Distinctive competence and competitive advantage.

DISTINCTIVE COMPETENCE AND COMPETITIVE ADVANTAGE

Strategic planning refers to a firm's efforts to monitor, understand, and adapt to a changing environment in order to establish and maintain a favorable competitive position. Recently, attention has been directed toward assessing and improving

the strategic planning activities of smaller companies. It has been claimed that systematic planning can positively affect small business success.1 The processes of environmental assessment, internal analysis, and the development of goals, objectives, and supporting strategies are typically stressed.2 These activities are often ignored or approached haphazardly by small business owner/managers.3

1 K. Mayer and S. Goldstein, The First Two Years: Problems of Small Firm Growth and Survival (Washington, D.C.: Small Business Administration, 1961); C. Orpen, "The Effects of Long-Range Planning on Small Business Performance: A Further Examination,' Journal of Small Business Management (January 1985), pp. 16-23; R. B. Robinson, Jr. and J. A. Pearce II, "Research Thrusts in Small Firm Strategic Planning,' Academy of Management Review (January 1984), pp. 128-137; and G. Vozikis and W. F. Glueck, "Small Business Problems and Stages of Development,' Proceedings of the Academy of Management National Meetings (1980), pp. 373-377.

2 J. E. Van Kirk and K. Noonan, "Key Factors in Strategic Planning,' Journal of Small Business Management (July 1982), pp. 1-7; R. Moyer, "Strategic Planning for the Small Firm,' Journal of Small Business Management (July 1982), pp. 8-14; R. B. Robinson, Jr. and W. F. Littlejohn, "Important Contingencies in Small Firm Planning,' Journal of Small Business Management (July 1981), pp. 45-48; P. H. Thurston, "Should Small Companies Make Formal Plans?' Harvard Business Review (September-October 1983), pp. 162-188; J. G. Wacker and J. S. Cromartie, "Adapting Forecasting Methods to the Small Firm,' Journal of Small Business Management (July 1979), pp. 1-7; and J. A. Timmins, M. C. Fraker, and J. Brown, "Large Firm Forecasting Techniques Can Improve Small Business Decision Making,' Journal of Small Business Management (July 1979), pp. 14-18.

3 D. L. Sexton and P. Van Auken, "A Longitudinal Study of Small Business Strategic Planning,' Journal of Small Business Management (January 1985), pp. 7-15; W. D. Jones, "Characteristics of Planning in Small Firms,' Journal of Small Business Management (July 1982), pp. 15-19; D. L. Sexton and P. M. Van Auken, "Prevalence of Strategic Planning in the Small Business,' Journal of Small Business Management (July 1982), pp. 20-26; G. H. Rice and R. E. Hamilton, "Decision Theory and the Small Businessman,' American Journal of Small Business (January 1979), pp. 7-15; T. W. Still, "An Exploratory Investigation of Strategic Planning Behavior in Small Firms,' D. B. A. dissertation, Florida State University, 1974; and T. Cohn and R. A. Lindberg, How Management Is Different in Small Companies (New York: American Management Association, 1972).

Little research has focused on the development of distinctive competence, competitive advantage, and sustainable competitive advantage,4 despite the fact that these concepts are critical to the strategic thrust and eventual success of the small business. These factors must be explicitly recognized for their role in shaping a firm's strategic response to its particular competitive situation.

4 Some initial efforts in this area were made by T. Neil, "Distinctive Competence: A Marketing Strategy for Survival,' Journal of Small Business Management (January 1986), pp. 16-21; and D. G. Watkin, "Toward A Competitive Advantage: A Focus Strategy for Small Retailers,' Journal of Small Business Management (January 1986), pp. 9-15.

Distinctive competence may be defined as some skill, activity, or capacity that the business is uniquely good at in comparison to rival firms.5 Producing better quality products than competitors, having a more knowledgeable and skilled workforce, or being able to react to customer demands much more quickly than competitors are examples of distinctive competence.

5 A. A. Thompson, Jr. and A. J. Strickland III, Strategy Formulation and Implementation: Task of the General Manager (Plano, Texas: Business Publications, Inc., 1986), p. 62.

A business can exist without any distinctive competence. For example, if consumer demand is particularly strong in relation to supply, simply offering the product to consumers may be sufficient to assure short-term success. However, if returns are attractive and entry barriers are not substantial, competition should intensify. Under such conditions, those firms with clearly established distinctive competences are more likely to survive. Most small firms recognize the importance of building and developing distinctive competences as a competitive strategy.

Establishment of a distinctive competence is a critical initial step in establishing a competitive advantage. In order to transform a competence into a true competitive advantage, two important factors must be present. First, the competence must represent an area or capacity that consumers value or care about. As Coyne suggests, the competence must reflect some "key buying criterion' for the market.6 For example, a firm may produce superior products, but unless quality is a key buying concern for consumers, this distinctive competence will not lead to competitive advantage.

6 K. P. Coyne, "Sustainable Competitive Advantage-- What It Is, What It Isn't,' Business Horizons (January-February, 1986), pp. 54-61.

The second factor necessary for developing a distinctive competence into a competitive advantage is communicability. That is, the market and its consumers must be aware of the fact that a firm's distinctive competence exists. If a firm boasts a distinctive competence that consumers value as a key buying factor and consumers are aware that the firm possesses the competence, then a true competitive advantage exists. Although a number of specific competitive advantages may be possible, Porter notes two basic categories or types of competitive advantage: low cost and differentiation.7

7 M. E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1985), p. 11.

From a strategic perspective, businesses are not only concerned with establishing a competitive advantage, but also with maintaining it. Sustainable competitive advantages are those that cannot easily be duplicated by rival businesses.8

8 C. W. Hofer and D. Schendel, Strategy Formulation: Analytical Concepts, (St. Paul, Minn.: West Publishing Company, 1978), p. 25.

The primary purpose of this exploratory study was to identify areas of distinctive competence common to small businesses. A secondary purpose was to assess the degree to which these competences can lead to competitive advantage and sustainable competitive advantage.

METHOD

Forty-six small businesses from a three-county area of central Illinois were selected for participation in this study. All were quite small--most employed ten or fewer workers. All of the firms had received formal consulting and assistance through the Small Business Institute program in 1983, 1984, or 1985. Twenty of the businesses were service firms; eighteen were retail firms; and eight were manufacturing operations.

The businesses were divided into one of two categories. Businesses with one or more years of operating experience were classified as ongoing businesses (34) and those with less than a year of experience were classified as start-ups (12). Twenty-five of the ongoing businesses (74 percent) had been in existence four years or more. The mean age of the ongoing business was 11.2 years.

Since distinctive competence is a function of both external (competitive) and internal factors, attempts to identify different types of distinctive competence must recognize the external and internal conditions specific to each business. Two subjective procedures were used in this study to identify the distinctive competence of each firm. First, the environmental conditions (threats and opportunities) and internal profiles of each business were studied. Second, owner/manager perceptions of competence were considered. Owner/manager assessments suggested areas for consideration, but the owner/managers' suggested areas of competence were not accepted unless supported by the results of the independent analysis.

RESULTS

Table 1 summarizes the eleven common distinctive competences found for the 46 businesses studied and the frequency with which each competence was identified. Note that some companies possessed more than one area of competence. "Experience, knowledge, and/or skill of the personnel (workers and/or owners)' was the most common area, present in over 30 percent of the businesses. The second most common area was "unique, special, and/or original product or service' (20 percent); followed by "better/more complete customer service' (15 percent); "location' (13 percent); "low costs/ price' (11 percent); and "relative quality of product/service' (11 percent). The five remaining areas of distinctive competence were present in less than 10 percent of the businesses. Interestingly, five of the businesses studied (11 percent) possessed no distinctive competence.

Table 2 presents comparisons of distinctive competences for the ongoing and start-up businesses. Although cell sizes are relatively small (particularly for the start-up group), differing patterns of competence emerge for the two groups. Among start-ups, "location' is a common distinctive competence, noted in 42 percent of the start-up businesses. However, the "location' competence is noted in only one case within the ongoing group. Emphasis on "customer service' is a distinctive competence in over 20 percent of the ongoing businesses, but is not present as an area of distinctive competence for any of the start-up businesses. The "low costs/price' competence is more prevalent among start-up businesses (25 percent) than ongoing businesses (present in only 2 of these businesses). Although "experience /knowledge/skill of owners/ workers' was noted in both groups, it was more common in ongoing businesses (35 percent of these businesses) than in start-ups.

Table 3 percents comparisons of distinctive competence by type of business operation. With the service category, the most common distinctive competences were: "experience/knowledge /skill of owners/workers' (25 percent); "location' (25 percent); "relative quality of product/service' (20 percent); and "low costs/price' (15 percent). Among the retail businesses, the most common areas were: "experience /knowledge/skill of the owners/ workers' (44 percent); "unique/special /original product or service' (28 percent); "better/more complete customer service' (17 percent); and "variety /availability/flexibility of product/ service' (17 percent). Due to the relatively small number of businesses in the manufacturing category (n = 8) and the large number of different competences noted, no particular pattern emerged for this group.

COMPETITIVE ADVANTAGE

A distinctive competence is of value in a competitive environment only if it can be transferred into a competitive advantage. Do the distinctive competences found for business in this study lead to competitive advantage, and can that competitive advantage be sustained?

Table 4 lists each distinctive competence noted in this study and indicates the considerations that must be addressed for these competences to translate into competitive advantages and sustainable competitive advantages. As noted earlier, a distinctive competence becomes a competitive advantage if it taps some key buying criterion of the market and if it can be communicated to customers. Sustainability, generally, is a function of competitor characteristics and actions.

Consider the most common areas of distinctive competence found in this study. First is "experience/knowledge skill of owners/workers,' noted in over 30 percent of the participating businesses. In order for this competence to lead to competitive advantage, the competence must exist as a key buying criterion for potential customers. In other words, this competence is significant to the buying public only if the "experience' is somehow reflected in the final product or service. If this is the case, customers must be aware that the experienced workforce has led to a better product or service. Making customers aware of the distinctive competence can require considerable advertising, promotion, and time. However, once consumers understand and accept this competitive advantage, its sustainability is likely to be strong. In general, rival businesses will have to expend considerable resources to erode or alter customer perceptions once this competitive advantage has been established.

The distinctive competence of having a "unique/special/original product or service' offers the obvious potential for being a key buying criterion, and the competence should be relatively easy to communicate if the product or service genuinely fills consumer needs. Thus, this distinctive competence appears to be one that could readily lead to competitive advantage. Sustainability depends largely on competitors' ability to offer similar or substitute products or services as dictated by consumer demand.

"Better more complete customer service' and "relative quality of product /service' are likely to be important buying criteria as long as price is not adversely affected. These areas of distinctive competence may be somewhat difficult to establish and project to potential customers, but once established, they are likely to remain strong and sustainable.

"Location' is difficult to evaluate. The influence of this competence as a key buying criterion is likely to depend on the nature of the product or service being offered. For example, a convenience store needs an easily accessible location, but consumers may be willing to travel some distance to purchase low-cost, quality carpeting. Communicability is direct and straightforward. Sustainability, due to the fixed nature of location, is strong (particularly if desirable locations are not readily available to rival businesses).

The distinctive competence of "low cost/price' is certainly a key buying criterion, and price can be communicated easily. Thus, this distinctive competence can clearly be converted into a competitive advantage. Sustainability depends largely on the capacity of rivals to undercut prices or to offer substitute products or services at a lower cost.

The other five distinctive competences found in this study were present in less than 10 percent of the businesses in this sample. They, too, are analyzed for potential as key buying criteria, communicability, potential for converting to competitive advantage, and sustainability.

CONCLUSION

This exploratory study identified areas of distinctive competence present among a sample of 45 small businesses. Each area of competence was evaluated for its potential as a competitive advantage. The potential sustainability of each competitive advantage was also explored. Future research should analyze the relationships between distinctive competence and performance criteria. Longitudinal studies would be helpful in determining whether the competitive advantage derived from possessing one or more areas of distinctive competence can be sustained in the long run.

Table: 1 COMMON AREAS OF DISTINCTIVE COMPETENCE

Table: 2 AREAS OF DISTINCTIVE COMPETENCE FOR START-UP AND ONGOING BUSINESSES

Table: 3 AREAS OF DISTINCTIVE COMPETENCE BY AREA OR TYPE OF BUSINESS OPERATION

Table: 4 OVERVIEW OF COMPETITIVE ADVANTAGE