LINKING KNOWLEDGE MANAGEMENT WITH BALANCED SCORECARD Mahfuzul Hoque" Mahmuda Akter’ Dewan Mahboob Hossain™~ Abstract: The ideas like Balanced Scorecard (BSC) and Knowledge Management has become very much approved in this ambitious business domain. The prime mission of this writing is to tie knowledge management with BSC in an organization. On one hand, BSC is a strategic performance measurement tool that helps in strategic managemem by linking some sirategically significant, relevant, and interrelated measures or indicators. On the other hand, knowledge management also helps in strategic management by ensuring a proper flow of information and knowledge throughout the organtzations so that all the employees of the organization remain conscious about what to do and what is the target, In this paper, through a framework, itis shown how a proper and effective knowledge management can lead to the organization's financial success that can be revealed through the Balanced Scorecard, INTRODUCTION Today, organizations are competing in a complex and dynamic environment. In order to achieve the organizational goals in the long run, a proper understanding and monitoring of the overall business environment and appropriate implementation of the well-developed strategies through proper strategic management are necessary. Strategic management process can be described as an objective, logical, systematic approach for making major decisions in an organization (David, 1999). It attempts to organize qualitative and quantitative information in a way that allows effective decisions to be made under the conditions of uncertainty. A successful strategic management demands proper collection of information and knowledgeable utilization pf information. According to Austrian management “Guru” Peter Drucker, “Knowledge is the only meaningful resource today” (Stephens, 2000). These days, for every organization, sharing and managing of knowledge has become a key issue of getting success in the highly competitive market, Human knowledge is Associate Professor, Department of Accounting & Information Systems, University of Dhaka Astociate Professor, Department of Accounting & Information Systems, University of Dhaka Assistant Professor, Department of Accounting & Information Systems, University of DhakaD, U, Journal of Marketing, Vol. No. 8, June 2005 ‘as one of the most valuable intangible resources of an organization. It that knowledge is the critical resource of the future (Berdow and Lane, 2003), Knowledge is created through a blend of data and information by the human and this mixture is done through using people's own intuition (immediate insight) and experience so that this knowledge adds value in taking actions. “It Judes not only the ‘old knowledge’ that is in people's heads or the ‘organization's databases but also the ‘new knowledge’ that is generated when people work with information from sources like the Internet or when they work together in think tanks or communities of practice”(Stephens, 2000). When raw and unorganized data are organized and given a proper shape for using in a particular purpose, it becomes an information. To become a knowledge, all these data and information should be mixed with the intuition and experience of the human resource of the organization. Zander and Kogut (1992) has given a ‘Knowledge-based view’ of organizations. They considered ‘organizational knowledge’ (that includes operational routines, skills, procedures and know-how) as the most priceless asset of an organization. Knowledge Management is a large issue that focuses on the full range of procedures by which an organization organizes knowledge. This huge range of processes includes the acquisition, retention, storage, distribution, and use of knowledge in the organization. Management experts agree that learning and growth are the means to strategic victory, the basement for the future. A learning, and growing organization is one in which knowledge management activities are employed and expanding in order to support the workmanship of all the persons in the organization. In a knowledge-based organization, human beings are the only holding pond of Knowledge. In the contemporary business atmosphere of expeditious technological transition, it is becoming substantive for knowledge workers to be in a ceaseless learning fashion, Kaplan and Norton (1996) highlight on ‘learning’ more than just ‘training’. So, there should be mentors and tutors within the organization as well as there should also be ease and comfort of communication among employees thet allows them to promptly get support on problems and puzzles when it is imperative. It also includes technological tools that help in learning and growth. A knowledgeable devising of strategies, their proficient accomplishment, and continuous assessment are urgent to get the prosperity. On this thought, in 1996, Kaplan and Norton introduced the Balanced Scorecard (BSC hereafter) Approach, a competent and conversant mechanism for successful strategicLinking Knowledge Management with Balanced Svorecard 9 management, From its very introduction the BSC approach got immense concentration from both the academicians and the practitioners. The BSC approach conceives learning and growth through “knowledge” as the foundation for organizational success. The main objective of this article is to Tink knowledge management with BSC in an organization and establish the fact that the success of knowledge management can be understood/ measured by Balanced Scorecard. For this, literature review ‘an both Knowledge Management and BSC is done. At the end of the paper through a model, it is shown how the success of knowledge management can be revealed through a BSC in an organization KNOWLEDGE MANAGEMENT Davis (2002) has defined knowledge ‘commercially’. According to him, nowledge is all about the ‘need 10 know’ to be competitive (¢.g. Time to Market). This need fo know is ultimately necessary for our survival, and in particular, to enhance our decision-niaking processes. Althongh our successes will ultimately depend on worthy, on-time and on-line know how — knowledge”, in order to know something, a humen being has a number of resources available in his/her environment, These resources can be data, information, expertise, intuition, life experiences, opinion from different people, several published documents, etc. In business, knowledge is all about the need to know to become competitive in the market. This need co know ultimately helps in surviving in the long run and it also enhances the decision-making processes. According to Myers (1996), *... we can identify- and then manage- organizational knowledge only t0 the extent it has been captured by an organization's systems, processes, products, rales, and culture” ‘The victory of a business depends on meritorious, on time deployment of knowledge. Knowledge, created from inition and experience, is essential in making good strategic decision, {t is particularly yseful for making decisions where there is a great uncertainty. This should be complemented with strategic management analyses. Most organizations can benefit from strategic management that is based upon knowledge creation and analysis in decision making. Business organizations can get competitive advantage in hyper- competitive markets by developing organizational knowledge through strategic planning (Akhter, 2003). According to KPMG Research Report (2000), knowledge is about customers, products, processes, competitors ete. thar can be90, 1D. U. Journal of Markoting, Vol. No. 8, June 2005 codified in people’s mind or in an explicit form (BML Consulting, 2002). A company’s knowledge must include technical knowledge as well as knowledge about how to function in the global market, work with local laws, how tn protect intellectual property, and how to operate successfully in various forms of partnerships (Berdow and Lane, 2003). Businesses can only survive and thrive by exploiting every possible advantage in the increasingly competitive market ‘Therefore, now a day, it is accepted all over that a sustainable competitive adyantage and profitability depends highly on how a company creates and shares its knowledge (Desouza, 2003), This competitive environment begets the theme of knowledge management in the mind of management thinkers. “Knowledge management’ is getting the right knowledge to the right people at the right time to serve the right objectives (Stephens, 2000). It is a management philosophy that combines purposeful information management with « culture of organizational learning in order to improve the business performance. It should be the task of the organizational leaders to create an environment in the organization for managing the knowledge. Knowledge management involves connecting people through developing a culture of sharing knowledge and discouraging ‘hoarding’ of knowledge. In a research report on Knowledge Management in India done by BML Consulting and Griffith University School of Management (2002), Knowledge Management is defined as, “Applying the collective knowledge and abilities of the entire workforce to achieve specific organizational objectives”. To serve the market in an efficient way it is necessary that the human resource of an organization should be well updated about the market and their responsibilities, Today’s organizations, in other words, today’s employees and decision-makers need to be information literate (Drucker, 1992), The use of Information Technology has led to a new era of sharing information and knowledge. The information system can create smart human who has the ability to anticipate the market (Stephens, 2000). The employees should always focus on the activities of their competitors and the demand and behavior of theit customers, For this, they need information. Advances in information technologies have improved the ability to manage both information and knowledge from the aspects of collection, storage, and circulation. The success of knowledge management activities depends on people who properly use the knowledge exchange and utilization process. Through this, people can have better idea about their organization and how several options can be well utilized.Linking Knowledge Management with Balanced Scorecard, 91 Applying Knowledge Management in the Organizations The appropriate accomplishment of Anowiedge management In AN OFganlZAuion is an extensive task. According to Stephens (2002), flow of knowledge can be soundly maintained in the following conditions: (a) A ‘Flat’ organization helps in the smooth flow of information throughout the organization. A ‘hierarchical’ organization cannot give the assurance of smooth flow of information. A flat organization provides with more flexibility than a hierarchical one (). ‘There should be an information sharing culture throughout the organization, If the employees believe in ‘information hoarding’, smooth flow of knowledge is impractical (©) Technology-based initiatives should be taken, as Information Technology is an indispensable part of knowledge management. Knowledge Management propagates an organization’s “intellectual capital”, Intellectual capital is considered as a significant issue of knowledge management, It has three parts: human capital, organizational capital and customer capital (Davis, 2002). Humans are the key particles for using knowledge, ie., only they can use data and information exercising their perceptivity and experience, Organizational capital institutes the basement for corporate stability. This Capital deals directly with the baseline of the business, such as its processes to establish credible data, information and business intelligence (BI) reservoir (Davis, 2002). Customers can also be a part of intellectual capital as from them organizations can get necessary information and feedback about their performance. Stephens (2000) identified the followings as tools for knowledge management: 1. Recruitment: To bring in new people; 2. Reorganization: To bring together productive people; 3. Training: To enhance people's capacity to access information and grow knowledge. 4. Leadership: By ‘salting’ the organization with people who are good at accessing information and sharing knowledge and who encourage others to do the same. Awad & Ghaziri (2004) introduced a Knowledge Management System Life Cycle (Figure 1) that centers around three questions; 1. What is the problem that warrants a solution by the knowledge management system? How important is the problem? What clues indicate that the systemD, U, Joumal of Marketing, Vol. No. 8, June 2005 = built? What will the user and the company as a whole gain from i What development strategy should be considered? Who is going to build the system? 3, What process will be used to build the system’? Figure 1: Knowledge Management System Life Cycle | Evaluating existing icture ¥ From the Knowledge management team en Knowledge capture Desgn Knowledge | management blueprint Verify and validate the Knowledge management system | x Implement the Knowledge ‘management system ‘Manage change and rewards structures | Post system evaluation Source: Awad, E, M, and Ghaziri, H. M. (2004), Knowledge Management, Pearson Education Singapore Pte. Ltd, (Indian Branch), India.Linking Knowledge Management with Balanced Scorecard 93 Tiwana (2000) gave an approach to knowledge management development described as follows: Analyze exiting infrastructure; Align knowledge management and business strategy: Design the knowledge infrastructure, Audit existing knowledge assets and systems; Design the knowledge management team; Create the knowledge management blueprint: Develop the knowledge management system; Deploy, using the results-driven incremental methodology; Manage change, culture, and reward structures; 0. Evaluate performance, measure ROI, and incrementally refine the Knowledge management system. i Si So io ie OES THE BALANCED SCORECARD (BSC) APPROACH According to Kaplan and Norton (1996), “The Balanced Scorecard (BSC) translates an organization's mission and strategy into comprehensive set of performance measures that provides the framework for implementing its strategy.” To survive in this complex business world, organizations. should develop proper mission and vision and ensure effective strategic management for them. Organizations should think of long-term prospects rather than dealing with fulfilling short-term objectives only. The BSC is a unique tool that helps the people in an organization to articulate their overall vision. This approach, initially developed by Kaplan and Norton, acts as a performance measurement aed control tool that includes both financial and operational measures that are related to the organizational goals. Managers, who are using this BSC approach, do not have to rely on short-term financial measures as the sole indicators of organization’s performance (Kaplan and Norton, 1996). The BSC approach presented by Kaplan and Norton allows managers to look at the business from four different perspectives. It provides answer to four basic question 1, How do customers see us? (Customer perspective). 2. What must we excel at? (Internal business process perspective). 3. Can we continue to improve and create value? (Learning and growth perspective). 4, How do we look to shareholders? (Financial perspective).= 1D. U. Journal of Marketing, Vol. No, §, June 2005 To cover the four basic perspectives, a BSC should put together the following dimensions and measures (Hoque, 2003): 1. Financial Dimension: Here, Key indicators are operating income. return on investment (ROM), net earnings, earings per share, sales growth, generation of cash flows and economic value added (EVA), Internal Business Process Dimension: The key indicators are Product design, product development, post sales service, manufacturing efficiency and quality. 3. Learning and Growih: It includes information like intellectual abilities of employees, information systems, organizational procedures to manage a business and adaptation ability to changes, employee training and development and employee satisfaction. N 4. Customer Dimension: This dimension includes customer satisfaction survey, customer retention, new customer acquisition, customer response time, market share and customer profitability. Itis very important to mention here that Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate financial data 18 always relevant, important and managers should provide it. However, it is important to State that the emphasis on only financial performance measurement tools leads to an unbalanced decision, as it will show disregard to other important perspectives. Recently management philosophy is emphasizing on the importance of customer focus and customer satisfaction in any kind of business. There is no doubt that if Customers are not satisfied, they will cyentually find some other suppliers that will meet their needs. Even if current financial performance shows a good picture, an unsatisfactory performance from customer perspective may result in a future deterioration, Another important perspective emphasized by Kaplan and Norton is learning and growth. This perspective highlights issues like, employee Preparation and corporate cultural attitudes related to both personal and corporate enhancement. Another perspective of BSC is the internal business process, This Perspective allows the managers to know how well their business is running, and whether its products and services conform to their mission. All these perspectives are strategically linked with the overall mission and vision of the organization (refer to Figure 2).Linking Knowledge Management with Balanced Scorecard 95 Figure 2: BSC Providing a Framework to Translate a Strategy into Operational Terms val ~ era Boece |g | lore Process: € Temsleear Vision And enon sere Seren + eran | \ Settee? [—— ‘Source: Kaplan, R-S. and Norton, D.P. (1996), Using Balanced Scorecard as a Strategic Management System, Harvard Business Review, January-February, 9.76. Though this BSC approach is covering so many issues discussed, it should be noted that BSC does not mean just ‘using more measures’ but it means putting a handful of strategically critical measures together in a single report (Hoque, 2003), That is, these four perspectives are not simply an aggregation of independent perspectives. Rather, there is a logical coherence among them - earning and growth lead to better business processes, which in turn lead to increase value to the customer, which finally leads to improve financial performance. Kaplan and Norton (1996) named this relationship as “cause-and- effect relationships” among the four BSC perspectives. This cause and effect alliance can be realized in ¢ crystalline fashion through Figure 3.96 'D, U, Jounal of Marketing, Vol, No. 8, June 2005 Figure 3: The Cause and Effect Relationship Return on Capital Employed Financial Perspective 7 Customer Loyalty | Customer Perspective Internal business process Process Quality y | Learning and Growth Perspective | Source: Kaplan, R. S.and Norton, D. P. (1996), The Balanced Scorecard Translating Strategy into Action, Harvard Business School Press, Boston. A survey shows that 60% of the Fortune 1000 firms have experimented with the BSC Approach (Silk, 1998). But Hoque et al (1997) stated that little evidence is available outside the US on current practice of Balanced Scorecard. Adopters « include organizations like KPMG Peat Marwick, Allstate Insurance, AT & T ete. (Chow et al, 1997), However, many other researches suggest that there are evidences of using Balanced Scorecards outside the USA also. Malmi (2001) didLinking Knowledge Management with Balanced Scorecaud 7 semi-structured interviews in 17 organizations in Finland and found a widespread application of BSC approach. Letza (1996) examined three UK companies and found the application of BSC there. Kald and Nilsson (2000), in their research on Nordic countries (Danish, Finish, Norway, Swedish) found that a majority of the companies of these countries have adopted balanced scorecard. According to Atkinson et al (1997), BSC has the potential to provide planners with a way of expressing and testing a sophisticated model of cause and effect in’ the organization, a model that provides managers with a keystone to manage desired and actual results. Otley (1994) states that, “It seems clear that the BSC approach has something to offer, but also that the study of management control is more complicated and more contingent than previously recognized”. Atkinson et al (1997) states: “The BSC is among the most significant developments in ‘management accounting and thus, deserves intense research attention." LINKING KNOWLEDGE MANAGEMENT WITH BALANCED SCORECARD (BSC) In order to establish a BSC in a profit-oriented organization, the first step is to devise a strategic blueprint, for the organization in which the mission and activities of the organization should be strategically confederated. This strategic map should initiate with the aspect of learning and growth, The fundamental argument of this article is that, learning and growth is not workable without shaping a proper basement of knowledge management. The rationale is, learning and growth mainly focuses on issues like intellectual aptitudes of employees, information systems, organizational maneuvers to govern a business and refitting ability to changes, employee training and development and others. A precise knowledge management system forges a solid foundation for this kind of issues. From the detailed discussion of knowledge management (done in the beginning of the article), it can be summarized that it is a process which involves transforming the raw data (collected from both internal and external sources) into information and then again transfiguring this information into knowledge by use of human intuition and experience. To metamorphose the information into knowledge, other than human insight and maturity, organizational support and capability (like policy and strategy inclination, manpower maturation & human empowerment capability, technological & information capability) are also needed. There should be a knowledge culture that will ensure creation and exchange of knowledge. This ultimate management of knowledge will lead to a proper learning and growth of an organization. The justification is, through knowledge. employees will acquire the skills and formulate and implement newD. U, Journal of Marketing, Vol. No. 8, June 2005 options timely, accurately and efficiently. Thus, they will be competent to reconstruct the business process when needed according to the contemporary need of the market. This modernistic organized set up of the internal busiriess process will satisfy the customers at a greater extent as new options and conveniences will be serviceable to the customers. This customer satisfaction Will lead to a superior financial accomplishment with an increased sale leading to. an augmented contribution margin and thus a heightened profit (Figure 4). Figure 4: Linking Knowledge Management with BSC INDICATORS! MEASURES OF BSC THE CAUSE-AND-EFFECT RELATIONSHIP OF BSC. | KNOWLEDGE | NANAGEMENT Operatingincome, RO, Net Firancal | |_— earings, EPS, Sales row, | Performance _| EVA | fia | | Customer salistacion survey, | | Customer retention, New customer aquiston, Throw suibles. Guslame response time, rece ornate talsfocton & loyalty Marit share & Cusorer | | eters a rofahily | | Sao r a | eadsto ae | Usable information | Dusiness fooess arnt, wparence 8 ‘cxgizatonal copenites exctame | | Keowee cmaton 8 |__| euing & growth | esa | : sae: Moternzed internal | Seep, Fossles sevice, Mandaciing | ficieny &Quaity | : —t | Ittetectuataoity of employees, iixration syste, Crganzationl — procediesio manage the busines 8 adapt to change, Empoyes training & |__ceveopment Brecon Pet | For most of the organizations, the main target is to get financial success. From figure 4, it can be said that, if an effective knowledge management can be done in an organization, it will ultimately result in the financial achievement.CONCLUSION On one hand, BSC is a strategic performance measurement tool that helps in strategic’ management by linking some strategically significant, relevant, and uacrrelated measures or indicators. On the other hand, knowledge management also helps in strategic management by ensuring a proper flow of information and Knowledge throughout the organizations so that all the employees of the Greanization remain consefous about what to do and what isthe target. In Figure 4, it is shown that how a proper and effective knowledge management ean lead to cause and effect relationship of a BSC and produce the financial success of the Creanization. Whether proper knowledge management is done in the organization or not can be revealed through the indicators of BSC. As the ultimate financial puceess of the organization is a result of the chain effect initiated with a good Knowledge management and then leading to other perspectives of the BSC. it ean be said tha. if the indicators of BSC show satisfactory results, proper knowledge management is done References Akhter, 'S._H. (2003), ‘Strategic Planning, Hyper competition and Knowledge Management Business Horizons, January- February, pp. 19-24 Atkinson, A. A. Banker, R.D.. Kaplan, R.S, and Young, S. M., (1997), Management Accounting, NJ, Prentice-Hall. Atkinson, A.A., Balakrishnan, R., Booth, P., Cote, .M., Groot, T., Malmi, T., Roberts, HeUtiana, E. and Wu, A. (1997), New Dimensions in Management Accounting Research, Journal of Management Accounting Research, Vol.9, pp. 80-108 Awad, E.M. and Ghaziri, H. M. (2004), Knowledge Management, Pearson Education Singapore Pte. Lid, (Indian Branch), India Berdow, I and Lane, H. W. 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