If you've ever had one of those days when you've wondered why you bother to chase down yet another after action review from a reluctant content contributor or wrestle with a difficult node in your taxonomy, take heart. There is a reason for this work, and that reason is Innovation. Innovation is the goal knowledge management serves; it's why our organizations need KM (and why they need knowledge managers like us). For manufacturers and the service industry alike, innovation leads to growth (by creating new or improved products or services), efficiency (by creating new or improved processes), and profits.
So what does it take to create an environment that fosters innovation? One key component is having ready access to the available knowledge. This reduces the danger of reinventing the wheel and provides a solid foundation on which innovation may be built. Another component is knowing what knowledge is lacking within your organization. It has been argued that knowing what you don't know is in fact critical to achieving that state of open-mindedness in which you are willing and able to entertain a new idea. Both of these elements are by-products of an effective knowledge management system.
Of course, knowledge management by itself will not turn your organization into a wildly creative place. You also need people who are willing to absorb this knowledge, think about it differently, and then take risks with it. In addition, you need an organizational culture that (i) encourages experimentation, (ii) understands that innovation is a numbers game (i.e., you need to produce a lot of ideas before you will find one worth pursuing), (iii) seeks to turn failed experiments into positive learning opportunities, and (iv) generously rewards success.
For an introduction to the ways in which knowledge management can promote and support innovation, see Knowledge Management and Innovation: An Initial Exploration, which is an Ernst & Young Working Paper written in 1997 by Rudy Ruggles and Ross Little. For a more recent and very thoughtful guide to innovation, see Mark Gould's blog post Ceci n'est pas une pipe.