There has been a great deal said in recent years about competitive advantage (CA). Unfortunately there are almost as many definitions of competitive advantage as there are of strategy—always a source of confusion for those looking for a practical understanding of a topic that they can apply to their businesses.
Having a competitive advantage is taken to mean one company has some kind of an edge over its competition. However, some advantages are more predictive of a company’s success than others.
The Operational (Vendor) Perspective
The most frequently offered examples of competitive advantage refer to the superiority of a functional capability, asset or competency one company has over its rivals: better technology, faster response time, better cost structure, quicker product development cycle, broader product offering, larger distribution network, more extensive CRM data, company culture, etc.
While these can certainly be operational advantages, they are not competitive advantages; they focus on things that a business may have or perform better than do its competitors. A superior capability can most certainly be the major contributor to a competitive advantage, but is rare that it stands on its own.
In reality, ‘’competitive advantage’ is a misleading orientation for figuring out how a company can win in its market because it’s an internal, vendor perspective. It focuses on things that the business may perform better than do its competitors, but it doesn’t specifically take into account whether they contribute any real incremental value in the eyes of its customers.
It is true that the operations of a company is the source of most contributors to competitive advantage; it is where ‘value’ is created: the combination of sometimes unique, sometimes common functional components that, together, created and delivered a unique value to customers. However, playing the, “our internal process is better than your internal process” game falls short of addressing the real issue.
The Market (Customer) Perspective
In order for any advantage to be considered a true competitive advantage, it has to be assessed where competition lives and is ultimately evaluated—in the marketplace. A business has a competitive advantage if its offer is preferred by customers because they see it as providing greater value than others in the market. Such an advantage is seen in a company’s ability to more frequently capture sales than its competitors. It is the reason a company has the customers it does.
In contrast to focusing on competitive advantage, thinking, “being preferred” puts the focus of any potential advantage on the outcome a business hopes to achieve as a result of having it. It is the customer’s perspective of the concept. Only when an internal superiority can be tied to an increase in customer preference (that is, greater sales) can a company conclude that it contributes to its competitive advantage.
The Financial (Business) Perspective
From a marketing perspective, we’d stop here. However there is one more viewpoint needed to properly cover the subject of competitive advantage.
Having higher sales than competitors is always a good thing. However, it’s not sufficient. You also have to be profitable making that happen. For Michael Porter of the Harvard Business School, of all the possible advantages a business can have, there is none more significant than being more profitable (i.e., having higher margins) than its competitors. When a firm’s profitability is above the average of its rivals it is said to have a true competitive advantage in its market; and the degree to which it is above that average is a measure of the strength of its advantage.
Creating a competitive advantage, in and of itself, is never a business goal; rather, it is what results from doing a superior job both understanding and profitably meeting the needs of a company’s target customers. Many things can be important to a buyer, but there are only a few which meaningfully influence vendor ranking in a given purchase situation. The more in-depth knowledge it has about what those factors are and the roles they play in vendor selection, the more likely a business is to create a unique value proposition that will make it the most preferred supplier in its market.