Competitive Advantage as a Theoretical Construct: A Conceptual Assessment.

INTRODUCTION

The notion of competitive advantage has been a cornerstone of the field known as Strategic Management. As such, research on competitive advantage occupies a central position in strategy literature (e.g., Porter, 1980, 1985; Rumelt, 1984, Barney, 1991; Ghemawat, 1991; Teece, Pisano,

Is competitive advantage what it takes to compete, a characterization observed during competition, or an outcome of competition? Is competitive advantage contingent on the competitive situation or is it a more general trait of the firm? Put differently, how is competitive advantage different from competence, strengths, and, ultimately, performance?

This article, addressing the above questions, makes three observations regarding competitive advantage. First, competitive advantage does not equate (superior) performance. Second, competitive advantage is a relational construct. Third, competitive advantage is context-specific. In presenting these three observations, this article proposes suggestions to refine and operationalize the "competitive advantage" concept.

COMPETITIVE ADVANTAGE DOES NOT EQUATE PERFORMANCE

The structural approach (Porter, 1980, 1985) and the resource based view (RBV) (Wernerfelt, 1984, Rumelt, 1984, Barney, 1991) are two dominant perspectives in strategy which purport to explain competitive advantage, sustainable advantage in particular. It seems, however, that neither perspective readily differentiates competitive advantage from superior performance. Instead, they are treated more as interchangeable constructs.

Competitive Advantage: The Structural Approach

The structural approach rooted in IO economics posits that strong defensible market position (read power) in an attractive industry renders sustained competitive advantage (Porter, 1980, 1985). Here, industry positioning plays an important role in determining the firm's competitive advantage. Using the structural approach, Porter (1980) advances the industry analysis framework (five-forces) whose ultimate function is to explain the sustainability of profits against bargaining and against direct and indirect competition. To achieve sustainable profit, a firm needs sustainable advantage, in either cost or differentiation (Porter, 1980, 1985).

   Competitive advantage grows fundamentally out of value a firm is able to
   create for its buyers that exceeds the firm's cost of creating it. Value is
   what buyers are willing to pay, and superior value stems from offering
   lower prices than competitors for equivalent benefits or providing unique
   benefits that more than offset a higher price. There are two basic types of
   competitive advantage: cost leadership and differentiation. (Porter, 1985:
   3).

In this sense, Porter defines competitive advantage in rather specific and concrete ways that seem to implicitly equate competitive advantage to profitability (performance), and sustainable advantage to sustainable profitability. That is, competitive advantage is treated as an outcome (of positioning) and should be pursued as an end in itself. An important question arises: Is either cost advantage or differentiation advantage sufficient and necessary for superior performance? If the answer is no, then we should perhaps conclude that competitive advantage, within Porter's perspective (1980, 1985) at least, does not equate performance.

A government-sponsored near-monopoly firm in certain industries, for instance, could enjoy high profit without either cost advantage or differentiation advantage over rivals. Also, it is highly conceivable that the firm with the lowest cost in a market may not enjoy better performance than a rival which happens to have (for whatever reason) overwhelming advantage in access to distribution. Although competitive advantage in cost or differentiation may increase the likelihood of better performance, competitive advantage per se is not the same as performance. At least, cost advantage and differentiation advantage, two generic types identified by Porter (1980), are not necessarily the ultimate determinants of performance. Superior performance could also come from other types of competitive advantage, e.g., speed or flexibility, or perhaps more practically, combinations of multiple competitive advantages.

As such, maybe we should not use the general term competitive advantage as a surrogate for superior performance, nor should we assume that competitive advantage, whatever type, automatically leads to superior performance. Competitive advantage and performance are two different constructs and their relationship seems to be complex.

COMPETITIVE ADVANTAGE: THE RESOURCE BASED VIEW

The RBV (Rumelt, 1984, Barney, 1991; Grant, 1991) provides another perspective on competitive advantage, whose basic tenet is that unique resources are the sources of sustained competitive advantage (Barney, 1991). To generate such advantage, a resource must be rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (cf. Barney, 1991; Grant, 1991).

In RBV, a firm's unique resource is treated as being inherently related to performance. The unique, inimitable, and immobile resource is valuable precisely in the sense that it generates economic rent (Barney, 1991). Here the linkage between competitive advantage (unique resources) and performance (economic rent) is more direct than that in Porter (1980): it does not even have to specify cost advantage, differentiation advantage, or any other types of competitive advantage. If a firm has valuable, rare, and inimitable resource, then superior performance ensues. That is, the definition of such resources (as the essence of sustained competitive advantage) already has inherent performance implications.

Several questions arise. Does the RBV assume that there is only one particular type of unique resource (hence one type of sustained advantage) in a particular industry? Does the prescription by the RBV preclude the situation where more than one firm can have such resource(s)? If firm A has resource X that fits the RBV prescription and firm B has resource Y that also meets the RBV criteria, then what determines which firm has competitive advantage over the other? Or does it matter? If we can identify the resources that bear the dictation by the RBV and use them to directly predict performance, do we still need constructs like competitive advantage or sustained competitive advantage?

Based on the above review of the two dominant perspectives on competitive advantage in our field, we come to the following observations, which will be further elaborated on in later sections. First, competitive advantage and performance are two different constructs. Second, if competitive advantage, either defined by position or resource, is used casually as a surrogate of superior performance, it is not only redundant but also tautological. Third, competitive advantage, whatever type, does not guarantee superior performance. Finally, for competitive advantage to be a theoretically useful construct, it has to be better defined and operationalized.

COMPETITIVE ADVANTAGE IS A RELATIONAL TERM

In this section, we seek to understand competitive advantage at its most basic level of analysis and in the most basic form. We argue that competitive advantage is a relational term. It is essentially a comparison drawn between a focal firm and its rival(s) on certain dimension(s) of concern in competition. Specifically, we examine competitive advantage in the context of its reference point (Fiegenbaum, Hart, and Schendel, 1996) and according to its magnitude and composition, and comment on its operationalization.

Reference Point

Competitive advantage, as a relational term, depends on the reference point. That is, we must answer the question such as "against whom?" and "on what?" Does competitive advantage mean that one firm must be superior than all rivals? Or does competitive advantage mean only to be a pair-wise comparison between two rivals of concern? Porter's (1980) description of the cost leader advantage seems to suggest that the cost leader has absolutely the lowest cost position among all firms in an industry, hence perhaps his justification for equating such (cost) competitive advantage to superior performance.

In reality, however, competitive advantage could be, and often is, assessed between any pair of rivals on certain dimension(s) that has competitive ramifications. For instance, among three chain stores A, B, and C which compete in an industry where, say, number of is a major area of competition locations (for reason of customer convenience). A has the largest number, B the middle, and C the smallest. Then we could infer that, assuming the number of locations is of linear importance in competition, firm A has competitive advantage over B, which in turn has competitive advantage over C. In this case, we can compare a particular firm with the other two, we can also choose any two focal firms of interest to conduct pair-wise comparison. Such pair-wise comparison on a specific and discrete dimension of competition features competitive advantage in its most basic form and at its most basic level of analysis.

Notice that such conception of competitive advantage separates competitive advantage from firm performance, treating them as distinct constructs. Firm A may have more locations than Firm B, but Firm B may have more sales volume per location due to competitive advantages in other areas, e.g., merchandise selection and service quality. In this sense, Firm B may actually have better performance (profitability) than Firm A. However, just because Firm B performs better than Firm A does not mean that Firm A doesn't have competitive advantage over Firm B in terms of number of locations. It simply means that there are often multiple dimensions of competition that jointly determine firm performance. A firm may have to have multiple competitive advantages to enjoy superior performance.

In this sense competitive advantage is not an undifferentiated, overall determinant of performance. It is a firm's relational score on a particular competitive dimension vis-a-vis that of rivals that may contribute to superior performance. However, we do not deny the possibility where one dimension of competition single-handedly determines performance and hence competitive advantage on that dimension is the determinant of superior performance. This is only a special case within the general conception of competitive advantage discussed above.

In summary, we propose the following definition of competitive advantage: the differential between two competitors on any conceivable dimension that allows one to better create customer value than the other. This definition builds on Porter (1985) in emphasizing the importance of creating customer value. It moves down from the generic types of competitive advantage, i.e., cost and differentiation, to a more basic level and form of competitive advantage. In addition, this definition also facilitates the operationalization of the construct: first identify the dimension of competition and then compare a pair of firms against this dimension. It provides a baseline understanding of competitive advantage and readily accommodates the description of competitive advantage by both the structural approach and the RBV, two dominant perspectives in our field.

Magnitude

Given the above definition, two types of competitive advantage can be conceived: heterogeneous vs. homogenous. The resource based view hinges on the concept of resource heterogeneity (Rumelt, 1984; Barney, 1991). Moreover, Barney (1991) treats sustained competitive advantage as an equilibrium term: all attempts to imitate a valuable, rare, and difficult-to-imitate resource cease to exist. In this sense, resource heterogeneity sustains, hence competitive advantage sustains.

Presented in its strongest form: you either have it or you don't. Those who have it have competitive advantage; those who don't don't. Similar to Porter's conception of cost advantage (1980), here the RBV also focuses on the situation of "best of all" instead of merely pair-wise comparisons among competitors. The examples of such valuable, unique, and difficult-to-imitate resources certainly abound, e.g., De Beers monopoly of supply of raw diamond and Coca-Cola's brand name (in a league of its own).

If firms by and large could imitate rivals' resources and products, then these firms are by definition competing on some common dimensions. In such cases, on these common dimensions at least, competitive advantage is the differential between rivals, regardless of whether some of them also have heterogeneous competitive advantage based on other unique dimensions of resources or products. Such differential in (homogenous) firm resources is perhaps the most commonly observed form of competitive advantage, e.g., productivity and other efficiency-related factors.

Composition

Another important concern is the composition of competitive advantage. A competitive advantage could be a discrete one based on a firm's differential with a rival on one specific dimension of competition, e.g., presence at the retail shelf space. A competitive advantage could also be a compound of multiple individual advantages that work together as an integrative whole. For instance, Wal-Mart's competitive advantage in low cost is a compound of multiple discrete competitive advantages that include location, information technology, warehouse and transportation systems, and corporate culture, among others (Ghemawat, 1991).

Although many discrete competitive advantages could contribute to a firm's performance directly, e.g., dominance of retail shelf space, they also contribute to form compound competitive advantages, which in turn contribute to firm performance. Typical compound competitive advantages include efficiency of organization and production process (cost advantage) and quality and innovation in products (differentiation advantage), and speed and flexibility of market responses.

Operationalization

Regarding operationalization of competitive advantage, some cautions have to be taken. Although we define competitive advantage as differential between a pair of rivals, the direction of the differential is of importance. This may cause problems especially when the "pair-wise" assumption is violated, e.g., statistical analysis done on a large sample of subjects, where firms' relative competitive advantage is determined by their score on certain dimensions. Take again the store chains as an example. The number of locations may not have a linear effect on competition and after a value creation. After a certain critical number has been reached, increases in number of locations will likely cannibalize a chain's own stores, reaching into less densely populated areas, and diminishing headquarters managerial attention to individual stores. As such, uncritical use of the raw scores of a group of firms on a certain dimension that has implication for competitive advantage does not always capture the essence of competitive advantage. That is, the same amount of differential may not mean the same degree of competitive advantage, and a positive differential on the very same dimension may mean competitive advantage in one situation, i.e., between a pair of firms below the optimal point, but competitive disadvantage in another, i.e., between a pair of firms beyond the optimal point.

Moreover, the measurement of compound competitive advantage may pose even more problems. It is so because of the multiple dimensions involved and a compound competitive advantage may not be a simple summation of individual competitive advantages. Therefore, the traditional measures of adding scores from multiple dimensions as well as the bilateral linkage between a variable and performance featured in typical statistical analyses may not always capture the essence of such compound competitive advantage. Simultaneous modeling and other more sophisticated methodology which better capture a firm's position against a rival on multiple frontiers at the same time seem to be more appropriate analytical tools.

COMPETITIVE ADVANTAGE IS CONTEXT-SPECIFIC

Competitive advantage is a relational term between a focal firm and rival(s) within a specific context of competition. Competitive advantage is not a universal, general, and overall characterization of a firm or certain aspects of a firm. Similar terms to competitive advantage could be found in competence and strengths, which seem to be generally regarded as firm-specific traits, but are also argued to be meaningful primarily within a certain context. We first discuss the situational nature of these terms and then explore the context-specific nature of competitive advantage.

Prahalad and Hamel (1990) discuss core competence as a unique set of resources and capabilities, both technical and organizational, that allows a firm to be competitive in a wide range of end product markets. However, core competence can also turn into core rigidity (Leonard-Barton, 1992). For instance, the highly skilled and sophisticated sales force of Encyclopedia Britannica used to be its core competence over lesser competitors. Yet with the advent of the digital era, that intense personal selling business has been transformed largely into one that values convenience and low cost, allowing lesser competitors to compete more effectively and diminishing the core competence of Britannica (Evans and Wurster, 1997).

Similarly, firm strengths is another term that is often used to refer to or imply competitive advantage (Leaned, Christensen, Andrews, and Guth, 1965; Andrews, 1971). But such a term is also argued to be highly situational in nature. Grant (1998: 13) observes:

   Is Michael Eisner a strength or a weakness for Walt Disney Company? To the
   extent that he has masterminded Disney's revival over the past 14 years he
   is an outstanding strength. Yet his quadruple heart-bypass surgery and
   inability to implement a management succession plan suggest that he is also
   a weakness."

To be sure, the terms strengths and weakness, in its original context of SWOT analysis (Learned et al, 1965), are used in conjunction with opportunities and threats that characterize a firm's external environment. The moral is that a firm's strategy should explore the fit between the firm and its environment. As such, strengths (and the underlying resources and traits they represented) are by definition dependent on the environmental context. It is not necessarily the core competence and strengths per se that render competitive advantage. It is the fit between such firm attributes - strengths, resources, core competencies, capabilities, whichever is in vogue in the literature - with the requirement in specific competitive context that really matters.

Somehow this message seems to get lost in the past two decades or so in strategy research. The structural approach made the analysis of competitive environment more systematic and rigorous (Porter, 1980, 1985). The RBV made the analysis of the firm more systematic and rigorous (Barney, 1991). Consequently, competitive advantage seems to be defined either as a market position (Porter, 1980) or resource position (Wernerfelt, 1984). Maybe it is high time that we revisit the message of fit embedded in the original SWOT framework and conceptualize competitive advantage accordingly, for neither market position nor firm resources and capabilities in themselves could by themselves illuminate the "ultimate" source of competitive advantage (Collis, 1994).

In the end, matching a firm's resources and capabilities along changing market opportunities is perhaps the most fundamental task in creating competitive advantage given its context-specific nature.

CONCLUDING REMARKS

In this article, we have presented three observations on the construct of competitive advantage and conceptually explored competitive advantage as a relational and context-specific construct. Overall, one conclusion seems to have emerged from the tour of literature that we have taken in this article. That is, for competitive advantage to be a theoretically meaningful construct for strategy research, its definition must be more clearly and rigorously stated and its operationalizations better specified. Before we can do that, competitive advantage will only remain a heavily-loaded term, used largely for convenience but not theoretical preciseness.

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