Zhou 1Budgeting and the Organizational Knowledge CreationYongyi ZhouProf. TurnbullKnowledge Management Systems / INF 385QDecember 10, 2008Zhou 2Introduction This paper examines the in what ways budgets can keep paces with organizational knowledge creation. It posits that budgets within innovative enterprises have the potential to move forward with organizational knowledge creation. Drawing upon an organizational intentionand dovetailing of formal procedures with informal processes give managers the tools to balance the tensions between budgets and the organizational knowledge-creating process. Using research on the budgeting and existing theory of organizational knowledge creation I will examine what are the potential opportunities for firms to align budgeting with the organizational knowledge creating process.Organizational Knowledge Creation Knowledge has begun to gain a new wave of attention in the past two decades. Hamel’s (1990) article sees competencies, capabilities, skills, or strategy has been increasing in recent years. Drucker (1993) argues in his latest book that in the new economy, knowledge is not just another resource alongside the traditional factors of production ---- labor, capital, and land ---- but the only meaningful resource today. Not only socio-economic theorists such call for our attention to the importance of knowledge as management resource and power, but also an increasing number of scholars in the fields of industrial organization, technology management, management strategy, and organizational theory have begun to theorize about management of knowledge. Experts of modern management and organizational theory have gotten clearer on seeing knowledge as a resource, a process and an output critical to organizational competitive advantage. The new generation of managers has to release the coils of the traditional Western view of an organization as a machine for "information processing" as they realize thatZhou 3innovation, in a twenty-first-century environment in which the only certainty is uncertainty, has become a prerequisite for survival. According to Nonanka and Takeuchi (2005), knowledge creating can be as important as processing knowledge. In practice, organizational knowledge creation often comes through crisis, forcing companies to break away from the past and move into new and untried territories of opportunity. Nonanka and Takeuchi contend that Japanese firms are successful “because of their skills and expertise at organizational knowledge creation (2005)”. In other words, Japanese companies are innovative, that is because they create new knowledge and use it to produce successful products and technologies. Budgeting as a Control ToolBudgets started life in the 1920s as tools for managing costs and cash flows in some largeindustrial organizations. Management literature often describes budgets in terms of a board organizational plan referring to managerial concepts such as planning, coordinating, and control (Evans and Ward, 2005, pg. 407). In general, a finished budget usually requires considerable effort and consists of several basic steps. First, the ongoing and desirable programs will be determined and priorities will be established. Second, the costs of plans for each unit will be estimated in monetary terms so that all the plans can be combined later into a well-balanced program in tune with the institutional goals. In the end, for a given time, the estimates will be compared with the actual results in order to decide whether a major or minor shift in budget allotments is necessary.An organization’s size does not materially affect the basic steps of budgeting, although a large organization may have dozens of internal budgets subsumed under its general budget. Every fiscal year, budget officers will compare the actual performance against what wasZhou 4expected, making corrections for any significant differences. By combining and coordinating, budgetary controls put subsidiary budgets to effective use in achieving organizational vision, strategic objectives and performance expectations. Budgeting as a Measurement ToolFrom the 1960s budgets mutated into fixed performance contracts. Companies increasing used accounting results such as costs, net income, or return-on-investment (ROI) not just to keep score, but also to motivate the actions of operating personnel at all levels. By the early 1970s companies began to use financial indicators to manage the business, which led to theincreased use of fixed performance contracts as the basis of setting fixed targets against which performance was evaluated and rewarded. The fixed performance contract typically begins with an “earnings” contract between senior executives and external parties and then cascades down the organization in the form of “budget” contracts between senior executives and operating managers. In addition, the budget contract is usually fixed for a period of twelve months. It purpose is to commit a subordinate or team to achieving an agreed-upon outcome and then to enable a superior to control the results against that outcome reserving the right to interfere and change the terms if necessary. Thus, budget contracts range from highly authoritative to highly participative.If used in a responsible way, such contracts provide the basis for a clear understanding between organizational levels and enable senior executives to maintain control over multiple divisions and business units. Budgeting and the Organizational Knowledge CreationKnowledge conversion, according to Nonaka and Takuechi (2005), is the conversion process that brings the knowledge of individual staff members into the organization and puts thisZhou 5knowledge to effective use in achieving organizational vision, strategic objectives and performance expectations. In order to promote the knowledge conversion/ organizational knowledge sharing, five enabling conditions are required at the organizational level. They are:1. Intention: Aspiration to goals, fostering commitment by engaging employees in fundamental questions.2. Autonomy: Letting people act independently as far as possible. 3. Fluctuation and creative chaos: To stimulate interaction between the organization andits outside environment; there is a breakdown that must be overcome, followed by reflection on what happened. 4. Redundancy: The intentional overlapping of information about business activities, management responsibilities and the company as a