Assessing the impact of knowledge management strategies announcements on the market value of firms

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Abstract

Although there is much literature on the relationship between KM strategies and organizational performance, the benefit of KM strategies is not well understood. We addressed this issue by exploring how KM strategies influence a firm's market value using event study methodology. We evaluated the cumulative abnormal returns for KM strategies announced by U. S. firms from 1998 to 2003. Our findings supported the hypothesis that firms’ announcements about their KM strategies provoked positive reactions in the market. More specifically, strategies that focus on either (i) knowledge reusability through IT or (ii) knowledge sharing through informal discussions among employees contributed to higher performance than strategies that emphasized both. This outcome empirically supported our argument that the emphasis on either tacit or explicit knowledge results in a better market value of the firm. Furthermore, the market's reaction to the announcement is dependent on the firm's industry classification. The findings of this study offer insights that may help managers maximize the market impact of their KM strategies.

Introduction

Organizations are increasingly undertaking KM initiatives and making significant investments in them. Furthermore, investors are paying more attention, when valuing a firm, to announcements concerning KM activities. For example, Lockheed Martin's announcement of their effort provided its employees with a centralized base that allows them to access the expertise of seasoned employees without constantly having to ask for help; this affected investors’ evaluation of the firm, resulting in a positive cumulative abnormal return (CAR) assessed at about 4%.

Most organizations continue to make efforts to realize benefits using KM. However, despite their best efforts, it is not clear how KM enablers can be employed strategically. KM strategies are high-level plans that focus on providing the organization with the knowledge and capabilities needed to achieve its visions and goals. They provide the framework within which the organization can manage new ways of using KM. Furthermore, KM strategies outline KM processes required for managing knowledge effectively [25]. KM strategies have become a fundamental issue for many companies [1].

Several studies have categorized the different types of KM strategies that organizations may adopt. The emphasis of these studies has generally been on how KM strategies affect organizational performance. With a codification strategy, knowledge is stored in repositories systematically, while a personalization strategy implies person-to-person communication. We believe that companies undertaking either of the two strategies in isolation produce higher performance than companies adopting both strategies.

Although the concept of KM strategy is receiving increased attention, the literature primarily relies on case studies, anecdotes, and conceptual frameworks. Empirical studies remain few and far between. Moreover, among the few empirical studies that have explored KM strategies, the majority have focused on the relationship between KM strategies and non-financial performance. These studies have not addressed the effects of KM strategies on financial performance. Understanding what performance gains firms can receive from KM strategies is essential before they can implement KM strategies. However, previous studies have not provided a way for executives to understand the true benefits that can be achieved from KM investments.

We examined the impact of KM on a firm's perceived market value. This was pursued by employing an event study to assess the impact of KM strategies announced by firms on the market value of the firms. Event study methodology uses change in market value to measure the market's response to a variety of announcements, such as KM system implementation. Positive fluctuations in the stock market as the result of firm's announcements reflect the benefits that the market expects the implementation to contribute to the organization's value.

Section snippets

Literature review

A review of prior KM research uncovered key enablers for successful KM in organizations; these included human, technical, and organizational resources. The studies have shown how KM enablers affect organizational performance. For example, Sabherwal and Sabherwal [21] examined the effects of contextual factors on CAR associated with IT-based KM announcements by adopting event study methodology. The results of their study highlighted the need for managers to consider the specific circumstances of

KM strategies

Many KM strategies have been developed to help an organization manage its knowledge. Among them, we tried to identify the relationship between KM strategies and financial performance on the basis of Choi and Lee's work, developed on the basis of the knowledge-based view (KBV), which holds that knowledge assets can be a unique resource that may lead to a long-term sustainable competitive advantage [23], and provide a strong theoretical underpinning. The KBV identifies two types of knowledge:

Research methodology

Assessing the impact of KM on performance improvements is difficult due to the difficulty in measuring knowledge. However, one purpose of managing knowledge is to increase the returns to the organization, and thus measuring its benefits is essential for KM [3]. Without measurable success, support for KM is not likely to improve, or even continue. Previous studies used ROA, ROS, ROE, or ROI. However, these accounting-based measures have been criticized because they limit the capability to

Sample characteristics

Table 2 summarizes the announcements in terms of KM strategies and industry type. The classification of 79 firms resulted in 40 system-oriented, 24 human-oriented, and 15 dynamic strategies. The majority of these firms were in the manufacturing and service industries.

KM strategies and CAR

The CAR related to system-oriented announcements in the sample and the t-test results are reported in Table 3.

The mean CAR on each of the days in the 5-day event window for the system-oriented strategy are shown in Fig. 2. Thus, a

Limitations

Although the findings of our study were interesting, they must be interpreted in the context of its limitations.

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    Our sample of announcements was relatively small (n = 79). In particular, the dynamic strategy in the financial industry had only one sample firm. The small sample size was due to its limited time period (1998–2003); this was necessary because KM had not been recognized as a usable business practice until 1998 and our initial empirical investigation was started in early 2004 (using data

Acknowledgements

This work was supported by the research program 2009 of Kookmin University in Korea. The authors also thank Prof. Edgar H. Sibley for his constructive editorial help.

Byounggu Choi is an assistant professor at the College of Business Administration of the Kookmin University in Seoul, Korea. He was formerly on the faculty of the School of Information Technologies at the University of Sydney. He held his MS and PhD degree in management information systems from the Korea Advanced Institute of Science and Technology (KAIST) in Seoul. He received his BS degree in statistics from the Korea University. His research interests are knowledge management, e-commerce,

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    Byounggu Choi is an assistant professor at the College of Business Administration of the Kookmin University in Seoul, Korea. He was formerly on the faculty of the School of Information Technologies at the University of Sydney. He held his MS and PhD degree in management information systems from the Korea Advanced Institute of Science and Technology (KAIST) in Seoul. He received his BS degree in statistics from the Korea University. His research interests are knowledge management, e-commerce, and business value of IT. His papers have been accepted by or published in the Journal of MIS, IEEE Transactions on Engineering Management, Information & Management, Omega, and others. He has presented several papers at the ICIS, HICSS, and PACIS.

    Ana Jong is a graduate from the University of Sydney. She received her degree in the Bachelor of computer science and technology with first class honours. Her research areas are in knowledge management. She is currently working as a business analyst for Objective Corporation. Objective Corporation is an established leader and specialist provider of proven content, collaboration and process management solutions for the public sector.

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