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In this chapter we will review preliminary research on KM, innovation, their definitions, adaptation, various perspectives and approaches. We further discuss how these variables interact with each other as well as relate to business performance.

Knowledge Management Strategies and Business Performance

Interest in knowledge management (KM) has risen steadily since the 1990s and nowadays, many organizations have relied on KM strategies/practices as a key element of their operations. KM has been accepted as an integral part of management practice which builds methodologies through models, frameworks, and approaches that are objectively via rigorous studies (Wickramasinghe, Bali, & Geisler, 2007). The core of KM is knowledge but there are various terms and perspectives around it. Since Peter Drucker coined the term “Knowledge worker” (Ellingsen, 2003), researchers have defined and redefined the notion as well as how to best manage those workers (Kwon & Watts, 2006). Despite extensive research, we haven’t been able to build a commonly accepted approach towards the KM paradigm. Though, it has at least been acknowledged that KM is indispensable, and hence, there is a need for developing KM strategies.

KM strategies refers to the overall approach an organization intends to take to align its knowledge resources and capabilities to the intellectual requirements of its strategy (Zack, 1999).

Bierly and Daly (2002) similarly asserted that the set of strategic choices addressing knowledge creation in an organization comprises the firm’s KM strategy. Nevertheless, KM strategy is often embraced unconsciously (Garavelli, Gorgoglione, & Scozzi, 2004). To grow and stay competitive, organizations must have a consistent vision and deliberately manage its knowledge by implementing appropriate KM practices. Preliminary research has provided a multitude of approaches to managing knowledge. Gillingham and Roberts (2006) stated that KM field focuses on three key components: people, process, and technology.

From simple technologies such as email, web blog, forum to more complex ones such as AI, data mining tools, etc., all belong to the technology component of KM. Technology is the least important to KM and fails to contribute unless the other two elements are properly aligned (Alan & Lorna, 2011). Process regards to internal systems that organizations have established over years of running business. It includes best practices for a specific organizational environment and embeds in it what is good and what is practicable for the organization. People

are the most fundamental component in KM, driving the other two components. KM is effective only when KM principles are accepted by individuals, which will later promote quick KM exploitation. Nevertheless, the focus on the people component does not necessarily mitigate the significance of the other two components. In contrast, a balance among all three components would provide the best KM practice.

Another popular approach for developing KM practice is based on the categorization of knowledge. Polanyi (1966) initially classified knowledge into two categories: tacit and explicit.

Explicit knowledge is easily captured and documented to share while tacit knowledge resides in human mind, behaviors, and perception, hence, it is hard to be formalized and communicated (Nonaka & Takeuchi, 1995). It emerges from people’s interactions, requires skills and practices (Mårtensson, 2000). Similar to explicit- and tacit-oriented types, Hansen, Nohria, and Tierney (1999) categorized KM into codification and personalization strategies. In the codification strategy, individual knowledge is combined, put in a cohesive context, and made accessible to members of the organization via databases. It is a document-to-person approach under the condition that knowledge can be extracted and codified. This KM strategy is highly structured as compared to the personalization approach that is semi-structured. The personalization strategy exploits the tacit aspect of knowledge and presumes that knowledge is shared chiefly through direct personal interactions (Desouza & Evaristo, 2003).

From the same perspectives, Choi and Lee (2003) classified KM into four styles:

dynamic, passive, system-oriented, and human-oriented. Companies of dynamic styles emphasizes both tacit- and explicit-oriented methods while companies of passive style don’t put emphasis on KM. System-oriented style focuses on codifying and reusing knowledge (Choi &

Lee, 2003). Codifiability is increased through ITs (Shani, Sena, & Stebbins, 2000), thus, the difficulty of accessing and utilizing knowledge is decreased (Hansen, Nohria, & Tierney, 1999).

Knowledge is managed and distributed in a formal way, through procedures, codes, documents, and working manuals. On the other hand, human-oriented style puts emphasis on obtaining and sharing tacit knowledge through interpersonal contacts. Knowledge is formed within informal social networks, thus, human elements are important for effective KM (Lang, 2001).

This research chooses to study the KM strategies typology by Choi and Lee (2003), specifically, on system-oriented strategy and human-oriented strategy. The reason is that their typology is based on classical and well-known research in KM field which relate to difference

between tacit and explicit knowledge. Moreover, the terms of system-oriented and human-oriented strategy are also aligned with concepts about KM’s core elements in previous research, and are widely accepted by both academics and practitioners.

The contention that KM affects multi aspects of organizational performance has been supported by findings from previous research. KM has been a crucial strategic resource due to its uniqueness and non-substitutability. KM is positively linked to enhanced competitiveness and organizational performance, as well as a major driver behind lasting business success (Schulz &

Jobe, 2001). KM strategies has impacts on both financial outcomes (Vaccaro, Parente, & Veloso, 2010) and non-financial outcomes (e.g. quality, innovation, productivity) (Forcadell &

Guadamillas, 2002; Mukherjee, Lapré, & van Wassenhove, 1998). When studying impacts of KM on organizational effectiveness, Mohrman, Finegold, and Mohrman Jr. (2003) examined 10 companies and found a weak positive correlation between the degree to which the organizations generated, utilized knowledge and overall organizational performance, including financial dimensions. On the other hand, by using both financial and non-financial measures, the strength of the correlation may be accentuated.

Among many dimensions of organizational performance that are influenced by KM strategy, this paper will focus on a narrower domain reflecting business performance which represents economic aspects of organizational performance. The reason for this choice is the magnitude of business performance. That magnitude includes three dimensions – namely, theoretical, empirical, and managerial (Cameron & Whetten, 1983). Theoretically, business performance is at the center of strategic management. It is the time test of any business strategy (Schendel & Hofer, 1978), including KM strategy. Empirically, a dominant portion of strategy research employs business performance dimensions to assess a variety of strategy content and process problems; the central role of business performance can be clearly seen in many prescriptions proposed for performance improvement (Venkatraman & Ramanujam, 1986). In this study, business performance will be measured by both non-financial and financial criteria, including (1) customer performance, and (2) financial performance. Since KM strategy has impacts on various dimensions of organizational performance, it follows that KM strategy positively contributes to business performance.

Knowledge Management Strategies and Innovation

Innovation concept has been studied in a good amount of research (Damanpour & Evan, 1984; Nonaka, 1994; Subramaniam & Youndt, 2005). Some define innovation as a structure or administrative system, a policy, a plan or program, a production process, a product or service that is new to the company, which has been acquired or generated internally (Daft, 1982;

Damanpour & Evan, 1984). Work organization, introduction of changes in management, marketing systems, etc. can all be examples of innovation. Rogers (1998) defines innovation as the process of commercialising or deriving value from ideas. According to Cardinal, Allessandri, and Turner (2001), the innovating process emcompassess technical, physical, and knowledge-based activities that are essential to form product development procedures. As for Harkema advantages and deliver to customers what they want (Metaxiotis & Psarras, 2006). Schumpeter (1934) identifies five types of innovation:

 The launch of new products;

 New methods of production;

 The exploration of a new market;

 New source of supply, raw materials;

 New business organisations that create or break up a monopoly.

Within the context of this research, the type of innovation being investigated is new product (or service).

Innovation process greatly relies upon knowledge (Gloet & Terziovski, 2004) as knowledge is generated and converted into products, services, and processes (Choy, Yew, & Lin, 2006). The importance of knowledge to innovation has been acknowledged by both scholars and practitioners. For example, the European Commission decided that Europe needed to elevate its creativity and innovation for both social and economic benefits. Hence, it declared the year 2009 as the European Year of Creativity and Innovation. In doing so, it recognized the need for better use of knowledge and faster innovation, and also acknowledged the need to broaden the creative

skills of the whole population (Alan & Lorna, 2011). As in research field, when analyzing the impact of knowledge and its features or typologies on innovation, du Plessis (2007) proposes that KM plays three roles in innovation. The first role of KM in innovation is to produce and sustain competitive advantages via utilisation of knowledge and combination of practices. The second role of KM is reducing complecation in the procedure, and managing knowledge as a major causal factor to innovation. As Cavusgil, Calantone, and Zhao (2003) noted, firms that produce, utilise knowledge quickly and effectively are capable of innovating quicker at higher rate of success than those who do not. This notion is strongly supported nowadays with the rise of many successful innovative companies like IBM, Sony, Alibaba, etc. The third role of KM is ensuring the consolidation of knowledge, both internal and external, by making it more accessible and ready at hand. Knowledge consolidation means that knowledge can be interchanged, shared, developed, elevated, and made accessible when needed. Knowledge can be integrated via KM platforms, tools, and processes to support organisational learning and innovation. Chen, Zhu, and Xie (2004) contended that without helpful information and KM to facilitate knowledge integration, which succeedingly boosts innovation, organizations might be under-exploiting knowledge as an innovative source.

Beside these three roles, du Plessis (2007) also states a few critical contributions of KM to innovation, including:

1. KM allows the exchange and codification of tacit knowledge which is crucial for organisational innovation ability;

2. KM is a crucial for making knowledge explicit and amalgamating into new and innovative ideas. KM offers tools, mechanism, and platforms to assist the availability and accessibility of knowledge.

3. KM enables collaboration in innovation. Collaboration here is characterized as customers’, suppliers’, and employees’ ability to build knowledge sharing communities within and beyond organisational boudaries. These communities cooperate to accomplish a joint business goal, benefiting all community members.

Cavusgil et al. (2003) suggested that collecting tacit knowledge from collaborative stakeholders is likely to lower risk and cost of innovation by securing a right-first-time approach. This assists in cutting short development cycles and enhance the rate of successful innovation.

4. KM with its various activities enhances organisational capabilities and opportunities (e.g. absorptive capability, transformative capability, potential learning opportunities, etc.)

5. KM is a part of the culture that is favorable for knowledge constitution, sharing, collaboration, and eventually, innovation. Knowledge’s constitution, exchange, and elevation develop employees’ skills that are specifically crucial for the innovation process.

Through what du Plessis (2007) stated above, it is safe to say that KM directly contributes to innovation, which eventually contribute to an organisation’s successful business performance. More evidence on the notion can be found in an extensive amount of research in the KM and innovation field. For example, Gopalakrishnan, Bierly, and Kessler (1999) asserted that knowledge positively influences probability of innovation. Effective KM involves (1) identifying knowledge, (2) generating new knowledge, (3) developing competence, (4) effective management of innovation (Enkel, Gilbert, Makarevitch, & Vassiliadis, 2002). A KM system is conceded to facilitating the innovation process via faster access to new knowledge. As knowledge contributes to innovation, innovation is also seen as the best payoff from KM (Majchrzak, Cooper, & Neece, 2004). Darroch (2005) presents empirical findings to advocate the notion that firms with adequate are potentially more innovative as well. As innovation process is becoming more interactive, more reliant upon knowledge, KM is increasingly central (Swan, Newell, & Robertson, 2000).

As this research studies KM strategies typology by Choi and Lee (2003) which are system-oriented strategy and human-oriented strategy, the fundamental basis of how these two strategies affect innovation is now discussed. Tapscott and Williams (2006) see a clear link between the role of knowledge employee and innovation in interacting with peers and with organisational KM resources, but believe that the nature of the interaction has become more advanced. They describe social media as tools that can initiate and enable more powerful forms of collaboration than before. They point out that knowledge employees rountinely participate in peer-to-peer knowledge exchange across organisational boudaries, forming networks of expertise in a more complex way than traditional communities of practices do. They do this by using a wide range of technologies such as wikis, social networking systems, blogs, search engines, video conferences, discussion forums, etc. Technology allows those workers to use a network to

exchange knowledge, which potentially lead to new knowledge creation. From their point of view, we see how the combination of human and system element plays a role in creating innovation. Similarly, Denning (2000), envisions two basic different approaches or mindsets relating to KM and innovation. The first one is called the Napoleonic or the engineering approach, which refers to the application of scientific discovery to practical invention. This approach assumes the existence of a controllable path – a process based on a series of linked tasks – from the formation of an idea to its exploitation. In Denning’s (2000) terms, the approach represents an effort to reduce all knowledge to a set of mechanistic propositions which he attributes to “…a continuing itch for reductionist simplicity” (p. XV). The other approach is called Tolstoyan or ecological approach. It is based on the creative chaos and freedom on which creativity thrives. It seeks to exploit the connections between things and people that are featured in the collaboration and social networks of KM. Denning (2000) maintained that human naturally connects things and can apply these connections in new and creative ways. This process is said to be faster and more reliable and rigid mechanistic processes of management, which tend to rely on analytical (rather than creative) thinking. Nevertheless, the integration of both approaches can be beneficial to organisations’ innovation performance.

As discussed, KM strategy has been linked to business performance and innovation, preliminary research also declare that KM can enhance organizational performance and competitiveness indirectly via higher innovative capability (Braganza, Edwards, & Lambe, 1999;

Gloet & Terziovski, 2004). Accordingly, innovation can be considered as a mediator between KM strategy and business performance.

Innovation and Business Performance

In general, innovation refers to changing or creating new ways of doing things, new processes, products, and ideas. For business, innovation could mean implementing new ideas, improving an existing service or product, changing business models, and adapting to changes in the market. As previously mentioned, categories of innovations in this study are product innovations and process innovations, which are considered the most characterized classifications in the field (Šakalytė & Bartuševičienė, 2013). New products and processes are crucial for economic growth as they are usually better, faster ways of doing things or better meet the needs of society. Therefore, it is necessary to review the literature on the relationship between

innovation and business performance in order to see how important innovation is in terms of values added to organizations.

Nowadays, innovation is important for almost every aspect of society: it is an economic stimulus, a determinant of value creation and sustainability, social development, and a requirement for international competitiveness (Šakalytė & Bartuševičienė, 2013). However, the importance of innovation has not always been recognized. Dating back to the development of innovation concept in economic theories, adherents of classic economics did not consider innovation as a main factor behind economic growth and described its role mainly as a facilitator for other factors such as land, labor, capital. For instance, Adam Smith asserted that the allocation of labor in the economy was the driver of a country’s prosperity and inventions (mainly machines) were just a tool that made work more efficient and hence, allowing production at lower labor cost (Smith, 1776). Another economist, Jean-Baptiste Say, attended to the benefits of innovation in terms of introducing new machines that facilitated production and created new jobs. He emphasized the benefits of innovation for consumers mainly lying at lower prices of products (Say, 1880). This stream of economic theory was criticized to be disproportionately devoted to physical assets’ roles, while ignoring the role of intellectual assets (Lemanowicz, 2015).

The importance of innovation was later recognized by the economist Joseph Schumpeter, author of the book The Theory of Economic Development. Since the book was published in 1934, Schumpeter has been reputed to be the “prophet of innovation” (McCraw, 2007). According to Schumpeter (1934), innovation is a critical dimension of economic change. He argued that economic change revolves around innovation, and technological innovation often results in temporary monopolies which brings in high profits for a period of time before competitors succeed in imitating or generating a similar innovation. These temporarily high profits are the incentive for companies to create new products and processes (Pol & Carroll, 2006). Innovation continued to receive more attention when the international OECD program called TEP (Technology/Economy Program) was established in 1988. Its publications focused on the application of technology, scientific research, and innovation for the economy and society.

Thanks to the success of OECD program, economists started seeing knowledge and innovation as sources of competitive advantages and economic growth (Lemanowicz, 2015). In his 1954 book “The Practice of Management”, Peter Drucker also attended to the importance of

innovation, stating that the two most important functions of a business are Innovation and Marketing.

As explained by Schumpeter (1934), theoretically, innovation helps business grow because new products initially face little competition, hence, creating temporary monopolies which generates abnormally high profits. Lieberman and Montgomery (1988) backed the notion, adding that continual product innovation is another key to maintain competitive advantages because pioneers that innovate to keep up with changing technologies and customer needs are able to secure available market niches, which makes them formidable rivals and excessively hard to win. They also contended that a series of monopoly profits can be maintained if companies continuously launch a line of new and innovative products. The theorized importance of innovation has later been validated by other researchers through several studies. Geroski, Machin, and Reenen (1993) observed a sample of 721 large, quoted firms in the U.K and concluded that innovating companies are likely to be faster, more adaptable, more flexible, and better at dealing with market pressures than non-innovating companies. These characteristics are especially crucial during tough times such as economic recessions. In his research in 1999, Peter Roberts examined 4914 drug products from different U.S pharmaceutical companies and found that innovative propensity affects the degree to which firms’ abnormal profit persist over time.

Similarly, Cho and Pucik (2005) discovered a positive link between firm innovativeness and profitability, as well as growth, and market value. To answer the question “Are innovative companies more profitable?”, Minor, Brook, and Bernoff (2017) gathered five years of data from 154 companies that all used the same ideation management software. They were able to investigate correlataions between those companies’ commitment to innovation and their financial resutls like growth and profit. They found a significant correlation between the ideation rate and growth in profit or net income: the more ideas that were accepted, the faster the company grew.

Companies that have the greatest level of employees’ participation in generating ideas are also

Companies that have the greatest level of employees’ participation in generating ideas are also

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