Intellectual capital and knowledge management effectiveness

Building on the complexities of organizational knowledge creation the paper explores the alignment of knowledge management practices with the epistemological beliefs of individuals or groups in organizations. A pan-European research project investigated individual’s philosophy about truth, knowledge and the optimum approach of knowledge creation. These individual viewpoints and requirements are then contrasted with the knowledge management practices implemented in organizations. The results highlight significant misalignment between knowledge management requirements in epistemological terms and individual’s perception of organizational knowledge management activities. The paper claims these differences lie at the heart of problems companies experience with extracting value from knowledge management initiatives. The paper suggests ways of identifying and evaluating resource transformations in organizations, in order better to understand and manage knowledge creation to grow the intellectual capital of organizations. epistemological paradigms. It is also assumed that if the personal epistemology matches the corporate KM practices, then those practices are viewed as being more effective. Empirical data collected via surveys and interviews are presented and discussed before implications for future research and the management of knowledge and IC are drawn. Management of Intellectual Capital Today IC is recognized as a key strategic asset for organizational performance and its management is critical for the competitiveness of organizations (Grant, 1997; von Krogh and Grand, 2002; Grant, 1996; Boisot, 1998; Griffiths et al., 1998; Roos and Roos, 1997; Spender, 1996). According to Roos et al. (1997) and Marr et al. (2003) the management of IC involves: identifying key IC which drive the strategic performance of an organization; visualizing the value creation pathways and transformations of key IC; measuring performance and in particular the dynamic transformations; cultivating the key IC using KM processes; and the internal and external reporting of performance. A visual representation of these steps can be found in Figure 1; each of these steps will be explained briefly below. The first step is to identify the key IC resources in an organization. The traditional starting point is the strategy in which organizations identify the most important resources, especially the knowledge[SP1] resources (see Figure 2), in order to achieve their strategic objective. Advocates of the resource based view of the firm, such as Penrose (1959) and later Wernerfelt (1984) and Barney (1991), view the set of organizational resources as drivers for the strategy development. Either way, managers have to identify the IC that drives the value creation in an organization. IC resources might include human resources (skills, know-how, competence), stakeholder relationships (customer relationships, licensing agreements, distributions agreements), and organizational resources (systems, processes, organizational culture, management philosophy, intellectual property, brands). Closely related to IC are the physical resources (buildings, physical networks) and financial resources (investments, cash) that act as enablers to value creation. The second step is to visualize how IC helps to achieve the overall strategic objectives of the organization. This visual representation of causal relationships or transformations in maps is described by Kaplan and Norton (2000) as strategy maps, by Neely et al. (2002) as success maps, and by Gupta and Roos (2001) as Navigator building on the original work of Edvinsson and Roos in the Skandia IC supplements (Roos and LoÈvingsson, 1999). Such maps are representations of the business logic and they show the assumed value creation pathways that will lead to the achievement of the strategic objectives and satisfaction of key stakeholders. When organizations have mapped the value creation pathways they can develop performance indicators that help them to understand whether the organization is successful in implementing its strategy. Building measures around the business hypothesis allows organizations to test the assumptions about how the business works. The IC management phase will use the insights gained from identifying, mapping, and measuring knowledge assets. At this stage managers decide whether to cultivate and nurture the existing IC using KM processes or whether the assumptions of value creation were wrong in which case they have to go back to step one and identify the real drivers of success. The performance capacity of the company is based on the knowledge of its people (Savage, 1990) as well as on the collective or organizational knowledge (von Krogh et al., 1994). This Figure 1 Managing the intellectual capital Figure 2 Classification of knowledge assets [ 772] Bernard Marr, Oliver Gupta, Stephen Pike and GoÈran Roos Intellectual capital and knowledge management effectiveness Management Decision 41/8 [2003] 771-781 explains why companies are thriving to become learning organizations pursuing the objective of continuous development of their knowledge assets (Senge, 1990). The important strategic role of knowledge has lead academics and practitioners to define concepts, approaches and tools to make IC an identifiable and manageable resource. KM practices represent the tools that allow organizations to maintain and grow organizational knowledge assets. A more detailed discussion about knowledge management is provided below. Knowledge management We define KM as the collective phrase for a group of processes and practices used by organizations to increase their value by improving the effectiveness of the generation and application of their intellectual capital. KM processes are meta-processes which cannot be uniformly observed like physical processes and differ according to their means of creation, nature, recording, transmission and mode of use (Boisot, 1995). According to our definition, no two KM implementations will be the same since socio-cultural contexts differ and more importantly because human beings with different perceptions and philosophies are central to all KM applications. The reasons why companies invest in KM are that it either gives them a temporal effectiveness or efficiency advantage over their competitors, or they do it to try to negate the competitive advantages of others. Many dress up the decision to invest in KM in softer terms but the underlying motives remain simply advantage or survival (Lyles and Schwenk, 1992; Huber, 1990). Practice reviews show that KM is not just a fad and is taken seriously by companies and governments (Ruggles, 1998; KPMG, 2000). Given this, it is rather unexpected to find that according to surveys such as that by CTP (1999) few companies think that their investment in KM was a success while between 16 per cent and 36 per cent felt it was a failure. Other studies find that KM practices often increase the knowing-doing gap (Pfeffer and Sutton, 1999) Nonaka et al. (2000) state that despite the widely recognized importance of IC, albeit they primarily equate IC with knowledge, as a vital source of competitive advantage, there is little understanding of how organizations actually create IC by dynamically managing knowledge. Furthermore, according to Nonaka and Konno (1998) knowledge creation requires a shared context which they call `̀ ba’’ (equivalent to `̀ place’’ in English). Ba is a shared space which can be physical, virtual, or mental. Knowledge, in contrast to information, cannot be separated from the context ± it is embedded in ba. The requirements for ba imply that in order for organizations to succeed with KM, an understanding of exactly what it is that is being managed is required and, in addition, an understanding of who is using it to do what. It seems crucial that the KM practices in organizations match the knowledge creation requirements of individuals or group of individuals who are involved in the knowledge creation. In addition, it is usual to find that different parts of an organization use different KM practices to fulfil their allotted function. This means that if organizations have global and uniformed KM practices, or if the KM practices have been designed for the requirements of one specific group, that the KM system is not adequately serving all or at least one of the groups and is therefore sub optimal. Typical modes of failure are that the KM system is ignored and knowledge is created outside the KM system. Thus, in order to ensure effective KM for the key functional groups in the company it is important to understand their epistemological belief systems with regard to knowledge and how it compares with the corporate epistemology which is represented by the company KM system. Furthermore, it is vital to determine the roles that knowledge plays in creating value for the company and how it changes the company through organizational learning. To shed more light onto the issue of epistemology below we will discuss the different theories of knowledge and knowledge creation. Differing notions of knowledge creation There is considerable latitude among human beings as to the nature of knowledge, what it means and how it should be managed, if at all. If organizations try to impose a model of knowledge creation and then attempt management on a basis foreign to the workforce they will most certainly fail. It is therefore critical to understand people’s beliefs and use of knowledge in order to design the KM system that matches the requirements of individuals and groups of individuals. The theoretical understanding of organizational knowledge has evolved over the last 50 years. A predominant view is the positivistic science view of knowledge creation. The so-called cognitive perspective [ 773 ] Bernard Marr, Oliver Gupta, Stephen Pike and GoÈran Roos Intellectual capital and knowledge management effectiveness Management Decision 41/8 [2003] 771-781 (Simon, 1993; Varela et al., 1991) is characterized by information processing and rule-based manipulation of symbols. Under this epistemological view, knowledge is seen as abstract, task specific and oriented towards problem solving (von Krogh et al., 1994). The world is seen as pre-given and representations of reality can be re-created and stored (Varela et al., 1991). This means managers and organizations are able to create representations of truth through processing information available to them in their external environment, which are then storable and retrievable in KM systems (March and Simons, 1958; Daft and Weik, 1984; Prahalad and Bettis, 1986). In a contrasting view of autopoieses, knowledge is seen as socially constructed and therefore objective observation is impossible. Realities are not pre-given and representable, instead reality and knowledge is contextsensitive and history-dependent. In this autopoietic view, cognition is a creative act of bringing forth a world and knowledge is created through an interpretation process and social cognition connected to observation (von Krogh et al., 1994). This view conforms with the Japanese intellectual tradition where knowledge involves emotions, values and hunches and is not viewed simply as data or information that can be stored (Takeuchi, 2001). A third view is the connectionistic epistemology in which organizations are seen as self-organized networks composed of relationships, the rules of how information is processed are not universal, they vary locally (Venzin et al., 1998). IC consists of individual knowledge and of the organizing principles (Kogut and Zander, 1995). Kogut and Zander (1995) distinguish between know-how and information. Knowledge is held by individuals, but is also expressed in regularities by which members cooperate in a social community. The differing philosophical positions impact how individuals and organizations view the practicalities of knowledge creation. In the more positivistic-scientific viewpoint of the cognitivists knowledge can be codified and made available in systems. Therefore, organizational knowledge can be created separately from individuals. In the contrasting interpretive and phenomenological viewpoint of autopoietics, on the other hand, knowledge is seen as private and constantly interpreted and re-interpreted depending on the social context and experience of the individual (Habermas, 1984; Bhaskar, 1975; Weber, 1962). In the connectionistic viewpoint, private and public knowledge is combined, and firms only exist because they are better at transferring and sharing knowledge than the market (Kogut and Zander, 1995). The three epistemological classes are described in further detail by Venzin et al. (1998) and Habermas (1984) as they relate to KM. Table I shows an interpretation of these epistemological classes in a KM setting. To determine the value beliefs of the various functional groups in companies and their attitudes to knowledge, a questionnaire comprising 16 questions devoted to epistemological issues has been developed. The questionnaire included statements reflecting the three different epistemological views described above and the subjects could choose one of the three options for each of the 16 questions. The questions were repeated in that respondents are first asked to describe their own view on knowledge creation and secondly, how they see the capabilities of their company’s KM system. It should be noted, that the questionnaire was not aimed at determining the software characteristics but rather the KM environment of the company so that KM practices and management attitude are also reflected. Although not exhaustive, the questionnaire aims at providing a broad general picture of the respondent’s views of knowledge and truth and then the respondent’s views on how they perceive their company. Data collection can either be in paper form or electronically. Collected data are analysed by attributing each response to the epistemological class to which the response belongs. In general, this leads to mixed responses in which people select responses which indicate them to be in more than one epistemological group. As the analysis is intended to be indicative rather than definitive, it is necessary only to determine the predominant epistemology. This survey has been applied to functional groups or departments of several European companies from various industries. For this paper we selected six representative organizations, which show patterns that were repeated throughout the larger study. Each member of the group or department was given the survey to fill in. We analyzed 198 surveys from these six companies, however the number of surveys varied depending on the size of the group or department. In order to reflect the view of the groups and departments we included at least 80 per cent of the members of each group or department, which varied in size between 12 and 78 members. Proceeding in accordance with an agreement for non-specific attribution, the questionnaire results were coded and [ 774] Bernard Marr, Oliver Gupta, Stephen Pike and GoÈran Roos Intellectual capital and knowledge management effectiveness Management Decision 41/8 [2003] 771-781