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Knowledge management has become new challenge for most of the modern organizations seeking to compete in the highly uncertain business environment. It has been widely accepted that the only reason to sustain competitive edge and to raise performance in the long run, is knowledge: that is, how organizations create or acquire knowledge, how organizations retain and store knowledge, how organizations use knowledge and how organizations protect and manage knowledge they have. Knowledge management has been evolved as a new way of collecting organizing and sharing of organizational intellectual and creative resources. It has been referred as the systematic effort that focuses on the creation, sharing, storage and implementation of the intellectual capital so that organizational financial performance can be enhanced. Collectively, information, experience, understanding, relationships, processes, innovation and discoveries are said to be the intellectual capital of the organization (Daft, 2001).
All the organizations need and use knowledge, whether they are private or public, big or small, services, manufacturing or resources. Every organization needs knowledge to successfully run its day to day activities which ultimately affects its financial performance. So, managing knowledge effectively in order to use it for increasing performance is not an easy task. Knowledge has become a strategic weapon that has changed the basis for competition in the current business scenario. This competition becomes more extensive in case of large business organizations. Like globalization, this wave of "Knowledge Management" has expanded all over the world map. All the organizations from every nook and corner of the business world are pushing efforts to manage their knowledge resources in order to compete with their rivals. The business gurus have started anticipating that future will belong to those who will make ample efforts to get, store and use knowledge, irrespective of the condition that it is either a business or an individual, and also irrespective of the fact that business is for profit or not for profit. This research is also being conducted with the same aspiration that is to check the viability of knowledge management as a tool to excel in case of large organizations, working in Pakistan. In this research, the impact of knowledge management process on the organization's financial performance will be studied. The spectrum of this research will remain confined to the Islamabad based organizations. The prime objective of this research is to promulgate the results to the beneficiaries so that they can factually accept the above board reality that knowledge management can fetch enormous benefits to the organizations that adopt it as a strategic tool.
A peeping view on the human history would make it clear that knowledge management has existed and utilized from a long time, although not by this name, which has been recognized a few years ago. The world over known management guru "Peter Drucker" first introduced the term of knowledge workers in 1979 and then during the middle of 1980's Karl Eric started writing about knowledge management. However the very first definition of KM was appeared on the horizon of academic and business literature in late 1980's and defined it as "information based organizational learning". Until 1995 it was passed from different phases and became an established discipline in this very year of 1995. Since 1995, this established discipline has been going through its evolution phase and efforts are being made to define it more precisely (Drucker; Nonaka; Senge; Kirrane, as cited in Holowetzki, 2002)
Defining Knowledge Management:
Knowledge Management Review of 2007 defines "Knowledge Management" in the perspective of an organization as "collecting, organizing, and storing the knowledge and experiences of individual workers and groups within organization and sharing it within the organization". Knowledge Management has progressed from an emerging to an increasingly common function within the organizational setups from the past fifteen years. More and more organizations are putting efforts to accumulate knowledge within organizations as an intellectual property, which has led the Knowledge Management to its acme of maturity ((Foss and Mahnke, 2003).
Managing knowledge is becoming a strategic weapon for the sustainable growth of the organization (B. Choi, H. Lee 2002). The knowledge asset can produce long term sustainable competitive advantage (M. Alavi 2001). With the passage of time, traditional organizations are getting comprehensions that inter organizational knowledge management will become a strategic factor for gaining and sustaining competitive advantages irrespective of the type of business (Boisot M. 1998).
Knowledge-intensiveness is becoming the foundation characteristic of today's business organizations (Martinsons and Hosley, 1993; Lettieri et al., 2004; Murray and Carter, 2005). But the formalization of this knowledge is rarely done because of the heterogeneity and fragmentation (Andeasen et al., 2004). The formalization of knowledge seems to be difficult because of the high turnover of volunteer staff and the lack of operational maturity (Lettieri et al., 2004: Gilmour and Stancliffe, 2004; Helming et al., 2004; Thorp, 1998). An organization which is focusing on the people, business practices, organizational structures, information and communication technologies (ICT), knowledge and governance practices is said to be mature (Thorp, 1998). A mature firm also focuses on the innovation and new business tools or practices development (such as KM) to enhance product development and/or service delivery and ultimately strategic performance (Binney's 2001). An effort on the practices development such as "Knowledge Management" and maintaining internal knowledge relationships can help an organization to multiply future benefits Ballantyne, 2003; Chong and Choi, 2005).
2.2 Knowledge Management Process:
KM Process is combination of creating, capturing, sharing, applying, and reusing knowledge (Baker and Badamshina, 2002). Effective knowledge management is dependent on the process that positively influences individual and organizational capabilities, motivations, and opportunities to learn, gain knowledge, and perform in a manner that end upon positive business results" (Argote, McEvily, and Reagans, cited in "Learning theories-knowledge management process", 2003). Knowledge management process comprises the following four steps which are creation of knowledge, storage of knowledge, sharing knowledge and knowledge management implementation.
2.3 Creation of knowledge:
In an organization knowledge can be created through two sources: internal resources and external resources. Internal resources are those which exist within an organization. It comprises knowledge workers, previous organizational records, individuals learning, creativity and innovation, experimentation, heuristics, problem solving methods applications. It can also be done through employee to employee discussions and sharing of ideas and experiences as and when the need arises in response to a problem (Baker and Badamshina, 2002). Knowledge can also be acquired through external resources by experts hiring, getting information from other organizations in the same field, taking output from customers, internet, research, book, article, research journals (Baker and Badamshina, 2002).
2.4 Storage of Knowledge:
An organization has to deal with the problem of knowledge storage once the knowledge has been created. Modern technology has played pivotal role in facilitating the organizations in this respect. With the introduction of "The Taxonomy" which is similar to central meta-directories in which all the knowledge of an organization can exist with referential and tracking structure, organizations has overcome these problems (Mizumori, (2000). The storage can also be done through the use of Organizational Memory Information System (OMIS) introduced by Stein and Zwass in 1995. OMIS integrates past and present knowledge by making it explicit for future use (Lemken, Kahler and Rittenbruch, 2000).
2.5 Knowledge Sharing:
Another crucial step of knowledge management process is the knowledge sharing. The sharing process can include on the job discussions between employees, formal apprenticeships, discussion forums, corporate libraries, professional training and mentoring programs, knowledge transferring meetings and special facilities to share knowledge like chat rooms, and accessing the organizational memory (Kucza, 2001). Knowledge can also be shared through communication processes and flow of information (Gupta and Govindarajan, 2000).
2.6 Knowledge Management Implementation:
The implementation of knowledge management processes includes the efforts of documenting the appropriate individual knowledge and its dissemination through company wide databases so that it can be used for future problems. With the rising use of computers and adaptations of technologies like knowledge bases, expert systems, and knowledge repositories, the rate of knowledge implementation has also increased in the organizations (Devenport and Prusak, 1998).
Knowledge management process helps to develop human capital inside an organization. Human capital has been defined as the extent of competence and capabilities possessed by employees (Wiig, 1997). The researchers (Becker, 1964; Snell and Bohlander, 2007) have also related it not only with the employee's knowledge, skills, capabilities, commitment, know-how, and ideas but also with the health. Naturally Human Capital is intangible because it only adds value to a firm. This value addition depends on problem solving and decision making in complex situations. So, Human Capital moves with employee. Any organization is unable to own such capital. So, the employees have a method for controlling preferences about the investment on human capital (Roos et al., 1997). Now employees want their organizations to follow such a human capital theory which focuses on the comparison of investment on the development of skills and knowledge along with the future benefits such as increase in salary or authority and the status as well (Becker, 1975). If the employees' have high potential then they will attract more human capital investments. But it is also noticeable to check that the spending will cost to the organization (Snell and Dean, 1992). However, some of the characteristics of human capital completely differs from this transformation. In resource-based theory of organization, researchers (Prahalad and Hamel, 1990; Barney, 1991) cite human capital of employees as core competencies based on their value (extent of employees' contribution to competitive advantage) and exclusivity (incomparable and non-transferable human capital to certain firms). By combining these uniqueness and knowledge of the employees, a framework had been developed by Perez and de Pablos (2003) which declares high value and uniqueness as the most important features of human capital that becomes the source for the competitive advantage. Organizations try to create it through internal development and by improving the extendibility distinctiveness of the resources those are intangible. (Lepak and Snell, 1999; Prahalad and Hamel, 1990). In general, on continuous basis successful organizations try to make efforts to enhance employee human capital by using KM process (Youndt et al., 1996). In KM context, the prime focus of any company is to create organizational knowledge through which they aim to attain high operational efficiency so that they can produce innovative products, and improve customer service.
2.7 Organizational Performance:
The performance of an organization is referred to as financial performance. In financial performanceits very important to take proper considerations of budgets, assets, operations, products, services, markets and human resources (Dixon 1999, Thurbin, 1994; Smith, 1999). It is very important to notice that financial benefits of an organizational performance are often associated with the success of that organization(Thrbin, 1994).
In order to measure the financial performance the profitability ratio is used. In this ratio profit after interest payment is compared with the capital and reserves. It illustrates the profitability for shareholders or owners. Acid test or quick ratio is used as an indicator of liquidity. This ratio measures the liquidity of a company (Elliott and Elliott, 2002). The liquid assets which can be easily converted into cash are expressed with respect to the debts of one year (Maes et al., 2001). These ratios measures the financial performance of any company.
Knowledge Management Process
Independent Variable Intervening Variable Dependent Variable