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Knowledge Management

Knowledge Management is a methodology aimed at improving competitiveness and security of the company by using a full set of tools of protection, management and economics of intangible assets of the company. It studies the strategies aimed at timely providing the necessary knowledge to those members of the community who need these skills in order to improve the efficiency of the community’s activity.

There are two most common definitions of knowledge. One of them is quite specific and practical; the other is of general nature. The first one argues that knowledge is practical information which actively manages the processes of task performing, problem solving and decision making. In this case, managing knowledge means systematically, accurately and thoughtfully creating, updating and applying them for maximizing business performance and return from assets based on knowledge. At the same time, it is possible to state that knowledge is any word, fact, example, event, rule, hypothesis or model that enhances understanding and performance in a particular activity or discipline. In relation to this, knowledge management means the formalization of and access to practical experience, knowledge and expert data, which create new opportunities, contribute to the improvement of activity, stimulate innovations, and increase consumer costs (Hung 2009, pp. 320-333).

Knowledge is something that many organizations are increasingly produce, sell and buy. Businesses have to solve complex problems that cause them to develop advanced knowledge and maximally use it.
Although the exact cash equivalent of knowledge value in the organization cannot be calculated, there are some criteria for measuring its economic value. The difference between the market value of the company and the value of its tangible assets is one of the indicators of the value of intangible assets, most of which represent one form of organizational knowledge. There is evidence that only 6 to 30% of the company value is made up of the assets referred to in the traditional balance sheets, and the rest is intangible assets. As a result, 50% investment of manufacturing companies account for intangible areas such as research and development, training, professional experience, etc. (Fuller 2002).

Further, we’ll focus on the mechanism how knowledge management provides a competitive advantage of an organization, its contemporary functions and information technologies it is provided through, as well as analyze the potential and real effects of knowledge management systems implementation.

Knowledge Management and its Contribution to Competitive Advantage Creation

Knowledge management has two main objectives. The first one is efficiency, the use of knowledge for productivity growth by increasing speed or reducing costs. The second is innovation, creating new products and services, new businesses and new business processes“Invisible” domain is the intellectual assets that can bring and are bringing companies real dividends. These are patents and copyright, knowledge and competencies of staff, trademarks, client base, a network of loyal suppliers and partners, culture of innovation implementation, corporate memory and databases, business processes quality, etc. (Akdere 2009, pp. 349-61).

It is important to strive to form such an approach to knowledge management which correlates, balances and integrates organizational, human and technological components of knowledge.

Substantial expansion of access to knowledge, made possible by modern information technology changes the very nature of the relationship between expert and amateur, between the organization and employee, between the source and receiver of goods. Knowledge eliminates static and unidirectional business, because it creates a basis for continuous forward movement in the dynamically changing network involving both creators and users of information.

In light of the expansion and use of knowledge the concept and practice of lifelong learning becomes widespread, which is a set of measures enabling a person to learn throughout life on a principle that can be described as “any education is valuable anywhere, at any time and of any content.” A demand appears for the distribution of educational resources of the individual throughout his life, rather than their concentration in a strictly defined period. This involves the formation of the continuing education system including self-learning with consulting and methodological support (organization of the network of open universities, distance learning, etc.) (Akdere 2009, pp. 349-61).

With the revolutionary changes in production and information technologies, a new management function is also formed, whose mission is to accumulate intellectual capital, identify and spread the available information and experience, and to create the prerequisites for dissemination and transfer of knowledge. Application of intellectual capital and professional competence of personnel related to it are responsible now for the survival and economic success of companies. Knowledge becomes a source of high productivity, innovation and competitive advantage.

Knowledge management function and the creation of a learning organization

In order to permanently reduce the deficit of knowledge, organizations need to solve such important problems as (Fuller 2002):

  • acquisition of knowledge, i.e. the use of knowledge existing in the world and its adaptation to the needs of the organization (e.g., use an open trade regime, attract foreign investment and conclude licensing agreements), as well as acquiring new knowledge by conducting research and development activities;
  • assimilation of knowledge (e.g. achieving universal primary education, creating opportunities for lifelong learning and development of higher education system);
  • knowledge transfer, i.e. the use of new information and telecommunication technologies, corresponding legal regulation and access to information resources.

In its concrete application, knowledge management as a function and as a form of management covers the practice of giving additional value to the available information through the identification, selection, synthesis, storage and spreading of knowledge; imparting knowledge of the consuming nature so that it starts representing information which is necessary and available for user; and the creation of an interactive learning environment where people are constantly exchanging information and use all the conditions for the absorption of new knowledge (Davenport & Prusak 2000).

Knowledge management functions involve the application of different methods depending on the characteristics of a particular phase of acquisition and development of new knowledge. The literature discusses various approaches to the division of this process into stages with varying degrees of specification. The following version of knowledge management stages takes into account both available supply and real objectives and needs for identifying and using necessary knowledge (Liebowitz & Beckman 1998):

  1. Determine (identify what knowledge is crucial for success);
  2. Collect (acquisition of existing knowledge, experience, techniques and skills);
  3. Select (the inflow of collected knowledge is adjusted and its usefulness is assessed);
  4. Store (selected knowledge is classified and introduced into the organizational memory: human, paper, electronical);
  5. Distribute (knowledge is extracted from the corporate memory and become available for usage);
  6. Apply (knowledge is applied for the implementation of tasks, problem solving, decision making, brainstorming and learning);
  7. Create (new knowledge is revealed by monitoring customers, feedback, causal analysis, benchmarking, experiment, research, creative thinking, and data development);
  8. Sell (on the basis of intellectual capital, new products and services can be implemented outside the enterprise).

According to Liebowitz & Beckman (1998), the following is a brief list of the most important properties that should be targeted when performing each stage: high efficiency, focus on the consumer, improvement and the highest quality, high flexibility and adaptation, high level of professional experience and knowledge, high speed of learning and innovations, presence of the innovation system based on information technologies, self-management.

Exercising the function of knowledge management, it is important to create conditions for obtaining the necessary new knowledge. Among the means used, it is possible to distinguish three main ones (Cohen & Prusak 2001):

Purchase of knowledge. Various authors name the following methods of purchase of knowledge and experience: recruitment of new staff possessing knowledge and experience; establishment of a partnership with another organization; transition of any function from another organization to operate permanently in the given structure.

Rent of knowledge. The methods of rent of knowledge and skills include such methods as hiring consultants; receiving assistance from customers, suppliers, consumers, academic institutions and professional associations; involvement of other organizations on subcontracting conditions. Knowledge about customers increases the effectiveness of relations with them, and the knowledge acquired in conjunction with the customer opens the way for more innovations, products and services of a higher quality.

Knowledge development. It is possible to point out such means of developing knowledge and skills as sending employees for training outside the company; development and provision of training programs within the organization; inviting instructors from outside for the training within the organization; dissemination of existing knowledge within the organization.

Knowledge acquisition, storage, distribution and transformation in a form suitable for intra-company use involve the formation and implementation in practice of certain organizational conditions. In practice it has found expression in the introduction of such positions as Knowledge Management Director, Vice President for Intellectual Capital Management, Intellectual Asset Manager, Training Director, forming of cross-functional project teams in the field of knowledge management. There are also knowledge brokers, who transfer ideas and inspire those who cannot communicate directly with one another.

A large-scale survey conducted by Conference Board and Pricewater House-Coopers covering 158 corporations made it possible to determine that 80% of companies introduced the system of knowledge management, 25% of companies have a position of Senior Knowledge Manager, 53% of companies have a special apparatus and structure, 46% of companies have a dedicated budget, 6% use company-wide programs, 60% are going to introduce it within the next 5 years. According to Meta Group data, more than 75% of the 2000 largest companies in the world already use methods and technologies for knowledge management (Hung 2009, pp. 320-333).

The nature of the influence of the new function on a general corporate organizational structure is of direct practical interest. Recently the world practice has witnessed the spread of a new corporate model which provides a significant expansion of co-operation among competitors, suppliers and customers. This model changes the traditional concepts of the boundaries of an organization. Professional knowledge and skills of each partner can create a “best-in-everything” organization in which each function and process is implemented on a global level. As a result, a higher efficiency of production is provided, and the environment of mutual trust and mutual responsibility is created. Partnership in this case is less formal. Information networks establish effective and fast communications between the companies. This is a direct way to the appearance of structures in the future forming the so-called horizontal corporations, which realize the function of knowledge management through information technologies.

IT and Knowledge Management

Knowledge management function is really connected with codification processes. The purpose of codification, i.e., bringing knowledge in documentary or a formalized system, is to make local knowledge and often unreported knowledge understandable and accessible to a wide circulation. It is important to note that knowledge is a complex, flexible and rich in content structure. Enterprise database may contain structured information describing: 1) unique knowledge of experts – “the knowledge of the human intellect”, 2) unique structured information obtained by expert systems – “the knowledge of artificial intellect”. The expert system is understood as a program that according to a previously known algorithm operates the information representing the knowledge of an expert in a particular subject area, expressed in a form suitable for use on computer in order to develop recommendations for solving problems or issues set by the user (Wang & Wang 2009, pp. 94-109).

For instance, very often organizations or their subdivisions are trying to recreate the wheel. Thus, people are working on some project, but do not know what other division of the company is working on the same or similar question. It may be happening in a branch of some other country, or a similar project was carried out a couple of years ago, but the problem has already received a solution. Lew Platt, the president of Hewlett-Packard, once said that if Hewlett-Packard had known everything that Hewlett-Packard knew, it would have been three times as profitable. These words are relevant for any company, organization or enterprise. Knowledge management technologies can and should be used to improve organizational effectiveness by eliminating duplication of effort.

Therefore, the company management decided to implement a knowledge management system. Project team developed a strategy of knowledge, the implementation of which was assumed by the introduction of information technologies and staff development system. Concerning the information system, the management set a clear goal: to develop and implement a technology that would provide all its employees the access to a common information base, and contribute to the rapid and high quality dissemination of knowledge among the HP staff in all countries. The result of these developments was the Intranet, which was not even called that way at the time. And HP was the first company in the world to implement such a system (Wang & Belardo 2009, pp. 635-59).

Integration of operations into a single whole is conducted by means of information systems. Computer-integrated manufacturing uses the system of powerful personal computers for information provision of all phases of activities from project developments to manufacturing, inventory management, and distribution. In the offices local structures or interconnected communication systems allow people to work distantly being in any location. The organization is becoming a set of separate flexible manufacturing systems, interacting and controlled by computers. Corporate systems where knowledge management function incorporates not only company’s employees but also partners, suppliers, customers and even competitors help to establish a real partnership between the companies.

According to Fortune, almost half of the companies included in Fortune 1000 has introduced and continues to develop different KMS; another third is planning to do it this year. Implementing KMS usually entails a complete change in structure and business philosophy, the role of an employee in the company. It is therefore very important to choose the right approach to the implementation (Wang & Wang 2009, pp. 94-109).

The results of the study conducted by the McKinsey experts show that all the companies that implemented knowledge management, without exception, have made substantial improvements. However, some companies’ financial performance and efficiency indicators have increased much more than those of other companies. The available data determined the division of the studied companies into two groups, and the gap in the results was very noticeable. Thus, time for developing a new product in the first group of companies has reduced in two years by 11% compared to 1.6% in the second group, and the time of launching the product on the market has reduced by 4.6% and 0.7% respectively. To understand the reason for such a significant difference in the effectiveness of knowledge management systems, the approaches to their implementation in these companies were studied (Hsiao 2006, pp. 1289-1317).

The companies with less impressive results implemented knowledge management by applying the approach from the top to the bottom, that is, knowledge was imposed by the management into all areas of the company. It triggered the psychological moment: the workers, naturally, gained new knowledge, but the internal resistance to coercion did not allowed them to get it in such amounts and of such quality as it could have been if they had a sincere desire to learn. More successful companies used the approach from the bottom to the top: they introduced a series of measures that promoted staff to independent search, formulation and voluntary exchange of knowledge (Ardichvili & Yoon 2009, pp. 307-19).

In general, it is now clear that the KMS can be an important tool to combine IT with business, and there exist real opportunities to create systems of business management.

However, today a difficult situation has also formed, when, on the one hand, it is clear that no further development of business processes is impossible without computer technologies, but on the other hand, no one has clearly proved that investing in IT is somehow justified. It is amazing, but so far there is no economy of this industry, and the arguments on the total cost of ownership are songs and spells, designed for trusting consumers. Some researchers are trying to refute the allegations about the economic efficiency of IT. For example, in his book “The Squandered Computer”, Paul Strassmann (1997) shows that there is no direct link between investment in IT and profitability: the company can invest in IT and may not necessarily become profitable, or vice versa. Earlier, the same conclusions were stated by other economists, especially the Nobel Prize winner Robert Solow (2000, pp. 74), who formulated the productivity paradox: “We see computers everywhere except in the productivity statistics”.

Despite criticism, IT sphere occupies increasingly greater place in business and gradually becomes an integral part of it, although it is still far from reaching complete harmony between the CEO, CFO and other persons responsible for making decisions, and CIO, providing their support by computer facilities.


The abovementioned changes in the system of management are opening up new opportunities of geographical expansion of markets and production lines increase for organizations. Flexibility and ability to adapt to changes are nowadays more important than the constant striving to achieve results at any cost. From the standpoint of production and use of knowledge, it is crucial to pay continued attention to building innovative teams.

Among the most significant examples of the combination of multidimensional and varying types of knowledge and advances in technologies is the so-called virtual corporation, based on learning patterns. It is applied to form a temporary network structure of independent organizations, connected by information technology and combined in various combinations for effective functioning in a rapidly changing environment. The activities on the application of already existing knowledge and new information create prerequisites for the creation of a learning organization. Under the conditions of increasing international competition, increasing expenditures on research and need for supporting scientific and technological personnel, and the desire to share the risk associated with the creation and commercialization of technologies, organizations tend to combine into consortia and innovative strategic alliances.

At the same time, in a rapidly changing world, the choice of a single strategy is becoming impossible, and the more promising approach is the one known as “scenario planning” and allowing managers to take into account the uncertainty of the future. This type of analysis (scenario thinking or scenario analysis) combines predetermined elements with the most significant uncertainties (key uncertainties) in the development of future scenarios. While all the scenarios are equally possible in future, the organization must develop plans, but cannot build its activities according to plan.

Obviously, in systems based on these principles, equals participation should be shared between people whose intellect has dynamism, the ability to take non-trivial solutions, does not require pre-programming, but is limited to simultaneous holding no more than seven objects in memory, and machines capable to process huge amounts of data. They could be combined in a single system by means of information technologies that support knowledge management, and this is factually their major integrating role. Thus, knowledge management creates the conditions under which knowledge is transformed into a type of investments, and professional experience becomes a kind of asset creating competitive advantage of the organization on the globalized market.



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