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Achieving Competitive Advantage Through Knowledge Management and Innovation: Empirical Evidences from the Indian IT Sector

Mundra, Neeru; Gulati, Karishma; Vashisth, Renu. IUP Journal of Knowledge Management9. 2 (Apr 2011): 7-25.
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Knowledge Management (KM) refers to a range of practices used by organizations to identify, create, represent, and distribute knowledge for awareness, learning and reuse across organizations. KM is closely related to organizational learning initiatives. This may be distinguished from organizational learning by emphasizing on the management of specific knowledge assets and development and cultivation of the channels through which knowledge flows. The present paper investigates the vital link between management of knowledge in organizations, innovations in which an organization may involve KM and the development of a sustainable competitive advantage. Various hypotheses have been formulated to know whether KM and competitive advantage are interrelated or not. Innovation in the product and services are done by various organizations but in this paper the authors have tried to study whether the innovation in KM is critical for the success of an organization or not. The paper also provides practical implications for creating a competitive advantage in modern firms. KM covers a wide range of functionalities, support and different sets of activities where organizations have to keep a check on various departments. Therefore, to achieve this research objective, the authors study the sharing of best practices and knowledge of employees in different areas of organization. [PUBLICATION ABSTRACT]

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Translate Full text Headnote Knowledge Management (KM) refers to a range of practices used by organizations to identify, create, represent, and distribute knowledge for awareness, learning and reuse across organizations. KM is closely related to organizational learning initiatives. This may be distinguished from organizational learning by emphasizing on the management of specific knowledge assets and development and cultivation of the channels through which knowledge flows. The present paper investigates the vital link between management of knowledge in organizations, innovations in which an organization may involve KM and the development of a sustainable competitive advantage. Various hypotheses have been formulated to know whether KM and competitive advantage are interrelated or not. Innovation in the product and services are done by various organizations but in this paper the authors have tried to study whether the innovation in KM is critical for the success of an organization or not. The paper also provides practical implications for creating a competitive advantage in modern firms. KM covers a wide range of functionalities, support and different sets of activities where organizations have to keep a check on various departments. Therefore, to achieve this research objective, the authors study the sharing of best practices and knowledge of employees in different areas of organization. Keywords: Knowledge management (KM), Innovation plot, Competitive advantage, K-Commerce (Knowledge Commerce), Competitive differentiator Introduction We live in the knowledge age, a new era which is likely to have a radically different outlook and entail a new business compass to traverse. The world is changing fast which is crucial to the success of firms in the rapidly changing setting of the knowledge era. Success in

today's global, interconnected economy springs from the fast and efficient exchange of information. Sustainable competitive advantage is no longer rooted in physical assets and healthy finances but in effective channeling of intellectual capital. The development and practice of Knowledge Management (KM) is continuously and dramatically increasing in organizations. Due to improvements in KM, the race for seeking a competitive edge through knowledge increases at a faster rate. Businesses have long recognized the importance of managing their intangible assets. Development of brands, stakeholder relationship and reputation and organizational culture is readily viewed as sustainable catalyst of business advantage. The ability to leverage and develop intangible assets, particularly those providing financial and professional services, creates a core competency to organizations. In this knowledge-intensive organization, knowledge processing is the stepping stone to success. In any organization, efficient KM is a very critical issue to gain cutting edge advantage and is being considered as one of the most important assets (Figure 1). Figure 1 clearly depicts how KM and innovation helps the organization to gain competitive advantage. As it is not very easy to manage knowledge in the organizations so various infrastructure tools are used to manage it effectively. Organizational structure also affects the KM process as it influences the communication between the employees which in turn either motivates or demotivates the employees. If the structure of the organization is flat then employees are empowered and try to develop more and more tacit knowledge which when codified becomes the explicit knowledge and can be stored in the knowledge base of the organization. Similarly, organizational culture also affects the knowledge base of the organization. Not only KM infrastructure, but also innovation of new ways of managing knowledge signifies the quality of knowledge to be inventoried. Every organization has some knowledge base which it uses to update itself and taking decisions. It is necessary to have a view on its strength, weakness, opportunity and threats, so that the right knowledge can be implemented at the right time. The strategies implemented for this also show whether the company will achieve competitive advantage or not. There are two main KM strategies, which are: (1) personalization strategy; and (2) codification strategy:

1. Steps in Codification Strategy: * Identify who has knowledge. * Classify and extract the knowledge. * Manage the knowledge. 2. Steps in Personalization Strategy: * Identify who has knowledge. * Classify the knowledge and store information about whom to contact to get it. * Manage the 'pointers to knowledge'. By grinding all these, a Knowledge Management System (KMS) can be developed. If all the ingredients are effective then it is certain sure that the organization will gain competitive advantage. There are seven common KM processes in every organization. Rigorous study is required in an organization to identify the needs, stages of requirement and distribution of the knowledge components to the right people at the right time. After this, KM can be initiated to bridge the knowledge gap to cure inefficiency among the employees. So distribution of proper knowledge helps in creating job satisfaction among the employees. The seven KM processes are described below: 1. Externalization: This is the process of codification, the transformation of knowledge from tacit to explicit. It is called externalization because it involves taking the knowledge out of the person. 2. Communication (of explicit knowledge): This is the 'stuff' of information management. 3. Internalization: It is the process of learning by doing, of making the knowledge second nature, of creating habits. 4. Socialization: It involves the communication and possibly enhancement of tacit knowledge.

5. Locating and Acquiring External Explicit Knowledge New to the Group: The process of scanning (to locate), accessing, and acquiring external explicit knowledge. 6. Locating and Acquiring External Tacit Knowledge New to the Group: The process of scanning (to locate), accessing, and acquiring external tacit knowledge. 7. Inventing Knowledge New to the Group: The process of inventing original knowledge is usually achieved by one person or a small group. Initially the new knowledge is of a tacit nature, e.g., a composer's first idea about tune and rhythm. Objectives of the Study The main problematic aspect of KM which may be addressed in this paper is the overarching question of KM i.e., whether it will be influential to develop an effective way of managing knowledge, to maximize innovation and attain optimum competitive advantage. Organizations spend huge amount of money in Research and Development (R&D) for the innovation of products and services. The objective is to know whether it will be fruitful to spend an amount on R&D of various ways of managing knowledge, so that in turn the managed knowledge can give an opportunity to develop new products or services. There are various studies on the 'use of IT for gaining competitive advantage', 'innovation, necessary for competitive advantage' and 'knowledge, an important asset for the organizations', but this paper has tried to fill the gap and to merge these studies so that it can be known whether the interlinking of these is really a necessity for an eminent organization. K-Commerce: Dynamic Innovation in Knowledge Management Due to globalization and major expansion plans, business organizations are now facing lot of complexities and chaos. In order to bridge the gap, raised due to globalization, it is imperative to use IT to control, coordinate and innovate businesses. IT gained much importance allowing organizations to manage knowledge globally. Knowledge sharing is even more complex and critical for multinational organizations. If an organization is orthodox, it can never succeed because the effects of innovation in KM process are not visible. In order to have the full effect of KM, organizations should be at par with the latest technology. There are various types of innovation that can

be applied in organizations to have a competitive edge. An attempt has been made to plot the types of innovation on the basis of two dimensions (Figure 2). The Innovation Plot The plot clearly depicts that the innovation done can be categorized into two things: 1. Nature of new knowledge; and 2. Amount of knowledge to be applied and acquired. Depending on this there are four major types of innovations: 1. Major Incremental Innovation: The innovation is a major incremental innovation if the nature of knowledge is additive i.e., there is a new thing but it is in sequence with the existing findings and the amount of knowledge that is to be acquired and applied is high. Also it is an internal dimension, based on the knowledge and resources involved. An incremental innovation will build upon the existing knowledge and resources within a certain company, which means that it will be competenceenhancing (For example: various mobile handsets of Nokia). 2. Minor Incremental Innovation: Innovation is a minor incremental innovation if the nature of knowledge is additive i.e., there is a new thing but it is in sequence with the existing findings and the amount of knowledge that is to be acquired and applied is low. An incremental innovation will involve modest technological changes and the existing products on the market will remain competitive (For example: adding more features in the Microsoft Office, the tool which is mostly used by the organizations for managing their information). 3. Minor Radical Innovation: The innovation is a minor radical innovation if the nature of knowledge is substitutive i.e., there is a new thing but it is in sequence with the existing findings and the amount of knowledge that is to be acquired and applied is low (For example: the tool which is mostly used by the organizations for managing their information and development of Tally software which is used by most of the firms for maintaining and preparing invoices and customer information).

4. Major Radical Innovation: A radical innovation, on the other hand, will require completely new knowledge and/or resources and will be, therefore, competencedestroying. A radical innovation will instead involve large technological advancements, rendering the existing products non-competitive and obsolete (For example: use of integrated circuits instead of vacuum tubes. Today K-Commerce (Knowledge Commerce) is also one of the most dynamic examples of major radical innovation). K-Commerce K-Commerce is the trading of knowledge in a variety of forms using electronic networks. Though knowledge is already been packaged and traded, as in the case of licenses for patent exploitation, the use of the Internet creates opportunities for gaining profits from investment in knowledge development. K-Commerce represents a convergence of practices in four areas: 1. Knowledge-Intensive Products and Services: It is augmented by a growing focus on more effective KM. 2. Internet: It acts as a strategic business opportunity which allows knowledge providers to reach audiences globally and at a low cost. 3. E-Commerce: It is the ability to carry out automated transactions round the clock, 365 days a year. This is particularly attractive for selling explicit knowledge, downloadable by customers for immediate use. 4. Marketing: Developing closer understanding of customer needs and building up one-to-one customer relationships and for this Internet is helping to improve the quality of relationship marketing. Interpolis Expands the Use of K-Commerce Support to Meet the Growing Demand for Customer Service: A Case Study Interpolis is one of largest insurance companies in the Netherlands, with a workforce of more than 2,600 people. It forms a powerful and assertive part of Robobank group. The company has gained wide recognition with its advertizing campaign 'Interpolis crystal clear'. Besides financial compensation, Interpolis also offers compensation in kind. The company offers an overall package of non-life and life insurance products, working on a co-operative bias. Consequently,

interpolis works with the Rabobank group to ensure continuity and security for its customers. Profit is not the most important goal. In 2005, Interpolis merged with Achmea, part of the European insurance group Eureko. The Rabobank exchanged Interpolis for 37% of the shares in Eureko. Since the merger, interpolis belongs to the largest insurance group in the Netherlands. Interpolis Expands Use of K-Commerce Support to Meet the Growing Demand for Customer Service K-Commerce support is a customer service and support solution that replicates the experience of the best customer service representatives to provide fast, accurate and consistent answers to the customers. Interpolis began by using K-Commerce support in July 1999 to support the staff at Rabobank branches selling insurance policies. Interpolis has traditionally spent an enormous amount of time and investment to train their call centre agents. Despite training, agents sometimes have found difficult to always find the right answer to customers' questions quickly. But now agents can use Inference's knowledge base to provide the answers. Initially, Interpolis used K-Commerce to handle travel insurance claims. With the help of Inference's Dutch consulting partner-'Everest,' Interpolis has expanded its use into other sectors of insurance including home and auto claims. Agents can now provide consistent and accurate advice to its customers across multiple business lines. K-Commerce will provide call centre agents at interpolis with virtual help, like having an expert on their shoulder, so that they can easily provide their customers with the answers that they are looking for. Interpolis expanded the use of K-Commerce support which reinforces their position as the most advanced knowledge base member service solution available today. Competing with Knowledge as a Competitive Differentiator Despite the clear importance of knowledge-driven decision making, substantial percentage of companies do not leverage (or do not fully leverage) knowledge in their decision making. In the past also various surveys were done by executive search firms and it was found that 45% of corporate executives relied more on their instinct than on facts and figures in running their business and thus do not believe in collecting data or doing surveys. Still, most of the companies collect the data about the customer needs and accordingly products are developed. These companies act as competitive differentiators. The

data collected by the customer are managed by the middle level employees so that the analysis can be made. This is nothing but managing the knowledge and pilot testing of the product is done by many companies to know the success of the product after launching, so that right action can be taken at the right time. This shows that companies who are full-fledged knowledge competitors have gained considerable competitive advantage, and first mover status, over peer companies. However, the companies which are working on their intuitive minds never succeed in today's scenario, but if they manage knowledge efficiently, it is easy to institutionalize the best practices, and this helps in becoming a business imperative rather than simply a competitive one. Does Innovation Affect Knowledge Management? No one can deny the fact that it is innovation that helps the organizations to gain competitive advantage. But there is a question as to how innovation affects KM. The answer is the rate of innovation which is rising day-by-day in the market and today every organization is spending a huge amount of their money in building good KM base. Not only this, organizations are trying to discover new methods of managing knowledge, so that maximum information can be extracted from the market before time. This helps them to strike the market at the right time and gain profits. The entire peak innovations are related to technology as nowadays Excel and Access are no more tools for KM but Tally and other financial and statistical tools are coming forward. Information Portal at Various Organizations: Database of Knowledge Management Information portal provides intranet users and selected extranet users access to a variety of internal and external business services and applications. This portal helps all the employees in enhancing their knowledge and be up to date. This also helps the employees in developing best strategies. The various advantages are: * Easy to develop, distribute and publish an information. * Enhances cross platform. * Increases productivity. * Less costly.

Research Methodology A sample of 15 companies has been taken to know whether they implement KM in their organizations to have more effective strategies. The type of research design used in the present study is descriptive in nature. This includes surveys and fact-finding enquiries of different kinds. Data for this study are obtained from primary and secondary sources. Secondary sources include records, internet and discussion with company officials. The primary data was collected through observation and interaction with the people involved in KM. The data was collected by direct interaction with the concerned person to know their opinion about KM. Data analysis of the responses from IT people has been done with the help of percentage analysis and graphs. The data is also collected from Internet, websites of IT companies, reports from organizations, etc. The list of the sample companies considered in the present study is as follows: 1. TCS 2. HP 3. HCL Infosystems Ltd. 4. Cartel Pvt Ltd. 5. Snap-On 6. Accenture 7. Amdocs 8. Adobe Systems India Pvt. Ltd. 9. Birlasoft Limited 10. Euro Info Systems 11. Wipro 12. Siemens

13. R-Systems 14. Sapient 15. QA InfoTech Z-test is employed to understand the interlinkings among various parameters. The hypotheses have been made and tested to achieve the objectives. H1: KM is necessary for competitive advantage by applying z-test, as z = 0.78 and the value is between the range of 1.96 (5% level of significance), the hypothesis is significant and is accepted. 76% of respondents agreed that KM helps in getting competitive advantage. H2: Innovation is necessary for competitive advantage by applying ztest, as z = 1.09 and the value is between the range of 1.96 (5% level of significance), the hypothesis is significant and is accepted. H3: Tacit knowledge generated by employees helps in KM by applying z-test, as z = 1.53 and the value is not between the range of 1.96 (5% level of significance), the hypothesis is insignificant and is accepted. 83% of respondents agreed that employees of the organization help in generating and managing the knowledge. H4: KM and innovation in new ways of managing knowledge are related by applying ztest, as z = -0.37 and the value is between the range of 1.96 (5% level of significance), the hypothesis is significant and is accepted. 79% of the respondents agreed that R&D should engage in innovating new ways of managing KM. H5: Competitive advantage is the only aim of KM by applying z-test, as z = -2.14 and the value is between the range of 1.96 (5% level of significance), the hypothesis is significant and is not accepted. Analysis of Data

Data collected by way of survey of the respondents selected from the sample IT/ITeS organizations were analyzed using percentage analysis and displayed through charts. The detailed analysis of the survey findings are given in Figure 3. Figure 3 depicts that out of 15 companies surveyed, 21% of the companies were not familiar with the concept of KM although these companies are managing the information collected through various sources and implementing the same for gaining success and profit. Chief Knowledge Officer (CKO) is the person in the company who is having the sole responsibility from the stage of extracting the information, to managing and implementing it. Through the analysis (Figure 4), it was found that the companies are familiar with the concept of KM but still 72% of the organizations do not have CKO. Figure 5 shows that the companies have CKO but the companies who are implementing KM with the help of CKO are 66% and rest are doing it without the help of CKO. Through the analysis, it can said that the idea that "Human resources are the most valuable asset of any organization" is not wrong. This has been analyzed by the survey (Figure 6) and it was found that in almost all the organizations human component (employees) generate effective knowledge for the firm. It has been observed (Figure 7) that only 26% of the organizations like HCL, Wipro, etc., are implementing the ideas given by their employees which not only helps the organization to gain competitive advantage but also helps in increasing the morale of the employees. From Figure 8, it is found that out of 26% companies that implement the tacit knowledge of their employees. 79% of the companies agreed that their employees give vibrant ideas and try to innovate more ideas for the success of the company. It was found that 66% of the companies implement KM; also 86% of the companies (Figure 9) agreed that KM helps in getting competitive advantage by managing the knowledge. The company can easily implement the right knowledge at the right time and at the right place. KM is necessary for every organization but from where the companies collect information is the question that comes to everyone's mind. It is

clearly analyzed from Figure 10 that the information is not only collected from the market surveys but the employees also devote themselves to share their precious and innovative ideas with other members of the company. This information is then processed and stored for future use. The main tools used by these companies are the database applications for sharing and using the knowledge. After database applications, the other common tools used for this purpose are computerized advisors, groupware and video conferences. The data collected through the questionnaire is clearly shown in Table 1. The reason behind the 1st rank of database is that nowadays every organization is maintaining a database of all their information and knowledge. Instead of database, some organizations use the word knowledgebase. This helps the organization to collect all the information in a single place and the information can be retrieved any time for use. After database, Artificial Intelligence (or Intelligent Agents) is given 2nd rank. Collecting all the information in a single place is easy but to find the appropriate information at the time of use is difficult. So, with database, artificial intelligence is also common. Management Information System (MIS) is given the 3rd rank because it is very easy to use and maintain most of the information easily. Not only this, it also helps to make decisions. Example Decision Support System (DSS) helps top management to make decisions. Nowadays saving data on the Internet is also very common as memory of the hardware can crash but data once stored on web can never be lost. This is the only reason why web base and web portals are used by many organizations. Expert system, Enterprise Resource Planning (ERP) and simulation techniques are innovative tools of KM and used only by large organizations for gaining competitive advantage. All other web-based methods like video conferencing, e-mail, chat groups, etc., are no more common but necessary for sharing knowledge with the employees of other branches and that is the only reason why virtual office concept is spreading in India and has become the reason behind the survival for various organizations. Face-to-face interactions like meetings and conferences are the main methods for sharing everyone's knowledge in the company internally. After face-toface interaction, E-mail and groupware are other important methods for this purpose (Figure 11). Group works should be conducted as face-to-face interaction is the main method used by the companies for sharing the knowledge internally. Keeping this in mind 49% of the companies always conduct

group works and 29% of the companies conduct this often. But 6% of the companies still conduct it occasionally and 2% never conduct it (Figure 12). It has been asked to those 86% of the companies which believe that KM is necessary for competitive advantage whether R&D department should also deal in innovating new ways for managing knowledge. 79% responded positively and others responded that R&D should deal in innovating new products or processes only (Figure 13). Although competitive advantage is one of the major objectives of the organizations for implementing KM, there are other objectives too. The other main objectives are to standardize the existing knowledge in the form of procedures and protocols and transformation of individual knowledge into collective knowledge (Figure 14). Conclusion KM is one of the key factors determining the success of any organization and also responsible for contributing higher productivity to IT companies. Several studies in the area of KM reveal that several factors which offer innovative and competitive advantage to KM are universal to organizations. In the present study, the authors randomly approached the IT managers in Delhi to find out whether KM acts as a competitive edge or not in the Indian context. The study is descriptive in nature, and focuses on specific parameters. The results suggest that innovation and IT are found to be crucial ingredients of the KMS. Innovation of new ways of managing knowledge effect KM and the more knowledge is managed the more innovation of products or services a company can do. From the empirical study the authors also found that KM and innovation are necessary for achieving competitive advantage and it is found that Wipro, with the help of a user defined KM system, has been able to cut down a part of its induction training program from a period of 7 days to a period of 4-5 h. KM affects innovation but innovation does not affect KM unless and until the innovation is of new ways of managing knowledge. Innovation and human personnel are found to be crucial ingredients of the KMS as the human resources also contribute a lot in discovering new ways of managing knowledge. Technology is also an important facilitator. People and their interactions create knowledge and promote the flow of knowledge. Like any other study, this study also suffers from some limitations. The study is based on a relatively limited amount of data collected from a concentrated geographical region. More widespread

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