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Knowledge Management:
Integration and Coordination
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Table of Contents
Abstract ..................................................................................................................................................... 3
1.
Introduction ...................................................................................................................................... 4
2.
Data and Change ............................................................................................................................... 5
3.
Rational Economic Order .................................................................................................................. 6
4.
Decentralization ................................................................................................................................ 8
5.
Redesigning the Corporation ............................................................................................................ 8
6.
From Cost Accounting to Yield Control ........................................................................................... 10
7.
From Legal Fiction to Economic Reality .......................................................................................... 10
8.
Information for Wealth Creation .................................................................................................... 11
9.
Conclusion ....................................................................................................................................... 12
10.
References .................................................................................................................................. 13
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Abstract
Knowledge goes hand in hand with the state of equilibrium. The state of equilibrium is so
fundamental, especially, under the discipline of economics since it enables economists to explain
relationships. That is why, in economics, all other things should be held constant (ceteris
paribus) for us to explain rational behaviour. In this article, the relationship between equilibrium
and the process of planning is explored, and it is established that the two move together. Further
to this, it is shown that knowledge has to be harnessed to aid in making decisions as well as the
planning process. And, essentially, when all necessary knowledge is availed to decision makers it
becomes probable that optimal decisions could be achieved; creating an enabling environment
for value to be created.
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1. Introduction
The concepts of knowledge and economics are brought together by F.A. von Hayek in a journal
article entitled Economics and Knowledge. He invokes us to think about the effect existing
knowledge contributes to economic analysis. Simultaneously, he wants us to think in the
converse and consider whether economic analysis conveys any knowledge at all.
Von Hayek also points out that knowledge goes hand in hand with equilibrium. There must be
stability otherwise what you know today might not be applicable the next day. And, if the rate of
change is unmanageable it would be difficult for society to profess any kind of knowledge on
anything. However, change is inevitable. And, that being the case, it is important that we
understand causes and effects, otherwise what we already know might be lost. An understanding
of this cause and effect enables us to achieve equilibrium or stability. But, at the same time, von
Hayek posits that the position of equilibrium is dependent on the assumptions people make about
the future. In other words, there should be foresight and anticipation. That way, we can be able to
take measures to ensure that an equilibrium position is maintained, by factoring in anticipated
changes into our present actions.
However, for us to factor into our analysis changes (and hence achieve equilibrium) there should
be planning. In the process of planning, it is normal to make some assumptions to cater for any
eventuality. And, if there are changes in the plan, it follows that there must, equally, be changes
in the assumptions. In the process, consequently, there would have to be a different set of
anticipations. The other important point brought forward by Von Hayek is that for equilibrium to
exist there must be a relationship between the various actions taken by an individual. And, the
fact that these actions relate to each other is what gives rise to a plan because they will be
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understood as one thing. However, since actions take place over a given time it implies that time
is a very essential ingredient of equilibrium. This is part of the reason why in real life for a plan
to unfold it has to be given time; and hence we some times talk about a short term plan or a long
term plan.
2. Data and Change
For plans to work, the data on which they are based should be corroborated by data from the
plans of other individuals. Without this, it is probable that the plans would be unachievable as the
data available would not have been presented in an integrated manner.
It is often the case that the data given to decision makers differ in interpretation to the data as
known to people whose conduct is being analysed. And, if this analysis means that a plan has to
be developed subsequently; problems in reaching the desired state of equilibrium might develop.
Actually, von Hayek indicates that in case the state of equilibrium was desired it would be hard
to ascertain that it already existed at inception of performance. In such instances, equilibrium
would be determined towards the end of the process, ex-post, hence this limits knowledge. If this
happens, then it becomes difficult to fully understand the extent of the change. To me this sounds
logical, since if you are not able to quantify accurately two positions, before performance and
after, it would then be difficult to say that there have been changes.
The author also makes an argument that equilibrium does not depend on correct foresight. He,
however, posits that equilibrium exists if there is integration and compatibility between various
plans. Further to this, the data, which Von Hayek considers the bedrock of planning must
correspond to the expectations of all members of society. The data, therefore, must be in
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alignment to the expectations of all, for equilibrium to happen. Consequently, equilibrium is not
dependent on good foresight but integration of data and alignment of plans.
Von Hayek further adds that the concept of equilibrium makes it possible for economics, as a
science to exist. He gives an illustration of perfect competition as providing a situation where the
concept of equilibrium analysis is best put to use. He, however, criticizes other economists for
assuming that there is perfect knowledge or that there is constancy. For without these
assumptions, their analysis becomes void.
3. Rational Economic Order
In a second article entitled: The Use of Knowledge in Society, von Hayek argues that it would be
easier for planning if all the knowledge was possessed by a single individual. He, however,
acknowledges that this cannot happen. The reality is that, often times, the information necessary
for decision making or planning is dispersed, and not concentrated with the same source. At
times, some of this information may appear contradictory. And, because of these contradictions it
may take some time for us to realize how it all connects together, and attain an equilibrium state.
The equilibrium state is also essential in tackling the economic problem, which is allocating
scarce resources.
The problem confronting society, however, is not just a matter of allocating scarce resources.
But, it is also how the scarce resources should be allocated for effective use; and the challenge
here is harnessing all the available knowledge to make the right decisions. Von Hayek points out
that the lack of understanding of the nature of the economic problem has led to differences in
opinions as to how to tackle economic issues through policies. This as discussed earlier is
exacerbated by knowledge not being centralised, hence posing a bigger challenge for planners.
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That is, the necessary knowledge may not get to the planner to enable effective decision making
or planning.
According to Von Hayek, the solution depends on how centralised this planning is. He goes on to
indicate that the word planning has, usually, been used to mean centralized planning. He also
elaborates that decentralized planning is what can be regarded as competition. This is because
different entities do their own planning using the knowledge they have, individually, hence this
provides a platform for competition to take place.
There are different kinds of knowledge, Von Hayek says. There is scientific knowledge, which
only a few experts are likely to be privy to. And, then there is specific knowledge, which every
individual might posses. This information, however, becomes useful if that individual is involved
in the planning process. Von Hayek asserts that less importance is, often, attached to the
importance of knowledge derived from specific circumstances. And, according to him the
consequence of this attitude is that less importance is then attached to the phenomenon of
change. Von Hayek also draws a connection between change and the economic problem. To him,
economic problems arise because of the changes that have taken place. Otherwise, if things
continue as before, there is likelihood that there would be contentment.
However, Von Hayek makes a point, which might have been valid at the time he wrote his paper,
in the 1940s, but does not seem to carry any credence in the modern business environment. That
is, he claimed that there is little change under current economic situations. It is clear that by the
current business environment Von Hayek was referring to the conditions in the 1940s. On the
contrary, the modern business environment is fraught with changes. The fact that there is
globalisation and improvements in technology and telecommunication has meant that
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competition for markets has intensified. As competition intensifies companies are becoming
more innovative in order to keep ahead of the rest; and this entails a lot of change.
4. Decentralization
Von Hayek argues that it is important that there be decentralization in planning and decision
making. This is important since people on the ground are closer to action, hence are better
informed and could hopefully make the right choices. He, however, noted that there may be
problems in developing localised solutions since the decision maker or planner may still need all
information related to the problem. This is essential since decisions ought to be made within the
environmental context. But, since the manager in question may not be in possession of all the
necessary information, his planning and decision making is likely to be impaired by lack of
adequate information.
Failure by a divisional manager to have access to other information may have disastrous
consequences. This scenario is likely to lead to a manager failing to see a bigger picture. Failure
to consider other aspects of the company often leads to dysfunctional behaviour, which is a
situation where a manager tends to improve his performance even if that comes at the expense of
everybody else. This need to always have a bigger picture can be likened to what Peter Drucker
alluded to when he wrote about the economic chain costing.
5. Redesigning the Corporation
Economic literature shows that by the 1960s organisations had already begun to use data
processing tools or computers. These marked a remarkable achievement, since it meant that
information could be processed much quicker. And, not only that but large volumes of data could
be handled compared to the past. This, in a way, was a welcome technological advancement,
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since as we have seen from the writings of von Hayek knowledge is dispersed among different
people. Having data processing tools provided an opportunity of ensuring that knowledge is
brought together to help in planning, decision making and controlling of activities.
According to Peter Drucker, the advent of computerization led to a situation where people tended
to think that these new machines would be taking over the responsibilities of running businesses.
As such, people started talking about computer generated business models. What most people
did not realise, at the time, was that computers were a means of getting the job done and were
not meant to replace managers. Drucker goes on to indicate that one of the notable areas where
computerization has had a major impact is in the area of operations, such as Computer Aided
Designs. This underscores the previous argument that computers cannot replace managers,
because managerial roles are dynamic. On the other hand, operations are repetitive hence could
be automated, and left to computerisation.
The author also points out that these data processing tools have been underrated. The major
problem has been the failure to harness information generated by computers to inform decisions.
The information generated could enable mangers to see businesses in a new light. Businesses,
nowadays, should be seen as being capable of converting costs into yield. And, the focus should
be on the outcomes and the processes employed should focus on value creation rather than costs.
In order for this to happen, businesses should have their systems linked up with those of other
companies, which might be either suppliers or customers. And, this happens in a value system.
When this happens, the best way to account for costs would be to use modern costing methods
such as Activity Based Costing (ABC). And, most of these modern costing techniques have been
developed to focus on outcomes or yield.
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6. From Cost Accounting to Yield Control
Drucker points out the distinction between traditional costing methods and ABC. He highlights
that traditional costing methods tend to focus on functional costs, rather than looking at costs as
part of a value chain. That is, costs are incurred when materials or other resources are acquired
by a company, go through processing and until the final product is sold. He credits ABC with
this type of focus since it tends to take into account all costs involved in production. Drucker also
credits ABC with introducing a questioning approach. That is, ABC tends to facilitate questions
such as whether it is necessary to carry out certain activities. And, if the outcomes of such
activities are clear and value adding it becomes easier to make production decisions.
ABC, Drucker points out, is most ideal for service related costs. However, one of the reasons for
the preference of ABC under service related industry, which has not been mentioned by Drucker,
is that it more accurately allocates and apportions overheads to activities. By controlling the
number of times an activity is performed a company is then in a position to control total
overheads.
7. From Legal Fiction to Economic Reality
Drucker emphasises the importance of the value system. He even proposes an Economic Chain
Costing method. According to him, it is not just enough to know the total cost of the various
operations; but it is essential that a company understand the economic environment under which
it is operating. Failure to appreciate what is happening in its environment might make such a
company uncompetitive.
It is important, Drucker argues, that a company be in a position to manage the cost stream of its
suppliers and distributors. Having closer working relationships is one way of ensuring that costs
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are controlled to within an acceptable level. This is made more effective by the application of
modern costing methods such as ABC, which aids management in ascertaining where much yield
and value are created. As such, this enables the appropriate mix of suppliers and distributors to
be chosen. Eventually, this compels decision makers to be more focused on the principles rather
than legal boundaries, of their companies, in managing and controlling costs.
Drucker also talks about price led costing, which is nowadays known as target costing. This
approach, he argues, makes organisations more competitive, at least in terms of cost management
and control. With this price led costing, a company starts with a desired price that will enable it
capture a desired market share. From this, a desired mark-up is deducted to establish a target
cost. Management should then put in place measures to ensure that the targeted costs are
achieved; if they happened to differ from the actual costs. This type of costing is in contrast to a
cost based approach, where first of all, costs are established and a profit mark-up added. When a
company uses this method, it becomes difficult for it to compete on cost.
8. Information for Wealth Creation
Drucker argues that companies are formed to create wealth, rather than control costs. That is a
valid argument since wealth generation is the principal reason why shareholders invest in
companies. And, shareholders expect this wealth to come in the form of either capital
appreciation or dividend payouts or both. Although shareholders might be interested in seeing
costs being controlled, that is not supposed to be the main focus. This is because concentration
on cost control could lead to managers making short term and dysfunctional decisions. Such
dysfunctional decisions are likely to be profit focused rather than value creative.
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Drucker advises that in order to create wealth, managers should focus on quality information.
This information might be in the form of: foundation information; productivity information;
resource allocation information, as well as competence information. He, however, goes on to
indicate that the four types of information are useful for tactical decision making, in the short
term. In the long term and for strategic advantages information has to be collected about the
environment.
9. Conclusion
Different people posses different kinds of knowledge, and unless this knowledge is brought
together it would not benefit society. That is because for there to be an understanding of how our
economic system works we should know how the different parts relate to each other. It is this
understanding which makes it possible to reach a state of equilibrium. Equilibrium is important
in the sense that it enables us to make decisions and plan since if it exists we can say that we
have knowledge on what is happening.
Planning is also important if we are to maintain the state of equilibrium. That is why the advent
of computerisation should not be taken to represent the replacement of humans by machines or
tools. The tools are meant to assist humans carry out operational decisions, which are, usually,
repetitive in nature. However, to deal with the dynamic environment that we often come across
in the modern business environment we still need managers to lead organisations.
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10. References
Drucker, P.F (1995) The Information Executive Really Need. Harvard Business Review. Reprint
95104, pp.53-62
Von Hayek, F.A (1937) Economics and Knowledge. Economica, New Series. Vol.4, No.13,
pp.33-54 available at; http://www.jstor.org/
Von Hayek, F.A (1945) The Use of knowledge in Society. The American Economic Review.
Vol.35, no.4, pp.519-530
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