Knowledge Management: Perils and Promises

During the last decade or so, knowledge management—a set of management activities, aimed at designing and influencing processes of knowledge creation and integration including processes of sharing knowledge—has emerged as one of the most influential new organizational practices. Numerous companies have experimented with knowledge management initiatives in order to improve their performance. At the same time, the literature on knowledge management has virtually exploded (e.g. Nonaka and Takeuchi 1995; Choo, 1998; von Krogh et al., 2000; Easterby-Smith et al., 2000; Nonaka and von Krogh, 2009).

Knowledge management would thus seem to be one of those areas where managerial practice and the academic literature develop simultaneously and perhaps even co-evolve. Here knowledge management is not much different from many other management fads of the recent decades such as business process reengineering or total quality management that also promise to contribute to competitive advantage—although this is asserted rather than carefully demonstrated. The analogy goes further, for knowledge management is also akin to these fads in that there is no clear disciplinary foundation for it. Indeed, the underpinnings of knowledge management are a mixed bag, ranging from Eastern philosophical traditions over ideas from organizational behavior to notions from information science. Strikingly (to us, at least), organizational economics plays a limited role in the empirical literature on knowledge management (for recent exceptions see Mahnke and Venzin, 2003; Foss, 2007; Ambos and Mahnke, 2010). However, the knowledge management literature neglects organizational economics at its peril.

Organizational economics looks inside the firm by examining the tasks of motivating and coordinating human activity. It is taken up with explaining the nature of efficient organizational arrangements, and the determinants of such arrangements. Efficiency is understood in the sense of maximizing the joint surplus from productive activities, including processes of creating, sharing, and exploiting knowledge. A basic proposition is that the costs and the benefits of productive activities—and therefore joint surplus—are influenced by the incentives, property rights, and ways of disseminating and processing information that structure productive activities. Perhaps as a result of organizational economics playing at best a small role in the evolution of knowledge management, there is seldom any sustained attention to the cost of knowledge management activities. For example, when von Krogh, Ichijo, and Nonaka (2000) in a major survey of the knowledge management literature mention cost, they devote four pages (out of more than 250) to it, and then only treat costs of searching for knowledge, a category of cost that is only one among a multitude of relevant costs of knowledge management.1 This neglect of organizational costs is quite representative of the whole knowledge management literature. Moreover, we would argue that even the potential benefits of alternative ways of organizing knowledge management are ill-understood in the literature. On the managerial level, something similar may be observed. This is, perhaps, best expressed in the words of a knowledge manager, who recently stated to us that:

Because neither the relevant costs of alternative ways of organizing knowledge in organizations, nor their benefits are addressed in any systematic manner in the knowledge management literature, the attendant trade-offs, and how these may be influenced by managerial action also remain ill-understood. The result is that the literature does not allow propositions about optimal knowledge management strategies, and how these vary with changes in the relevant parameters, to be made. In other words, in its present manifestation, the knowledge management literature does not constitute a managerially relevant contingency framework; it may supply inspiration (and entertainment) for managers, but not much in the way of firm guidance.

Lest this be taken as a wholesale condemnation of knowledge management, let us state immediately that the knowledge management literature contains numerous salient observations on knowledge processes, that is, processes of creating, sharing, and exploiting knowledge (e.g. Lyles and Schwenk, 1992; Nonaka and Takeuchi, 1995; von Krogh et al., 2000). In addition, the literature does much to identify key characteristics of knowledge structures that surround knowledge processes in terms of knowledge type, knowledge distribution, complexity, and relatedness (e.g. Lyles and Schwenk, 1992; Weick and Roberts, 1993; Galunic and Rodan, 1998). In this chapter, we take some of these ideas as grist for a theoretical mill consisting of organizational economics. In particular, we focus on the coordination and incentive problems that processes of creating, sharing, and exploiting knowledge inside firms may give rise to, and how various aspects of governance may be understood as a response to such problems. We thus take steps towards meeting the challenge contained in the recent observation that ‘the time is ripe to start addressing learning and knowing in the light of inherent conflicts between shareholders’ goals, economic pressure, institutionalized professional interest and political agendas’ (Easterby-Smith et al., 2000).

The remainder of the chapter is structured as follows. First, we highlight key insights from organizational economics, and briefly sketch general implications for the understanding of knowledge management practices. Second, we show that novel propositions about knowledge management may be derived from organizational economics. We also address from an organizational economics perspective a number of central phenomena (e.g. firm specific learning, teamwork, communities of practice, knowledge integration) that have been discussed in the knowledge management literature. Conclusions follow. A final reservation: our chosen subject in this chapter is a vast one. Considerable narrowing of the issues is necessary for space reasons. Thus, in the following we disregard knowledge management issues that relate to the matter of the boundaries of the firm (e.g. make-or-buy decisions, joint ventures, networks, etc.), and focus solely on knowledge management as it pertains to internal organization.2