Intellectual Capital and Knowledge Management

Strategic Management of Knowledge Resources

Federica Ricceri

• Publisher: Routledge
• Year: 2008
• ISBN:
  9781134139828
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

It is widely held that the successful management of knowledge resources within industry creates value. However, how this value is created is less clear. This book explores the management of knowledge resources in organisations. Several of the frameworks which have been created around the world to manage knowledge resources are examined and the book

1
Introduction

Why the management of knowledge resources?

In the past few decades, the world has rapidly moved from its industrial economic base, in which economic growth was considered to be mostly determined by the use of tangible resources. Instead national economies around the world have shifted towards a knowledge base, in which wealth creation is associated with the ability to develop and manage knowledge resources (KR) (see, among others, MERITUM 2002; SKE 2005, 2007; EC 2006; Guthrie et al. 2007). As Drucker (1993:42) observes:

knowledge is the only meaningful resource today. The traditional ‘factors of production’ – land (i.e. natural resources), labour and capital – have not disappeared, but they have become secondary. They can be obtained, and obtained easily, provided there is knowledge. And knowledge in this new sense means knowledge as a utility, knowledge as the means to obtain social and economic results.

The role of KR as the engine of organizations has become widely recognized and there is no doubt that successful organizations tend to be those that continually innovate, relying on technologies, and the skills and knowledge of their employees, rather than hard assets such as plants or machinery (Guthrie et al. 2007).

It is widely recognized (e.g. Roos et al. 2005) that the management of KR creates value; not so clear is the connection between their management and their organizational performance. The need to investigate the management of KR in more depth is well established in the literature. According to Mouritsen (2004:258) ‘we struggle to specify how decisions can develop knowledge and translate this into desirable effects’. Also, Roos et al. (2005:5) state that if organizations do not change their management practices and strategies to take into account intangible resources, it is likely that benefits deriving from these resources will not be realized.

The importance of KR and their management is not limited to private or listed organizations, but also relates to public and other not-for-profit organizations, as all these entities are responsible for delivering value to various stakeholders. Knowledge resources are central to stakeholder engagement and they represent critical elements for assessing the competitive position of the organization and the grounds of organizational performance.

Several practitioners and academics have attempted to provide managerial and reporting tools that aim to facilitate an understanding of KR, their management, and links to organizational performance. These tools aim to improve managers’ and stakeholders’ decision making and to address the shortcomings of the traditional financial accounting perspective which fails ‘to keep up with the revolution taking place in business’ (Edvinsson and Malone 1997:1). For instance, these tools include ‘inscription devices’ that focus on understanding KR and making them manageable (Mouritsen et al. 2001:736) by using metrics, narratives and visuals, such as figures, tables and pictures.

Also, several national and international institutions have produced various intellectual capital (IC) frameworks¹ and authoritative guidelines. These frameworks provide guidance in the management, measurement and reporting of IC.² Also, many of these IC frameworks are the result of cooperation between researchers, companies, industry organizations and consultants and have, therefore, been informed by practice. Several IC frameworks will be reviewed in-depth in chapter 2. However, if and how organizations are actually using these IC guidelines is yet to be established and therefore illustrations of how organizations manage their KR in practice will be explored in chapters 3 and 4. In chapter 5, several lessons from the analysis of the IC frameworks and management of KR (MKR) in practice will be used to build this book’s original contribution to the theory and practice of IC which is the design of a strategic management of KR (SMKR) framework.

Knowledge resources and strategy

The inclusion of KR in an organization’s strategy³ formulation process is fundamental for their management and is a major premise of this book. A central question in the field of strategic management is: why do some organizations perform better than others (Barney 2001:644; Teece et al. 1997:509)? This question forms the foundation of the debate surrounding the strategic relevance of IC and its management. This debate has seen the emergence of two main strategic views: the market-based view and the resource-based view. The main difference between these two views is the identification of those factors which explain the organization’s performance and which need to be considered in strategy formulation. These two views will be briefly considered below, highlighting different approaches to strategy formulation and the relevance of KR within these.

In the market-based view, external environmental factors play an important role in explaining an organization’s performance and in determining its strategic choices. Within the market-based view several theories and models have been developed for forecasting future conditions and for scenario building under the motto ‘predict and prepare’ (Ackoff 1983:59). Among these, industry and competitor analysis, stimulated in particular by Porter’s (1980) book, Competitive Strategy, have given rise to models that present a checklist of factors to be considered, often categorized as economic, social, political and technological (Mintzberg 1994:55).

The resource-based view is based on the assumption that organizational performance can be explained by an organization’s resources portfolio (Dierickx and Cool 1989) and its deployment. Therefore, strategies should be defined around firm-specific resources which provide abnormal rents to the organization (Barney 1991). Within the resource-based view, it is recognized that knowledge is a main strategic asset of the organization (Itami and Roehl 1987; Hall 1993; Grant 1996), and a shift towards a more internally focused approach to strategy formulation is proposed. Grant (1991:129) expressed this as:

the firm’s most important resources and capabilities are those which are durable, difficult to identify and understand, imperfectly transferable, not easily replicated, and in which the firm possesses a clear ownership and control…. The essence of strategy formulation, then, is to design a strategy that makes the most effective use of these resources and capabilities.

Within this resource-based view, two streams of thought can be identified: the ‘static’ stream and the ‘dynamic’ stream. The first stream, ‘static’, highlights the stocks of strategic relevant resources as the foundations of competitive advantage (see, for example, Barney 1991; Amit and Schoemaker 1993; Peteraf 1993). For instance, Barney (1991) argues that sustained competitive advantage derives from the stocks of resources and capabilities controlled by the firm that are valuable, rare, imperfectly imitable and not substitutable.

The second stream, ‘dynamic’, is based on the view that accumulating firm-specific assets, that is assets which may be non-tangible and respond to the characteristics highlighted above (Barney 1991; Peteraf 1993), is not enough to support competitive advantage, as these stocks of relevant strategic resources need to be appropriately managed. To achieve and maintain competitive advantage, organizations must learn dynamically to use their resources effectively (Prahalad and Hamel 1990; Senge 1990; Nonaka and Takeuchi 1995) and to build and consolidate ‘competencies that empower individual business to adapt quickly to changing opportunities’ (Prahalad and Hamel 1990:81). Therefore, organizations develop their strategic resources and renew these to achieve congruence with a changing environment. This is known as ‘dynamic capability’. Teece et al. (1997:515) state that: ‘The term “capabilities” emphasizes the key role of strategic management in appropriately adapting, integrating and reconfiguring internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment.’

In other words, the ‘dynamic capabilities approach’ links the market-based view and the resource-based view, and highlights the context according to which strategic resources, and in particular KR, have to be understood, managed and developed.

The role of stakeholders in the organizational context is discussed by Clarkson (1995:107), who states that:

the survival and continuing profitability of the corporation depends upon its ability to fulfil its economic and social purpose, which is to create and distribute wealth or value sufficient to ensure that each primary stakeholder group continues as part of the corporation stakeholder system.

However, the management of relationships with stakeholders can result in much more than simple continued participation in the stakeholder system. Managing relationships with primary stakeholders can constitute ‘intangible and socially complex resources’ that may enhance organizations’ ability to create value in the long term (Hillman and Keim 2001:127). There is enough evidence to suggest that one effect of the increasing relevance of KR in the knowledge-based economy may be a trend toward a greater reliance on trust⁴ (Adler 2001). Therefore organizations are required to consider stakeholders in their decision-making processes. This helps to anticipate issues, to deal with them proactively and, therefore, to achieve organizational sustainability.⁵

The SMKR framework, which is advocated in this book in chapter 5, extends the dynami...