Importance of Knowledge Management to Strategy and Value Creation - Literature review Example

Knowledge Management 2008 Introduction With the growth of information technology and the new economy, concepts like organizational learning, knowledge management, knowledge economy and learning organization are increasingly becoming commonplace in management literature. Especially in the sphere of information technology and other knowledge-intensive industries, intellectual capital rather than other scarce resources like physical capital and labor, has come to be the crucial determinant of creating competitive advantage for the organization. Hence, the stress has moved from the distribution of a given set of scarce resources, typically labor and physical and financial capital, to the creation, allocation and distribution of scarce resources like knowledge. The process of knowledge creation and distribution, however, is socially determined and dependent on the interactivity of the institutional framework in which the organization operates. The literature on organization emphasizes on the cognitive processes within the organization as well as the interaction with rules and routines of related organizations. In this paper, I will discuss the importance of knowledge in value creation, different types and definitions of knowledge and management accounting to gain competitive knowledge. Importance of Knowledge to Strategy and Value Creation In the literature on knowledge management and organizational learning, knowledge is seen as the crucial parameter that leads to competitive advantage. Drucker said in his seminal work in 1964, said “What does make a business distinct and what is its peculiar resource is its ability to use knowledge to social, economic and managerial advantage” (quoted in Blackman and Henderson, 2002). An organization that strives for continuous acquisition, management and distribution of knowledge is typically called the learning organization. According to Garvin (1993), “a learning organization is an organization skilled at creating, acquiring and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights (p 80, quoted in Blackman & Henderson). However, an organization can create competitive knowledge through the learning process only if knowledge exists and can be identified. There is a huge body of literature on the knowledge and learning, ranging from quantitative models on how organizations can create, manage and disseminate knowledge to those analyzing the epistemological roots of the relevant terms (reviewed in Easterby-Smith and Lyles, 2003). Significance and Different Types of Knowledge Typically, organizational knowledge is categorized according to 1) ‘know what’ comprising data and information, 2) ‘know how’ comprising procedures, 3) ‘know why’ comprising understanding and wisdom and 4) ‘know who’ comprising the persons who are depositories of particular knowledge (Ackoff, 1989 cited in Krohwinkel-Karlsson, 2007). In addition, Caryannis (1999, cited in Krohwinkel-Karlsson, 2007) also included ‘knowing what you know’ and ‘not knowing what you know’ as elements that needs to be analyzed more closely by the management. The difference between knowing what knowledge one has and not knowing so is all the more enlarged by the fact that organizational knowledge may be explicit – when key knowledge is documented and shared formally – or tacit – when knowledge is embedded in personal experience and skills of individuals. Tacit knowledge requires a socialization process for the acquisition, management and dissemination to be effective. Nonaka and Tekeuchi (1995, quoted in Krohwinkel-Karlsson, 2007) finds that in order to form a “knowledge-creating company”, various elements like the national and organizational culture regarding communication processes and an effective dialogue between policy-makers and those involved in the operation process are crucial. Besides, it is often difficult to distinguish between explicit and tacit knowledge. Tacit knowledge is based on the individuals’ beliefs and interactions with others. It exists within the mental models of individuals and to convert it into organizational resource, a cognitive process is required. Much of the literature on tacit knowledge focuses on behavioral models. As Cook and Yanow (1993, quoted in Blackman & Henderson, 2002) says, “because it is not obvious, a priori, that organizations are cognitive entities, in drawing on individual cognition as a way of understanding organizational phenomena, we must take care not to lose sense of the "as if" quality of the metaphor, forgetting that organizations and individuals are not the same sorts of entities (p. 435). However, this approach of cognitive entities emphasizes the individual capabilities over social interactions. Deetz (1998, quoted in Jian, 2000) says, “The inference of an underlying mechanism gives apparent explanatory power but directs the attention away from fully describing the complex interactions of organizational members… The inferred power of cognitive processes misdirects attention away from the operant power of historical formations and the social relations they embed” (p.3). The social nature of tacit knowledge is increasingly being researched upon, with a greater focus on ethnographic studies. As Cooke and Yanow (1993) says, “The concept of organizational learning, then is not encountered as a theoretical hypothesis (Can organizations learn?) to be tested and proved. Rather, the concept is addressed through empirical observations that call to be understood. The ontological problem of the existence of an organization as cognitive entity is, thus, not encountered” (p.440, quoted in Blackman & Henderson, 2002). Cyert and March (1963) were the first to moot the idea that an organizational can initiate a learning process that is distinct from the additive value of knowledge of individuals in the organization. They maintained that typically rules and routines were susceptible to external shocks that lead to absorption of new knowledge thereby acquired. They noted that an organization “changes its behavior in response to short-run feedback from the environment according to some fairly well-defined rules. It changes rules in response to longer-run feedback according to some more general rules, and so on” (p 101-2, quoted in Krohwinkel-Karlsson, 2007). In contrast to Cyert and March’s theory of learning as a mode of increasing the organization’s efficiency, Argyris and Schon (1978) differentiated between single-loop and double-loop learning. When the organization responds to first order problems without necessarily changing the rules of the game, it is called single-loop learning. Such organizations may be characterized as adaptive organizations as they tend to respond to problems. On the other hand, when the organization begins to question the basic terms of reference of operations and gives a second thought to its strategic directions, it is said to undertake double-loop learning. This is generative learning, when there are systemic enquiry, team learning and shared vision. In a subsequent study, Argyris and Schol (1996, cited in Krohwinkel-Karlsson, 2007) has added the triple-loop learning, which represents the “highest” level of learning when the members of the organization may in fact question the validity of the existence of the organization. At this level, the organization has incorporated learning as an integral part and is not just an espousal of its values (Schein, 1992 cited in Krohwinkel-Karlsson, 2007). Each level of the learning process is interrelated and some researchers have even found a cyclical process of learning in which each stage of learning leads to an alteration of the earlier one (Pedler and Boutall, 1992, cited in Krohwinkel-Karlsson, 2007). Organizational learning is not necessarily the same as the sum of individual learning since there might be reasons for each individual in the organization to be protective about his own knowledge and defensive about acquiring new knowledge. Duncan and Weiss (1979, quoted in Jian, 2000) notes, "a more radical approach would take the position that individual learning occurs when people give a different response to the same stimulus, but Organizational Learning occurs when groups of people give the same response to different stimuli." Researchers have found instances of learning and unlearning in the organization (Hedberg, 1981, cited in Jian, 2000). Further, learning may be unconscious and not necessarily intentional (Huber, 1991, cited in Malhotra, 1996). Weick (1991, quoted in Malhotra, 1996) says, "perhaps organizations are not built to learn. Instead, they are patterns of means-ends relations deliberately designed to make the same routine response to different stimuli, a pattern which is antithetical to learning in the traditional sense" (p. 119). Although learning is in general considered to be a tool for developing competitive advantage, it is not necessary that learning leads to “intelligent behavior” and hence improved organizational efficiency (Miner and Mezias, 1996, quoted in Krohwinkel-Karlsson, 2007). In contrast to an organization that may or may not capitalize on the learning process, a learning organization is one “where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning how to learn together” (Senge, 1990, p 4, quoted in Krohwinkel-Karlsson, 2007). In the learning organization, the learning process has a strategic element that is spearheaded by the leadership. In this new line of thinking, instead of the social interactive process, teamwork is seen to be the crucial element of building up the learning organization. Management Accounting The concept of knowledge management and management accounting are the most recent additions to the stream of literature on organizational learning. Knowledge management means the manner in which organizations acquire, distribute, store and analyze knowledge (Huber, 1991, cited in Malhotra, 1996). According to Huber (1991, quoted in Malhotra, 1996), “An entity learns if, through its processing of information, the range of its potential behaviors is changed”. The main users of knowledge management have been consulting companies that aim to benefit from codifying knowledge in a systematic manner such that there might be divergent applications of the knowledge. Organizations get access to knowledge and distribute through a process of knowledge sharing, depending on the source of the knowledge, the learner’s attitude as well as the source’s capability to share knowledge and the relationship between the two types of organizations (Cummings, 2003, cited in Krohwinkel-Karlsson, 2007). In most cases, information technology is employed intensively for the purpose of various stages of knowledge management, ranging from data handling to storage of data to its analysis and transmission and sharing. Increasingly, large organizations, even those other than consulting companies, are developing capabilities for knowledge storing and sharing. Management accounting refers to identifying, collecting and reporting information that managers can use in planning, controlling and decision making (Ali, 2006). Although management accounting uses the various traditional tools like costing, budgeting, variance-analysis and responsibility accounting, the modern scenario of organizational learning makes the traditional principles inadequate. In the early days of management accounting, labor-based costs were used to allocate direct overheads. In the 1980s, the advanced techniques of capital-intensive manufacturing processes made this measure insufficient. Besides, globalization and diversification have made it necessary for managers to have access to information on product-mix and the effect on decision making. Typical financial information prepared on the basis of cost systems limit the organization to pursue learning and knowledge acquisition and management. Hence, innovating management accounting principles that include activity-based costing, target costing, strategic performance measurement systems, benchmarking and value chain analysis have been developed. Knowledge management can encourage creativity (Nonaka and Takeuchi, 1995), facilitate innovation (Hargadon, 2000) and improve performance by inducing competencies (Pitt and Clarke, 1999). However, in specific terms, it is difficult to define the exact measure of management accounting that incorporates knowledge. Knowledge management has been variously defined as “info-mapping”, “balanced scorecard” of tangible and intangible assets, total quality management and business process reengineering and the networked firm without boundaries (Corral, 1998). It is a multi-disciplinary concept encompassing the core competence of the firm, information technology and the cognitive learning process. According to Porter’s (1980) theory, the level of competition in an industry is defined by the five forces: 1) the threat of entry of new competitors (new entrants), 2) the threat of substitutes, 3) the bargaining power of buyers, 4) the bargaining power of suppliers and 5) the degree of rivalry between existing competitors. The firm is supposed to have competitive advantage when its returns to capital are above the industry average. It is a function of the firm’s organizational ability to garner its resources, the industry parameters, the firm’s resource base and the strategic directions. Organizations today are interconnected through the business practices as well as through telecommunication technology hence intellectual capital, rather than physical capital, has emerged as the key strategic differentiator. According to Spender (1996), the availability of knowledge at the firm’s disposal and its ability to create more knowledge is at the root of a firm’s sustainable competitive advantage. Grant (1996), too, has emphasized that knowledge is the most important asset for the firm. Halawi et al (2005) specifies that the mechanism by which knowledge management integrates with competitive advantage is through rules and directives, sequencing, problem-solving and decision making. Senge (1990, quoted in Halawi et al, 2005) notes, "The rate at which organizations learn may become the only sustainable source of competitive advantage." The issue of knowledge transfer within and beyond the organization poses the biggest challenge in incorporating performance measures in management accounting. Ittner and Larcker (2001, cited in Bhimani, 2006) note that management accounting principles, considered irrelevant in the 1980s, has made a resurgence in the academic literature. Long term organizational success depends not only on organizational learning and knowledge management but also on innovations in performance measurements based on management accounting. Conclusion Thus, knowledge management, organizational learning and the incorporation of knowledge in management accounting is extremely crucial in modern organizations that are technology-driven. Since knowledge of an organization is the sum of individual knowledge, the management of the tacit knowledge that is embedded in the organization through documentation and social interaction is very crucial for gaining competitive advantage. To this end, management accounting that incorporates knowledge is particularly important in the technology-intensive organizations. Works Cited Ackoff, R.L. (1989). From Data to Wisdom. Journal of Applied Systems. 16:3-9 Ali, Liaqat (2006). Applications of contemporary management accounting techniques in Indian industry: An empirical study. PhD Thesis. 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