Leveraging Knowledge Management with the Balanced Scorecard M. R. Cabrita1, V.C. Machado2, A. Grilo2 1,2,3
UNIDEMI, Department of Mechanical and Industrial Engineering, Faculty of Science and Technology, FCT, Universidade Nova de Lisboa, 2829-516 Caparica, Portugal 1
[email protected],
[email protected],
[email protected]
Abstract – In a rapidly changing environment, innovative firms are increasingly using the Balanced Scorecard (BSC) to identify and communicate key factors that drive future value. Knowledge is described as the only meaningful resource in the Knowledge Economy (KE). Although there is recognition that knowledge is a key business asset, many organizations still do not understand the implications of Knowledge Management (KM). The key is to understand what makes knowledge valuable and, in particular, how knowledge creates wealth in a knowledge-driven economy. KM deals with the production, application, and distribution of knowledge within and between organizations. Such intellectual assets are always constituted through practices and undertakings in an everyday work life setting. This paper seeks to examine how the BSC represents a relevant tool to KM, bridging the gap between strategic objectives set at the senior level within an organization and their operational execution. Keywords – Balanced Scorecard, Knowledge Management, Knowledge Gap, Learning and Growth Perspective
I. INTRODUCTION The recognition of both the opportunities and challenges inherent in the Knowledge Economy (KE) concept, whether in Europe, Latin America and the Caribbean or in Asia-Pacific points to the truly global nature of the KE phenomenon. In a world where the nexus of technology, globalization and organizational change is apparent, the idea of knowledge as perhaps the only meaningful economic resource exercises powerful appeal [1]. Knowledge is seen as an ability to act and value is directly linked to the intelligence, speed and agility that come from a host of latent intangibles that represent a reservoir of potential talent and innovation that provides a source of competitive advantage [2]. In such context, one particularly pressing challenge is in managers and employees accessing and processing the necessary knowledge that is critical to support and sustain the strategic direction of the firm. Also, it is critical capturing new customers and markets while simultaneously retaining existing ones. Success in meeting these challenges will depend upon understanding and identifying the critical knowledge to execute the firm’s strategy and uncovering the knowledge gaps [3] to create innovative products and services, and so enable sustained company value.
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The Balanced Scorecard (BSC) is a powerful and balanced strategic management system that focuses on four perspectives of corporate strategy which translates the company´s vision and strategy into a set of performance measures and operational requirements. In this framework the systemic knowledge and renewal dimension is the extension of the growth and learning perspective. Despite the criticism around the role of BSC as a powerful management tool in a context of turbulent and disruptive changes as such of the KE, we argue that the BSC is still a practical framework to deal with the intangible nature of knowledge, while ensuring that investments in Knowledge Management (KM) align with and contribute to the company’s strategic direction. The present study therefore attempts to reconcile the KM approach with the strategic one. KM theories postulate that knowledge is the main determinant of the value creation. The resource-based view approach postulates that managing the evolution of technical and organizational processes builds the firm’s competitiveness. This paper explores the linkage between BSC and KM. The research methodology is first to explore the BSC and KM concepts. Further, it addresses an approach to connect the value of KM to strategy, incorporating KM proposes in the firm’s business strategy. II. THEORETICAL BACKGROUND The concept of knowledge-based economy was popularized by the Organization for Economic Cooperation and Development (OECD), which defined it as an economy directly based on the production, distribution and use of knowledge and information [4]. The Asia-Pacific Economic Cooperation Economic Committee extended this definition to include the production, distribution and use of knowledge as the main driver of growth, wealth creation and employment across all industries [5]. 1.
How Knowledge Creates Knowledge-Based Economy
Value
in
the
In a technically and intellectually based economy the rules of economics has been transforming the concept of value creation [6]. The concept of knowledge as a
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strategic asset underpins the idea that sustaining competitive success requires that firms capture the knowledge that resides in individuals and leverage it across the whole firm. Knowledge is then described as a “capacity to act” [7], which suggests that the application of knowledge to tangible and intangible assets drives the creation of new knowledge, increasing the firm’s intellectual capital. In such context, firms create value combining different types of resources (tangibles and intangibles) and competences, and that value increases as much as those resources and competences interact [8]. The key to value creation lies with the effectiveness of knowledge transfers and combination with other types of capital [9]. It also follows that in the new economy companies will perceive creativity and innovation as necessary commercial activities to underpin their global competitive standing, providing a platform for economic growth, profitability and long-term shareholder value. At the same time, tapping the collective creativity and knowhow of employees is emerging as one of the best ways to anticipate customer needs and grow new markets.
knowledge management and explore the convergence of knowledge management and learning. This linkage between KM and learning capability is better understood in Figure 1. Given the firm’s strategy, it is crucial to identify and evaluate the knowledge that the firm needs to execute its strategy. Knowledge gap represents what the firm must know when compared to what firm knows. Strategic gap refers to what the firm must do to execute its strategy and what firm can do. The key to maintaining knowledge superiority is the ability to continually learn, and do it faster and more effectively than the competition. Knowledge Management What our company must know Knowledge gap What our company knows
To be productive, knowledge must be used along with the firm’s other resources. The key is to understand what makes knowledge valuable and, in particular, how knowledge creates value in a knowledge-driven economy. Valuable knowledge is that knowledge that is unique, difficult to replicate and then provides the mainspring of competitive advantage. If the application of some specific knowledge can create or sustain a competitive advantage by enabling an organisation to better formulate and implement its competitive strategy, then that knowledge is a strategic resource [10]. 2. Knowledge Management and the Learning Component of Knowledge Chain Knowledge management (KM) is a complex and multifaceted concept; it encompasses everything the organization does to make knowledge available to the business, such as embedding key information in systems, processes and products, applying incentives to motivate employees, interpreting and absorbing customer’s wishes and forging alliances to infuse the business with new knowledge. The goal of KM is to implement a holistic approach towards the management of organizational knowledge while considering the specific boundary conditions of the organization [11]. In this context, learning should be considered a function and a cornerstone in knowledge exploitation that impacts every aspect of the KM systems. However, some authors [12] claim that the learning dimension of KM has been under-represented and underestimated. They argue that literature on KM fails to associate its role with the learning dimension of
Strategic Management What our company must do
Learning capability
Strategic gap What our company can do
Figure 1. Strategic knowledge gap analysis
3. The Balanced Scorecard: A Strategic Management System for Leveraging the Organizational Performance The rationale of the BSC focuses on providing a systematic tool, combining financial and nonfinancial performance indicators in one coherent measurement system. Metrics are constructed according to a predefined strategy, and the company’s processes are aligned towards this strategy, giving business people a comprehensive understanding of business operations. The scorecard is similar to a dashboard in a car [13]. As you drive you can glance at the dashboard to obtain realtime information such as how much fuel remains, the speed you are traveling, the distance you have traveled, etc. The BSC provides similar information to all levels of the organization through performance measures connected to specific business areas in the same manner. The BSC translates the organization’s mission and strategy into a comprehensive set of performance indicators for strategic management and measurement. It groups together several financial and nonfinancial indicators that describe the company’s strategy (leading indicators) and its performances (lagging indicators). Reference [14] studied the organizational impact of KM and found that KM practices are directly related to organizational performance which, in turn, was directly
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related to financial performance. An important issue is that there was no direct relationship found between KM practices and financial performance. An empirical study [15] developed with 560 managers from major Taiwanese hi-tech companies, the authors used the BSC approach to investigate the effects of the introduction of a KM system on operating performance. The results showed that after introducing KM there was a 5% to 10% improvement in performance in the customer, financial, and internal business process areas and a 10% to 15% improvement in performance in the learning and growth area. In addition, some authors [16] believe that BSC is a practical framework to deal with the intangible nature of knowledge and propose that knowledge can be measured using the BSC [17]. The BSC approach measures performance from four different perspectives that together encourage managers to look beyond traditional financial measures: (1) Learning and growth (concerned with actions to improve and create value); (2) Internal processes (concerned with what the firm must excel at); (3) Customer (considers how the firm looks to customers); and (4) Financial (considers how the firm looks to shareholders). These four perspectives permit a balance between short and long term objectives, between desired outcomes and the performance drivers to achieve those outcomes, and between hard, objective measures and soft, more subjective measures. The reasoning behind these four perspectives was that the long term success is a function of investment in capabilities that would in turn drive future performance.
learning and growing organization is one in which KM activities are deployed and expanding in order to leverage innovation and creativity of all the people in the organization.
KM Purposes
BSC Perspectives
Satisfied customers lead to increased financial results
Financial Results
Improved processes lead to improved products and processes for customers
Customers
Skilled, creative employees question the status quo and work to improve business processes
Internal Processes
Learning and growth of employees is the foundation for innovation and creativity.
Learning and Growth
Figure 2. Linking KM processes to the BSC perspectives Applying the learning and growth perspective, company has to identify the organizational infrastructure that would best fit its strategic goals. For successful implementation, while in the other three perspectives managers needed to identify where the organization stood currently and where it had to be in the future in order to be successful, this fourth perspective provides the actions on “how to get there”.
III. METHODOLOGY Although the balanced scorecard can form the foundation for organizational strategic success, it is not sufficient in itself. Along with strategies, there must be initiatives, such as business process improvement efforts, to steer the organization in the right direction and improve KM implementation.
The learning and growth perspective with its three dimensions – people, systems and organizational perspectives – focus on to create a climate that supports organizational change, innovation and growth. Figure 3 depicts the relationship between business processes in BSC and the use of KM in an organization [19].
1. Rationale for Balanced Scorecard in KM The cause-and-effect hypothesis is fundamental to understanding KM metrics in a way that the BSC prescribes. In looking at the original Kaplan and Norton [18] implementation, KM clearly fits within the learning and growth aspect of their framework. In this sense, KM outputs will impact on other processes with important effect in customers and ultimately in financial results as depicted in Figure 2. Learning and growth perspective is the key to strategic success and further the foundation for the future. Learning and growth is fostered by KM activities and initiatives. A
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enabler and knowledge environment (K space) and KM processes the outputs within KM transformation processes. Outcomes include proficiency, K diffusion, K codification and K innovation. Proficiency may be seen, for instance, as the number of world class employees, critical knowledge retained from employees or higher performance from communities of practice (CoP’s). Another outcome is K diffusion which refers to e-learning environment or performance of knowledge communities. K codification relates to codified lessons learned best practices and success stories. K innovation is the outstanding result of knowledge strategy. Inputs Human resources
Figure 3. KM linkage: Cause and activity 2. Translating Actions
Business
Strategy
into
Outputs
Outcomes Higher proficiency
Culture
KM
When defining and measuring performance one always has to keep in mind, that the reason to focus on knowledge and its management is not to have “more, better, faster” knowledge – but to create value. The foundation or fundamental cause for strategic success has to do with people. People can use their competence to create value in two directions: by transferring and converting knowledge externally or internally to the organization they belong to. When the managers of a firm direct the efforts of their employees internally, they create tangible goods and intangible structures such as better processes and new designs for products. When they direct their attention outwards, in addition to delivery of goods and money they also create intangible structures, such as customer relationships, brand awareness, reputation and new experiences for the customers [20].
K space E
KM success factors can be viewed as facilitating factors for a KM initiative, and some success factors include leadership, investing in people, and developing supporting organizational conditions like technological infrastructure and secured knowledge structure. A study [20] based on 66 Korean firms found that KM drivers such as learning orientation, knowledge-sharing intention, knowledge management system quality, reward, and knowledge management team activity were significantly related to the organizational knowledge management performance – i.e. knowledge quality and user knowledge satisfaction. Based on the literature review, we define the KM inputs, outputs and outcomes of a knowledge strategy as depicted in Figure 4.
Better K codification
KM processes
Technological resources
More K innovation
Figure 4. KM Transformation Process in a Knowledge Strategy IV. DISCUSSION Based on the above, we suggest an approach to enhance the measurement of KM in the organization. Figure 5 presents an extract of a strategy map where the BSC is centered on knowledge aspects. Proficiency
The KM activities currently taking place in organizations include creation, sharing, access, usage, and maintenance.
Better K diffusion
Investment in processes
K Diffusion
K Codification
K Innovation
Financial
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Learning/ Innovation
1. 2. 3. 4. 5. 6. 7.
Most important inputs are people, technology and organizational processes. Culture may be seen as an
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8. New products and services 9. K intensive product innovations
Bus
[6] L. Edvinsson, Corporate Longitude, London: Prentice Hall, 2002.
Figure 5. Strategy map Implementation process requires that companies link knowledge strategy and knowledge management actions with the business strategy. Future research should focuses on defining knowledge value drivers and metrics of knowledge objective and planned actions for individual companies trying to identify a common approach by sectors. V. CONCLUSION Extending the BSC approach to the KM environment will assist companies in understanding the use of KM in relation to their knowledge capital resources. The Balanced Scorecard is seen as a vehicle, through which a wide range of innovations and improvements in performance can be achieved, contributing to the development and continuance of long-term competitive benefit within a constantly challenging environment. Although it is not easy to integrate KM metrics into strategic decisions, we argue that making a conscious effort in conceptualizing, designing and putting to practice metrics like the ones described above can actually help one realize the true worth of KM. ACKNOWLEDGMENT We gratefully acknowledge the support given by UNIDEMI, R&D unit in Mechanical and Industrial Engineering in the Faculty of Science and Technology, FCT, New University of Lisbon, Portugal REFERENCES [1] P. Drucker, “The new society of organizations”, Harvard Business Review, September-October, pp. 95104, 1992. [2] C. Eustace, C, “A new perspective on the knowledge value chain”, Journal of Intellectual Capital, Vol. 4, nº 4, pp.588-596, 2003. [3] M. H. Zack, “A strategic pretext for knowledge management” In Proceedings of The Third European Conference on Organizational Knowledge, Learning and Capabilities, Athens, Greece, April 5, 2002, Available [on line] http://www.alba.edu.gr/OKLC2002/Proceedings/ [4] OECD, Organisation for Economic Cooperation and Development, Employment and Growth in the Knowledge-based Economy, OECD, Paris, 1996. [5] APEC, Asia Pacific Economic Forum, “The New Economy in APEC: Innovation, Digital Divide and Policy”, APEC Secretariat, Singapore, pp.181, 2002.
[7] K. E. Sveiby, “A Knowledge-based Theory of the Firm To Guide Strategy Formulation“, Journal of Intellectual Capital, Vol. 2, nº 4, 2001. [8] M.R. Cabrita, ”Intellectual Capital: A Phenomenon of Interrelationships”, International Journal of Business and Systems Research, Vol.3, nº2, pp.229-256, 2009. [9] M.R. Cabrita, V.C. Machado and A. Grilo, “Intellectual Capital: How Knowledge Creates Value”, In Knowledge Management for Process, Organizational and Marketing Innovation: Tools and Methods, E. O’Brien, S. Clifford and M. Southern, Enterprise Research Centre at the University of Limerick, Ireland, in press. [10] M.H. Zack, D.E. Smith, and J.A. Slusher, Knowledge and strategy. Institute for Knowledge Management. Williamsburg, VA, 1999. [11] P. Heisig, “Harmonisation of knowledge management – Comparing 160 KM frameworks around the globe”, Journal of Knowledge Management, Vol.13, nº4, pp.4-31, 2009. [12] M.D.Lytras and A. Pouloudi, “Towards the development of a novel taxonomy of knowledge management systems from a learning perspective: an integrated approach to learning and knowledge infrastructures“, Journal of Knowledge Management,Vol. 10, nº 6, pp.64-80, 2006. [13] A.M. Pangarkar and T. Kirkwood, “Strategic alignment: Linking your learning strategy to the balanced scorecard”, Industrial and Commercial Training, Vol. 40 nº 2, pp. 95-101, 2008. [14] M.H. Zack, J. McKeen and S. Singh. “Knowledge management and organizational performance”, Journal of Knowledge Management, Vol.13, nº6, pp. 392-409, 2009. [15] l. Pang-Lo and T. Chih-Hung, “Effect of knowledge management systems on operating performance: An empirical study of high-tech companies using the balanced scorecard approach”, International Journal of Management,Vol. 24, nº 4,pp.734-743, 2007. [16] S. Bose and K. Thomas, “Applying the balanced scorecard for better performance of intellectual capital”, Journal of Intellectual Capital, Vol. 8, nº4, pp. 653-665, 2007. [17] D.J. Skyrme and D.M. Amidon, ``New measures of success'', Journal of Business Strategy, Vol. 19 No. 1, pp. 20-24, 1998.
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[18] R. Kaplan and D. Norton, The Balanced Scorecard translating strategy into action. Boston: Harvard Business School, xi, pp.322, 1996. [19] A.M. Fairchild, “Knowledge management metrics via balanced scorecard methodology”, Proceedings of the 35th Hawaii International Conference on System Sciences, 2002. [20] K. E. Sveiby, “A Knowledge-based Theory of the Firm To Guide Strategy Formulation“, Journal of Intellectual Capital, Vol. 2, nº 4, 2001. [21] S. Yu, Y. Kim and M. Kim, ‘‘Linking organizational knowledge management drivers to knowledge management performance: an exploratory study’’, Proceedings of the 37th Hawaii International Conference on System Sciences, Waikola Village, HI, IEEE Computer Society, Piscataway, NJ, 2004.
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