Feature

posted 12 Jun 2002 in Volume 5 Issue 9

Knowledge-enabled e-business

Adding value to e-commerce initiatives through knowledge management

The effects of globalisation have precipitated a huge increase in the importance of e-commerce to organisations operating in every sector. In the first section of a two-part article, Paul Louis Iske and Tony de Bree describe the role of knowledge as a key differentiator in e-business strategy, and present a framework that supports the development and leveraging of individual and organisational capabilities for dynamic and sustained competitive advantage.

Introduction

The global knowledge economy

Many organisations have observed a fundamental change in business models and paradigms as a direct consequence of the emerging power of ICT, changes in the legal environment and the effects of globalisation. Though the changes in the economy promise to be significant enough to allow people to describe this global knowledge economy (GKE)[1] as the ‘new economy’, the underlying economic mechanisms and processes have yet to be fully understood. The main characteristics of the emerging GKE are:

The rise in the knowledge intensity of goods and services, and of the processes for creating, producing and distributing them;
The globalisation of markets for goods, services, capital and technology;
Changing industry composition, across all sectors;
The convergence of goods and services industries, and therefore the central role of competitive clusters of integrated activities now required to create, market and distribute goods and services on a global basis;
The rise of the online, virtual economy, with its associated e-commerce and e-business opportunities.

Many organisations that attempted to enter the virtual arena at an early stage were unable to generate profits from their e-business activities. Shareholders usually value these companies based on future expectations rather than on actual results. This may well change soon, as valuation models are being developed that are more sophisticated than traditional, accounting-based approaches. The concept of intellectual capital (IC) is generally identified as the key factor in understanding an organisation’s true value. However, so far little progress has been made in developing a consistent, transparent and accepted approach to describe and measure IC (with the help of so-called intellectual capital measurement systems) and establish a link with the financial valuation of an organisation, although some serious attempts have been made.[2] Keywords in this new business climate include: customer intimacy (the new strategic customer value position that organisations seem to be converging on), (customer) relationships, innovation, time-to-customer, dynamic competition, communication, value management, electronic commerce, ICT, flexible organisations, disintermediation, virtual business processes, entrepreneurship, creativity, challenge, opportunity, quality, alliances and networks.

One of the features of the global knowledge economy is that it is connecting individuals across the world using electronic forms of communication, which is why we can also speak of the ‘network economy’. It is exactly this form of networking activity that raises knowledge to the level of key differentiator. In fact, the formation of alliances, partnerships, ecosystems or networks of organisations that add value to each other and their respective customers are often based on the knowledge that each of the constituents on an organisational and individual basis possesses. The level of customer value creation, or destruction, created in these networks can be measured by implementing relationship capital measurement systems[3], utilising internet technology. It is also evident that alliances and other non-ownership-based external forms of collaboration generate, on average, a higher return on investment than straightforward M&As.

Our aim in this article is to clarify the importance of knowledge in e-business activities. The type of networks discussed will help an organisation to rapidly develop, initiate and execute the appropriate e-business-related activities in response to the anticipated changes in the global marketplace.

Knowledge-enabling e-business activities

The role that knowledge should play in e-business activities is two-fold:

Knowledge is the basis for action – sharing experiences, ideas and best practice lessons learnt will increase the effectiveness and the efficiency of the various activities undertaken by the organisation. Duplication of effort and repetitive mistakes will be avoided; people will be able to work together more effectivley; and standards can more easily be developed and applied where needed;
Knowledge about customers and other partners with regards to their needs is crucial to build and strengthen mutually profitable relationships – this knowledge is essential for developing the required services, products and content at the right moment, to give direction to traditional marketing activities, or to allow customers to ‘produce’ their own services and content themselves. Especially in this new GKE world of eVeryone-to-eVeryone connectivity, understanding the needs and business processes of the customer provides opportunities to create and deliver customer value-added products and services so that the value chains (physical and/or virtual) become more closely connected and interwoven. This should ultimately lead to enhanced customer loyalty and trust.

For initiation of a successful knowledge-oriented programme, three critical success factors can be identified:

Availability of a clear vision, understanding and commitment at management level. Management must understand the relationship between (e-)business strategy, the other elements of the organisation and the role that knowledge plays in order to sustain the current strategy or design and implement a new one;
The existence of an organisation that facilitates knowledge gathering and sharing within the organisation and in its relationships with other people in other organisations;
A structured, continuous selection of customer value-added projects with a direct and measurable impact on customer-loyalty and satisfaction. To build understanding and acceptance, it is vital to start developing knowledge-related activities in those areas where the customers are receptive and where (measurable or generally perceived) value can be created.

In the next sections we will describe instruments and methods that can support e-business strategy within an organisational perspective by creating and leveraging the relevant knowledge available. We will first focus on ‘internal knowledge housekeeping’, ie, the organisational conditions and activities that focus on the creation, dissemination and application of knowledge activities within the organisation and with its direct partners (customers and suppliers). It is important to point out that people with the right knowledge are currently scarcer than financial resources, so it is vital that the conditions under which these people will decide to stay with the organisation are created and maintained.

Knowledge-conscious management in e-business

Knowledge and competence

One of the biggest problems in designing and implementing a strategy for knowledge management is the lack of understanding of what knowledge actually is, hence the tendency for most initiatives to start with a definition of the concept. Usually, a great deal of discussion precedes the formation of the most usable definition, and the interesting thing is that these discussions never stop. We refer to this as the inductive approach, which acknowledges the importance of defining a common language. We would like to propose the following definition: knowledge is the combination of ideas, facts and experiences that are used to make a decision or to select an action by which a situation is changed into a more valuable one.

The word ‘competence’ is also used on a frequent basis. An individual’s competence, according to Karl-Erik Sveiby[4], can be regarded as consisting of five mutually dependent elements, including explicit knowledge (as discussed above):

Skill – the art of ‘knowing how’ is a practical proficiency (both physical and mental) and is acquired through training and practice. It includes knowledge of rules and procedures, as well as interpersonal (communication) skills;
Experience – mainly acquired by reflecting on past mistakes and successes;
Value judgements – perceptions of what the individual believes to be right and proper. These act like conscious and unconscious filters for each individual’s process of knowing;
Social network – the social network of an individual’s relationships with other human beings in an environment and a culture that is transferred through tradition. This network, of course, also includes people outside the traditional social context of family, religion and work. It includes people from other companies, organisations, communities and other physical or virtual groupings.[5]

Human competence cannot be copied exactly. Individuals develop their own competence through training, practice, experience, reflection and repetition, and competence is transferred through doing. So to a certain extent, competence depends on the social networks of the relationships people are part of. Organisational competencies or capabilities are built on the individual knowledge and competences of people who are part of the organisation, both in the strict sense and the extended (network) sense.

Organisational conditions for success in KM

KM has once again emerged as an immensely popular management topic, just as it did at the beginning of the 1980s, when topics like the learning organisation and the intelligent organisation were high on the agenda. Some people claim that KM is actually nothing more than a re-packaging of old ideas and concepts. This is partly true. However, new technologies and business models have sparked new approaches and innovative applications for knowledge.

Knowledge plays a role in every operational aspect of a business. Therefore, KM cannot and will not be accepted as a distinct functional area, and precautions should be taken not to position it as such within an organisation. The challenge for knowledge management is to develop and implement its associated instruments in combination with the required organisational change. The development and implementation of a positive and stimulating ‘knowledge environment’[6] can be co-ordinated and facilitated by a supporting role.

Instead of only focusing on the inductive approach explained above, we consider it the most constructive and pragmatic way forward to take a more descriptive or empirical approach. This type of approach describes knowledge(-conscious) management in terms of the objectives, activities and deliverables that are related to the role knowledge plays in an (e-)business environment. Knowledge(-conscious) management is the collection of instruments and measures that an organisation can develop and implement to identify, acquire, disseminate, apply and evaluate the knowledge it has, or should have, to obtain sustainable competitive advantage; it is the art of transforming common sense into common practice.

Managing knowledge in this context means paying attention to content, to experience and skills, and to people’s behaviour. The behaviour and thus performance of workers is in turn influenced by the different elements that make up an organisation.[7]

Every element (seven in total) of the organisation can be perceived as being a lever for change in support of increasing knowledge/competence-based performance. However, two of these are especially relevant:

Systems – the procedures, formal and informal, that drive the organisation and support its structure[8]. Five systems in support of performance improvement are essential: accountability, data/information systems, feedback, recognition and training. These functions have to be in place if an organisation is to function at a high level, matching market leaders in line with the predominant value discipline. If one or more of these systems is missing or if the systems are out of sync, the organisation is basically unable to take any decision effectively;
People and skills – the type of professions and knowledge/competencies that must be possessed by the employees of an organisation if its established goals are to be reached, again in line with the existing or desired strategic customer value position. This also covers the need, potential and resources/methodologies for competency development and leverage. As discussed above, before one can identify the kinds of people needed in an organisation, the organisational and individual competencies the enterprise currently possesses have to be analysed. Possible gaps between the current situation and the desired one also have to be taken into account. As a result of this analysis, an organisation might come to the conclusion that a certain strategy is not feasible because of missing individual and/or organisational knowledge.

All these ideas relate to traditional organisations, but how does knowledge management apply in new types of organisations such as the networks of people that use the internet to interact and communicate outside and across traditional organisational boundaries?

Figure 1: interactions within an organisational environment⁷

The e-business network as a community of practice

Communities are as old as mankind, but in recent times the word ‘community’ has acquired additional meaning in the context of new business models and developments in the ICT environment (in particular the internet). It is generally acknowledged that communities are key constructs for business innovation and coherence in the global knowledge economy, and the challenge is to support the creation and leverage of meaningful communities that add value to their members and their environment. Typically, one can distinguish four kinds of communities in the organisational/ICT meaning:

Informal networks – networks of people that communicate with each other outside the context of shared (business-oriented) goals and/or interests;
Communities of interest – good examples are discussion groups and chat-rooms, as found on the internet (or an intranet). Here people are joined together by a common interest;
Communities of practice – here people actually share knowledge. The exchange of experiences and ideas allows professionals to do their job more efficiently and effectively. A network organisation is a good example of a group that might turn into a community of practice;
Communities of purpose – here goals and targets can be set at which professionals can collectively aim. Collaboration between members is essential if the desired results are to be achieved. The group is collectively responsible for the generation of business benefits. A project team is a good example of a community of purpose.

To reach the next level of maturity, a community will combine the qualities of the less structured networks. By definition, communities are people-based. Many organisations think that a network of computers is the same as community. If it is, then it is a very impoverished community indeed. In a customer and business context, a community must be based on creating a meaningful way of providing a platform in which the transfer and exchange of knowledge can result in a ‘corporate brain’ that should be accessible to each of the members of the organisation. Investing in this type of strategy will help to overcome traditional problems with knowledge sharing, such as the idea that knowledge equals power and ‘not-invented-here’ syndrome.

Communities of practice can also play an important role in offering a possible solution for the organisational design problems that exist in traditional enterprises. Information, for example, no longer has to be passed purely from the top down, but can be exchanged between people in the areas where knowledge is being developed and applied (which is typically not the management level), and upwards to the management layers if it is adding value. This information is then assessed and used in the (re-)formulation of (e)-strategy.

A new phenomenon called dual citizenship can also be observed: people belong to their organisational entity (division, department, team) but at the same time belong to one or more communities of different types. Some are formal, other less so. From an HR point of view, new ways of motivating people to participate, and to acknowledge and reward the value that they add are required, even if these activities take place outside the formal entity. The organisational design that facilitates this way of working is sometimes referred to as opportunity-based design.

Given this, knowledge-oriented instruments and methodologies have to be developed and implemented, something we will address in part two of this article, which will be published next month. It is clear, too, that some degree of prioritisation is required before actual development and implementation can start. The conditions under which the instruments can add value also need to be clear; enablers and roadblocks need to be identified. This process is called the organisational readiness study.[9]

One important consideration is the degree of overall coherence within the organisation. The studies of Roos (www.anticipator.com) reveal that if there is no common mental framework or core goals and values, it becomes very difficult to survive in a highly competitive environment. Additionally, for KM to succeed, this collective ambition needs to be developed based on the broader vision and aims of the organisation. If we want people to work together and share their ideas and experiences, there should be a common sense of purpose. Building and leveraging the necessary capabilities and competencies requires a common understanding of the key value drivers, the key performance indicators and the critical success factors. The key words here are communication and interaction. A two-way communication process is extremely important: any communication barriers will jeopardise the chances of the organisation becoming an effective e-business, network-based, collaborative organisation. An open communication culture, supported by the corresponding elements (business processes and structure), should receive the full attention of management. Their own attitude and managerial style should therefore also form part of review process.

Organisational capabilities and enablers

An organisational capability or competence is something that an organisation must be able to do if it is to achieve its business aims and satisfy customer needs. These are basically constructed from the individual knowledge and skills of the people within the organisation or the e-business network.

It is important to recognise that, taken individually, no single capability will necessarily lead to sustainable competitive advantage. Instead, they should be considered as interdependent and interlinked entities.[10]

In order to best support the organisation’s objectives and identify optimal learning opportunities, it is necessary to develop a high-level understanding of the current business processes and activities to be supported, destroyed or transformed into the e-business processes. As discussed, a high-level business process/workflow and/or environmental analysis therefore needs be completed in order to design and implement the new processes.

Enablers are the building blocks for forming the basis of a successful implementation of knowledge-based instruments. Once the composite capabilities and enablers necessary to satisfy the business issues have been pinpointed, the appropriate instruments also have to be identified. These solutions can be described as the implementation agents of the enablers. The implementation of these solutions (in satisfying the original business issue) will result in both financial and non-financial gains.

This approach is not linear, as there are interdependencies to consider. Three areas to consider when implementing KM instruments are:

ICT – technology has different roles. It serves as an enabler in its own right, and has associated solutions attached to it, such as common architectures. It can also destroy existing ways of working and processes, thus also undermining formerly viable strategic options. However, it also performs an important role in supporting other enablers;
Customer-centric performance measurement – performance management performs three functions in the context of implementing KM:
- It measures the tangible and intangible benefits actually obtained as a result of the KM implementation. In effect it measures the difference between the ‘as is’ and the ‘to be’ situation;
- It measures the effectiveness of the composite enablers and solutions in satisfying customer needs and thus solving business problems. This allows the user to switch and change the composite enablers and solutions to achieve optimal results;
- It also acts as a check to ensure that the proposed solution and its implementation agents are all focused on one thing: satisfying actual customer needs and consequently solving broader business issues.

Customer-centric performance measurement has to connect measures like customer loyalty, employee loyalty and satisfaction, and internal quality of service.[11]

Process implementation – the KM process implementation is the glue that holds the approach and the enablers together. Process implementation determines the mix of enablers and solutions that are necessary to satisfy the wider business goals. In effect, it is the process that determines the implementation route.

Figure 2: interdependant relationship of organisational/individual capabilities¹⁰

References

1. We follow the OECD in our use of the term ‘global knowledge economy’. The OECD defines the GKE as: “An emerging set of activities, structures and arrangements as a knowledge-based economy on a global basis.”

2. See Bree, A.P. de (2001), pp.128-168

3. Ibid

4. Sveiby, K. E., (1997), pp.35-36

5. These social networks are also the basis for many types of new communities on the internet

6. See Kim, C. & Mauborgne, R. (1997)

7. Bree, A.P. de, op cit, p.104

8. Blanchard, K. (1997), pp.44-45

9. In organisational change terminology, this study or analysis is also called ‘corporate profiling’

10. Bree, T. de, op cit, p.26

11. See Heskett, J.L. (1994)

The concluding part of this article will be published in the next edition of Knowledge Management.

Paul Louis Iske is senior vice president and chief knowledge officer at ABN Amro. He is also a freelance consultant on strategic knowledge management issues. He can be contacted at: paul.iske@knocom.com

Tony de Bree is interim manager (e-business) at ABN AMRO Trust, and commercial director for Go4estraetgy Consulting. He can be contacted via: www.go4estrategy.com