What Is the Meaning of Competitive Advantage?

Article excerpt

INTRODUCTION

The terminology used in the field of strategic management that might possibly garner the prize for the most overworked and least understood catch-phrase is "competitive advantage." The extension of that phrase into "sustainable competitive advantage" is currently an elaboration of ambiguity. A search for usage of the phrase easily turns up numerous titles of articles and books, a number of which predate the widely successful usage of the phrase by Michael Porter in his book Competitive Advantage (1985). Since the appearance of the Porter book, the phrase has spread throughout management, marketing, economic, and human resource publications and served as a component of the titles of many "how to do it." books (e.g., Tweed, 1990) directed at a variety of business activities. Yet, in spite of the vast acceptance of this phrase, there are few attempts to clearly state what competitive advantage actually is, and this appears to be regardless of whether its use is in research or practitioner-oriented publications.

Prior to Porter's use of the competitive advantage terminology in 1985, typical references to competitive advantage used the term without explicit definition. For example, Spence (1984) and Caves (1984) both use the terminology in the titles of their articles but leave the definition of the terminology unaddressed. There is, however, an awareness in their articles of the relative competitive positions of firms within industries. Their perspectives are also heavily reliant upon the viewpoint that asserts that an industry's structure is the determinant of the firms' performances within the industry. Consequently, Caves focuses on the commitment of resources to establish entry barriers that would enhance the performance of a firm, and Spence focuses on the use of subsidies and restrictions by governments to give their domestic firms protection from foreign competitors. Apparently, competitive advantages in this sort of definitional framework are linked to the inhibition of competition or the absence of competitors.

One marketing text by Day (1984) discusses how to determine the value of a competitive advantage in the market by relating it to benefits which must be perceived by a customer group that is willing to pay for those benefits and cannot easily obtain those benefits elsewhere. The text also refers to the sources for advantages in the market as superior skills and resources, and links those sources to the ability of a business to either do more of something or do something better than is possible by its competitors. So in contrast to the previously cited usage of competitive advantage terminology by Caves and Spence, this conception of competitive advantage appears to be linked to a firm's being more competent in the market than its competitors.

This view of competency as being a source of competitive advantage is echoed in the later work of Reed and DeFillippi (1990), who assert that causal ambiguities concerning the source of competencies within a firm can lead to sustainable advantages for a firm. They build their arguments from the foundation laid by Hofer and Schendel (1978), who predate even Spence (1984) and Caves (1984) in using the terminology and relate competitive advantage to a firm's unique position as compared to its competitors, which is arrived at through its patterns of resource deployments. In Reed and DeFillippi's argument the end result of developing an advantage based on competencies, whether its causes are ambiguous or explicit, is superior financial performance.

The explicit assertion by Porter (1985) was that competitive advantage comes from the value that firms create for their customers that exceeds the cost of producing that value. The key concern for a business is to capture that value which is greater than its cost. Additionally, he identified two types of competitive advantage, which were cost leadership and differentiation. …