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.

52 RESEARCHES & DISCUSSIONS

IMPACTS OF KNOWLEDGE CREATION CAPABILITIES

ON CORPORATE PERFORMANCE IN VIETNAM TODAY

by Dr NGUYỄN 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

1 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

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

RESEARCHES & DISCUSSIONS 53

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

2 SECI Model

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

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

Socialization

Empathizing

Externalization

Articulating Embodying

Internalization

Connecting

Combination

Through

face-to-face

communication

or shared

experience, eg

apprenticeship

Transforming

explicit knowledge

to tacit one and

part of individual’s

basic information,

eg by learning,

reading and

discussing

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]

54 RESEARCHES & DISCUSSIONS

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 2 describes samples of scoring for KCC

[7], [8]

KCC is measured by: SSECI= (OS + OC)(OE+OI)/2 x Balance coefficient O – S,E,C,I min / O – S,E,C,I max

Figure 2: Sample of knowledge creating capabilities (balanced vs non-balanced)

3 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 privately-run 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

RESEARCHES & DISCUSSIONS 55

Knowledge creating

capabilities

Corporate performance

Balanced SECI

Labor productivity

Operating profit

.425**

.469**

**: Significant at 0.01 level

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

Socialization

(1-6 items

- 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

Externalization

(1- 6 items)

- Ability to share ideas and inventions with others using figures and charts

- Ability to raise new ideas through free discussions

Combination

(1- 6 items)

- 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

Internalization

(1- 6 items)

- 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

Figure 3: Correlation analysis results

These results confirm the importance of the

balance between knowledge creation activities in

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 4 and 5) The performance of

“balanced firms” is higher comparing with non-balanced firms

Figure 4: Differences of labor productivity

Figure 5: Differences of operating profit margin

4 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

56 RESEARCHES & DISCUSSIONS

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)

5 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

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, multi-functional 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

RESEARCHES & DISCUSSIONS 57

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

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