ASSESSING ADVANTAGE - A FRAMEWORK...
George S. Day & Robin Wensley Assessing Advantage: A Framework for Diagnosing Competitive Superiority Strategy is about seeking new edges in a market while slowing the erosion of present advantages. Ef- fective strategy nnoves are grounded in valid and insightful monitoring of the current competitive position coupled with evidence that reveals the skiHs and resources affording the most leverage on future cost and differentiation advantages. Too often the available measures and methods do not satisfy these re- quirements. Only a limited set of measures may be used, depending on whether the business starts with the market and uses a customer-focused approach or alternatively adopts a competitor-centered per- spective. To overcome possible myopia, the evidence of advantage should illuminate the sources of ad- vantage as well as the manifestations of superior customer value and cost superiority, and should be based on a balance of customer and competitor perspectives. Tbusiness HE notion that superior performance requires a to gain and hold an advantage over com- f)etitors is central to contemporary strategic thinking. Businesses seeking advantage are exhorted to develop distinctive competences and manage for lowest deliv- ered cost or differentiation through superior customer value. The promised payoff is market share domi- nance and profitability above average for the industry. This advice is sound, but usually difficult to fol- low. Management first must understand the reasons for the current advantages or deficiencies of the busi- ness and the vulnerability of the advantages to copy- ing or leap-frogging by competitors. Without a proper diagnosis, managers cannot choose the best moves to defend or enhance the current position. For many rea- sons the prevailing approaches to understanding com- petitive advantages are unlikely to yield valid and in- sightful diagnoses. We therefore evaluate the current approaches and methods within an organizing frame- work that clarifies the nature of competitive advan- tage. Our primary objective, however, is to use this framework to propose a process that can be used to George S. Day is Magna International Professor of Business Strategy, University of Toronto. Robin Wensley is Professor of Marketing, Uni- versity of Warwick, UK. ensure a thorough and balanced assessment of the rea- sons for the competitive position of a business. Perspectives on competitive position. Little is known about how managers decide what advantages distin- guish their business and how those advantages were gained. Two distinct approaches have been identified one starts with the market and is customer-focused and the other is primarily competitor-centered. Competitor-centered assessments are based on di- rect management comparisons with a few target com- petitors. This approach often is seen in stalemated in- dustries where the emphasis is on "beat the competition." The key question is, "How do our ca- pabilities and offerings compare with those of com- petitors?" These businesses watch costs closely, quickly match the marketing initiatives of competitors, and look for their sustainable edge in technology. Managers keep a close watch on market share and contracts won or lost to detect changes in competitive position. Customer-focused assessments start with detailed analyses of customer benefits within end-use seg- ments and work backward from the customer to the company to identify the actions needed to improve performance. This "market back" orientation is found in service-intensive industries such as investment banking where new services are easily imitated, cost of funds is the same, and entry is easy (Bhide 1986). Journal of Marketing Vol. 52 (April 1988), 1-20, Assessing Advantage / 1
Relatively little attentioti is given to competitors' ca- pabilities and performance���the emphasis is on the quality of customer relationships. Evidence of con- tinuing customer satisfaction and loyalty is more meaningful than market share. Why should it matter how managers view the arena in which they compete? The reason is that market en- vironments are not unambiguous realities. They are given meaning in the minds of managers through pro- cesses of selective attention and simplification (Pfef- fer and Salancik 1978). Otherwise managers could not possibly cope with the myriad of trends and events that must be organized, analyzed for patterns, and acted upon. Managers therefore adopt a customer-focused or competitor-centered perspective to help simplify their environment and decide what information is to be gathered and how it is to be screened and interpreted. Simplification comes at a cost, which is the risk that only a partial and biased picture of reality is cre- ated. A competitor-centered perspective leads to a preoccupation with costs and controllable activities that can be compared directly with corresponding activi- ties of close rivals. Customer-focused approaches have the advantage of examining the full range of compet- itive choices in light of the customers' needs and per- ceptions of superiority, but lack an obvious connec- tion to activities and variables that are controlled by management. Clearly a balance of the two character- istic perspectives is needed. In practice most busi- nesses tilt���in some cases very sharply���toward one or the other. A significant complication in the search for a bal- anced perspective is the confusing welter of overlap- ping meanings of "competitive advantage." Because there is no agreement on what elements to include or how they are related, information gaps cannot be identified. We address this problem with an organiz- ing framework that distinguishes the sources of ad- vantage from their consequences for relative compet- itive position and performance superiority. We then use this framework to guide an evaluation of the many ways in which competitive advantages have been measured. For example, we examine the merits of management judgments of strengths and weaknesses and how they compare with measures of market share, comparisons of the relative size of resource commit- ments, and customer comparisons of competitors on their purchase criteria. Eleven distinct measurement approaches are evaluated for (1) conceptual validity (is the measure compatible with the framework?), (2) measurement feasibility (does the measure employ readily available inputs that are likely to provide re- liable and unbiased information?), and (3) diagnostic insights (will the measure yield information that can guide strategic choices to enhance the long-nan value of the business?). Finally, we propose steps that can be taken to reorient marketing research to offer a bal- anced view of present and prospective advantages. The payoff for management is better insights into the ac- tions that promise the greatest effect on the compet- itive position of a business. The Concept of Competitive Advantage There is no common meaning for "competitive ad- vantage" in practice or in the marketing strategy lit- erature. Sometimes the term is used interchangeably with "distinctive competence" to mean relative su- periority in skills and resources. Another widespread meaning refers to what we observe in the market��� positional superiority, based on the provision of su- perior customer value or the achievement of lower rel- ative costs, and the resulting market share and prof- itability performance. Neither of these meanings gives a complete pic- ture, but taken together they describe both the state of advantage and how it was gained.' This integrated view is based on positional and performance superi- ority being a consequence of relative superiority in the ski]]s and resources a business deploys. These skills and resources reflect the pattern of past investments to enhance competitive position. The sustainability of this positional advantage requires that the business set up barriers that make imitation difficult. Because these barriers to imitation are continually eroding, the firm must continue investing to sustain or improve the ad- vantage. Thus, the creation and sustenance of a com- petitive advantage are the outcome of a long-run feed- back or cyclical process (Figure 1). Underlying the simple, sequential determinism of the source -^ position -^ performance framework is a complex environment fraught with uncertainty and distorted by feedbacks, lags, and structural rigidities. Before introducing these complexities, we describe each of the primary elements of the framework. Sources of Advantage Superior skills and resources, taken together, repre- sent the ability of a business to do more or do better (or both) than its competitors. Superior skills are the distinctive capabilities of personnel that set them apart from the personnel of 'Though our focus is on understanding how to compete better in a chosen product-market arena, this can be achieved only if the context is properly defined. The choice of product-market arena is partly a matter of strategic choice, reflecting the definition of the business (Abell 1980) and the capabilities of the business, and partly an empirical question of whether the competing alternatives are perceived to be substitutes (Day, Shocker, and Snvastava 1979). It is possible that the choice of where to compete actually follows assessnnent of how to compete. 2 / Journal of Marketing, April 1988
FIGURE 1 The Elements of Competitive Advantage ��� SOURCES OF ADVANTAGE ��� superior skills ��� superior resources ��� POSITIONAL ADVANTAGES ��� superior customer value ��� lower relative costs ��� Investment of profits to sustain advantage PERFORMANCE OUTCOMES ��� satisfaction ��� loyalty ��� market share ��� profitability competing firms. Some of the benefits of superior skills arise from the ability to perform individual functions more effectively than other firms. For example, su- perior engineering or technical skills may lead to greater precision or reliability in the finished product. Other skills are derived from the systems and organization structure that enable a firm to adapt more responsively and faster to changes in market requirements. Superior resources are more tangible requirements for advantage that enable a firm to exercise its ca- pabilities. They may reside in the scale of the man- ufacturing facility, the location, the breadth of sales- force and distribution coverage, the availability of automated assembly lines, or the family brand name. The distinction between the antecedent sources of advantage and the positional advantages that result when they are deployed adroitly is seen readily in suc- cessful turnaround strategies such as that of Foremost- McKesson in drug retailing. The management rec- ognized that their skills���derived from an in-depth knowledge of their suppliers' and customers' busi- nesses and the myriad of products they handle���could be parlayed into something more than a delivery and billing service. By enhancing these skills with heavy investments in data processing hardware and systems resources, the firm sharply reduced the costs of the many activities between the suppliers' finished goods and the pharmacy shelf. These actions made the firm so efficient that its suppliers could not possibly do as well on their own. The resulting information was used to offer unique value-added services to both suppliers and customers. Foremost now can help manufacturers manage inventories, analyze market data, and plan new product development efforts. Retailers are tied more closely through leases of electronic ordering equip- ment, shelf management plans, and even the provi- sion of price labels. Positions of Advantage The positional advantages of a business are directly analogous to competitive mobility barriers that could deter a firm from shifting its strategic position. They are understood best within the value chain or business system framework attributed to McKinsey and Co. but largely developed into a management tool by Porter (1985). A value chain first classifies the activities of the firm into the discrete steps performed to design, produce, market, deliver, and service a product. Sup- porting these specific value-creation activities are firmwide activities such as procurement, human re- source management, and technology development as well as the infrastructure of systems and management that ties the value chain together. Only activities with a great impact on differentiation, that account for a large or growing proportion of costs, need be consid- ered. Lowest delivered cost positions. An overall cost edge is gained by performing most activities at a lower cost than competitors while offering a parity product. NUCOR, for example, has achieved an enviable steel cost position by making extensive use of scrap metal instead of iron ore and producing all its steel by the efficient continuous-casting method, which eliminates the intermediate step of making ingots. This strategy also can be focused on a distinct market segment. For example. Fort Howard Paper uses only recycled pulp, rather than the more expensive virgin pulp, to make toilet paper and other products. The quality, however, is acceptable only to the away-from-home market (of- fice buildings, hotels, and restaurants), so the com- pany does not try to sell to the home market through grocery stores. Differentiated positions. A business is differen- tiated when some value-adding activities are per- Assessing Advantage / 3