It is now generally accepted that knowledge can be considered as the most strategic resource for an organization. The value incorporated into products and services is mainly due to the knowledge resources reside in the organization. KM can be used to facilitate the development and application of organizational knowledge in order to create value and to increase/sustain competitive advantage.
Yet it is still difficult to determine the return on investment in knowledge as value creation by KM initiatives is indirect and long-term. There is not easy way to identify a direct cause-effect link between KM initiatives and specific business performance. KM initiatives usually have multiple effects throughout the organization. However, the long term benefits of KM can be translated into the bottom line value and be evaluated in relation to the organization’s mission and goals.
For high technology companies, their value-creation role is usually in producing new innovative products/services based on patented technologies and innovative business model. The ability of a company to produce new products/services is directly related to revenue generation. This in turn is a reflection of the company’s ability to innovate. Effective KM processes usually encourage a sharing and learning environment that sparks creativity and ensure that the company will have the competencies to exploit technical knowledge and process expertise for the creation of new products/services. This demonstrates that KM creates economic values through the ability to innovate.
The magnitude of economic values that can be derived from knowledge assets and KM may be estimated for publicly listed companies. The market capitalizations of high technology companies are usually much greater than their book values. This is a reflection of the market-based valuation of intangible assets of these companies. When the financial obligations, shareholder investments and tangible assets are subtracted from the market capitalization of a company, the remaining value can represent the market-based valuation of the company’s knowledge assets and its ability to manage it effectively. The ability of a company to manage its knowledge assets can be measured by a number of output parameters such as number of new products, number of patents/licenses, and employee turnovers, and relative comparisons can be made in terms of rates of generation and on per employee basis.