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Term Paper Knowledge Management in German SMEs

Master of International Business Administration Wiesbaden Business School, Hochschule Rhein-Main Innovation and Knowledge Management Winter Semester 2011/12 Prof. Dr.-Ing. Klaus North

Written by Pilar Abelli, Daniel Hrstic & Stavroula Mitsa

Table of Contents
Table of Contents ...................................................................................................... I List of Abbreviations ............................................................................................... II List of Figures and Tables ..................................................................................... III 1. Introduction .......................................................................................................... 1 2. Conceptual Framework ....................................................................................... 3 2.1 SMEs in Germany ............................................................................................ 3 2.2 The Competence Ladder.................................................................................. 4 2.3 Knowledge Management in SMEs ................................................................... 5 3. Project Introduction ............................................................................................. 7 3.1 IHK Lahn-Dill .................................................................................................... 7 3.2 Fraunhofer ProWis ........................................................................................... 8 3.3 Exzellente Wissensorganisation 2009 .............................................................. 9 4. Analysis and Evaluation of the Initiatives ....................................................... 10 4.1 Systematization of the SMEs examined ......................................................... 10 4.2 Consolidation of KM tools with the Competence Ladder................................ 11 4.3 Evaluation of the Projects ............................................................................... 13 5. Conclusion ......................................................................................................... 15 Appendix ................................................................................................................. 15 Bibliography ........................................................................................................... 16

List of Abbreviations
BMWi Bundesministerium fr Wirtschaft und Technologie (Federal Ministry of Economics and Technology) cf. EFQM e.g. EU IHK confer European Foundation for Quality Management exempli gratia European Union Industrie- und Handelskammer (German Chamber of Industry and Commerce) IFF Fraunhofer Institute for Factory Operation and Automation IKM IPK Innovation and Knowledge Management Fraunhofer Institute for Production Systems and Design Technology ISO IT KM SME International Organization for Standardization Information Technology Knowledge Management Small- and medium-sized enterprises

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List of Figures and Tables


Figure 1: The Competence Ladder ............................................................................ 4 Figure 2: SMEs by Sector ........................................................................................ 10 Figure 3: SMEs by Size ........................................................................................... 11 Figure 4: Consolidation of KM Tools and the Competence Ladder ......................... 13

Table 1: Definition of SME ......................................................................................... 3 Table 2: Motives and Objectives of KM tools ............................................................. 6

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The basic economic resource -the means of production- is no longer capital, nor natural resources, nor labor. It is and will be knowledge.
Peter Drucker

1. Introduction
In times of a turbulent and ever-changing global environment, Innovation and Knowledge Management (IKM) in organizations gains more and more importance. Not only huge multi- and international groups but also national small- and medium-sized entities (SME) are confronted with the challenges of growing cost pressure, e.g. due to increasing commodity prices, decreasing product life cycles, fluctuating demand, individual customer requirements, new processes and technologies as well as labor turnover. Each of these challenges motivates organizations to react and requires certain measures. However, in contrast to multi- and international groups, which are in the position of satisfying, for instance, growing cost pressures by offshoring and outsourcing cost and labor intense activities, SMEs have limited capabilities to defend against growing cost pressure. This is strongly related to a general attribute of SMEs: they are less able to react to turbulent changes in their business environment due to their limited production capacities, static structures as well as financial restrictions. The need for affordable tools and systems in order to compensate this weakness and ensure the fluent and efficient functioning of common processes within an organization under turbulent conditions becomes a crucial objective. The underlying term paper focuses on the implementation of knowledge management (KM) in German SMEs. The objective of this elaboration is to investigate those environmental changes that motivate SMEs to deal with KM in particular (motives), to inquire objectives which are set in order to challenge those motives and to figure out which concepts and methods (tools) of KM are used in order to achieve the objectives. Methodologically, the term paper is divided in five chapters. After the introduction, chapter two will act as a conceptual framework, providing a defini1

tion of SME according to European law, introducing the concept of the competence ladder and the concept of KM for SMEs. Chapter three will introduce the projects this term paper is based on. These are the projects of the IHK Lahn-Dill, Fraunhofer ProWis and Exzellente Wissensorganisation 2009. The main chapter of the term paper is chapter four which will systematize the objectives and tools of KM in the participating SMEs. The created connection between KM tools and the competence ladder is supposed to classify and systematize on which level of the competence ladder those KM tools have been implemented. Chapter five will end with a conclusion.

2. Conceptual Framework

2.1 SMEs in Germany According to the recommendation 2003/361/EC made by the European Commission on May 6th, 2003, enterprises qualify as micro, small or mediumsized enterprises, if they fulfill maximum ceilings for staff headcount and either turnover ceiling or balance sheet ceiling as follows.
Table 1: Definition of SME

Source: created by the authors, based on information from ec.europa.eu (2009), p. 3

In general, companies are determined as SMEs if they have less than 250 employees and a turnover less than 50 million. There are 1.81 million SMEs in Germany which represents 99.3% of all German business entities. SMEs are of crucial importance for Germanys economy since they generate 45% of the Gross Value Added1 and offer jobs to 13.8 million people in the private sector, especially in the construction industry.2 Besides the quantitative impact on Germanys economy, the qualitative macroeconomic influence of SMEs is even more important according to their contribution to the supply chain: Many multi- and international companies in the EU are supplied by specialized SMEs from Germany in form of goods and services and, therefore, depend on the knowledge and quality of these SMEs.3

Gross Value Added equals the value of goods and services produced less intermediate consumption 2 cf. www.destatis.de 3 cf. N.A. (2002), p. 5

2.2 The Competence Ladder The competence ladder refers to the process of using information, transferring it into knowledge and competence in order to create measurable value, which is the major objective of knowledge based management.
Figure 1: The Competence Ladder

Source: North (2011a)

The competence ladder starts with the exchange of information in form of verbal communication and applications in Information Technology (IT), such as databases and intranet, and continues with the application of knowledge.4 Knowledge refers to tacit or explicit understanding of people in routines, organizational structures and processes. It is the product of individual and collective learning and its development can be divided into know-what, knowhow, and know-why of which all build a single level on the competence ladder. The transfer of information (know-what) into a useful application is determined as know-how which depends on the factor motivation (knowwhy). At the end of the ladder, competence is created if the right choice of knowledge is applied in the right moment to solve a specific problem or to exploit a new business opportunity which requires the proper functioning and interrelation of each level of the competence ladder. The ladder construction can be done following a strategic knowledge management (top-down ap-

The following is based on North (2011a), pp. 7-9

proach) or an operational management of information, data and knowledge (bottom-up approach) and represents a guideline for KM in SMEs.5

2.3 Knowledge Management in SMEs In order to improve planning and action, as well as react properly on internal and external changes in their business environment, SMEs must create, acquire, and transfer knowledge.6 KM offers solutions, tools, and structure to SMEs and gives advice on how to deal with the valuable resource of knowledge in a systematic way. Organizations not only need to preserve knowledge, they also need the skills and competence to dynamically update and put knowledge into practice. In order to improve their efficiency towards the challenges of changing internal and external business conditions, organizations must keep on learning from their own and others experience and adapt KM according to their individual needs. Whereas big companies face the problem of identifying and sharing knowledge, SMEs are confronted with the problem of developing and evaluating knowledge.7 According to Lamieri/North it depends on the size and the sector of the organization to clarify which KM tool offers adequate solutions in order to maintain competitiveness, efficiency and innovativeness. The following table confronts changes in the business environment (motives) with equivalent objectives:

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cf. North (2011b), pp. 35-40 & North (2011a), pp. 7-10 cf. Baets (2005), p. 12 7 Ibidem

Table 2: Motives and Objectives of KM tools

Source: created by the authors, based on information from IHK Lahn-Dill, Fraunhofer ProWis and Exzellente Wissensorganisation 2009
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The table shows what objectives are set most commonly when diverse changes in the business environment occur. Since SMEs are less likely able to face growing cost pressure by offshoring or outsourcing they must increase efficiency and productivity in the production process through process automation, for instance. This, however, requires KM tools in order to guarantee the exchange of information and knowledge, which represents a precondition for achieving the determined objectives.

cf. Appendix Summary of all projects including sector, size, motive, objective & tool of each SME

3. Project Introduction
According to the importance of SMEs for the German economy and their impact and contribution to the EU-wide supply chain, the Federal Ministry of Economics and Technology (BMWi) in cooperation with the European Commission assists German SMEs in terms of research and innovation. The overall objective, hereby, is to maintain sustainable growth, create workplace as well as social and economic cohesion in the entire EU and to become the most dynamic and competitive knowledge-based market in the world.9 In order to do so, the initiatives IHK Lahn-Dill, Fraunhofer ProWis and Exzellente Wissensorganisation 2009, among others, were implemented by the BMWi and are supposed to provide support for diverse German SMEs in implementing adequate tools of KM. These initiatives are described in the following section.

3.1 IHK Lahn-Dill IHK Lahn-Dill assisted 13 German SMEs with a number of employees in a range of 7 to 600 from the manufacturing and service/ IT industry between November 2002 and January 2004 in developing and testing concepts of KM which were customized to certain needs and conditions of these organizations. The objective was to prepare specific guidelines for KM that would also be transferable and applicable to other organizations. All of the manufacturing companies focused on the implementation of documentation tools in order to maintain know how and to be prepared for labor turnover and braindrain. Databases, a matrix of competences or an intranet were common tools which were supposed to capture know how of experts and specialists and make it accessible for current employees and future generations. Additionally, these tools should improve the exchange of information as well as the communication process among employees. Those SMEs operating in the service/ IT sector rather focused on the implementation of debriefing methods for projects, e.g. project data sheets, in order to document and systematize lessons learned and to react appropriately
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cf. ec.europa.eu (2006)

to fluctuating demand. Other tools were information and communication platforms, data pools in order to identify and categorize know how and satisfy individual customer requirements as well as adapt to new processes.

3.2 Fraunhofer ProWis The Fraunhofer Institute for Factory Operation and Automation (IFF) and for Production Systems and Design Technology (IPK) supports German SMEs to develop the initiative Fit fr den Wissenswettbewerb through the ProWis project. The objective is to help SMEs incorporating existing knowledge and to optimize business processes. Therefore, ProWis provides expertise in terms of a KM tool that is set as an internet platform, the so called ProWis-Shop, which systematizes the learning process for a better use. The project involves 14 manufacturing and service/ consultancy based SMEs with a number of employees in a range of 9 to 500. The tools of KM in ProWis, for instance, include a guideline for project planning. This method provides structured workshops attended by a designated project manager, manufacturing and sales staff as well as experienced project managers in order to discuss and improve distributed planning materials which were prepared by the project manager in advance. The goal is to enter into the project at an early stage and support a trans-project learning process. A post-project tool is the so called debriefing workshop with the objective to identify successful solutions as well as deficits of past projects. These workshops teach participants to recognize effective methods and solutions and empower them to develop alternative approaches. The knowledge gathered in debriefing workshop helps to avoid repeating errors and takes advantage of potentials for improvement.10 Another tool is an internet platform. It gathers all the information obtained in the workshops and projects and also enables the periodical updating of the information.

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cf. Stauger / Voigt (2006), p. 40

3.3 Exzellente Wissensorganisation 2009 The initiative has been introduced by the German Federal Ministry of Economics and Technology (BMWi). The awarding of the applied companies was based on the evaluation of the KM structures and the ability of implementing comprehensive, practicable KM solutions. In the course of the initiative, 25 German SMEs were awarded as excellent knowledge-oriented firms and function as best practice for KM in Germany. The awarded SMEs can be distinguished between manufacturing, service providing and handcraft businesses. The manufacturing companies focused on the introduction of documentation tools in order to maintain and transfer know how. KM tools commonly used were databases, a matrix of competences for each employee or intranet. The transfer of knowledge was encouraged by establishing internal training centers and job training programs for newcomers. Furthermore, the companies participated in various research projects to gain external knowledge. Enhancing innovativeness in the firms played also an important role and was focused by introducing idea-management systems and idea-collection tools such as internal idea workshops. In addition, quality management systems were implemented such as ISO 9000 or EFQM that served as measures for knowledge gain through analysis. Those companies located in the service sector, on the other hand, focused on implementing debriefing methods for projects such as project databases or Wikis in order to document and systematize lessons learned and make knowledge available to the whole company. Other tools were information and communication platforms, data pools or a competence matrix for each employee in order to identify and categorize know-how. Furthermore, they organized visits to trade fairs or workshops that were meant to both train employees and also to gain external, updated knowledge. Firms in the sector of artisanry rather focused on implemented mainly knowledge preserving and transferring tools such as a matrix of competences for each employee or intranet. Moreover, they were interested in gaining and developing their knowledge constantly which was done by workshops.

4. Analysis and Evaluation of the Initiatives


4.1 Systematization of the SMEs examined For analyzing the KM approaches of the participating German SMEs in the mentioned initiatives, it is important to systematize both the sectors touched and the size of the companies as they influence the implemented KM tool. Referring to figure 2 it becomes clear that the main sector interested in the introduction of KM concepts and tools is the manufacturing sector with a share of 50% of the total 52 participants. It is followed by the service sector accounting for 44% and the handcraft sector with a share of 6%.
Figure 2: SMEs by Sector

Source: created by authors, based on information from IHK Lahn-Dill, Fraunhofer ProWis and Exzellente Wissensorganisation 2009

The company size is another influencing factor for the KM implementation in respective organizations. As showed in figure 3, the major part, with a share of 65%, of the total participating German SMEs are classified as medium sized organizations. Around 27% of the participants can be categorized as small companies and 8% are fitting the requirements for micro sized firms.

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Figure 3: SMEs by Size

Source: created by authors, based on information from IHK Lahn-Dill, Fraunhofer ProWis and Exzellente Wissensorganisation 2009

4.2 Consolidation of KM tools with the Competence Ladder The framework for KM in SMEs in this paper is based on six different KM tools in order to be prepared for the challenges such as increasing cost pressure, decreasing product life cycles, fluctuating demand, individual customer requirements, new processes and technologies as well as employee turnover. These KM tools are classified as follows: Knowledge oriented infrastructure Management of employees Knowledge in projects Knowledge in processes Knowledge in partnerships and cooperations Knowledge oriented leadership

A knowledge oriented infrastructure refers to the ability of sharing knowledge by means of capturing and transferring knowledge. Documentation systems are supposed to make know how available for current employees and future generations and to prepare the organization for labor turnover, for instance. The concentration on the management of employees is another KM tool to mention and it refers to the idea that employees of an organization are the knowledge carriers. Each single employee is the one to decide when and where respective knowledge is needed for ensuring the efficient and produc11

tive business procedures. This knowledge needs to be captured and transferred to the whole company.11 Knowledge in projects has the objective to share knowledge through project assistance. One way to learn through projects is the implementation of a project database which aims at systematically derivate and record lessons learned. It can also be detected what skills and procedures are needed for the assessment of the project teams through the combination of past projects and new projects.12 Knowledge in processes deals with the proper functioning and improvement of operational processes. The overall goal is to guarantee the reliable on-time delivery of flawless components in order to avoid delays in the entire supply chain. Knowledge management, therefore, concentrates on the know-how of setup, start-up and maintenance of machines and other production facilities.13 The category of knowledge in partnerships and cooperation indicates the need of integrating external knowledge gained through partnerships and cooperations such as research project with universities into the existing knowledge structures of the firm.14 Knowledge oriented leadership is the last category of the KM tool classification. It refers to the creation of an open company culture that is seeking to establish general conditions for the handling and development of knowledge in an organization.15 In order to systematize the implemented KM tools of the introduced projects, the authors of this paper created a model which results in a linkage of the KM tools described with the concept of the ladder of competence created by Prof. North.16

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cf. www.wissensexzellenz.de cf. www.ihk-lahndill.de 13 Ibidem 14 cf. www.wissensexzellenz.de 15 Ibidem 16 cf. North (2011b), pp.35-40

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Figure 4: Consolidation of KM Tools and the Competence Ladder

Source: created by the authors, based on information from North (2011a) and Exzellente Wissensorganisation 2009

The figure above shows which levels of the competence ladder are covered by the implemented tools of the analyzed SMEs. After having distinguished between (i) motive for KM in SMEs as well as (ii) objective and (iii) tools of KM the next chapter will transfer this framework to the SME examined and evaluate these projects in detail.

4.3 Evaluation of the Projects The majority of the SMEs (27%) set the objective to implement a customer oriented supply chain management which aims at satisfying individual customer requirements (cf. table 2). 57% of these organizations, in turn, decided to implement knowledge oriented infrastructure, such as intranet and databases, some in combination with the tool knowledge in projects. 23% of the SMEs aim at adapting to changing operational conditions. According to table 2 this objective follows the motive of new processes and technologies that effect business operations. In order to deal with these circumstances adequately 83% of these SMEs implement knowledge oriented infrastructure according to the evaluation. 58% combine infrastructure with knowledge in projects. Capture and transfer of knowledge was set a primary objective by 21% of all SMEs which results from the risk of losing know how due to employee turnover. In order to defend against this risk 73% of those SMEs focused on
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knowledge oriented infrastructure so that knowledge of experienced employees can be captured systematically. It is interesting to observe that this tool does not only count for micro and small family owned businesses but also for medium-sized companies especially from the manufacturing sector with more than 250 employees. 63% of those SMEs even consult another tool which is knowledge in processes. This seems even mandatory since labor turnover and loss of know how represent a serious risk for the maintenance of complex production processes. 17% of the inquired SMEs see a major risk in growing cost pressure. Thus, they aim at increasing efficiency and productivity in the production process since there is a limited number of affordable alternatives. 55% of them use knowledge in processes in order to systematize and improve production processes. Only 12% of the SMEs indicated that they suffered from fluctuating demand and decreasing product life cycle. An efficient tool used by most of these SMEs (67%) was knowledge in infrastructure in order to achieve the objective of enhancing innovativeness and competitiveness of the business. Also 67% of those SMEs used knowledge in projects additionally. The diverse tools of KM do not substitute each other. They can be used complementary and still focus on the same objective. According to the evaluation it is difficult to say whether there is a single focus on a specific motive and tool. Companies dealing with certain internal and external problems definitely aim at establishing KM as a leading force since it contributes to the common business objectives such as increasing innovativeness and competitiveness without or at least low additional costs.

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5. Conclusion
The basic economic resource -the means of production- is no longer capital, nor natural resources, nor labor. It is and will be knowledge. This quote of Peter Drucker from 1959, where he states that in industrialized economies the important resource is knowledge, remained valid until today. The work to do is nothing but easy, it is a challenge for SMEs to introduce KM in the everyday business and it takes effort, time and money. But experiences of the participants of the presented initiatives demonstrate that it is worth it. The analysis and evaluation of the projects showed on the one hand that most companies had introduced an IT infrastructure as basic KM tool but attempted also to introduce more advanced KM measures. On the other hand, it can be said that the less developed area of the ladder of competence is the area of dealing with knowledge in partnerships and cooperation. This fact shows future development perspectives for German SMEs such as the development of knowledge clusters, the creation of alliances with research institutions like universities and foundations or the implementation of communities of practice. Another area of development is the knowledge strategy step on the competence ladder. Improvements in the implementation of tools, such as linking the strategy of the firm with its core competences and knowledge goals need to be done since the goal of KM is to convert knowledge in sustainable, competitive advantages which can be measured as economic success. The ability of a company to be competitive in the long run and adapt to political, social and economic environmental changes does not only require the building of strong core competences but the necessity to link them in a systematic way with the business environment. This concept is described by the dynamic capabilities: be able to change, reconfigure and reinvent. In this context, knowledge management plays an important role and provides a framework for German SMEs in order to meet the named challenges.

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Appendix
Systematization and consolidation of the described projects:

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Bibliography Literature
Baets, Werner: Knowledge management and management learning Extending the horizon of knowledge-based management, Springer Science+Business Inc, (2005) Bundesministerium fr Wirtschaft und Technologie (BMWi): Wissensstandort Deutschland - Deutsche Unternehmen auf dem Weg in die wissensbasierte Wirtschaft, Berlin 2010 Fraunhofer IPK und Fraunhofer IFF: Praxisleitfaden Wissensmanagement ProWis Projekt, (2011) Mertins, K./Wang, W./ Will, M.: InCaS: Intellectual Capital Management in European SME - Its Strategic Relevance and the Importance of its Certification, Electronic Journal of Knowledge Management Volume 7, Issue 1, 2009 N.A. : Einfhrung von Wissensmanagement in KMU - Zusammenfassung: Hans Jrgen Herrmann Fit fr den Wissenswettbewerb, 2002 North, Klaus: Knowledge Management - an introduction by Klaus North, Script of IKM class WS2011/12, 2011 North, Klaus: Wissensorientierte Unternehmensfhrung, Wertschpfung durch Wissen, 5.Auflage, Gabler Verlag, 2011 Stauger / Voigt (Frauenhofer Institut): IFFOCUS Logistics connectsProWis: Knowledge Management solutions for SME, 2006

Online Sources
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dlr.de: http://www.dlr.de/Portaldata/45/Resources/dokumente/mm/Dokument ation_160802.pdf, 10.12.2011 ec.europa.eu (2006): http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_u ser_guide_de.pdf, 26.11.11 ec.europa.eu (2009): http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_re port_2009_en.pdf, 09.12.2011 ihk-Lahndill.de: http://www.wirtschaft-lahndill.de/wissen, 07.11.11 http://www.ihk-lahndill.de/wissen/unt_007.html, 07.11.11 knowledgemanagementgateway.com: http://www.knowledgemanagementgateway.com/, 24.11.11 prowis.net: http://www.prowis.net/prowis/?q=content/prowis-wissen-prozessemanagement, 07.11.11 wissensexzellenz.de: http://www.wissensexzellenz.de/index.php?id=2, 07.11.11

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Affidavit
We herewith confirm that we have written this term paper by ourselves without any assistance other than that indicated. All parts of the thesis which have been taken from published or unpublished sources have been clearly marked as such. This term paper has not previously been presented in this or similar form at any examination board in Germany or abroad.

Wiesbaden, 21th December 2011

_______________________________________________ Pilar Abelli, Daniel Hrstic & Stavroula Mitsa

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