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WHY GOVERNANCE MATTERS IN
KNOWLEDGE MANAGEMENT:
EXAMINING ORGANIZAIONAL KNOWLEDGE CREATION
FROM KNOWLEDGE GOVERNANCE PERSPECTIVE
Shih-Chieh Fang1, Pei-Wen Huang 2 and Chi-Wei Liu 3
1
Professor, Department of Marketing and Distribution Management,
National Kaohsiung First University of Science and Technology, Kaohsiung, Taiwan
2
Lecturer, Department of International Trade, Cheng-Shiu University, Kaohsiung,
Taiwan
Doctoral student, Graduate School of Management, I-Shou University,
Kaohsiung, Taiwan
3
Lecturer, Management School, HungKuang Technology University, Taichung,
Taiwan
Doctoral student, Graduate School of Management, I-Shou University, Kaohsiung,
Taiwan
Correspondence:
Lecturer, Management School, HungKuang Technology University, Taichung,
Taiwan
Doctoral student, Graduate School of Management, I-Shou University, Kaohsiung,
Taiwan
Tel: 886 7 4 2623 3427
E-mail: wliu01@ms15.hinet.net
WHY GOVERNANCE MATTERS IN
KNOWLEDGE MANAGEMENT:
EXAMINING ORGANIZAIONAL KNOWLEDGE CREATION
FROM KNOWLEDGE GOVERNANCE PERSPECTIVE
Abstract:
In an era characterized by knowledge economy, knowledge creation is a key to
the accumulation of competitive advantages. Thus, how to arrange a context to
facilitate the creation of organizational knowledge is one of the vital issues. In this
paper, we propose that the effect of organizational knowledge creation is to be
achieved on the premise that there is an effective design of knowledge governance
in
the
organization.
Through
the
function
of
knowledge
governance,
intra-organizational knowledge transfer and flow will be facilitated even under the
fact that knowledge is embedded and dispersed in individuals or departments. In
doing so, the mechanisms of organizational knowledge creation, knowledge
exchange and knowledge combination will function effectively and efficiently.
Accordingly, the performance of the organizational knowledge creation will be
embodied in the knowledge-based advantages.
This study aims to extend a comprehensive concept of knowledge governance in
terms of knowledge creation by investigating the underlying theoretical
underpinnings of knowledge governance. We proposed that transaction cost theory,
knowledge-based view, relational-embeddedness theory and cognition school could
be regarded as the theories that knowledge governance deposits. Furthermore, in
terms of these theoretical perspectives, five critical governance mechanisms
affecting knowledge creation are generated as follows: an incentive mechanism of
knowledge sharing; organization identification; trust; informal communication
channels; and organizational learning. Specifically, we propose a conceptual model
on organizational knowledge creation from knowledge governance perspective and
we end the paper with some discussion for future research.
Keywords: knowledge creation, knowledge governance, knowledge governance
mechanism, knowledge-based advantage
1
INTRODUCTION
The basic hypothesis and logic of knowledge-based view presume that an
organization functions as a repository of knowledge, in which knowledge is dispersed
and embedded in variant departments and employees (Kogut & Zander, 1992, 1996;
Grant, 1996; Lam, 1997). In line with this view, in order to enhance the organization’s
knowledge repository, it is worth for investigating and exploring that how
organizations organize the knowledge embedded and dispersed in different carriers
through effective governance mechanism to facilitate knowledge transfer, knowledge
integration, knowledge assimilation and knowledge application (Nonaka, 1994; Wong,
2000; Cross, Parker & Borgatti, 2001).
Up to now, much of the earlier work on organizational knowledge creation could be
broadly sorted into two approaches. One approach focused on the process of
knowledge creation: Huber (1991), Hedlund (1994), Nonaka (1994), Nonaka, Toyama
& Konno (2000), Schulz (2001) and Borgatti & Cross (2003) asserted that the nature
of organizational knowledge creation functions as a process of either recombining the
existing organizational knowledge or combining, absorbing, assimilating, and
transforming new knowledge acquired externally. What this approach emphasizes is
to examine knowledge creation from the perspectives of knowledge searching and
organizational learning (Schulz, 2001). The other school shifted their focus to the
structure of knowledge creation: Kogut & Zander (1992), Pisano (1994), Grant (1996),
Okhuysen & Eisenhardt (2002), Hansen (2002) and Cummings & Teng (2003) put
their stress on investigating how an organization cultivated a context beneficial to
knowledge creation or designed proper intra/inter-organization structure and
management mechanisms in order to facilitate the accumulation of organizational
knowledge. The perspectives of knowledge creation these researchers posited could
be categorized as knowledge sharing, knowledge transfer, and knowledge integration
(Hansen, 1999).
Though these two approaches proposed different theoretical and practical
implications in terms of the content to be examined, similar arguments are concluded.
The researchers assumed that the core concept of organizational knowledge creation is
that the generation of new knowledge will occur when organizational members
execute assigned tasks (cf., new product development and design) or participate in
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activities of problem-solving or decision-making. To put the rationale further
explained, the foregoing argument lies in the assertion that in order to perform the
assigned tasks or activities, organization members will make every effort to search,
integrate, assimilate and apply knowledge relevant to the tasks or activities.
Accordingly, new knowledge will emerge during the process of task execution; thus,
the newly-obtained knowledge will be further accumulated in the organizational
memory or repository. Eventually this new knowledge would be transformed into one
of the organizational competitive capabilities (Teece, Pisano & Shuen, 1997; Hansen,
1999; Postrel, 2002; Argote, McEvily & Reagans, 2003).
However, one should notice that the above argument is based on the assumption
that an organization is regarded as a social community with division of knowledge
(Kogut & Zander, 1996; Postrel, 2002). Therefore, when organizational members
execute the assigned tasks collectively, it is “knowledge governance mechanisms”
(Grandori, 2001), “organizing principles” (Kogut & Zander, 1992,1995, 1996) or
“integrating mechanism” (Grant, 1996) that organizes the dispersed and embedded
knowledge in different carriers to help knowledge integration and application. To be
precise, we define “knowledge governance mechanisms” as organizational
arrangements which involves the activities of knowledge creation and knowledge
exchange, such as the communication, negotiation, configuration or recombination of
knowledge. With the arrangement of knowledge governance, the experience and new
knowledge accumulated during the process of task execution further reinforce the
organizational knowledge repository. (Lam, 1997; Grandori, 2001a, 2001b; Ravasi &
Verona, 2001; Postrel, 2002; Takeishi, 2002; Uzzi & Lancaster, 2003). Furthermore,
since organizational knowledge creation is a dynamic process including manifold
phases such as knowledge flow, knowledge transfer, knowledge integration,
knowledge learning and knowledge application, a proper mechanism to govern these
knowledge-related activities is imperative. That is, a proper design of knowledge
governance mechanism will facilitate knowledge flow and sharing (Lam, 1997;
Grandori, 2001; Schulz, 2001; Madson, Mosakowski & Zaheer, 2002; Postrel, 2002),
maximize proper learning and minimize improper learning (Mohr, 2002), speed the
creation and application of organizational knowledge (Schulz, 2001; Foote, Matson,
Weiss & Wenger, 2002), further reinforce the organization’s knowledge repository and
then eventually convert the organization memory into the cornerstone of
organizational competitive capabilities (Teece, Pisano & Shuen, 1997; Hansen, 1999;
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Postrel, 2002; Argote, McEvily & Reagans, 2003). In a nutshell, we assert that
knowledge governance is a fundamental concept of knowledge management in that
only through the effective and efficient knowledge governance mechanisms will the
knowledge localized in organizational members be facilitated to flow and be shared.
In doing so, the efficiency and effectiveness of knowledge exchange and combination
in an organization will be promoted. Accordingly, the creation and utilization of
organizational knowledge will be highly facilitated. To be specific, without the design
of knowledge governance, an efficient and effective activity of knowledge creation
will less likely be present in a firm. Hence, to examine organizational knowledge
creation from knowledge governance perspective satisfies the theoretical justification
and importance (Grandori, 2001).
The related literatures on knowledge management in terms of knowledge
governance mechanism are constructed with divergent theoretical foundations.
There seems to be lacking in comprehensive understanding about the concept of
knowledge governance. This study serves to fill up the literature gap to present a more
global content of knowledge governance by synthesizing its theoretical underpinnings.
Thus, one of the contributions of this research is to build up the concept of knowledge
governance in terms of knowledge creation from its theoretical underpinnings. We
would like to clarify the content of organizational knowledge creation and knowledge
governance, to analyze some possible knowledge governance mechanisms facilitating
organizational knowledge creation, to investigate the relationship between knowledge
governance mechanism and knowledge creation as well as the relationship between
knowledge creation and knowledge-based advantages, and then to develop a
conceptual model of knowledge creation from knowledge governance perspective.
The contribution of this research is four-fold. First, it provides a richer basis for
understanding and interpreting the concept of knowledge creation. Second, it
synthesizes a comprehensive understanding about the concept of knowledge
governance by exploring the underlying theories. Third, it analyzes the decisive
knowledge governance mechanisms in terms of the theoretical underpinnings the
knowledge governance posits. Fourth, it provides a better understanding about the
relationship among knowledge governance mechanism, knowledge creation and
knowledge-based advantages by proposing a conceptual mode.
This paper is organized as follows. In the next section, the literature on
organizational knowledge creation from four perspectives — organizational learning,
4
knowledge transfer/sharing, knowledge integration and knowledge spiral — is
briefly reviewed and then the content of organizational knowledge creation is
analyzed. Next, based on earlier relevant researches, we propose four underlying
theoretical underpinnings of knowledge governance — transaction cost theory,
knowledge–based view, relational embeddedness theory and cognition school — and
then from the management implication, we generate five decisive knowledge
governance mechanisms affecting organizational knowledge creation. Followed by
this part, we move our attention to explore the content of knowledge creation
performance. A conceptual model of knowledge creation from knowledge governance
perspective is thus presented. Finally, this paper ends up with some discussion for the
future research.
APPROACHES OF ORGANIZATIONAL KNOWLEDGE CREATION
Researchers of knowledge-based view proposed that an organization would
accumulate the essential knowledge asset by utilizing variant methods to reinforce the
quality and quantity of its knowledge repository. Organizational knowledge repository
itself is actually an embodiment of the organizational competitive capability. The
most common-used method to improve their ability in knowledge accumulation and
application is to create more useful knowledge. In terms of the approaches of
knowledge accumulation for an organization, four perspectives are discussed in the
following section, namely organizational learning, knowledge transfer/sharing,
knowledge integration and knowledge spiral.
Huber (1991) claimed that organizational learning is a process of an organization’s
creating new knowledge or modifying its existing knowledge. Pisano (1994) also
clarified the contention that through organizational learning, either learning by doing
or learning before doing, knowledge could be recombined and then new knowledge
would be created. Similar argument and implication of organizational learning were
also proposed by Hedlund (1994), Schulz (2001) and Holmqvist (2003). Specifically,
these scholars, examining knowledge creation from organizational learning
perspective, emphasized that the creation of organizational knowledge lies in its
capability of absorbing, imitating, digesting and utilizing knowledge. Yet, Hamel
(1991) and Hansen (1999, 2002) moved their focus on examining organizational
knowledge creation from the perspective of knowledge transfer/ sharing. They found
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that the transparency of knowledge, intensive interaction of members, and successful
knowledge sharing/transfer all promotes organizational knowledge creation.
Furthermore, one of Tsai’s (2000) study on multi-national enterprise (MNEs) also
supported that knowledge sharing/transfer among the subsidiaries in MNEs had a
positive impact on the knowledge-receiver’s converting the shared knowledge into the
new knowledge of the organization and then institutionalizing the newly-created
knowledge. In terms of knowledge integration perspective, it is defined either as the
reconfiguration of the existing organizational knowledge (Teece et al., 1997) or as the
combination of external new knowledge under the process of exchange (Kogut &
Zander, 1992; Grant, 1996; Okhusyen & Eisenhardt, 2002). Grant (1996) and
Okhusyen & Eisenhardt (2002) argued that firms could effectively integrate
professional knowledge localized in each department through the integrative
mechanisms of routines, directions and group-decisions. In doing so, the assigned
tasks would be executed and during the period of the execution new organizational
knowledge would be further created. The last perspective towards organizational
knowledge creation is the concept of knowledge spiral. Nonaka (1994) proposed this
concept with the two dimensions: epistemology (cf., knowledge tacitness and
explicitness) and ontology (cf. individual → group→ organization). Nonaka (1994)
asserted that because the subject of knowledge creation is an individual, during the
process of the individual’s participation in a group’s or the organization’s task activity,
explicit knowledge transformed into tacit knowledge (Internalization, I), and then
transformed into explicit knowledge (Externalization, E) or tacit knowledge
(Socialization, S), or combined the explicit knowledge with other explicit knowledge
(Combination, C). This concept emphasized that knowledge was cultivated through
the SECI process with different stages of individual, group and organization, and
knowledge will be created continuously in an organization under a proper design of
“Ba” (Nonaka et al., 2000).
Accordingly, based on the nature of our study and the generated contention of
earlier research, we define organizational knowledge creation as when an individual
department or organizational members execute the assigned tasks, solve certain
problems or even make decisions, through the process of organizational learning, they
will apply the newly-transferred and newly-integrated knowledge resulting from the
organizational learning process to the task execution, problem solving or decision
making and in due course they will transform or internalize the newly-created
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knowledge into the accumulation of the organization’s knowledge repository. Under
the scope of the above definition, organizational learning is a process of searching,
assimilating, and absorbing the internal existing knowledge and the external new
knowledge. Hence, from organizational learning perspective and knowledge
transfer/sharing perspective; we argue that the primary condition for a successful
organizational learning or knowledge transfer/sharing exists in the fact that if there is
a “knowledge exchange mechanism” constructed in the organization (Nahapiet &
Ghoshal, 1998; Matson et al., 2003). By setting up this knowledge exchange
mechanism, knowledge could smoothly flow and be shared in the organization and
thus serves the purpose of organizational knowledge creation. As far as knowledge
integration perspective and knowledge spiral perspective are concerned, researchers
emphasized the organizational “combinative capability” (Nahapiet & Ghoshal, 1998)
in knowledge integrating, applying and transforming, namely organizational
capability in reconfiguration of diverse knowledge. Accordingly, we adopted the
contention of Nahapiet & Ghoshal (1998) that the mechanisms of organizational
knowledge creation could be categorized into “knowledge exchange” and “knowledge
combination” ( Figure 1)
Knowledge
Creation
Mechanism of
Knowledge Exchange
Organizational
Learning
Mechanism of
Knowledge Combination
Knowledge
Knowledge
Spiral
Sharing
Knowledge
integration
Figure 1: The relationship between the ways of knowledge creation and the mechanisms of knowledge
creation
Knowledge exchange
Since knowledge is embedded and dispersed in individual members or departments
in an organization, during the execution of their tasks, consequently, it is highly
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possible that there would be the occurrence of knowledge exchange with other related
departments or members (Davenport & Prusak, 1998). Successful knowledge
exchange depends on two aspects, namely “know what” and “know who” (Cross et al.,
2001; Wexler, 2001). The former means that the task performers know exactly about
what kind of knowledge is essential and valuable for the execution of the assigned
tasks; the latter denotes that the task performers have the information about who
(“know who”) or where (“know where”) could provide important knowledge
(Borgatti & Cross, 2003). Since the purpose of knowledge exchange is to gain new or
complementary knowledge (Matson et al., 2003), an effective knowledge exchange
mechanism will assist organization members to search, acquire and transfer related
knowledge and then to proceed and to promote the organizational knowledge creation
(Schulz, 2001).
Knowledge combination
Supposing that “knowledge” rather than labor or task is regarded as the
fundamental component of a professional division in an organization, how to combine
the variant professional knowledge to execute tasks becomes one of the most
important management issues (Kogut & Zander, 1992; Okhuysen & Eisenhardt, 2002).
The embodiments of organizational knowledge combination exist not only in the
replication of existing knowledge (Kogut & Zander, 1992) but, what is more
important, the reconfiguration of existing and new knowledge (Teece et al., 1997),
and the application of the leveraging capability (Foote et al., 2002). In addition, Grant
(1996) argued that the design of coordination mechanism could be the measure of
organization combinative capability. He proposed that the scope, efficiency and
flexibility of knowledge integration would determine the knowledge accumulation of
the new product design in an organization. Nahapiet & Ghoshal (1998) also asserted
that “knowledge combination” is one of the important mechanisms to create
organization intelligence capital (the so-called “organizational knowledge” in this
study). Thus, from the perspectives of replication, reconfiguration, or leveraging
capability, we generate that the eventual purpose of knowledge combination in an
organization is to enhance its competitive advantages.
To sum up, we argued that under the function of the two organizational knowledge
creation mechanisms, knowledge exchange and knowledge combination, at a given
8
situation, the efficiency and effectiveness of knowledge creation will be promoted and
the organizational knowledge advantages will be further enhanced.
KNOWLEDGE GOVERNANCE
The concept of knowledge governance could be traced back to 1960 Peter
Drucker’s advocate of another inspiring management thought on “knowledge
workers”. In recent years, many scholars have moved the argument to one that
emphasized on division of knowledge (Kogut & Zander, 1996; Grant, 1996) and the
“embeddedness” of organizational knowledge (Lam, 1997; Cross et al., 2001). The
core contention of the variant concepts all highlighted that organization managers
should regard “knowledge” as the core value while managing their organizations.
Only through organizational design will the knowledge localized and dispersed in
each carrier in the organization be effectively linked and be utilized. In doing so,
knowledge resources could be allocated properly to relevant members and tasks.
Appropriate or effective design of knowledge governance mechanism is a
necessary condition for effective application of organizational knowledge
(Nooteboom, 2001). The foremost principle of designing knowledge governance
mechanism is about how to make the dispersed and embedded knowledge flow
smoothly within organization (Almeida & Kogut, 1999; Gupta & Govindarajan,
2000a; Schulz, 2001). With the help of various incentive mechanisms, organization
members would share and exchange their expertise of their own free will (Szulanski,
1996; Hansen, 1999; Grandori, 2001a; Postrel, 2002; Michaillova & Husted, 2003).
To explore the nature and content of “knowledge governance”, four underlying
theories were examined: transaction cost theory, knowledge-based view, relational
embeddedness theory and cognition school.
Transaction Cost Theory. Based on the logic of comparative institution, transaction
cost theorists asserted that when the target of transaction is characterized by
specificity, difficulty of measurability and causal ambiguity, firm would opt for
internalizing the transaction due to opportunism. That is, in a context of high degree
of uncertainty, the firm would adopt a hierarchical governance to secure the
transaction (Hennart, 1994; Conner & Prahalad, 1996). Therefore, as regards
knowledge transaction, hierarchical organization exists with legitimacy in contrast
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with market (Lam, 1997; Nooteboom, 2000). However, hierarchical governance does
not come without any cost. Since members in a hierarchical structure merely assume
the designated authority via arrangement, they do not have power over residual claim
or residual control right (Demsez, 1991; Chi, 1994). For that reason, motivation for
organization members to share knowledge spontaneously is not attendant. When a
market transaction, distinguished as its high-power incentive mechanism, turns into a
low-power incentive kind of firm transaction, firms would face with difficulty of
motivating effective knowledge transaction. This is the first dilemma, as regards
knowledge transaction, that hierarchical organization should try to overcome
(Hannert, 1994; Grant, 1996). Therefore, to inspect what an effective knowledge
governance mechanism is from the transaction cost perspective calls upon the issue of
incentive mechanism designing.
The devise of incentive mechanism is to facilitate
knowledge flow within organization and knowledge sharing among organization
members. Feasible incentive measures include financial, non-financial, intrinsic and
extrinsic reward systems (Gupta & Govindarajan, 2000b; Osterloh & Frey, 2000).
Knowledge-based view. Kogut & Zander (1992) suggested that though organizations
with competitive advantages face the dilemma of “transferability and immitability”,
the higher-order organizing principle resided in hierarchical structure helps overcome
the intricacy. Thus, hierarchical governance has its relative value in contrast to market
governance in terms of knowledge transfer and knowledge sharing. Moreover, Conner
& Prahalad (1996) indicated that in a hierarchical mode of governance, the
employment contracts integrate diversified scope of expertise. As a result of the
“knowledge-substitution effect” and “flexibility effect”, organizational competitive
advantage is accumulated through organizational learning and experience. In
comparison with market contracts, the knowledge governance mode in a hierarchical
structure is more efficient and competitive in terms of knowledge transaction;
therefore justifies its existence. By emphasizing that firms are capable of integrating
specialist knowledge, Grant (1996) also confirmed that firm exists because of its
hierarchical mode of knowledge governance. As a knowledge integrator, the firm
builds up its own shared value to make use of the advantages of integration — its
efficiency, scope and flexibility. To sum up, the KBV scholars emphasized that the
advantages of hierarchical knowledge governance mode comes from the assumption
that organization is regarded as a social community and thus results in similar identity
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(Kogut & Zander,1996; Brown & Duquid,2001). Such identity helps reinforce
organization members’ cohesion, value and norms and further embodies on the
interaction based on common language (Nonaka & Takeuchin, 1995; Grant, 1996).
Under such organizational context, the effect of knowledge transaction, sharing,
integration and application would be promoted and hence speed up the accumulation
of organizational knowledge (the so-called “organizational knowledge creation” in
this study). As such, the implication for managers is that managers should strengthen
organizational culture in which organization members share strong value and
commitment of the organizational objective as well as shape an organizational culture
which is beneficial to knowledge sharing activities.
Relational Embeddedness Theory.
In recent years, some of the organizational
theorists discussed related issues of knowledge sharing and creation from network
perspective of inter-personal embeddedness within organizations (Nahapiet &
Ghoshal, 1998; Hansen, 1999, 2002; Borgatti & Cross, 2003; Uzzi & Lancaster, 2003).
The main point they tried to make is that through informal social ties and interaction
within the internal network, organizational knowledge could be more transparent and
thus facilitate the knowledge exchange and sharing of organization members (Borgatti
& Cross, 2003). As observed by Cross et al. from empirical studies, for most of the
engineers and scientists working in the corporations, the amount of knowledge
acquired through informal relational interaction are five times of that acquired
through formal mechanisms. In other words, such informal relational embeddedness
plays a vital role both in the knowledge sharing within organizations and in the
process of organizational learning (Davenport & Prusak, 1998; Hansen, 1999; Cross
et al., 2001). In order to let the knowledge embedded in the relationships or flow in
the network function well, trust is considered to be a basic requirement. Only when
knowledge is communicated on the basis of trust, can the individual receiver aware
that the shared knowledge is of value, importance and relevance (Cross et al., 2001;
Hansen, 2002; Borgatti & Cross, 2003). More specifically, from the perspective of
relational embeddedness in terms of knowledge governance, an effective governance
mechanism is constructed on the informal relational interaction and mutual trust
among members. The implication for managers is that top management should create
a context favoring for building up the informal interaction channels and shape
working ambience with mutual trust.
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Cognition School. In the 1940s, Simon and March studied organizational behavior
from cognitive perspective. They assumed that there exists an organization memory or
mental model within the organization. The studies of cognition school follow a line of
investigation regarding organization theories, including issues such as decision
making, communication and coordination, design of incentive mechanism and
governance mechanism (Moorman & Miner, 1997; Strati, 1998; Paoli & Prencipe,
2003). This line of study echoes the theme advocated in Journal of Management and
Governance (2002) special issue for “Cognition and Governance”: exploring
“governance” issues from cognitive point of view indeed opens another window for
organization studies (Shapira, 2000).
The main assertion of cognition school emphasizes on the fundamental rationale of
bounded rationality in collective thinking and action. The consequence of bounded
rationality is even impairment when the knowledge is characterized as embeddedness
and tacitness. The embedded and tacit knowledge coupled with bounded rationality
further limit the ability of organizations in decision making and problem solving (Lam,
1997; Grandori, 2001). Apart from the aforementioned problems, organization
members would interpret and reflect differently (Strati, 1998) such issues as the
problems encountered by organizations, organizational tasks and the goal to achieve
because of cognition. In the same vein, there exist problems of conflicts and mutual
adjustment among organizational members as an effect of different cognition.
Studies of governance issues from cognition school mostly recognized the
phenomenon of “cognitive failure“ (Grandori, 2001) or “cognitive distance”
(Nooteboom, 2001). Therefore, they postulated that to elevate the possibility of high
degree of shared cognition, some measures of governance should be adopted such as
interactive learning, promotion of communication and absorptive capability.
Accordingly, the negative impact of cognitive failure and distance would be
alleviated (Grandori, 2001; Nooteboom, 2001). Grandori (2001) further denoted that
what organization management should do is to reinforce communication, knowledge
sharing and organizational learning within organization in terms of effective
governance of knowledge management. As the above subject is concerned, the
management should shape a culture of knowledge sharing and build a shared context
to reinforce communication between members. As such, organizational learning
would be ultimately promoted.
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In this section, we try to explore the content of knowledge governance and its
managerial implication for organizations anchored in the theories of transaction cost,
knowledge-based, relational embeddedness and cognition school. Five essential
conditions are induced when effective knowledge governance is considered: the
incentive mechanism for knowledge sharing, organization identity — the cohesion
and consistency in goals between members, mutual trust between members, informal
communication channel and organizational learning. These factors would promote
knowledge flow and knowledge sharing within the organization more effectively
and thus strengthen the ability of organizational knowledge creation.
Knowledge Advantages of Organization: performance of knowledge creation
What we mean of organizational knowledge creation is that through knowledge
exchange and combination, knowledge (or experience) could be cumulated and
created during the process of task execution and decision-making. The cumulated and
created knowledge then is to be stored in the organizational knowledge base or
memory. That is to say, task execution and decision-making are the causes as well as
the consequences of knowledge creation simultaneously. By virtue of the circulation
of the causes and consequences, organization is able to construct its knowledge-based
advantages to some extent.
According to McEvily & Chakravarthy (2002), the “knowledge-based advantage”
refers to the fact that “the knowledge created by the organization could help construct
its unique core competence, and further embody in the promotion of its competitive
performance”. More precisely, the knowledge-based advantages formed through
knowledge exchange and combination would embody in organizational value creation
activities. These value creation activities include, at least, the following activities. 1.
Product innovation. Knowledge exchange and sharing within organizations would not
simply help embody those embedded knowledge within individuals in new product
development. The re-combinative capability of organizations at the same time
facilitates their capability of product innovation (Madahavan & Grover, 1998;
McEvily & Chakravarthy, 2002). 2. Innovation of manufacturing process. Just as the
embodiment of knowledge-based advantages in product innovation, through
combination of effective knowledge exchange, sharing and absorptive capability, the
organizational manufacturing process would continuously be upgraded and innovated
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(Argote et a., 2003). 3. Technological uniqueness. Since the knowledge-based
advantage is the result of continuous knowledge creation and accumulation,
undoubtedly it is with characteristics of path dependence and causal ambiguity (Teece
et al., 1997). These specific advantages would further enhance the level of
organizational technology with uniqueness and leading competence in contrast to its
competitors. In summery, product innovation, innovation in manufacturing process
and unique technology are the embodiment of knowledge-based advantages. They
promote organizational competitive performance as well as construct organizational
unique competence.
PROPOSITION DEVELOPMENT
As the prevailing paradigm of organization management shifted to a
knowledge-based one, we regard it is imperative to explore the content of knowledge
creation within organizations and the relationship between knowledge creation and
knowledge-based advantages from knowledge governance perspective. Therefore, we
propose that effective knowledge governance would facilitate knowledge exchange
and combination among organizational members. It would be beneficial for the
members to combine the shared and acquired knowledge through knowledge
exchange, focusing on both quality and quantity, and further apply in task execution
and decision-making. The knowledge created through knowledge exchange and
combination would ultimately embody in the knowledge-based advantages of product
innovation, innovation of manufacturing process and technological uniqueness.
Accordingly, we try to construct a conceptual model exploring the issue of knowledge
creation from knowledge governance perspective. Our model echoes the standpoint of
Schulz (2001) that the premise of effective knowledge exchange and combination is
to promote knowledge flow and sharing within organizations.
In the following section we move our attention to the factors affecting
organizational knowledge creation, that is, knowledge governance mechanism. The
nature of these factors and their implication for knowledge flow and sharing is going
to be discussed. Further, the effect of these factors on knowledge governance
mechanism for knowledge creation would be discussed. Propositions were inferred to
predict the relationship between knowledge creation and knowledge-based
advantages.
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Incentive Mechanism. It is believed that if management could provide necessary
incentives for knowledge sharing among organization members, it could accelerate
organizational knowledge sharing, exchange and transfer (Gupta & Govindarajan,
2000a). Osterloh & Frey (2000) proposed that there are two kinds of incentive
mechanism: intrinsic and extrinsic ones. Intrinsic mechanism refers to non-financial
reward such as praise publicly, peer affirmation and job promotion. It is similar to
“satisfaction” in terms of “psychological contract” perspective. As for extrinsic
mechanism is one characterized of materialism and financial reward. It is a kind of
contingent punishment and reward. Gupta & Govindarajan (2000b) proposed similar
assertion while they put more emphasis on the commitment and support of top
management and the design of “high-incentive” and group-based incentive system.
“High-incentive” system focuses on the fact that whether the reward system is able to
distinguish the actual performance of member or groups; while the group-based
incentive system, on the other hand, is about rewarding based on group performance
rather than individual ones.
To conclude the forgoing assertion, through the design of intrinsic or extrinsic
incentive system, the organization members would be motivated by high-powered
incentives to thoroughly and clearly share their knowledge in terms of
problem-solving and decision-making. Hopefully, through such mechanism, a
“knowledge-sharing island” could be established as claimed by Postrel (2002). At the
same time, the efficiency of knowledge searching and acquiring for individual
members would be improved and knowledge exchange and combination would be
promoted under such context. That is, with the emergence of incentive mechanism,
we postulated that knowledge creation within organizations could be highly
strengthened.
Proposition 1: The design of incentive mechanism could elevate the effectiveness of
organizational knowledge exchange and combination for knowledge creation.
Organization Identification. The shared value of organization members could
provoke individuals to obey specific norms and routines within organizations (Grant,
1996). The congruent goals and high degree of cohesion among members also
confirm the existing shared meaning. As a result, based on the existing shared value
and meaning among organization members, individual members would achieve
15
common recognition of the empowered task from the organization (Grant, 1996). The
fundamental rationale of the above contention is that organization identification,
based on common value among organization members, means mutual agreement and
high degree of cohesion toward organizational goals (Nahapiet & Ghoshal, 1998;
Nooteboom, 2001). Since there is identity among organization members, individuals
are likely to be motivated to share knowledge and therefore, assist knowledge flow
thoroughly and exchange efficiently (Kogut & Zander, 1996; Brown & Duguid, 2001).
In addition, under the consensus of accomplishing the assigned tasks, the knowledge
shared and exchanged in terms of quality, quantity and relevance is naturally more
likely to meet individual’s expectation. As such, the acquired knowledge in the
process of knowledge exchange and sharing is more readily to be applied and
interpreted to further reinforce the knowledge combinative capability of organizations
(Kogut & Zander, 1992; Grant, 1996; Brusoni, Prencipe & Pavitt, 2001). To sum up,
organization identification is a vital organizational design for promoting exchange and
combination of expert knowledge under complex division of knowledge (Kogut &
Zander, 1996). In other words, it is one of the cornerstones of organizational
knowledge creation.
Proposition 2: The higher degree of organization identification, the more beneficial
to the promotion of the effectiveness of knowledge exchange and combination is for
knowledge creation.
Trust. Trust stands for a multi-dimensional concept. The meaning of trust includes: 1.
a status of cognition, not easy for objective evaluation; 2. a belief of expectation, the
“trusters” do not expect disadvantageous action from the “trustees”; 3. a behavior of
mutual interaction 4. behavior of trust is advantageous to inter-personal or
inter-divisional positive interaction (Dodgson, 1993; Davenport, Davis & Grimes,
1999). Regarding to the research question of this paper, we think that trust is the core
concept of knowledge exchange and sharing. Davenport & Prusak (1998) indicated
that trust is not only the necessary condition for knowledge exchange, it is also the
consequence of knowledge exchange and sharing. Providing that trust-based
interaction, in terms of knowledge exchange and sharing, is built among organization
members, the knowledge exchange parties would specifically recognize the quality
and quantity of the exchanged knowledge and be capable of evaluating the result of
exchange. Therefore, we argue that mutual trust among organization members could
16
facilitate the knowledge flow thoroughly and transparently within the organization
(Nahapiet & Ghoshal, 1998; Davenport, et al., 1999).
A study of collaborative R&D project teams (Davenport et al., 1999) found that
mutual trust among team members is essential for promoting the performance of R&D
cooperation. Two types of trust are induced, namely competence-based and
process-based trust, in this study. In terms of “competence-based trust”, it means that
organization members trust that the knowledge embedded in individuals is of high
quality and quantity. The syndrome of “Not Invented Here” or hierarchical barrier
would thus less likely to happen (Michailova & Husted, 2003). In the context of
competence-based trust, what individuals exchange and share is often with high
relevance and value (Borgatti & Cross, 2003). Therefore, it is helpful for knowledge
acquirers to effectively combine their knowledge and apply for solving specific issues.
“Process-based trust” is built through organization members’ past positive experiences
so that they do not expect any opportunistic behavior from the other party.
Consequently, in the context of organizational knowledge exchange, the “seller” of
knowledge is willing to exchange and share knowledge with the “buyer” according to
past positive interaction. In conclusion, mutual trust among organization members
would help remove the barriers of knowledge transaction in the internal knowledge
market, enhance the quality and quantity of exchanged knowledge, promote the
efficiency of knowledge exchange and combination and further reinforce
organizational knowledge creation.
Proposition 3: Higher degree of mutual trust among organization members would
help promote the efficiency of knowledge exchange and combination for knowledge
creation.
Informal Communication Channels.
Informal communication channels could be
constructed through the informal relational network within the organization. It doe not
merely improve the informal interaction between members; at the same time, it is the
most effective mechanism of knowledge exchange within the internal knowledge
market (Matson et al., 2003). The effectiveness results from the fact that when
competitive advantages involved with tacit and embedded knowledge, it is more
easily to transfer through informal interpersonal communication face by face (Lam,
1997; Gupta & Govindarajan, 200b). From informal interpersonal ties and social
network perspectives, Cross et al., (2001), Borgatti & Cross (2003) and Uzzi &
17
Lancaster (2003) claimed that informal communication channels are advantageous to
reinforce organization members’ capabilities of “know what” and “know how”.
Knowledge exchanged and shared in a natural way is not only more valuable. It is
especially with cost advantage. Thus, the efficiency of knowledge exchange and
combination for knowledge creation is strengthened.
The informal relational network is composed of inter-personal relationship,
personal attraction and types and structure of relational ties. Nahapiet & Ghoshal
(1998), Cross et al., (2001) and Borgatti & Cross (2003) all recognized that the
interlocking of relational network within organizations exhibits communication
between individuals or division, transparency and openness of interaction, which all
contribute to knowledge sharing within organizations. Hansen (1999, 2002) and Uzzi
& Lancaster (2003) further made clear that the aforementioned density of interlocking
would contribute to more diversified knowledge available to individuals and more
speedy knowledge flow and transmission. That is, informal communication channels
help speed up the process of searching and transferring knowledge and further exert
deeper impact on the knowledge exchange and combination for knowledge creation.
Proposition 4: The more the informal communication channels appear in the
organization, the more effective the knowledge exchange and combination for
knowledge creation would be.
Organizational Learning.
To synthesize the above contention regarding knowledge creation and the nature of
the research question in this paper, we adopt the assertion of Nahapiet & Ghoshal
(1998) that the mechanism of knowledge creation is distinguished as knowledge
exchange and combination. We define knowledge exchange as “the smoothness of
knowledge transaction and the outcome of exchanged knowledge in terms of quality
and quantity in the internal knowledge market.” When individual members are
enthusiastically willing to devote to knowledge creation activities (Szulanski, 1996),
knowledge exchange between organization members would continuously proceed and
therefore routines for knowledge sharing are formed (Dyer & Singh, 1998). Through
the process of knowledge exchange, knowledge would not be appropriated by any
specific person (Grant, 1996). Moreover, acquiring new knowledge or complementary
knowledge would reduce individuals’ cognitive limitation of knowledge creation —
18
the so-called bounded rationality. Since the purpose of knowledge exchange is to
acquire new or complementary knowledge (Matson et al., 2003), effective knowledge
exchange mechanism would facilitate the searching, acquiring and transferring of
relevant knowledge for individual members to elevate the efficiency of knowledge
creation (Schulz, 2001) and reveal better performance of knowledge creation. The
knowledge-based advantages would embody in the capability of product innovation,
innovation of manufacturing process and technological uniqueness.
Proposition 6: The elevated efficiency of knowledge exchange would help
organizations construct better knowledge-based advantages.
The combination of organizational knowledge illustrates in the replication of
existing knowledge (Kogut & Zander, 1992) and the construction of organizational
routines (Grant, 1996). It emphasizes on the re-allocation of existing and new
knowledge (Teece et al., 1997) and its ability of “leveraging” (Foote et al., 2002).
Thus, we define knowledge combination as “individual members could recombine the
existing knowledge into new knowledge by integrating existing and new knowledge
and be able to leverage this reallocation of existing and new knowledge”. The purpose
of knowledge combination is to combine the individual knowledge which is
embedded and dispersed within the organization. Through organizational capability of
knowledge integration, effective combination of existing and new knowledge and
recombination of existing knowledge (Kogut & Zander, 1992) would be achieved by
making use of the scope, efficiency and flexibility of knowledge integration (Grant,
1996). The ultimate purpose would be to raise the speed of innovation (Tsai, 2002)
and embody in the knowledge-based advantages to acquire competitive advantages
(Ravai & Veron, 2001).
Proposition 7: Organizational capability of knowledge combination would
strengthen its knowledge-based advantages.
y Incentive Mechanism
y Organization Identify
y Trust
y Informal Communication
Channels
y Organization Learning
y Knowledge
Exchange
y Knowledge
Combination
y Product Innovation
y Innovation of
manufacturing process
y Technological uniqueness
Conceptual Model :Organization Knowledge Creation from Knowledge Governance Perspective.
19
DISSCUSSION AND FUTURE DIRECTION FOR RESEARCH
This paper serves to discuss the content of knowledge creation in terms of
knowledge governance and at the same time try to build up a conceptual model for
research. To construct a complete theoretical basis for knowledge governance
perspective, we include transaction cost theory, knowledge-based view, relational
embeddedness theory and cognition school to infer what the content of effective
knowledge governance is and the influential factors are. According to the nature of
our research question, we define knowledge creation of organizations as “ through the
mechanism of knowledge exchange and combination, individual members would
create new knowledge in the process of task execution and decision-making of new
policy and at last strengthen organizational knowledge base. As for the knowledge
governance mechanism, we think that it is the arrangement of every knowledge
creation and exchange activity including integration, control, communication,
coordination, reallocation and recombination. The performance of knowledge creation
is embodied in the organizational knowledge creation activity in which
knowledge-based advantages are achieved through individual knowledge exchange
and combination. In the process of knowledge creation, we postulate that effective
knowledge exchange and combination among individuals and acceleration of
organizational knowledge accumulation should be mediated by appropriate
knowledge governance mechanism if the performance of knowledge-based
advantages is of concern.
This study is based on the inference of conceptual model, therefore there leaves
much room for further empirical test. For the sake of future research, we try to
develop the measurement for the constructs and variables in the following section.
Influential Factors of Knowledge Creation
We conclude five factors influencing organizational knowledge creation based on
the aforementioned theories. 1. Incentive mechanism. According to Davenport &
Prusak (1998), Gupta & Govindarajan (2000b), and Osterloh & Frey (2000), incentive
mechanism is to motivate individuals’ behavior of knowledge sharing. It is a reward
system that could reflect the genuine individual behavior of knowledge sharing.
Another factor of intrinsic motivation comes from the support of top management.
20
Therefore, we measure the situation of executing incentive mechanism when
individuals proceed with knowledge sharing behavior from three aspects: if the
knowledge sharer would feed back with a. financial reward (such as cash) b.
non-financial reward (such as promotion, public praise) c. support from top
management.
Organization Identification. It refers to whether the organization members reach
consensus or cohesion in terms of task execution. We adopt the standpoints of Kogut
& Zander (1996), Nahapiet & Ghoshal (1998) and Brown & Duguid (2001) to
measure organizational identity. These items include a. organization members
understand the objective of task. b. organization members have common vision about
the outcome of task (such as market share). c. organization members share the same
destiny and prosperity to achieve task objective.
Trust. We adopt the contention of Nahapiet & Ghoshal (1998), Davenport & Prusak
(1998) and Borgatti & Cross (2003) that organization members trust each other on the
basis of past experience of knowledge transaction and the affirmation of counter
party’s expertise. They are convinced that the transactional knowledge is of value,
credibility and with relevance to task. Accordingly, the items asked to measure trust
including: a. organization members trust in each other’s expertise b. organization
members trust that the acquired knowledge is beneficial to their task execution c.
organization members trust that opportunistic behavior will not occur during the
process of knowledge transaction.
Informal communication channel. Informal communication channel is built on the
basis of social inter-personal network. Cross et al., Borgatti & Cross (2003) and Uzzi
& Lancaster (2003) emphasized that in such informal inter-personal network,
individuals could more easily access valuable knowledge within a short period of time.
Therefore, we measure informal communication channel from the following items: a.
the informal inter-personal relationship is main communication channel for
organization members; b. organization members often get together to discuss task
related issues; c. there is much interaction within this informal inter-personal network.
Organizational learning. Organizational learning means that organizational members
21
would deem the task execution as an opportunity to learn (i.e. learning intent) and are
able to recognize which knowledge is beneficial to the task-related activities
(absorptive capability). Based on this definition, we develop the following items
according to Hamel (1991), Cohen & Leinthal (1990) and Zahra & George (2002): a.
organizational members reckon task execution as a great opportunity to learn; b. when
members encounter with task problems, they would try their best to search for useful
knowledge for solving problems and accomplishing task; c. members are able to
recognize the real value of the acquired knowledge.
Knowledge creation. Based on the previous studies on relevant issues, we define
knowledge creation as “new organizational knowledge created through knowledge
exchange to facilitate knowledge flow and knowledge combinative activities, in
which the exchanged, shared and acquired knowledge is re-configured, allocated, and
integrated.” Our measurement would be based on the contention of Nahapiet &
Ghoshal (1998), Schulz (2001) and Boratti & Cross (2003). The example questions
would be regarding a. organization members could access the information they need
within a short period of time b. when searching for knowledge, organization members
know who is the key person to the specific knowledge c. valuable knowledge could be
accessed through knowledge exchange between individuals d. organizational
members often tell or teach what they learned recently to their colleagues e.
organization members participate knowledge sharing activities relevant to task
execution.
In line with Kogut & Zander (1992) and Grant (1996), we develop the following
measurement about knowledge combination a. organization members could apply the
newly acquired knowledge to the existing knowledge b. organization could combine
diversified knowledge by virtue of appropriate integrating mechanism, such as rules,
routines and team group.
Organizational knowledge advantages—the performance of knowledge creation
In this study, we treat the knowledge advantages as performance of knowledge
creation. From the point of view of Teece et al., (1997), Madahavan & Grover (1998),
Mcevily & Chakravarthy (2002) and Argote et al., (2003), the organizational
knowledge advantages are operationalized as a. new product innovation: measured by
22
the speed, and quantity of innovation and the novelty of product; b. innovation of
manufacturing process: measured by the performance of improved manufacturing
process; c. the uniqueness of technology: if the technology is above the average level
in the industry when compared to the competitors
The purposes of this paper try to explore the nature of knowledge creation from a
governance perspective and expect to provide new insight and research direction for
further understanding organizational knowledge creation. We do not investigate
knowledge governance under specific context in terms of inter- or intra- organization;
therefore, it would be a direction for further research. Further, similar to the concept
of this research, it is also possible to apply such approach for the study of relevant
issues of knowledge management such as knowledge sharing, knowledge transfer,
knowledge acquisition, knowledge integration, knowledge learning and knowledge
application to deepen our comprehension of knowledge management.
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