Knowledge Management Drivers

Research Paper: RP—ECBPM/00023

Knowledge Management Drivers: Lessons from a UK and USA based survey

Research Paper: RP-ECBPM/0023

By Dr. Yasar F. Jarrar & Prof. Mohamed Zairi Mrs. Elaine Aspinwall

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Research Paper: RP—ECBPM/00023

KNOWLEDGE MANAGEMENT DRIVERS: LESSONS FROM A UK AND USA BASED SURVEY

Yasar F. Jarrar European Centre for Total Quality Management University of Bradford Emm Lane, Bradford BD9 4JL United Kingdom Tel - + (0) 1274 23 4319 E-mail – [email protected]

Professor Mohammed Zairi SABIC Professor of Best Practice Management European Centre for Total Quality Management University of Bradford Emm Lane, Bradford BD9 4JL United Kingdom Tel - + (0) 1274 23 4313 E-mail – [email protected]

Mrs. Elaine Aspinwall University of Birmingham Edgbaston Birmingham B15 2RF United Kingdom Tel - + (0) 121 414 4249 E-mail – [email protected]

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Research Paper: RP—ECBPM/00023 ABSTRACT The importance of intellectual capital and the management of knowledge are strongly emerging themes in today’s organisational world (Chase, 1997). Many authors and practitioners (Quinn, et al., 1996, Matinez, 1998, Numri, 1998, Albert and Bradly, 1997) note that the emerging patterns are that intellectual capital will replace natural resources, commodities, finance, technology and production processes as the key factor influencing competitive advantage. This is because, with the exception of intellectual capital, everything else (IT, materials, and technical information) is available to everyone on more or less the same terms. The success of a corporation will lie more in its intellectual and systems capabilities than in its physical assets.

After introducing the concept of knowledge management and its basic definitions, this paper presents the results of a survey of leading UK and USA organisations, which focused on identifying the drivers of knowledge management. The survey includes an overview of organisational perceptions of the increasing importance of knowledge. Moreover, it reports on the major drivers for knowledge management in leading organisations and attempts to answer the question on everyone’s mind: is knowledge management another fad or is it a requirement for future performance excellence?

As we live in a world characterised by globalisation and free flow of information, the findings of this study are of extreme relevance to Southeast Asian companies, since it is believed that the same drivers which popularised knowledge management in the West will affect, if they have not already affected, the region. This study should provide insights to those embarking on such programmes in Southeast Asia.

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Research Paper: RP—ECBPM/00023 1. THE AGE OF KNOWLEDGE The attention being paid to knowledge management (KM) has been growing very fast. Business magazines, books, and journals are publishing countless theories and business cases on knowledge management and related topics, and the number of conferences organised all over the world is growing exponentially. But why is this concept generating so much hype? And what are its major drivers?

The importance of intellectual capital and the management of knowledge are strongly emerging themes in today’s organisational world (Chase, 1997). Many authors and practitioners (Quinn, et al., 1996, Matinez, 1998, Numri, 1998, Albert and Bradly, 1997) note that the emerging patterns are that intellectual capital will replace natural resources, commodities, finance, technology and production processes as the key factor influencing competitive advantage. This is because, with the exception of intellectual capital, everything else (IT, materials, end technical information) is available to everyone on more or less the same terms.

“Knowledge is now a crucial factor underpinning economic growth. Producing goods and services with high value-added is at the core of improving economic performance and international competitiveness, increasing intangible investment, which is difficult to measure, and has become a major issue for enterprises and governments” Former Secretary General, OECD (quoted in Skyrme, 1998). In short, the main theory proposed by the advocates of knowledge and intellectual capital management is: the success of a corporation lies more in its intellectual and systems capabilities than in its physical assets. It is believed that in this evolving knowledge environment, both individuals and organisations will have one source of competitive advantage: intellectual capital. This represents an individual’s (or organisation’s) accumulated knowledge and know-how, coupled with the ability to decant this into a system to create value.

In support of these claims, a survey of Fortune 1000 executives (Quinn, 1997), revealed that 97% of respondents said there were critical business processes that would benefit from more employees having the knowledge that was currently with one or two people, and 87% said costly mistakes are occurring because employees lack the right knowledge when it is needed. Moreover, to emphasize this increasing importance of knowledge management, the recent changes to the EFQM Business Excellence Model have included the addition of two sub-criteria that address knowledge management (EFQM, 1999).

So it does not come as a surprise to find many organisations have already embarked on some form of ‘knowledge management system’. A report by Business Intelligence (quoted in Numri, 1998), claimed that successful KM programmes can produce returns of hundreds or even thousands of per cent. Still, the same report emphasised that KM is a very young discipline. In fact, in a recent survey using the Knowledge Management Assessment Tool (KMAT), a benchmarking tool devised jointly by the American Productivity and Quality Centre (APQC) and Arthur Andersen (quoted in Zairi and Ahmed, 1999), only 15% of the organisations reported that they were satisfied with their ability to manage knowledge strategically.

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Research Paper: RP—ECBPM/00023 2. WHAT IS KNOWLEDGE? In order to successfully manage knowledge, it is prudent to clearly define it. The definition of knowledge adopted here is “information combined with experience, context, interpretation, and reflection. It is a highvalue form of information that is ready to apply to decisions and actions” (Albert and Bradley, 1997). Business knowledge generally is of two types: 1. Codified knowledge - Knowledge that can be written down, transferred, and shared. It is definable and can be protected by the legal system. 2. Tacit knowledge - know-how, and is by nature difficult to describe. It can be demonstrated but rarely codified, and resides with its holder. It gets transferred through demonstration and on-the-job training. Examples include process knowledge in manufacturing firms, and relationship knowledge in service firms. From an accounting point of view, physical assets have an expected life over which they are useful in generating income or benefits. In stark contrast, information and knowledge assets could in theory last forever (Martinez, 1998). This open ended value of knowledge assets means that there is no one-to-one correspondence between the effort required to create them and the value of the services that they yield.

The source of business knowledge in any organisation is its intellectual capital, which is defined as “the difference between a firm’s market value and the cost of replacing its assets. It is those things that we normally cannot put a price tag on, such as expertise, knowledge and a firm’s organisational learning capability” (Hall and Andriani 1998). It has three major components as classified by many practitioners (Edvinsson, 1996, Hall and Andriani 1998, Numri, 1998): 1. Human capital: the knowledge that each individual has and generates. Within an organisation, it is the collective capabilities of employees to solve customer problems, and the firm’s capability to extract the best solutions from the knowledge of its people. It includes the collective experiences, skills, and general know-how of all the firm’s employees. This kind of capital is rented, not owned, and must be managed accordingly. Gaining access to the power of a firm’s human resource often means knowing what piece of information or knowledge is relevant, which employee has it, and the speed with which the knowledge can be shared. 2. Organisational (Structural) - organisational capital is that knowledge that has been captured/institutionalised within the structure, processes, procedures, plans, and culture of an organisation. It is the know-how contained in the company’s distinctive processes and competencies. This is much more amenable to management control. It is the infrastructure that firms develop to commercialise their human capital, and provides the environment that encourages the human resources to create and leverage knowledge. It includes both direct and indirect support, and for each there are both physical and intangible elements. Direct physical support includes an open structure, and easy access to computers while intangible aspects include computer software, work procedures, and marketing plans. Indirect physical support includes buildings, light, etc., and the intangible aspect includes strategic plans, and payroll. All these aspects should be designed and managed to maximise intellectual output. 3. Customer (Relational) - refers to the organisation’s relationships or network of associates and their satisfaction with, and the loyalty to, the company. It includes knowledge of market channels, customer and supplier relationships and agreements, industry associates and a sound understanding of the impact of government public policy. Like human capital, customer capital is shared, not owned, and can only be managed as a joint enterprise between the firm and its partners.

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Research Paper: RP—ECBPM/00023 3. WHAT IS KNOWLEDGE MANAGEMENT?

Knowledge management means the “strategies and processes of identifying, capturing, and leveraging knowledge to help the firm compete” (American Productivity and Quality Centre, 1997). “In order to maximise value to customers, we must have an outstanding capability to create, enhance, and share intellectual capital across ICL’s global organisation, ‘knowledge management’ is a shorthand term covering all the things that must be put in place – e.g. processes, systems, culture and roles – to build and enhance this capability.” ICL’s definition of KM (quoted in Lank, 1997).

In general, knowledge management is the process of continually managing knowledge of all kinds to meet existing and emerging needs, to identify and exploit existing and acquired knowledge assets and to develop new opportunities (Quintas, 1997). It is a “systematic process of underpinning, observation, instrumentation, and optimisation of the firm’s knowledge economies” (Demarest, 1998). Its overall purpose is to maximise the enterprise’s knowledge related effectiveness and returns from its knowledge assets and to renew them constantly (Wiig, 1997).

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Research Paper: RP—ECBPM/00023 4. STUDY OBJECTIVES AND PARTICIPANTS The objective of the study presented in this paper is to identify the major factors that are driving the interest in, and rapid spread of, knowledge management. It is hoped that by identifying these, it would be possible to conclude whether the advocates of the concept have substantial grounds or whether the whole movement is just another management fad. This study is a part of a larger research project where the objectives were to identify the best practices for ‘people and knowledge management’ for future performance excellence. For the purpose of the study, questionnaires were sent to senior managers in leading UK and USA organisations from all sectors. The only criteria for sample selection was that organisations taking part had to be leaders in their field (the assumption was that leading organisations would provide the best insights into best practices). The sources used to select the sample were successful case studies published in the literature, recognised market leaders (e.g. Fortune 500), and quality award winners (e.g. EQA, MBNQA). A further selection process involved the individuals to be contacted. Where possible, the contact was the most senior manager in the organisation. In total, 300 questionnaires were sent out and 75 were returned giving an overall response rate of 25%. Participating organisations included Andersen Consulting, Kodak, IBM, Royal Mail, Trident, Jaguar, Rover, KPMG, Boston Consulting Group, Yamaha, Honda, Ames Rubber Corporation, Globe Metallurgical Inc., Xerox, Skandia, DHL, among others.

The organisations that responded came from the manufacturing (44.3%) and services (55.7%) sectors. The manufacturing sector included industrial and consumer goods manufacturers like automotive, auto parts, medical products, and office equipment. The service sector included business consulting, banking and financial services, food retail, advertising, IT consulting, courier, insurance, and education. All the respondents were experienced practitioners at senior levels in their organisation. Figures 1 shows a breakdown of the respondents by job function. Figure 1 - Breakdown of study participants by job functions Senior Management (CEO, MD, GM) Human Resource Management Head Quality Head Process / Operations 0

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Research Paper: RP—ECBPM/00023 5. STUDY FINDINGS The questionnaire presented the participants with several questions to assess the perceived importance of knowledge and intellectual capital in organisations, now and in the future. Participants were requested to show how strongly they agreed with these statements on a 5-point Likert scale. In addition, participants were presented with a list of potential drivers for knowledge management and were asked to comment, from their experience, on the influence of each of these drivers (in terms of its effect on spreading the knowledge management concept). Figure 2 shows the top five drivers as identified by the survey. The remainder of this paper is dedicated to presenting these drivers (in descending order of importance as identified by the study participants), and discussing possible cause or implications. Figure 2 Knowledge Management Drivers – Study Results Knowledge as a competitive weapon Effective exploitation of existing intellectual capital Concerns over impact of downsizing on intellectual capital Availability of tools and methods Fad / fashion

8% 29% 15% 23%

25%

5.1 Knowledge as a competitive weapon

The turbulent organisational environment has intensified the need for increased speed and reduced cycle time. Organisations no longer have the time to reinvent solutions (Edvinsson, 1996), and must exploit all the knowledge available to them to be able to succeed. The most common slogan is “to learn faster than the competitor and apply the new knowledge where needed as efficiently as possible” (American Productivity and Quality Centre, 1997). In such competitive times, knowledge is truly the main weapon for competitive advantage. Drucker (1995) wrote that “knowledge is the only meaningful economic resource”, and a survey of CEOs (Wiig, 1997) of large US companies pointed to the fundamental role that knowledge and intellectual capital plays within the modern enterprise. The CEOs agreed that ‘knowledge is our most important asset’. They also agreed that knowledge-based assets would be the foundation of success in the 21st century. To further test this trend, study respondents were asked whether they agreed that “Information and knowledge (intellectual capital) will soon be the only basis for competition between organisations in world markets”. Although the statement emphasised an extreme (… the only basis…), 51.2% of the respondents agreed with it.

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Research Paper: RP—ECBPM/00023 These all seem to be clear indicators to the critical role knowledge will play in the organisations’ future, and thus the importance of ‘knowledge management’, which is seen to be the most beneficial approach to leveraging and exploiting intellectual capital.

5.2 Effective exploitation of existing intellectual capital and assets

In every organisation there is knowledge that is dispersed over several individuals working at different locations, and possibly in different time zones and is stored in various media such as paper, IT, or audio. Roos and Von Krogh (1996) noted that “there is a large potential of knowledge that is never utilised in most companies”. After investigating some of the dormant knowledge within his organisation, Lew Platt, the CEO of Hewlett-Packard, was quoted saying, “If HP knew what HP knows, we would be three times as profitable”.

Further questioning into this area revealed that 77% of the responding organisations did not have any formal knowledge ‘map’ (guide to who knows what) in their organisation, and 78% agreed that this is a crucial practice to implement in order to begin to fully exploit the available potential in their organisation.

Structured knowledge management could realise that potential. By managing knowledge, organisations are aiming to create synergy among all these resources and to improve their performance on a continuous basis. Their objective seems to be making existing knowledge more productive in the light of the core processes and products (American Productivity and Quality Centre, 1997). Moreover, and although some knowledge workers work independently, collaborative work is often necessary for complex projects. “In any employee attitude survey done over the past 40 years, the No. 1 complaint has been the same thing: communication, or lack of it. People say they want more communication. Communications that spreads useful information to saves from reinventing the wheel, information that helps employee meet project deadlines, and stay competitive” (O’Dell, 1996). In short, they needed a ‘system’ which allows exploiting the available information and experience. The tools required for such effective collaborative work are provided by knowledge management (Stivers and Joyce, 1997).

5.3 Concerns over impact of downsizing on intellectual capital

The bulk of valuable information and knowledge today seems to be in the organisation’s intangible elements. A recent study (Fornell, 1999) revealed that in the Top 100 Dow Jones organisations the composition of shareholders value has changed form 50% tangible and 50% intangibles in 1970 to 20% tangibles and 80% intangibles in 1999. To further test this trend, survey respondents were asked to comment on changes in their work; 83% of the participants agreed that ‘employees are becoming ‘knowledge workers’, i.e. they rely less on their physical capabilities and more on intellect and knowledge’.

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Research Paper: RP—ECBPM/00023 However, in the days before re-engineering dramatically downsized the middle management ranks, middle managers were often the most knowledgeable people in the firm about what was happening, what was relevant, and who had the relevant information or skill. Now middle managers are largely absent and “firms are struggling to figure out who knows what” (Edvinsson, 1996). Organisations have went through several waves of downsizing, re-structuring, and re-engineering in the last decade. These actions have helped cut cost in the short term, and produced positive streamlining effects in some cases, but many organisations have realised, although too late, that they lost a wealth of intellectual capital.

Moreover, 85.2% of the respondents agreed that there was an erosion of employment security and predictable career paths. So although organisations might be more clever about downsizing, volatile market conditions and intense competition have deprived organisations and employees from being able to have long term stability.

For these reasons, organisations feel that the more they can upload knowledge from brains into systems and procedures, the more they can control it and the less they depend on individuals. This seems to be a major driver for initiating knowledge management initiatives.

Clearly, people are an enterprise’s main asset (they hold the bulk of the organisation’s knowledge), but they can walk out the door at any time. Still, enterprises want to service their customers on a continuous basis. “By transforming individual knowledge into collective knowledge, enterprises are not only trying to reduce the risk of knowledge erosion but also increase the speed with which knowledge can be made productive” (American Productivity and Quality Centre, 1997).

5.4 Availability of knowledge management tools and methods

The major tool and enabler for knowledge management is IT. IT has dramatically matured in the past few years and employees now have easier access to knowledge databases, knowledge networks, etc. IT investments provide instant information access within and outside the corporation and provide a means to create and capture knowledge (Stivers and Joyce, 1997). The availability of such powerful technology has clearly encouraged organisations to manage the available knowledge, as study respondents identified this as the fourth most important driver for knowledge management initiatives. “People say knowledge management is not about information technology and it’s not, but I challenge you to try to do it without IT” American Productivity and Quality Centre President (O’Dell, 1996).

From the vendor standpoint, the new KM offerings are coming considerably closer to being turnkey solutions. “Today's KM systems can locate information in a variety of different data stores (both internal and external), deliver information to users when they need to receive it, refine and analyse information, and offer a collaborative environment for users to share information” (Andrews et al, 1999). The vendors are also doing a much better job of articulating their value propositions. Add to this the fact that more vendors have entered the KM market and are now reporting solid sales growth.

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Research Paper: RP—ECBPM/00023 5.5 Fashion / fad

Given all the current enthusiasm for knowledge management and its potential, there are still sceptics who see it as a passing fad. The study revealed that 8% of the participants subscribe to this view. The organisational world has become flooded recently with latest ‘ideas’ and ‘techniques’, so much so that organisations have increasingly become very suspicious of these so called new approaches. Defendants of knowledge management quickly argued that “Knowledge management is broad, multi-dimensional, and covers most aspects of the enterprise’s activities. In contrast, fads have gained popularity by focusing on limited scope to simplify the problem setting. Whereas simplicity has been their attractiveness, it has also been their weaknesses” (Wiig, 1997).

However, those wary of knowledge management being yet another management fad are also justified in posing key questions. For instance, Quintas (1998) asks whether the trend toward knowledge management adequately defined and identified, and is what is perceived to be happening genuinely new and different? He goes on to question whether anything meaningful can be said in order to guide the knowledge management process – is knowledge manageable in terms of management as a process with which we are familiar, or is knowledge management an oxymoron? From these arguments, one may conclude that knowledge might be seen as a component of all forms of human and organisational activity, rather than a subject of concern in its own right. Only time can tell. O’Dell (1999) argues that being a fad is just a natural stage that all ideas (good or bad) go through.

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Research Paper: RP—ECBPM/00023 6. CONCLUSIONS

When asked whether they think that all organisations need a structured knowledge management system, 78% of study participants strongly agreed. Although KM is a very ‘young discipline’, the results of the study clearly revealed a considerable awareness of the importance of intellectual capital. In the current transformation from physical production to ‘knowledge work’, enterprises are increasingly dependent upon data, information, and the means to communicate and manipulate these resources. Organisations realise that the existence of a stock of knowledge (intellectual capital) is not enough to account for the high value in the marketplace associated with many knowledge companies. Indeed, it is the ability of companies to leverage their intellectual capital that is perhaps a greater key to profitability. “Fundamentally, knowledge is a more important asset than land, labour, and capital and must be managed as such instead of leaving it to chance” (Morrissey, 1998). Competitive advantage will go to those organisations that effectively generate, maintain and exploit ‘knowledge’ of their task domains and themselves, thus, there is a strong need for organisational KM (Whitaker, 1996).

The study also revealed that this awareness and acknowledgement of intellectual capital’s importance is shared between manufacturing and service industries alike (81.5% of manufacturing organisations and 88% of service organisations agreed that “intellectual capital will surpass physical assets to form the bulk of the future organisation’s value”). This fact opposes the dominant perception that service industries (software, health-care, financial services, communications, and consulting) are the most enthusiastic about KM as it is clearly identified in their work. Intellectual capital is clear in manufacturing industries as well (professionals generate the preponderance of value-through activities like research and development, process design, product design, logistics, marketing, or systems management) and the study showed that these organisations are aware of this aspect.

The study results have put forward a case for the need for knowledge management. All the indicators point to the increasing importance of knowledge and the trend seems to be that knowledge management will soon be part of the ‘way organisations do their business’. The knowledge revolution is here and no one can afford not to be involved. It is time to ‘manage’ knowledge.

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Research Paper: RP—ECBPM/00023

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