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Article Excerpt
Abstract
Business value of information technology is an enduring research question. The elusive link between IT and financial firm performance calls for further research into intermediate organizational variables through which IT may influence firm performance. This study proposes that knowledge management (KM) is a critical organizational capability through which IT influences firm performance. In the context of multibusiness firms, the study examines how the IT resources of a firm should be organized and managed to enhance the firm's KM capability, and whether and how KM capability influences firm performance. The study develops two hypothesizes: (1) IT relatedness of the firm's business units enhances cross-unit KM capability; (2) KM capability, in turn, leads to superior firm performance. Data from 250 Fortune 1000 firms provide empirical support for these hypotheses. IT relatedness of business units enhances the cross-unit KM capability of the firm. The KM capability creates and exploits cross-unit synergies from the product, customer, and managerial knowledge resources of the firm. These synergies increase the financial performance of the firm. IT relatedness also has significant indirect effects on firm performance through the mediation of KM capability.
Keywords: IT relatedness, knowledge management capability, complementarity, corporate performance, multibusiness firms, diversification, coordination, synergy
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Introduction
The firm-level performance implications of information technology have been an enduring research theme in the information systems literature (Kohli and Devaraj 2003). While some studies have found a significant link between IT and firm performance, others have failed to do so (Devaraj and Kohli 2003). One explanation for the inconsistent findings is that the causal link from IT to firm performance is too long and that most studies have overlooked important intermediate organizational capabilities that mediate the relationship between IT and firm performance (Barua and Mukhopadhyay 2000; Sambamurthy et al. 2003). Recent research interest in the knowledge management (KM) phenomenon indicates that KM capability could be a critical mediator between IT and firm performance. IS researchers posit that IT enhances the KM capabilities of organizations (Alavi and Leidner 2001; Gold et al. 2001; Schultze and Leidner 2002). Further, organizational theorists and strategists suggest that KM capabilities, in turn, provide competitive advantages and increase financial firm performance (Eisenhardt and Santos 2002; Teece 1998). Collectively, the two propositions suggest that IT may impact firm performance through the mediation of KM capability.
Despite widespread belief that IT enables KM and KM improves firm performance, researchers have attempted very little theoretical work on the development of nomological relationships among IT, KM capability, and firm performance. Systematic empirical investigations of these relationships are also scarce. Reviews of the IS literature do not identify any study that establishes a link from IT to KM capability, or from KM capability to financial firm performance (Alavi and Leidner 2001; Schultze and Leidner 2002). Moreover, reviews of organizational theory and strategic management literatures point out that KM studies have not yet addressed the key issues of strategic management such as the nature of competitive advantage and implications for firm performance (Eisenhardt and Santos 2002).
The objective of this study is to advance our understanding of the relationships among IT, KM, and firm performance by addressing the following research questions at the firm level of analysis: (1) How should IT resources of the firm be organized and managed to enhance the KM capability of the firm? (2) How does KM capability improve financial firm performance? This study examines these questions in the context of multi-business firms operating in multiple product markets. Since knowledge is usually applicable beyond a single product market (Sampler 1998), and there are few external markets for efficient exchange of knowledge (Teece 1980), the internal market of a multibusiness firm provides opportunities for exploiting knowledge in multiple product markets, creating knowledge-based synergies, and improving the overall performance of the firm (Grant 1996b; Robins and Wiersema 1995; Teece 1980). IT organization and management in a multibusiness firm have important implications for the firm's ability to exploit such cross-unit synergies (Brown and Magill 1994, 1998; Sambamurthy and Zmud 1999, 2000; Weill and Broadbent 1998; Weill and Ross 2004). Thus, large multibusiness firms provide a rich context for investigating the research questions of this study.
The paper proceeds as follows. The theoretical foundations section introduces the key constructs of the study and develops hypotheses linking KM capability to firm performance and IT relatedness to KM capability. The methods section presents the procedures used for data collection, validation of the measurement properties of the constructs, and the test of the proposed research model. Findings are presented in the results section. The paper concludes with a discussion of the findings and suggestions for future research.
Theoretical Foundations
In the context of a multibusiness firm, it is important to distinguish between knowledge management within and across business units. Within-unit knowledge management is important for improving the performance of individual business units. However, it does not suffice to justify why individually well-performing business units should exist under the governance of a corporate parent rather than as separate firms in the market. Cross-unit knowledge management seeks to create cross-unit knowledge synergies and make the joint value of the corporation greater than the sum of the values of the individual businesses (Tanriverdi and Venkatraman 2005). Since this study seeks to understand corporate level performance effects of IT and KM in multibusiness firms--as opposed to the performance effects at the business unit level--it focuses on cross-unit knowledge management capability.
Cross-Unit Knowledge Management Capability
What Are the Sources of Cross-Unit Knowledge Synergy in Multibusiness Firms?
In multibusiness firms, there are two major sources of cross-unit knowledge synergy: (1) knowledge relatedness and (2) knowledge complementarity (Tanriverdi and Venkatraman 2005). The concept of knowledge relatedness is rooted in the resource-based view (RBV) of multibusiness firms (Farjoun 1994; Robins and Wiersema 1995). It refers to the exploitation of knowledge resources across multiple business units. When multiple business units exploit the same knowledge resources (i.e., they use knowledge as a common factor of production), their joint production costs become less than the sum of their stand-alone production costs. Thus, knowledge relatedness creates sub-additive cost synergies. The concept of knowledge complementarity is rooted in the economic theory of complementarities (Milgrom and Roberts 1990, 1995). A set of knowledge resources is defined to be complementary when doing more of any one of them increases the returns to doing more of the others. Returns to a knowledge resource vary in the levels of returns to complementary knowledge resources. Jointly, a set of complementary knowledge resources produces greater returns than the sum of their individual returns. Thus, knowledge complementarity creates super-additive value synergies (Barua et al. Whinston 1996; Barua and Whinston 1998).
Knowledge Resources: Which Knowledge Resources Should a Multibusiness Firm Manage for Cross-Unit Synergy Exploitation Purposes?
The creation, exploitation, and the renewal of related and complementary knowledge resources across multiple business units entails significant costs (Hill and Hoskisson 1987). If the benefits do not exceed those costs, the pursuit of cross-unit knowledge synergy can reduce firm performance rather than increase it (Gupta and Govindarajan 2000). Given that firms possess a variety of knowledge resources (Schulz 2001), managers must carefully choose which ones they should focus on for exploiting cross-unit knowledge synergies. Tanriverdi and Venkatraman (2005) identify product, customer, and managerial knowledge as the most-strategic knowledge resources of multibusiness firms. Product knowledge refers to research and development and operations knowledge by which the firm develops and produces its products and services (Markides and Williamson 1994; Robins and Wiersema 1995; Rumelt 1974). Customer knowledge refers to the needs, preferences, and buying behaviors of customers and markets of the firm (Woodruff 1997). It resides in the marketing and advertising skills and policies of the firm. Managerial knowledge refers to the knowledge required for governing business units of the firm (Prahalad and Bettis 1986; Rumelt 1974). It resides in corporate level managerial practices, policies, and processes of the firm (Grant 1988). Product, customer, and managerial knowledge resources also complement each other (Tanriverdi and Venkatraman 2005).
Knowledge Processes: Which Organizational Processes Facilitate the Exploitation of Cross-Unit Knowledge Synergies?
Exploitation of cross-unit knowledge synergies requires coordination across business units (Brown and Magill 1998). To develop a KM capability that creates, exploits, and renews cross-unit knowledge synergies on an ongoing basis, the multibusiness firm must institute a set of organizational processes (Stalk et al. 1992). In a review of KM studies in the strategic management literature, Venkatraman and Tanriverdi (2004) identify four interrelated organizational processes that are critical for managing cross-unit knowledge synergy: (1) creation (Nonaka 1994), (2) transfer (Argote and Ingram 2000; Szulanski 1996; Zander and Kogut 1995), (3) integration (Grant 1996; Grant 1996), and (4) leverage (Menon and Varadarajan 1992; Spender 1996).
Creation of knowledge resources that are relevant and applicable across multiple business units is essential for generating cross-unit knowledge synergies or renewing the existing ones. Transfer of related knowledge resources from source businesses to destination businesses where they are needed is important for extending the range of applicability of the firm's knowledge resources (Sambamurthy et al. 2003; Szulanski 1996). Integration of the transferred knowledge resources with the existing knowledge bases of the recipient business units is important for creating the synergies (Grant 1996a, 1996b). And leverage of the received and integrated knowledge resources for changing the behavior of the recipient businesses is important for converting the performance potential of the synergies into actual performance results (Menon and Varadarajan 1992; Spender 1996). If recipients of knowledge do not act on it to change their behaviors, the multibusiness firm cannot realize the performance potential of the cross-unit knowledge synergies (Tsai 2001). These four knowledge processes complement and mutually support each other (Venkatraman and Tanriverdi 2004). Collectively, they enable the firm to create and exploit the cross-unit knowledge synergies, and to renew them as they depreciate and become obsolete.
Conceptualizing the Cross-Unit Knowledge Management Capability of a Multibusiness Firm
The theoretical foundations reviewed above provide the following building blocks for conceptualizing the cross-unit KM capability of a multibusiness firm:
1. Related knowledge is a major source of cross-unit knowledge synergy in a multibusiness firm (Tanriverdi and Venkatraman 2005).
2. Product, customer, and managerial knowledge are the most strategic types of knowledge in a multibusiness firm (Tanriverdi and Venkatraman 2005).
3. Within a given type of knowledge, the exploitation of cross-unit synergy requires four interrelated processes: creation of related knowledge, transfer of related knowledge, integration of related knowledge, and leverage of related knowledge (Venkatraman and Tanriverdi 2004).
4. Complementary knowledge is another major source of cross-unit synergy (Tanriverdi and Venkatraman 2005).
5. The exploitation of the complementarities among product, customer, and managerial knowledge for cross-unit synergy requires the simultaneous implementation of KM capabilities in each of the three knowledge domains (Tanriverdi and Venkatraman 2005).
Building on these foundations, a cross-unit KM capability is defined as the firm's ability to create, transfer, integrate, and leverage related knowledge across its business units. The firm may have a unique cross-unit KM capability in each of its strategic knowledge domains. Thus, the overall cross-unit KM capability of...
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