Elsevier

Information & Management

Volume 43, Issue 8, December 2006, Pages 964-974
Information & Management

Understanding the failure of internal knowledge markets: A framework for diagnosis and improvement

https://doi.org/10.1016/j.im.2006.09.001Get rights and content

Abstract

In writing this paper, our objective was to use the concept of internal market failure to explain why many knowledge management initiatives fall short of expectations. We re-examined the conventional view of knowledge as a pure public good and developed a typology of knowledge as a heterogeneous public good. This permitted us to identify the different sources of internal market failure that impeded knowledge creation and sharing within firms. We then analyzed generic managerial responses to internal market failure and showed how the effectiveness of each response was limited by the nature of knowledge as a tradable commodity. We concluded by presenting a preliminary framework for knowledge management based on the enforcement of dynamic internal property rights. The objective of a dynamic response to internal knowledge market failure was seen as an attempt to balance individual incentives with the need to create and share knowledge throughout the organizational.

Introduction

The creation and dissemination of knowledge within firms is vital for sustaining competitive advantage, especially in knowledge-intensive industries [41]. However, effective knowledge management is difficult. Only 13% of the executives in a recent survey of European and US organizations felt that they effectively transferred knowledge between units [34] and many, probably most, knowledge management initiatives fail [38].

Much research in this area has focused either on technology or on ways of knowledge elicitation [5], [13]. Although both are important, we focused on incentives for knowledge creation and sharing. Exchanges within the firm's internal knowledge market could and often have resulted in a variety of organizational inefficiencies; i.e., internal knowledge market failures [37]. Our underlying assumption was that many managers have underestimated the complexity of the incentives for knowledge creation and sharing by employees and therefore misunderstood the sources of failure. The internal market view of knowledge management has emphasized the fundamental importance of costs and prices in eliciting knowledge [21]. It also recognized that new technologies can disrupt the existing internal market by changing individual incentives for creating and sharing knowledge, raising or lowering the costs of enforcing property rights, reducing or relocating transaction costs, supporting institutional mechanisms (such as, reputation and rating systems), and facilitating complex price-discovery techniques. Managers must therefore understand the standard responses to market failure and exploit emerging technologies in order to achieve a balance between individual incentives for knowledge supply and the organization's desire for free knowledge sharing.

Section snippets

A typology of knowledge public goods

An efficient internal market for a private good – a homogeneous depletable good with well-defined property rights – operates efficiently when it is supplied by many employees. In such ideal circumstances, consuming employees willingly pay some “price” (P) (which may be in non-monetary units of exchange) equal to the supplying employee's marginal, or opportunity, cost (EMC), so thatP=EMC.

Internal knowledge markets, however, seldom resemble efficient markets for private goods because knowledge

Barriers to effective management of internal knowledge markets

Different sources of inefficiency and market failure exist in all four quadrants of our knowledge typology. Managers may intervene in internal knowledge markets in an attempt to minimize the impact of such failures. However, managers must contend with two additional sources of failure.

Seven responses to internal knowledge market failures

The literature has identified a number of generic responses to market failures [42]. We now consider seven of the responses that are relevant to internal knowledge markets.

A dynamic view of knowledge management

The absence of risk-free responses to internal knowledge market failures suggested that a context-sensitive, dynamic managerial response should be more effective. The question that firms should ask is: in which quadrant should our knowledge be located? The state transition diagram in Fig. 5 shows how managerial responses trigger transitions between quadrants of the knowledge typology. Clearly, those on the right side should be avoided, due to the losses of organizational surplus imposed by

Conclusions

While scholars have written about internal knowledge markets and their problems, the typology described here provided a textured view of knowledge. Our typology recognized that excludability and negative externalities during knowledge exchange can result in different knowledge market failures. We explored the knowledge management challenges that arose in each quadrant of the typology and described the inevitable collateral risks associated with static managerial responses. We concluded that

Acknowledgements

The authors acknowledge the financial support of the Social Science and Humanities Research Council of Canada (SSHRC) Initiatives for the New Economy (INE) program. We would also like to thank the editor, E.H. Sibley, for extensive editorial assistance.

Michael Brydon is an assistant professor in the Faculty of Business Administration at Simon Fraser University, Burnaby. He received his PhD in management information systems from the University of British Columbia and MEng and BEng degrees in engineering management from the Royal Military College of Canada. His research interests lie at the intersection of decision theory, economics, and computer science and include computational economies, decision-theoretic valuation of real options, and

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    Michael Brydon is an assistant professor in the Faculty of Business Administration at Simon Fraser University, Burnaby. He received his PhD in management information systems from the University of British Columbia and MEng and BEng degrees in engineering management from the Royal Military College of Canada. His research interests lie at the intersection of decision theory, economics, and computer science and include computational economies, decision-theoretic valuation of real options, and markets for public goods such as knowledge and open source software. Recent articles have appeared in Decision Support Systems and Information and Technology Management.

    Aidan R. Vining is the CNABS professor of business & government relations in the Segal Graduate School of Business, Simon Fraser University in Vancouver, Canada. He obtained his PhD at the University of California, Berkeley. He also has an MBA from the University of California, Riverside and an LLB from King's College, London University. His research interests focus on both public policy and business strategy, especially strategy and organizational incentives. Recent articles have appeared in the Journal of Policy Analysis and Management, the Journal of Management Studies, Industrial and Corporate Change, American Behavioral Scientist, Journal of Public Affairs, and Public Administration Review. He is a co-author of Policy Analysis; Concepts and Practice (fourth edition, Pearson Prentice-Hall, 2005) and Cost-Benefit Analysis: Concepts and Practice (third edition, Pearson Prentice-Hall, 2006).

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