Superior knowledge management (KM) is often credited with boosting shareholder value, jumpstarting innovation and improving customer service, but with little evidence to support vendors’ heady claims, executives have to rely on faith instead of facts when approving costly initiatives.
Finally, research confirms that acquiring, sharing and using knowledge in meaningful ways definitively improves a company’s return on assets, sales and operating income.
“We only had soft evidence to support the link between superior KM and the bottom line,” says Jiming Wu, Ph.D., assistant professor of management for the College of Business and Economics at California State University, East Bay. “Now after studying the results of 62 companies, we’ve confirmed the link between superior financial performance and superior knowledge management.”
Smart Business spoke with Wu about the tangible and intangible benefits of superior KM.
What is KM and what types of knowledge does it typically include?
KM generally refers to a tool or automated system where companies gather, archive, analyze, and share tangible and intangible information from a variety of sources. In most companies, knowledge is scattered across the enterprise; it resides in databases, documents, manuals and people’s heads. The disparate formats and locales make it virtually impossible to tap or review holistic data when tackling business problems, and efficiency is compromised because business units and managers operate independently.
Top-performing firms use accumulated data to solve business problems, create new products, educate employees or drive operating efficiencies. For example, KM helps managers proactively spot patterns and relationships among customer complaints, product returns and diminishing sales. In turn, they eliminate restocking costs by altering product designs or instruction manuals, which boosts goodwill, sales, market share and the bottom line.
What are the benefits of a knowledge management system?
The top benefits include:
- Superior knowledge acquisition: Centralization allows executives to measure knowledge collection and make it a priority. Plus, a KM tool reduces the tendency for a manager to collect and hoard separate data.
- Superior storage and retrieval: KM systems allow companies to collect, organize, codify, store, safeguard, and access institutional knowledge and data. Without a tool or program, information stored in a variety of formats and systems can’t be retrieved or analyzed, and staff turnover often results in the loss of critical institutional know-how.
- Superior sharing and dissemination: It’s easy to share best practices and foster collaboration when everyone shares the same goals and has access to the same information. Plus, studies show that superior KM is capable of transforming run-of-the-mill companies into powerful learning organizations.
- Superior decision-making: It’s hard to make good decisions when managers have to react to problems. KM lets them analyze suppliers, customer preferences and the competitive landscape so they can forecast the impact of a new product on revenue, accounting, manufacturing and distribution, customer service and the bottom line. Our research revealed that superior KM firms are more efficient and profitable because they use data instead of hunches to anticipate problems, establish priorities and align valuable resources.
How does superior KM create a competitive advantage?
Companies get a leg up on the competition when they use a unique resource like KM to streamline business processes, reduce production costs or accelerate R&D. They tend to originate, design, test and release new products faster than the competition, and be more efficient because products are better aligned with marketplace needs. For example, engineers can nip defects in the bud by reviewing focus group feedback and adapting the design or manufacturing process before production. Marketing can eliminate seasonal revenue dips by reviewing customer demographics and buying cycles and creating unique advertising campaigns or promotions. You’ll prevail anytime you can produce something better, cheaper or faster than others, and knowledge is the key to outhustling the competition.
What did the study reveal about the link between superior KM and superior bottom line performance?
We studied the financial performance of 62 firms in reaching our conclusions. Half the firms were deemed to have superior KM because they were better at mobilizing and applying their resources to problems and they resolved issues more quickly than other firms. On average, the superior KM firms were 5 percent better in four key categories: return on assets, return on sales, operating income to assets and operating income to sales. Not only were the superior KM firms more profitable, they garnered more income from each dollar of their assets.
How can executives tailor benchmarks and measure the return on KM initiatives?
Because KM initiatives tend to be costly, executives need to track a variety of tangible and intangible measures to gauge the return. Intangibles include the time and resolution rates for customer problems because those should improve when agents, engineers and production managers have access to centralized information. Next, look for decreased cycle times in R&D and whether you’re developing and releasing new products faster than the competition. Finally, track tangible measures, such as your company’s growth rate, revenue, market share and profitability. If you’re exceeding industry norms, it’s probably due to superior KM, because now we know that the link between superior KM and superior financial performance is no coincidence.
Jiming Wu, Ph.D., is assistant professor of management at the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3099 or [email protected]
Insights Executive Education is brought to you by California State University, East Bay