A Simple Test to Determine your Firm's Competitive Advantage

TASA ID: 4374

Defining a firm’s competitive advantage is difficult.  Both my students and friends in the business world struggle with this often. Many students and practitioners of business strategy fail to understand whether a firm has the ability to do something better than the competition. There can’t be a more important question in business strategy, can there? Unless we understand what our company does better than the competition, then we can’t understand how we should compete. It’s similar to a boxer going into a match without knowing his best punch; he won’t have a very good strategy for defeating his opponent.

In my experience, business school students simply believe the hype. If a company says they offer superior customer service, well then that must be the case. They lack the intellectual curiosity to evaluate whether firm claims are valid. Business executives tend to be sentimental; they let their personal preferences influence their perceptions. I find that if a particular executive admires superior technological innovation, then he is pre-disposed to pursue superior innovation at his own firm, regardless of his firm’s true capabilities. Executives tend to choose a strategic path before establishing the firm’s true sources of competitive advantage. Looking back on my own career in the corporate world, I realize that most of the time, not only were we managers unsure of our firm’s competitive advantage, but also we weren’t even sure if we had one.

The truth is, some business managers are guessing. At best, they have only an intuitive sense of what their company does well. This is surprising, since there is a nice, crisp set of criteria that managers of any firm can use to determine their firm’s competitive advantage – or whether perhaps their firm lacks one altogether!

First, managers should brainstorm a list of resources and capabilities that their firm possesses. Resources are tangible and intangible assets owned by the firm. Capabilities are the abilities to do things that are embedded in the firm’s proprietary processes, and in its people. Resources and capabilities interact to create advantages.

If a firm has sustainable competitive advantage, the firm has the sought-after ability to pick and win fights, much like a boxer who knows he has the best left hook in the game. Like a boxer’s, the firm’s strategy will hinge on its ability to identify and exploit opportunities to knock out the opposition using that advantage.

The ‘resource-based view’ on strategy teaches us that a sustainable competitive advantage enables firm managers to answer “yes” to the following questions:

• Is your resource valuable? If a resource is valuable, that’s a good thing. But it’s not enough to claim that a firm possesses something valuable. All firms have access to electricity, which is valuable. It doesn’t create advantage.

• Is it rare? If access to this resource is limited, and your firm has it, we begin to see the seeds of competitive advantage. But trouble may still be lurking.

• Is it inimitable? Once your competitor realizes you have this stuff, can they imitate or copy it? Many of us remember that Dell Computers was once the company to beat in the PC business because they practically invented the web-based supply chain system. Now, most PC manufacturers have matched that capability. Since the web-based supply chain could be copied, it wasn’t infinitely sustainable.

• Is it non-substitutable? If your firm has superior delivery speed and accuracy using a truck-based delivery system, and your competition can meet or beat your capabilities using rail as a substitute, then this is not the basis of sustainable competitive advantage.

• Is it operationalizable? Leave it to professors to use a term like this! This refers to your firm’s ability to put your resource to good use. My favorite example of a firm that had a tremendous resource, but not the supporting capabilities, is Xerox’s invention of the Alto computer. The Xerox Alto computer had a bitmapped screen and a graphical user interface; it was the predecessor of the Apple Macintosh and Microsoft Windows operating systems. But Xerox lacked the market capabilities to exploit such an asset, and it never saw commercial success.

Before deciding which markets your firm should address, or which competitors your firm can address, be sure to identify whether you have a knockout punch. Have a fun brainstorming meeting where your team and you ask yourselves these five questions.

This article discusses issues of general interest and does not give any specific legal or business advice pertaining to any specific circumstances.  Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.

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