Journal of Information & Knowledge Management, Vol. 3, No. 3 (2004) 259–272 c  iKMS & World Scientific Publishing Co. Leveraging Cognition for Competitive Advantage: A Knowledge-Based Strategy Process Senthil K. Muthusamy, Ph.D. Department of Management, College of Business Administration Bowling Green State University, USA smuthu@cba.bgsu.edu Ramaraj Palanisamy, Ph.D. Department of Information Systems The Gerald Schwartz School of Business and Information Systems St Francis Xavier University, NS B2G 2W5, Canada rpalanis@stfx.ca Abstract. The organisation that wants to build competi- tive advantages has to create and leverage its capabilities. One of the central bases for achieving competitive advantage is the organisational capability to create new knowledge and transfer it across various levels and parts of the organisation. Because knowledge is central to strategy formulation and implemen- tation, knowledge management has become a key strategic task facing managers for achieving success in today’s complex and dynamic environments. A major challenge facing strate- gic management is engineering and managing the individual and group level knowledge that facilitates better strategies and invokes commitment. A knowledge management based model of strategy formulation process is presented. Traditional strategy frameworks are evaluated and a comprehensive cog- nition and learning centered strategy framework is suggested as a better model of strategy formulation and implementation for achieving competitive advantage. The implications of the knowledge-based approach for strategic management practice and research are highlighted. Keywords: Knowledge management; strategy formulation; competitive advantage; cognitive leverage. 1. Introduction Creating and sustaining competitive advantage is the core of strategic management (Barney, 1991; Prahalad and Hamel, 1994; Porter, 1985). The organisation that wants to build competitive advantages, which cannot be easily eroded by the environmental forces, must focus on build- ing organisational capabilities that are valuable, rare, and not easily imitable by competitors (Barney, 1991). One of the central bases for achieving competitive advantage is the organisational capability to create new knowledge continuously and transfer it across various levels and parts of the organisation (Kak and Sushil, 2002; Nonaka and Takeuchi, 1995). Organisations need to constantly learn from their internal and external environments to cre- atively manage tomorrow’s opportunities/threats as com- petently as they manage today’s business. This learning is essentially a dynamic knowledge creation process involv- ing employee interactions at various organisational levels, especially sharing the individuals’ competence and knowl- edge throughout the organisation. A ‘learning organi- sation’ is an organisation skilled at creating, acquiring, and transferring knowledge and at modifying its behav- ior to reflect new knowledge (Senge, 1994). In this con- text, researchers are particularly interested in studying the organisational learning and managerial cognitive pro- cesses that underlie the practice of strategy formulation and implementation (Mintzberg, 1976; Eisenhardt and Zbaracki, 1992). Since strategy processes are central to seeking and securing competitive advantage, it is very important to understand the various cognitive and learn- ing processes that help shape strategies of a firm so that they can be nurtured toward a firm’s advantage. A knowledge-based approach for strategy formu- lation and implementation starts with competence of people (Sveilby, 2001). The key to value creation is how effectively the employees’ knowledge and creativity are leveraged to create value for the firm. Since people in organisations need external and internal structures in order to express their knowledge (Sveilby, 1997; Weick, 1983), a knowledge based value network emerges because of knowledge exchanges (Allee, 2000). Thus from the organisational view point knowledge shared is knowledge doubled. The value creation is depending on the extent 259