Shareholder Value through Knowledge Management – How IT-based knowledge management generates the conditions for creating and retaining value Dr. Martin Stadelmann Senior Manager, Head of Management Consulting Mummert + Partner Unternehmensberatung AG (Switzerland) World Trade Center Leutschenbachstrasse 95 CH-8050 Zürich Martin.Stadelmann@mummert.ch the impact of the action taken, and which can also Abstract be used as a standard of comparison in the context of benchmarking for a certain number of Recent literature on the subject contains companies. numerous definitions of the term knowledge management (KM). The justifications which are adduced to legitimise KM business solutions on 1 KM: Creating value instead of reducing offer are equally numerous. Central to the costs argument in favour of the implementation and use of solutions involving KM for the majority of writers are the expected improvements in Based on the concept of shareholder value, the ability of a operational processes, and the optimisation of company to generate financial profit in the long-term organisational circumstances. The emphasis is on (thereby creating value for its owners), is regarded as a aspects of cost and the potential for saving precondition for the success of any entrepreneurial money, and on the opportunities for improving activity. The attainment of a level of value-creation which efficiency and rationalisation. By way of contrast, can be compared with that of competitors is dependent on the article presented here describes an integrated the financial deployment of the available material assets, approach to knowledge management which i.e. the means of production of fixed assets and assets in expands on this reductionist way of looking at circulation which can be assessed in monetary terms. things, and includes a strategic perspective of However, only the logical, targeted and innovative value creation and retention into its considera- deployment of the intangible business asset ”knowledge” tions. Taking as a starting point the main (referring to tried and tested procedures, customers, direction of thrust of the value-creation strategy – its emphasis on products and innovation, products and their qualities, information flow, values, customers and their loyalty towards the company behaviour, co-operation with internal and external or cost and operational efficiency - those areas of agencies etc.) can enable a company to surpass its internal business activities are identified, that competitors, and by means of a permanent increase in its hold out the prospect of considerable potential stock market capitalisation – and thereby its market value for the creation of value if accompanied by - to create shareholder value and secure it in the long coherent management systems, processes and term. From this point of view the following definition is structures, as well as supported properly by IT- offered: based systems for knowledge management. At the same time, a sample of measurable variables will Knowledge be presented from which it is possible to gauge is the basis which a company needs to establish specific capabilities which will The copyright of this paper belongs to the paper’s author. Permission to copy without fee all or part of this material is granted provided that the copies are not enable it to compete successfully in the made or distributed for direct commercial advantage. long term and thereby create, retain, and Proc. of the Third Int. Conf. on Practical Aspects of secure value for its owners. Knowledge Management (PAKM2000) Basel, Switzerland, 30-31 Oct. 2000, (U. Reimer, ed.) For companies which are resolutely orientated towards http://sunsite.informatik.rwth-aachen.de/Publications/CEUR-WS/Vol-34/ value-creation, it will therefore no longer be possible to gear the design and introduction of solutions involving M. Stadelmann 20-1 KM towards criteria of efficiency and rationalisation in. 2 Focus: Emphasis on product, customer Rather will they have to take continuous account – i.e. in and cost parallel with the working, problem-solving and decision- making processes in which employees are involved - of The establishment of a KM initiative which is specifically the necessity to identify their employees‘ need for geared to a certain company as a tool for creating and knowledge. It is important that this should be satisfied at maintaining shareholder value requires the involvement of the earliest opportunity, to enable companies to develop all of the agencies (board, top management, department and establish the core competences which are essential to heads, etc.) which are responsible for the company’s successful action and thus to the active creation of strategic orientation, and the consistent support of entrepreneurial value. management. These must define the dominant value- creation strategy for their company – emphasis on Additionally, it is vital for any knowledge management product, customer or cost - and communicate this program, to create the conditions for establishing a unambiguously within the company. The three generic company culture in which knowledge is communicated, value-creation strategies below are central to this: circulated and published. This may involve symbolic acts such as the periodic award of ”Knowledge Share • product-orientation – the continuous development of Awards”, though it can also be directly incorporated into innovative products and services, which can satisfy the material incentive system (e.g. as an integral part of the very latest demands of the market and customers, personal or even team MBOs). It is a central objective to • cost-orientation – the logical rationalisation and create a working atmosphere in which isolationism and financial optimisation of existing production and ”hoarding” knowledge do not constitute a source of power, influence or indispensability for specific individu- logistics procedures to secure leadership on cost, and als or groups within a company. Contrary to this, it should • customer-orientation – the creation of long-term and be the objective to attain a situation in which the cir- intensive relationships with customers to secure and culation of useful knowledge is rewarded, and employees build on the existing potential for a return (i. e. can distinguish themselves by making their knowledge, additional business, more intimate business relation, expertise and experience widely available on a broad front reap the benefits of cross- and up-selling). to be used and re-used in connection with entrepreneurial value-creation processes. In this context , emphasising the Within these three generic strategic orientations, it will be fact that ”knowledge is the only company asset which is possible for most companies to adopt an unambiguous not exhausted with use, but actually increases both position on the basis of the overarching company policy. quantitatively and qualitatively” will support arguments in favour of knowledge access, sharing and distribution. Customer- orientation Company Strategy Strategy of Value Creation Culture Need for Objectives knowledge Incentives to pass Core competences Structures/ on knowledge processes Knowledge Management Strategy Cost-orientation Product-orientation KM Initiative #1 KM Initiative #2 KM Initiative #n Figure 2: Positioning a company’s specifi of value- creation strategy which is specific to a company (e.g. ”Product-orientation) Value creation, benefits for the enterprise Taking that position as a starting point, KM initiatives Figure 1: Determinants and process of deriving a strategy must be directed at providing specific support activities for Knowledge Management (KM) for the establishment of the required core competences in the area of the strategic focus which has been specifically selected by a certain company or division within a com- pany (see table, Appendix page 20-5). Different studies M. Stadelmann 20-2 have in fact demonstrated that scarcely a single company conferencing and decision support systems, distance has succeeded in reaching the top in more than one of learning tools and discussion forums. these three areas, in comparison with its competitors, and that it is essential to strategic consistency to identify one’s of information own strengths and exploit them in a competitive Availability environment. Even so, it may be quite opportune, Company success due to value- creation oriented management wherever KM initiatives which are specific to an area or and work behaviour division are launched, either to adopt various of these Co s s • task-/problem oriented po m ibl • at the right time, in the right place bi e b directions of main thrust in parallel KM initiatives, or to ne y • in the right format d us • management an e pursue a combination of various of these value-creation d of m I Data warehouses, RDBMS, ad T strategies as part of a single initiative. In this case, all the repositories, MIS, Internet/ e Intranet technology/portals, document management, data activities and initiatives must be closely monitored and mining, push technology, • exchange of ideas search and retrieval tools, • joint activities and problem-solving coordinated, so that it is ensured, that the selected KPI/benchmarking systems • synchronous/asynchronous communications • documentation • training measures will not be contradictory with each other. • discussion Process E-mail, discussion forums, video support conferencing, chatting, groupware, workflow, decision support, computer- based training, distance learning 3 Approach: Example ”Product orientation” Figure 3: Combination of process support and the availability of information For the purposes of a ”knowledge value assessment”, those areas of knowledge will be identified in the The fields of knowledge which are specific to a company initialisation phase of a company-wide KM program or situation, and which are essential to the establishment (consisting of different KM initiatives) which are essential and exercise of the core competences which are relevant to the establishment and exercise of the core competences in the case of product-orientation, and thus require which enable the company to perform specific activities in intensive management (i.e. acquisition/collection, storage, respect of the selected strategy for value-creation (see maintenance, circulation/provision) come under the table, Appendix page 20-5). In the context of this example following areas: - the case of companies where strategy is focused on product-orientation (which is typical for pharmaceutical or • fundamentals and related research, hi-tech companies) - the particular competences are: • design, development, and construction, • project management, • the use of interdisciplinary working practices and • familiarity with the customer’s requirements, methods of problem-solving, • information about patents • the promotion of creative work styles and conceptual • competitors‘ development projects and the results thinking, • market intelligence • the rapid development and commercial exploitation of new products and generations of products in swift Obviously, management of these areas of knowledge is succession, conditional upon access to data and information from a • the development of solutions which are based on the variety of sources – both in-house and external. Access to transfer of knowledge between different functional external sources may involve the use of search and areas and divisions, retrieval tools which are based on internet technology and • the circulation and exploitation of technical access mechanisms. Data bases, data warehouses and knowledge, functional expertise, and experience intranet portals will be used to establish in-house inside and outside an individual team, information and knowledge stores – known as ”content • the identification of new areas of application for repositories” - , while tools for the provision of access existing technologies and solutions, and rights, document and content management and data • the early recognition of promising technological mining as well as analytical tools are available to developments and market trends. complement internet technology for the purposes of retrieval and searching. As a consequence, one of the main demands on an IT- based KM system consists in the provision of It is only this combination of tools and functionalities, infrastructure mechanisms (whether in the form of which support processes with sophisticated information functionalities or autonomous tools) which support the stores and access mechanisms, which permits a ”leverage establishment and exploitation of these competences from effect” that allows employees to re-orientate and the point of view of collaborative processes within and restructure their management and work behaviour with a between teams or groups of people. The following are view to the creation focussed on value. particularly suited to this : e-mail, groupware, workflow, M. Stadelmann 20-3 1. Problem, idea, objective, cause References 6. decisions, experiences, 2. Search, trigger actions Treacy, Michael, Wiersema, Frederik D. - The Discipline 5. Setting up teams & of Market Leaders: Choose Your Customers, Narrow 7. “New knowledge” joint activities Your Focus, Dominate Your Market, Addison Wesley Dashboard Navigator Personalized Page Publishing Company, 1997. Warehouse Header Repository N a Image/Units RDBMS v Object Store i g a t i o n Text/Units Java/Analysis Klasson, Kirk - Managing Knowledge for Advantage: Content & Collaboration Technologies, Knowledge 3. Search results, data, content 4. Sources, specialists, Leadership Series, Cambridge/USA, 1999. experts CIN (ed.) - Think Tank Studies ”The Knowledge Figure 4: The Knowledge Management cycle Paradox: How to Manage Your Most Strategic Asset”, Cambridge Technology Partners, Cambridge/USA, 1999. A system which is designed in this way will thus support employees in their customary problem-solving and decision-making processes, while at the same time ensuring that the results of these co-operative processes do not go astray, but continually flow back into the knowledge stores provided as ”new knowledge”. There they will broaden the knowledge base which is available for the next cycle of activities to include the latest experience and results. At present this still largely happens either in a structured or an unstructured form. However, future KM solutions and KM products will contain a methodical fusion of the two forms. 4 Conclusion The overarching objective behind the conception and design of knowledge management solutions must therefore be to provide their users with the information they require to fulfil their tasks successfully from those areas of knowledge which are relevant in the context of those tasks – at the right time, in the right place and in the right format. Regarding the collaborative processes involved in task fulfilment and problem solving, they must contain infrastructure mechanisms which can support cooperative work structures and procedures. In this combination, a KM solution will be able to improve considerably the competences which a product- orientated company needs to consequently pursue its emphasis on the value-creation, and to ensure both the creation of value (turnover, yield etc.) and its retention (which can be seen from stock market capitalisation) in the long run. M. Stadelmann 20-4 Appendix (Table) Establishment and Essential core Potential for the creation maintenance of areas of competences of value/measurable knowledge variables Product-orientation • fundamentals and related • rapid development and • quality of selection and research commercial exploitation of prioritisation of R&D • design and development new products and projects ! • project work and project generations of products • time-to-market " management • the early identification of • life cycle of company’s • lessons learned new areas of application own products ! • market trends and for existing technologies • number of company’s own customer requirements and promising patents and copyrights ! • information about patents technological • re-use of results of • competitors‘ development developments and market development ! projects and the results trends • yield/new development ! • market intelligence • interdisciplinary activity • acquisition of new custo- and problem-solving mers/proportion of return • creativity on new customers ! • conceptual thinking • transfer of knowledge between Divisions • transfer of knowledge within and between teams Customer-orientation • customers‘ habits, needs, • relationship management • customer loyalty ! preferences • creation of references, • length of relationship with • customer data (historical generation of customer ! data and personal details) recommendations • fluctuation in customers " • rival suppliers, market • identify and exhaust • turnover, return per knowledge and experience opportunities for cross- customer ! • good knowledge of own selling • share of wallet ! products and services • create exchange barriers • number of customers/ • tendering procedures • database/system-based employees ! • best practices for marketing, e-commerce • new-customer consultations and • retention marketing business/total business ! customer-support • establishment and • image ! meetings maintenance of a positive brand image • reliability of products and services • transfer of experience Cost-orientation • production schedules • efficient output of • turnover of stock ! • production processes, goods/services and • utilisation of means of processing orders processing of orders production at capacity ! • procurement/ sales • competence in procedures • productivity of factors of processes and channels and methods production ! • materials management and • analysis and problem- • scrap, rate of defects " logistics solving • delays in delivery " • best practices for • definition and maintenance • capital tie-up " operational processes of standard processes • internal and external benchmarking Knowledge Capability Benefit Table: Selected aspects of KM support for value-creation strategies M. Stadelmann 20-5