Impacts of knowledge creation capabilities on corporate performance in Vietnam today

The empirical evidence reveals a correlation between knowledge creating capabilities and financial performance of SMEs in retailing service, which implies some solutions to KCC in Vietnamese SMEs.

ECONOMIC DEVELOPMENT No 205, September 2011 IMPACTS OF KNOWLEDGE CREATION CAPABILITIES ON CORPORATE PERFORMANCE IN VIETNAM TODAY by Dr NGUYEÃN HOÀNG VIỆT* In response to the effort to evaluate knowledge creating initiatives of organizations, this study introduces the concept of ‘knowledge creating capabilities’ (KCC) that indicates the structural balance of the four knowledge creation modes proposed in the SECI Model by Nonaka & Takeuchi (1995) The relationship of these capabilities with corporate financial performance is explored using two financial indicators of Vietnamese small and medium enterprises (SMEs) from different sectors The empirical evidence reveals a correlation between knowledge creating capabilities and financial performance of SMEs in retailing service, which implies some solutions to KCC in Vietnamese SMEs Keywords: knowledge creation, knowledge assets, SECI Model, business performance Introduction At present, corporate competitiveness depends a lot on ability to create, employ, supply and protect knowledge of enterprises [1], [5] In a world where markets, products, technologies, rivals, laws and even social institutions have been changing quickly, a continuously innovative strategy based on corporate knowledge is a precondition for establishment of sustainable competitive advantages of enterprises Strategic vision of this effort requires enterprises to include knowledge resource as prerequisite and vital factors of the business strategy [6] Enterprises with effective knowledge management can provide their customers with higher added values, reduce personnel cost and overheads, improve their decision-making process, renovate continually, enhance labor productivity, develop new products, beef up flexibility of organizational structure and ensure a quick and effective dissemination of knowledge within the organization [4], [5] The main motive of an enterprise pursuing knowledge creation in 52 RESEARCHES & DISCUSSIONS general is to enhance its business performance [1], [4] Measuring the value of knowledge created and evaluating efficiency in knowledge management have become matters of concern to both researchers and corporate managers in Asia, Europe and America One of traditional approaches is to look for interactive relation between knowledge management (KM) and indicators of financial performance [4], [5] Although affirming positive relations, many authors admit that their researches or surveys are not highly persuasive KM is a new field originating from various sources, and therefore, generates various views and interpretations However, it is generally agreed that KM is related to inside knowledge of an organization and ways of using this knowledge to improve the corporate performance KM, in relations to members of organizations, implies two aspects: (1) how to create necessary knowledge (knowledge creation); and (2) how to use it to improve the performance * University of Commerce ECONOMIC DEVELOPMENT No 205, September 2011 I.Nonaka is the author of a theory of knowledge creation that attributes miraculous success of Japanese companies to creation and utilization of knowledge in business Nonaka introduces concepts of explicit and tacit knowledge and works out theoretical basis for the model of interactions between two classes of knowledge in development of organizations (See Figure 1), thereby explaining how Japanese companies create their dynamic of innovations Transforming explicit knowledge to tacit one and part of individual’s basic information, eg by learning, reading and discussing Tacit Tacit Tacit Through face-toface communication or shared experience, eg apprenticeship Tacit Socialization Externalization Empathizing Articulating Embodying Connecting Internalization Combination Explicit Explicit Explicit SECI Model Explicit knowledge is articulated into formal language and can be easily shared among individuals It can be expressed as scientific formulas, clear procedures and other media, including information, data, publications, texts, and documents codified by various means Explicit knowledge is characterized by theoretical approaches, solutions to problems, documents, databases, and knowledge base Tacit knowledge is personal knowledge embedded in individual experience and contains subjective insights, intuitions, hunches, and skills Tacit knowledge is hard to communicate or share with others and can only be learned from others through a close relation for a certain period of time Tacit knowledge involves intangible factors, such as personal beliefs, perception, institution, metaphorical models, and skills such as craft and know-how Nonaka & Takeuchi point out differences between Japanese and Western conceptions of knowledge and thinking ways They perceive knowledge creation as the key to continuous innovation, and by various mechanisms tacit knowledge can be transformed into explicit one and vice versa, based on socialization and coordination Explicit Nonaka & Takeuchi (1995) introduced their SECI Model based on actions and interactions between tacit and explicit knowledge Many subsequent researches (by Bohn 1994; Hansen 1999; Singh & Zollo 1998; and Swan 2000) try to separate these knowledge dimensions and concentrate on measurement of effects of tacit or explicit knowledge This paper therefore aims at systematizing arguments about knowledge creating capabilities, and analyzing importance of structural balance between four modes of knowledge conversion in the process of knowledge creation in enterprises as presented by Nonaka & Takeuchi in their SECI Model Converting tacit knowledge to explicit knowledge, eg through systematizing, interpreting, experiences, lessons Creating new knowledge by combining, classifying, summarizing explicit knowledge Figure 1: SECI Model – Knowledge creating process in an enterprise [7] RESEARCHES & DISCUSSIONS 53 ECONOMIC DEVELOPMENT No 205, September 2011 The work of Nonaka & Takeuchi has been widely accepted, validated and applied in several research fields This includes also internal (single organization) and/ or multi-organizational perspectives [10], because organizational knowledge creation (distinct from individual knowledge creation) takes place when all four modes of knowledge creation are organizationally managed to form a continuous cycle, it can be viewed as an upward spiral process, starting at the individual level moving up to the collective level, and then to the organizational level, sometimes reaching to the inter-organizational level Difficulty in building a link between tacit and explicit knowledge in a firm can cause problems This can cause ‘bottlenecks’ in the process of knowledge creation That ‘bottlenecks’ can occur when the four knowledge conversion modes are not equally balanced In other words, when a firm has either a lack of focus in any knowledge conversion mode (socialization, externalization, combination, internalization) or when it overly focuses its KM initiatives onto specific modes of the of SECI Model The concept of “Knowledge Creating Capabilities” proposed by Choi & Lee, which is defined as the level at which all four modes of SECI Model can work together as part of a common mechanism for knowledge creation KCC is then not the sum of individual knowledge creation activities but a concept that emphasizes the importance of the balance level between the four modes of knowledge conversion in a firm [1], [2] The composite score of KCC was the mean score of the four modes of SECI Model This score represents the level at where all SECI modes can work together allowing the generation of an appropriate spiral of knowledge creation Figure describes samples of scoring for KCC [7], [8] 54 RESEARCHES & DISCUSSIONS KCC is measured by: SSECI= (OS + OC)(OE+OI)/2 x Balance coefficient O – S,E,C,I / O – S,E,C,I max Figure 2: Sample of knowledge creating capabilities (balanced vs non-balanced) Methodology and research results We use an empirical approach along with results of other studies by Choi and Lee (2002); and Chang et al (2005) to test the framework Companies selected as the target population of this study are mostly members of the Hà Nội Trade Corporation (HAPRO) plus some privatelyrun SMEs in Hà Nội that have been in business for at least three years The target population comprises 61 companies from the following industries: manufacturing (37.8%), retailing and transportation (28.7%), communication and information (13.0%), service (11.2%), construction and real estate (8.1%), and agriculture (1.2%) KCC were assessed by a questionnaire It was composed by a subset of questions selected from Nonaka [7], [8] The content covered all modes of SECI Model and considered all their subconstructs The questionnaire included six items for each mode of SECI Model (See Table 1) In this study, corporate performance is measured by two indicators: operating profit margin and labor productivity Operating profit margin is calculated by dividing profitability by sales Labor productivity is computed as profitability divided by number of employees A total of 160 questionnaires were distributed to the companies from the target population, and a total of 52 companies corresponding to several industries answered the questionnaire Retailing industry presented a good balance between response ratio and number of observations It had a set of 38 observations, which represented a ECONOMIC DEVELOPMENT No 205, September 2011 response ratio of about 50% Due to these facts, this study focuses on the retailing sector Next, linear analysis is used for estimating relation between KCC and corporate performance of retailing companies The findings show that there is a significant correlation between KCC and firm performance (Figure 3) Table 1: Questionnaire items sample Mode Socialization (1-6 items Externalization (1- items) Combination (1- items) Internalization (1- items) Knowledge creating capabilities Content - Ability to present demands and requests of the client in formal contracts - Ability to share personal values and know-how that are difficult to verbalize through team work - Ability to share ideas and inventions with others using figures and charts - Ability to raise new ideas through free discussions - Ability to create a new idea using previous analyzed information and data - Ability to produce documents such as plans, specifications, reports, for implementing new concepts - Ability to provide successful models from inside or outside the company and share them for use between departments and within a department - Ability to apply the knowledge gained through training, manuals and documents, and assess its effectiveness companies Furthermore, companies were grouped according their balanced score ANOVA tests showed that there are significant differences between the levels of balanced SECI and their performance There are significant differences between non-balanced companies and companies with high level of balance in terms of labor productivity and operating profit margin (See Figures and 5) The performance of “balanced firms” is higher comparing with nonbalanced firms Figure 4: Differences of labor productivity Corporate performance 425** Labor productivity Balanced SECI Figure 5: Differences of operating profit margin 469** Operating profit **: Significant at 0.01 level Figure 3: Correlation analysis results These results confirm the importance of the balance between knowledge creation activities in Problems arising from the empirical study Firstly, from the overall results we are able to verify the importance of a well-balanced knowledge creation spiral (knowledge creating RESEARCHES & DISCUSSIONS 55 ECONOMIC DEVELOPMENT No 205, September 2011 capabilities) In the knowledge creation cycle, the “balance status” allows firms to be ahead of the non-balanced firms in terms of financial performance (labor productivity and operating profit margin) Secondly, in this study, the importance of balance in four knowledge creating modes was re-emphasized However this concept was indirectly noticed by previous researchers, and it has been overlooked by the majority of them The lack of emphasis from the academia on the importance of this concept, in addition with the few studies showing empirical evidence supporting this theory have driven firms to ignore the balance and, as an implication, have led them to pursue either tacitly-oriented or explicitly-oriented knowledge management approaches Thirdly, despite empirical results showing that corporate performance is positively associated with KCC, the characteristic of this relationship is ‘moderate’ This indicates that there may be other components affecting financial performance, such as organizational characteristics, business strategy and investment in strategic resources (e.g., information technology or human capital) Some measures to develop KCC of surveyed SMEs Estimating the application of SECI Model shows that most Vietnamese enterprises are in the initial stages of perception and application of business management based on knowledge In some enterprises where the process has been introduced, some gained indicators looked encouraging but they only came from subjective perception of managers and still lack real system and efficiency This study, therefore, proposes some measures appropriate to these initial stages and status quo observed in surveyed companies Firstly, CEOs of Vietnamese enterprises should change their thinking modes and move from the product-focused to value-focused model of business, and from product-based competition 56 RESEARCHES & DISCUSSIONS to value-for-customer competition with knowledge creation as the principal strategy Secondly, leaders of companies (director and vice-director of the Board, and director-general) should make strong commitments and pioneer the building of a mechanism for organizing and operating a SECI Model at CEO level, between CEOs and middle managers, and between CEO and strategic shareholders to establish shared contexts and relationships called “Ba” by Nonaka Thirdly, top leaders should pay full attention to the key role played by middle managers in transforming valuable suggestions into actions and sharing them with front managers to establish a balance and encourage dialoguing and exercising processes at appropriate “Ba” with a view to beefing up the SECI spiral path at basic level of the relation between the firm and customers and target markets Fourthly, companies should form a commission and multi-functional task forces to systematize and evaluate structure of knowledge assets of the company that consists of four categories: social knowledge assets, routine knowledge assets, conceptual knowledge assets, and systemic knowledge assets Special care must be given to R&D assets, trade brands, license and patent, and relations with shareholders and loyal customers Based on this foundation, the company can build and implement a strategy to develop knowledge assets and direct the business strategy based on value and knowledge profoundly and wisely Fifthly, the company should have a program to train and re-train employees in development of knowledge assets, skills and know-how; especially soft and instrumental skills such as offline and online communicative skill, information interaction and sharing, multifunctional team work in “Ba”, critical thinking and harmonizing realities with ideals, and presenting, communicating and persuading skills Empirical researches prove that they are essential skills to accelerate and enhance efficiency of SECI spiral path in the company ECONOMIC DEVELOPMENT No 205, September 2011 Sixthly, the company should launch an innovating movement to strive for excellence and accelerate R&D rate in order to reduce losses and opportunity costs of innovation, leading to renovation in valuable propositions and in “speed to market.” Additionally, the company should invest in establishing and implementing a system of encouraging and favoring knowledge creation and transfer, as well as a system of evaluating and controlling knowledge assets, business assets and knowledge creation management The purpose of this research is to affirm the importance of the balance among knowledge creation modes in companies Based on the SECI Model, this paper proposes some measures to enhance KCC that influence corporate performance This relationship was examined empirically using data on Vietnamese SMEs from the retailing sector Nonaka, I et al (1994), “Organizational Knowledge Creation Theory: A First Comprehensive Test,” International Business Review (3:4), pp 337-351 10 Rice, J L., & B.S Rice (2005), “The Application of the SECI Model to Multi-Organisational Endeavors: An Integrative Review,” International Journal of Organisational Behavior (9:8), pp 671-682 11 Singh, H & M Zollo (1998), “The Impact of Knowledge Codification, Experience Trajectories and Integration Strategies on the Performance of Corporate Acquisitions,” The Wharton School Working Paper No 9824 References Chang Lee, K., S Lee & I Won Kang (2005), "KMPI: Measuring Knowledge Management Performance," Information & Management (42), pp 469-482 Chen, M., & A Chen (2005), “Integrating Option Model and Knowledge Management Performance Measures: An Empirical Study,” Journal of Information Science (31:5), 2005, pp 381-393 Chen, M., & A Chen (2006), “Knowledge Management Performance Evaluation: A Decade Review from 1995 to 2004,” Journal of Information Science (32:1), 2006, pp 17-38 Choi, B., S Poon & J Davis (2006) "Effects of Knowledge Management Strategy on Organizational Performance: A Complementarity Theory-Based Approach," OMEGA: International Journal of Management Science Choi, B & S Lee (2002), “Knowledge Management Strategy and Its Link to Knowledge Creation Process,” Expert Systems with Applications (23), pp 173-187 Hansen, M., N Nohria & T Tiernery (1999), “What’s your strategy for managing knowledge?” Harvard Business Review, March - April, 1999, pp.106-116 Nonaka, I., & H Takeuchi (1995), The KnowledgeCreating Company, Oxford University Press, New York Nonaka, I., K Umemoto & D Senoo (1996), “From Information Processing to Knowledge Creation: A Paradigm Shift in Business Management,” Technology in Society (18:2), pp.203-218 RESEARCHES & DISCUSSIONS 57 ... four modes of knowledge conversion in the process of knowledge creation in enterprises as presented by Nonaka & Takeuchi in their SECI Model Converting tacit knowledge to explicit knowledge, ... such as offline and online communicative skill, information interaction and sharing, multifunctional team work in “Ba”, critical thinking and harmonizing realities with ideals, and presenting, communicating... Additionally, the company should invest in establishing and implementing a system of encouraging and favoring knowledge creation and transfer, as well as a system of evaluating and controlling knowledge