Assessing Competitive Advantage in Small Businesses: An Application to Franchising
Pilling, Bruce K., Journal of Small Business Management
ASSESSING COMPETITIVE ADVANTAGE IN SMALL BUSINESSES: AN APPLICATION TO FRANCHISING
An important theme in research related to business strategy centers on understanding the basis for and assessing the sustainability of competitive advantage (Day and Wensley 1988, Porter 1985). One change in the competitive environment that renders these assessments more challenging is the movement away from traditional "arm's-length" business arrangements and toward longer-term, more cooperative associations. These types of associations, which have been termed alliances or partnerships (Heide and John 1990), are characterized by "just-in-time" manufacturing systems (Frazier, Spekman, and O'Neal 1988) and by cooperative arrangements in distribution channels (Stern and El-Ansary 1982). In the context of small businesses, franchise arrangements illustrate this phenomenon; these arrangements represent significant levels of cooperation between the franchisor and franchisee and may serve to buffer the franchised operation from market forces (Hunt 1977).
An assessment of competitive advantage in small firms is clearly an important topic (Neil 1986, Stoner 1987, Watkin 1986); yet there has been limited research in this area. This article is based on research that applies the concept of competitive advantage to identify small businesses that would be good franchisee candidates. The basic approach was to assess the nature and extent of the competitive advantage held by a small business and use this as the basis for identifying firms likely to have favorable attitudes toward franchise arrangements. It also was an opportunity to more fully understand the reasons for those attitudes.
The essence of competitive advantage is the conversion of superior skills and/or resources into positional advantages, which in turn create positive performance outcomes (Day and Wensley 1988). Superior skills refer to "distinctive capabilities" of personnel that set them apart from competition and are illustrated by "ability to utilize relevant technologies" and "specialized knowledge of segment needs" (Day 1984). Superior resources are more tangible assets that enable a firm to realize its capabilities and may include distribution coverage and manufacturing processes. Successful utilization of skills and/or resources should give rise to positional advantage (Porter 1980), including cost leadership, differentiation, and focus.
Cost leadership refers to a firm's ability to establish a clear cost advantage relative to its competition. In a differentiation strategy, a firm strives to be unique along some dimensions that are widely valued by buyers, by selecting one or more attributes that buyers perceive as important, and by positioning the firm to uniquely meet those needs. Differentiation may be achieved through superior product quality, providing a superior service or technical assistance, or creating a unique product or service that is perceived by customers or distributors to be superior in value for the price (Day 1984). A focus or protected niche strategy is a market segmentation approach where the firm concentrates on a specific buyer group or market segment. The basis for this focus would generally be a cost advantage, a differentiated advantage, or both.
Porter's Value Chain (1985) has been proposed as a meaningful concept for understanding competitive advantage (Day and Wensley 1988, Porter 1985, Watkin 1986, McGinnis and Kohn 1988). Application of the concept generates insights concerning how firms compete against other firms, how value is created, and whether or not firms can expect to maintain a current competitive advantage. The basic premise is that competitive advantage stems from, and is understood by, examining the many discrete activities a firm performs in support of its products.
According to Porter, five primary value activities constitute the critical means of creating value: inbound logistics, operations, outbound logistics, marketing and sales, and service. …