Options analysis and knowledge management: Implications for theory and practice

Real options can be a powerful tool for quantifying the value of strategic and operational flexibility associated with uncertain IT investments. They also constitute a new way of thinking as to how knowledge management (KM) can be implemented and managed to maximize the upside potential while minimizing any downside risk. This paper explored how practitioners can incorporate options analysis into contemporary knowledge management. Options analysis is recognizing real options and then determines how they add value. The main issue here is to manage knowledge so that the theoretical option value is realized in practice. This paper developed a new metric, knowledge management performance index (KMPI), for evaluating the performance of a firm in its KM at any given point in time as follows: knowledge creation, knowledge conversion, knowledge circulation and knowledge completion. The higher the efficiency of the KM process, the higher the KMPI, thereby is enabling firms to become increasingly knowledgeable. To prove the contribution of the KMPI, a questionnaire survey was conducted among 121 firms listed on the Taiwan Stock Exchange Corporation (TSEC). This paper makes five important contributions: (1) it shows that if the KM process improves, the KMPI is enhanced. This finding is based on a survey of the questionnaires. As a result, the KMPI can effectively and efficiently represent the KM process; (2) it shows that when the KMPI increases, a company's performance will be enhanced in five different areas This indicates a significant relationship between the KMPI and the company's performance; (3) it also shows that the higher the KMPI, the higher the performance of the organization. This is especially valuable to any organization where knowledge is not being used optimally; (4) it provides an option analysis that may be helpful to managers for making the right decision in an uncertain environment; and (5) it presents the first application of the Black-Scholes model to use an actual business situation involving KM as its test bed. The results proved that the option pricing model can act as a measurement guideline for the entire knowledge of the whole company. (C) 2011 Elsevier Inc. All rights reserved.