Impacts of knowledge creation capabilities on corporate performance in Vietnam today

ECONOMIC DEVELOPMENT
No. 205, September 2011

IMPACTS OF KNOWLEDGE CREATION CAPABILITIES
ON CORPORATE PERFORMANCE IN VIETNAM TODAY
by Dr. NGUYEÃN HOAØNG VIEÄT*

In response to the effort to evaluate knowledge creating initiatives of
organizations, this study introduces the concept of ‘knowledge creating capabilities’
(KCC) that indicates the structural balance of the four knowledge creation modes
proposed in the SECI Model by Nonaka & Takeuchi (1995). The relationship of these
capabilities with corporate financial performance is explored using two financial
indicators of Vietnamese small and medium enterprises (SMEs) from different
sectors. The empirical evidence reveals a correlation between knowledge creating
capabilities and financial performance of SMEs in retailing service, which implies
some solutions to KCC in Vietnamese SMEs.
Keywords: knowledge creation, knowledge assets, SECI Model, business performance.

1. Introduction
At present, corporate competitiveness depends
a lot on ability to create, employ, supply and
protect knowledge of enterprises [1], [5]. In a
world where markets, products, technologies,
rivals, laws and even social institutions have
been changing quickly, a continuously innovative
strategy based on corporate knowledge is a
precondition for establishment of sustainable
competitive advantages of enterprises. Strategic
vision of this effort requires enterprises to
include knowledge resource as prerequisite and
vital factors of the business strategy [6].

Enterprises
with
effective
knowledge
management can provide their customers with
higher added values, reduce personnel cost and
overheads, improve their decision-making
process, renovate continually, enhance labor
productivity, develop new products, beef up
flexibility of organizational structure and ensure
a quick and effective dissemination of knowledge
within the organization [4], [5]. The main motive
of an enterprise pursuing knowledge creation in

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RESEARCHES & DISCUSSIONS

general is to enhance its business performance
[1], [4].
Measuring the value of knowledge created and
evaluating efficiency in knowledge management
have become matters of concern to both
researchers and corporate managers in Asia,
Europe and America. One of traditional
approaches is to look for interactive relation
between knowledge management (KM) and
indicators of financial performance [4], [5].
Although affirming positive relations, many
authors admit that their researches or surveys

are not highly persuasive.
KM is a new field originating from various
sources, and therefore, generates various views
and interpretations. However, it is generally
agreed that KM is related to inside knowledge of
an organization and ways of using this
knowledge to improve the corporate performance.
KM, in relations to members of organizations,
implies two aspects: (1) how to create necessary
knowledge (knowledge creation); and (2) how to
use it to improve the performance.

* University of Commerce


ECONOMIC DEVELOPMENT
No. 205, September 2011

I.Nonaka is the author of a theory of
knowledge creation that attributes miraculous
success of Japanese companies to creation and
utilization of knowledge in business. Nonaka
introduces concepts of explicit and tacit
knowledge and works out theoretical basis for the
model of interactions between two classes of
knowledge in development of organizations (See
Figure 1), thereby explaining how Japanese
companies create their dynamic of innovations.

Transforming

explicit knowledge
to tacit one and
part of individual’s
basic information,
eg. by learning,
reading and
discussing

Tacit

Tacit

Tacit

Through face-toface
communication
or shared
experience, eg.
apprenticeship.

Tacit

Socialization

Externalization

Empathizing

Articulating

Embodying

Connecting

Internalization

Combination

Explicit

Explicit

Explicit

2. SECI Model

Explicit knowledge is articulated into formal
language and can be easily shared among
individuals. It can be expressed as scientific
formulas, clear procedures and other media,
including information, data, publications, texts,
and documents codified by various means.
Explicit knowledge is characterized by theoretical
approaches, solutions to problems, documents,
databases, and knowledge base.
Tacit knowledge is personal knowledge
embedded in individual experience and contains
subjective insights, intuitions, hunches, and
skills. Tacit knowledge is hard to communicate or
share with others and can only be learned from

others through a close relation for a certain
period of time. Tacit knowledge involves
intangible factors, such as personal beliefs,
perception, institution, metaphorical models, and
skills such as craft and know-how. Nonaka &
Takeuchi point out differences between Japanese
and Western conceptions of knowledge and
thinking ways. They perceive knowledge creation
as the key to continuous innovation, and by
various mechanisms tacit knowledge can be
transformed into explicit one and vice versa,
based on socialization and coordination.

Explicit

Nonaka & Takeuchi (1995) introduced their
SECI Model based on actions and interactions
between tacit and explicit knowledge. Many
subsequent researches (by Bohn 1994; Hansen
1999; Singh & Zollo 1998; and Swan 2000) try to
separate these knowledge dimensions and
concentrate on measurement of effects of tacit or
explicit knowledge. This paper therefore aims at
systematizing arguments about knowledge
creating capabilities, and analyzing importance of
structural balance between four modes of
knowledge conversion in the process of
knowledge creation in enterprises as presented
by Nonaka & Takeuchi in their SECI Model.

Converting tacit
knowledge to
explicit knowledge,
eg. through
systematizing,
interpreting,
experiences,
lessons
Creating new
knowledge by
combining,
classifying,
summarizing
explicit knowledge

Figure 1: SECI Model – Knowledge creating process in an enterprise [7]

RESEARCHES & DISCUSSIONS

53


ECONOMIC DEVELOPMENT
No. 205, September 2011

The work of Nonaka & Takeuchi has been
widely accepted, validated and applied in several
research fields. This includes also internal (single
organization) and/ or
multi-organizational

perspectives
[10],
because
organizational
knowledge creation (distinct from individual
knowledge creation) takes place when all four
modes of knowledge creation are organizationally
managed to form a continuous cycle, it can be
viewed as an upward spiral process, starting at
the individual level moving up to the collective
level, and then to the organizational level,
sometimes reaching to the inter-organizational
level.
Difficulty in building a link between tacit and
explicit knowledge in a firm can cause problems.
This can cause ‘bottlenecks’ in the process of
knowledge creation. That ‘bottlenecks’ can occur
when the four knowledge conversion modes are
not equally balanced. In other words, when a
firm has either a lack of focus in any knowledge
conversion mode (socialization, externalization,
combination, internalization) or when it overly
focuses its KM initiatives onto specific modes of
the of SECI Model.
The concept of “Knowledge Creating
Capabilities” proposed by Choi & Lee, which is
defined as the level at which all four modes of
SECI Model can work together as part of a
common mechanism for knowledge creation.
KCC is then not the sum of individual knowledge

creation activities but a concept that emphasizes
the importance of the balance level between the
four modes of knowledge conversion in a firm [1],
[2].
The composite score of KCC was the mean
score of the four modes of SECI Model. This
score represents the level at where all SECI
modes can work together allowing the generation
of an appropriate spiral of knowledge creation.
Figure 2 describes samples of scoring for KCC
[7], [8].

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RESEARCHES & DISCUSSIONS

KCC is measured by: SSECI= (OS + OC)(OE+OI)/2 x
Balance coefficient O – S,E,C,I min / O – S,E,C,I max

Figure 2: Sample of knowledge creating
capabilities (balanced vs. non-balanced)

3. Methodology and research results
We use an empirical approach along with
results of other studies by Choi and Lee (2002);
and Chang et al. (2005) to test the framework.
Companies selected as the target population of
this study are mostly members of the Haø Noäi
Trade Corporation (HAPRO) plus some privatelyrun SMEs in Haø Noäi that have been in business
for at least three years. The target population

comprises 61 companies from the following
industries: manufacturing (37.8%), retailing and
transportation (28.7%), communication and
information (13.0%), service (11.2%), construction
and real estate (8.1%), and agriculture (1.2%).
KCC were assessed by a questionnaire. It was
composed by a subset of questions selected from
Nonaka [7], [8]. The content covered all modes of
SECI Model and considered all their
subconstructs. The questionnaire included six
items for each mode of SECI Model (See Table 1).
In this study, corporate performance is
measured by two indicators: operating profit
margin and labor productivity. Operating profit
margin is calculated by dividing profitability by
sales. Labor productivity is computed as
profitability divided by number of employees.
A total of 160 questionnaires were distributed
to the companies from the target population, and
a total of 52 companies corresponding to several
industries answered the questionnaire. Retailing
industry presented a good balance between
response ratio and number of observations. It
had a set of 38 observations, which represented a


ECONOMIC DEVELOPMENT
No. 205, September 2011

response ratio of about 50%. Due to these facts,

this study focuses on the retailing sector. Next,
linear analysis is used for estimating relation
between KCC and corporate performance of
retailing companies. The findings show that
there is a significant correlation between KCC
and firm performance (Figure 3).
Table 1: Questionnaire items sample
Mode
Socialization
(1-6 items

Externalization
(1- 6 items)

Combination
(1- 6 items)

Internalization
(1- 6 items)

Knowledge creating
capabilities

Content
- Ability to present demands and
requests of the client in formal
contracts.
- Ability to share personal values
and know-how that are difficult to
verbalize through team work.

- Ability to share ideas and
inventions with others using
figures and charts.
- Ability to raise new ideas through
free discussions.
- Ability to create a new idea using
previous analyzed information and
data.
- Ability to produce documents
such as plans, specifications,
reports, for implementing new
concepts.
- Ability to provide successful
models from inside or outside the
company and share them for use
between departments and within a
department.
- Ability to apply the knowledge
gained through training, manuals
and documents, and assess its
effectiveness.

companies.
Furthermore, companies were
grouped according their balanced score. ANOVA
tests showed that there are significant
differences between the levels of balanced SECI
and their performance. There are significant
differences between non-balanced companies and
companies with high level of balance in terms of

labor productivity and operating profit margin
(See Figures 4 and 5). The performance of
“balanced firms” is higher comparing with nonbalanced firms.

Figure 4: Differences of labor productivity

Corporate
performance
.425**
Labor productivity

Balanced SECI

Figure 5: Differences of operating profit margin

.469**
Operating profit
**: Significant at 0.01 level

Figure 3: Correlation analysis results

These results confirm the importance of the
balance between knowledge creation activities in

4. Problems arising from the empirical study
Firstly, from the overall results we are able to
verify the importance of a well-balanced
knowledge creation spiral (knowledge creating

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ECONOMIC DEVELOPMENT
No. 205, September 2011

capabilities). In the knowledge creation cycle, the
“balance status” allows firms to be ahead of the
non-balanced firms in terms of financial
performance (labor productivity and operating
profit margin).
Secondly, in this study, the importance of
balance in four knowledge creating modes was
re-emphasized. However this concept was
indirectly noticed by previous researchers, and it
has been overlooked by the majority of them. The
lack of emphasis from the academia on the
importance of this concept, in addition with the
few studies showing empirical evidence
supporting this theory have driven firms to
ignore the balance and, as an implication, have
led them to pursue either tacitly-oriented or
explicitly-oriented
knowledge
management
approaches.
Thirdly, despite empirical results showing
that corporate performance is positively
associated with KCC, the characteristic of this

relationship is ‘moderate’. This indicates that
there may be other components affecting
financial performance, such as organizational
characteristics, business strategy and investment
in
strategic resources (e.g., information
technology or human capital).

5. Some measures to develop KCC of
surveyed SMEs
Estimating the application of SECI Model
shows that most Vietnamese enterprises are in
the initial stages of perception and application of
business management based on knowledge. In
some enterprises where the process has been
introduced, some gained indicators looked
encouraging but they only came from subjective
perception of managers and still lack real system
and efficiency. This study, therefore, proposes
some measures appropriate to these initial stages
and status quo observed in surveyed companies.
Firstly, CEOs of Vietnamese enterprises
should change their thinking modes and move
from the product-focused to value-focused model
of business, and from product-based competition

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RESEARCHES & DISCUSSIONS

to value-for-customer competition with knowledge
creation as the principal strategy.
Secondly, leaders of companies (director and
vice-director of the Board, and director-general)
should make strong commitments and pioneer
the building of a mechanism for organizing and
operating a SECI Model at CEO level, between
CEOs and middle managers, and between CEO
and strategic shareholders to establish shared
contexts and relationships called “Ba” by
Nonaka.
Thirdly, top leaders should pay full attention
to the key role played by middle managers in
transforming valuable suggestions into actions
and sharing them with front managers to
establish a balance and encourage dialoguing and
exercising processes at appropriate “Ba” with a
view to beefing up the SECI spiral path at basic
level of the relation between the firm and
customers and target markets.
Fourthly,
companies
should
form
a
commission and multi-functional task forces to
systematize and evaluate structure of knowledge
assets of the company that consists of four
categories: social knowledge assets, routine
knowledge assets, conceptual knowledge assets,

and systemic knowledge assets. Special care
must be given to R&D assets, trade brands,
license and patent, and relations with
shareholders and loyal customers. Based on this
foundation, the company can build and
implement a strategy to develop knowledge
assets and direct the business strategy based on
value and knowledge profoundly and wisely.
Fifthly, the company should have a program
to train and re-train employees in development
of knowledge assets, skills and know-how;
especially soft and instrumental skills such as
offline and
online
communicative
skill,
information interaction and sharing, multifunctional team work in “Ba”, critical thinking
and harmonizing realities with ideals, and
presenting, communicating and persuading skills.
Empirical researches prove that they are
essential skills to accelerate and enhance
efficiency of SECI spiral path in the company.


ECONOMIC DEVELOPMENT
No. 205, September 2011

Sixthly, the company should launch an
innovating movement to strive for excellence and
accelerate R&D rate in order to reduce losses and

opportunity costs of innovation, leading to
renovation in valuable propositions and in “speed
to market.” Additionally, the company should
invest in establishing and implementing a
system of encouraging and favoring knowledge
creation and transfer, as well as a system of
evaluating and controlling knowledge assets,
business assets and knowledge creation
management.
The purpose of this research is to affirm the
importance of the balance among knowledge
creation modes in companies. Based on the SECI
Model, this paper proposes some measures to
enhance
KCC
that
influence
corporate
performance. This relationship was examined
empirically using data on Vietnamese SMEs from
the retailing sector

9. Nonaka, I. et al. (1994), “Organizational Knowledge
Creation Theory: A First Comprehensive Test,” International
Business Review (3:4), pp. 337-351.
10. Rice, J. L., & B.S. Rice (2005), “The Application of
the SECI Model to Multi-Organisational Endeavors: An
Integrative Review,” International Journal of Organisational
Behavior (9:8), pp. 671-682.
11. Singh, H. & M. Zollo (1998), “The Impact of

Knowledge Codification, Experience Trajectories and
Integration Strategies on the Performance of Corporate
Acquisitions,” The Wharton School Working Paper No. 9824.

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