship (Gibb: 1997), since it consists in the acquisition or alteration of business skills, knowledge, habits and attitudes. Learning produce multiple effects, such as optimising commercial performance in the short and long run, and enhancing personnel competence (van Gelderen et al., 2005). Base on cognitive theories entrepreneurial learning as a black box, still poorly understood (Kolb, 1984), but in the research indicates that much of this type of learning primarily consists of “learning by doing” (Smilor, 1997), and on feedback and mistakes (Gibb, 1997) and is, thence, experiential in nature (e.g.Minniti and Bygrave, 2001; Politis, 2005). The emphasis of Politis (2005) lies on the importance of past experiences in the continuous development of entrepreneurial knowledge. Minniti and Bygrave (2001) attempt to model entrepreneurial learning as an iterative decision cycle, in which the entrepreneur continually chooses between referring to knowledge previously gained and acquiring new knowledge. Likewise, Ravasi and Turati (2005) emphasize the existence of a self-reinforcing cycle that drives entrepreneurial learning, to the extent that the entrepreneur increasingly learns to control the outcomes of the business activity and, incidentally, the learning process itself.

All those learning process will improve the Entrepreunerial knowledge.

Knowledge Management (KM)

Knowledge management, like knowledge itself, is difficult to define as concepts and practices evolved quickly through the I990s. Two main issues are evident in this evolving path:

  1. i) knowledge is a critical resource, rather than land, machines, or capital (Drucker, 1993), and
  2. ii) organizations generally poorly managed it.

If more attention were paid to creating, providing, sharing, using, and protecting knowledge, the promise was that organizational performance would improve (Earle, 2001).

Current definitions of knowledge reflect a range of standpoints. The following definition contains a comparatively broad approach because it includes a range of phenomena such as values, insight, and information: “Knowledge is a fluid mix of framed experience, values, contextual information, and expert insight that provides a framework for evaluating and incorporating new experiences and information. It originates and is applied in the minds of knowers. In organisations, it often becomes embedded not only in documents or repositories but also in organisational routines, processes, practices, and norms” (Davenport and Prusak, 1998).

Knowledge management is a managerial activity which develops, transfers, transmits, stores and applies knowledge, as well as providing the members of the organization with real information to react and make the right decisions, in order to attain the organization’s goals.( Kanagasabapathy, et al.,2002). The other definition of KM by author as per table 1.

KM Definition


We will explaining the innovation defined as a catalyst within the creative destruction process, as a process of seeing and doing things differently, and as an evolutionary process or as a process of initiation and implementation.( Harri Jalonen 2012).

  1. Innovation as a catalyst within the creative destruction

Joseph Schumpeters’s (1911, 1941) define the innovation is an ideas of seeing and doing ‘things’ differently (see also e.g. Brown 1997). For Schumpeter, seeing and doing things differently was the force required for long-term economic growth. Seeing and doing things differently – i.e. innovation – creates and destroys existing structures causing continuous economic and social progress. Schumpeter called this process of continuous progress ‘creative destruction’. In creative destruction the existing power derived from previous technological, organizational, regulatory and economic paradigms is replaced by new forms engendered by innovation. The expression ‘creative destruction’ implies that innovation is a specific form of the changing existing process. Innovation is about change because it represents discontinuity or a break with the past (Drucker 1985; Bessant 2003).

At the heart of this change process is an organization’s ability to manage the translation of new ideas into new forms of action. In order to be considered as an innovation that has an economic or social contribution to offer, an invention has to be moved from ‘the laboratory’ into production and disseminated to other parties beyond its discoverers (Garcia & Calantone 2002). However, it is important to note that creative destruction is neither a linear nor a causal process (Smits 2002) where the old is merely replaced by the new – it is a process of success and failure. Adapting Foster (2010), it can be argued that in complex, ever-changing societies, innovators cannot make rational choices because of the uncertainty that they face. Therefore, in ‘creative destruction’ failing innovators are just as important as successful ones (Foster 2010).

  1. Innovation as a process of seeing and doing thing differently

The most common the definition of innovation deals with whether innovation is a process or a discrete event (Cooper 1998). Innovation is defined as an idea, practice or object perceived by its adopter to be new and an improvement. This definition implies to the three areas : firstly, an idea, practice or object which is not adopted is not innovation at all. To be regarded as an innovation, an idea must be implemented. Secondly, the ‘novelty’ of innovation is context-specific and depends on an adopter’s experience. What seems routine in some contexts may in other contexts be seen as innovation. Thirdly, while innovation implies change, not all change involves innovation since “not everything that an organization adopts is perceived as new” (Zaltman et al. 1973).

  1. Innovation as evolutionary process

From the process perspective, innovation is typically seen as a corelation between events and people in which actions at each stage of the process influence events in subsequent stages, which determine the innovation process will continue (Cooper 1998; Smits 2002). Utterback and Abernathy (1975), for example, have described innovation as an interactive process, where “a basic idea underlying the innovation is developed over time in a predictable manner with initial emphasis on product performance, then emphasis on product variety and later emphasis on product standardization and costs”. Utterback and Abernathy (1975) have emphasized that innovations do not only occur during developmental phases but may also occur during dissemination at which time innovations undergo continual improvement. Adapting Aldrich (2001), Sotarauta and Srinivas (2006) have conceptualized as an evolutionary process the development of an invention into an innovation and its further dissemination beyond its inventors.

The evolution of innovation consists of four generic processes: variation, selection, retention and struggle. Variation refers to any intentional or unintentional departure from routine. Variations manifest themselves as new ideas, of which some will be selected and others eliminated. The selection, is a selection processof ideas, the selection of new ideas is determined by the interplay between organizational competencies and environmental factors. Retention means the preservation or duplication of selected ideas with the result that they are repeated in the future. Struggle arises due to scarcity of resources within organizations and between them in a given environment.

In others authors, Rogers (2003), has offered a five stages model of the innovation process. Rogers’s (2003) model consists of the following stages: agenda-setting, matching, redefining/restructuring, clarifying, and routinizing. At the stage of agenda-setting, the organization perceives there to be a problem that may create a need for innovation. Matching refers to aligning a problem associated with the organization’s agenda with an innovation. In the redefining/restructuring stage, the innovation is modified and re-invented to suit the organization. Clarifying means the detailed definition of the relationship between the organization and the innovation. Finally, at the routinizing stage, the innovation becomes an ongoing element in the organization’s everyday life. As mentioned, Rogers’s model can be summed up in initiatory activities and those associated with the implementation of the innovation (see also Zaltman et al. 1973).

  1. Innovation as a process of innitiation and implementation

Due to an innovation involves deliberate and planned organizational activities, which, however, may paradoxically have positive or negative outcomes. And innovation has intended “novelty in action” (Altshuler & Zegans 1997) implicitly contains the idea that innovation is a process, which consists of various stages from initiation to implementation (Rogers 2003). Initiation refers to identifying problems, evaluating alternatives, whereas implementation refers to deciding between alternatives and putting innovation to use. Processes of initiation and implementation have obvious similarities with Joseph Schumpeters’s (1911, 1941) ideas of seeing and doing ‘things’ differently (Brown 1997).

Firm Performance

                                                                                                                                             I.          methodology approach

In the figure 1, we are offering the model of approach for  the topic, which is EK will impacting to the innovation, and the impacting also to the KM. KM has a role either bossting up to the innovation of the organization, also impacting to the innovation itself. Innovation as the heart of this change process is an organization’s has impact to the firm performance.

KM conceptual framework

Hypothesis 1: Entrepreneur Knowledge (EK) is positively related to innovation.


Entrepreneurs at organization must transform into organizational knowledge (Theriou et. al., 2009) which is must shared to employees, and therefore use this knowledge to improve organizational performance. Knowledge management (KM) enables the existing individual knowledge to be captured and transformed into organizational knowledge, which in turn must be diffused and shared by many employees (Theriou et. al. 2009).

It is expected that:

Hypothesis 2: Entrepreneur knowledge (EK) is positively related to Knowledge Management (KM).

Theriou  et al. (2009) indicates that knowledge management is considered to be vehicle for organization effectiveness and competitiveness. Global competition in this era become more and more intense, this is indicate that organization must survive and facing the challenge of daily instability and uncertainty environment that force organization to be more innovative (Trias de Bes, 2011, pp. 14).  It is expected that:

Hypothesis 3: Knowledge Management (KM) is positively related to Innovation

Some definition of the KM has summaries by Singh in  Cut Zurnali (2008) are:

  1. Extracting and organizing of knowledge to develop a profitable organization and more efficient. Dimttia and Oder (2001), explains that knowledge management is the process of capturing the collective organizational skills, knowledge wherever it is located, either in the database, the papers, or in people’s heads, and then distribute it to any knowledge in order to increase of acievement .
  2. Menurut Wiig (1999), Knowledge Management is a systematic building, explicit and deliberate, renewal, and application of knowledge to maximize the effectiveness with respect to organizational knowledge .


While Townley (2001), KM as a set of the process of creating and sharing of knowledge throughout the organization to optimize acievement the mission and goals of the organization. Thus, knowledge management is about improving the use of organizational of knowledge through information management practices and organizational learning to achieve excellence competitive advantage.

These scholars found a clear correlation between learning behaviour and considering contextual factors influence on entrepreneurial performance. Corbett (2007) bore out that learning plays an important role in opportunity discovery, so crucial for the entrepreneurial process

Hypothesis 4: Knowledge Management (KM) boosting up the EK to increasing the innovation 

Innovation is defined as “the creation of new knowledge and ideas to facilitate new business outcomes, aimed at improving internal business processes and structures and to create market driven products and services”(Al Hakim and Hassan, 2012). When defined as an outcome, innovation is the tangible product, service or process that is adaptable or diffusible, meaning it can be used in various contexts by different individual (Schaper and Thierry, 2004). Successful organization indicates that knowledge management enables the organization to become innovative (Theriou et al., 2009) and innovative become priority action for established corporations (Grant, 2010), also as a main reason to survive and growth (firm performance).

It is expected that:  Hypothesis 5: Innovation is positively related to Firm Performance

                                                                                                                                            I.          DISCUSSION

Knowledge is one of important element for innovation, but in this paper focused on the Entrepreneur Knowledge, Knowledge Management, Innovation and Firm Performance. EK indicate significantly related to the innovation. Innovations refer to practice, ideas or any object which is perceived as new (Mirza and Ali, 2011). Tidd and Bessant (2009) argue that innovation has four dimensions, such as: product innovation, process innovation, position innovation, and paradigm innovation.

Knowledge management plays an invaluable role in innovation ( du Plessis, 2007), and she define the value proposition of KM in innovation: KM assists in creating tools, platforms and processes for tacit knowledge, creation, sharing and leverage in the organization; KM assists in converting tacit knowledge to explicit knowledge; KM ensures the flow of knowledge used in innovation process.

KM also has a function to maximizing (Wiig : 1999), optimizing (Townly :2001) and improving the efficiencies in organizing of knowledge to improving the firm performance through the innovation (Dimittia and Oder : 2001).


Company in the coming year, view knowledge as the most powerful source that can be valuable to build strategic competitive advantage (Long Wu and Chang Lin, 2009) in the very rapid market environment. Firms use this knowledge require KM as vehicle for organizations’ effectiveness and competitiveness (Theriou et al., 2009). KM facilitates organizations to be faster, more efficient and more innovative. Organization also view KM as powerful solution to contribute innovation improvement and also improve their performance. KM helps to develop skill and knowledge of the entrepreneurs in order transfer, dissemination and accumulated knowledge, and stimulate this knowledge become an innovation through products and services.  Based on this paper, further research is needed on the potential role of EK and KM in innovation, and how the value of EK and KM can be maximized to have a more valuable innovation, that would be impact to firm performance.

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