The term “competitive advantage” has been around for as long as the study of business management, but the meaning has never been perfectly clear to me. That said, I recently discovered that I’d used the term “sustainable competitive advantage” in a presentation. In the talk, I explained that “adopting a marketing 2.0 approach can provide a sustainable competitive advantage over competitors that use a traditional approach to marketing moving forward”. What I realize, in retrospect, is that while my casual use of the term “sustainable competitive advantage” was intended to convey the idea that marketing 2.0 offers greater value than traditional marketing over the long term, the literal meaning was reductive and possibly misleading. In this post, I’ll explore what a “sustainable competitive advantage” might mean and whether or not marketing 2.0 can provide it.
Competitive Advantage
Before exploring “sustainable competitive advantage” I’d like to try to define what “competitive advantage” might mean. My sense is that this term seems self-evident to most people, but that it is actually an amalgamation of ideas. The self-evident meaning might go something like “an activity, position, or structure that provides a company with the ability to outperform competitors in the same market environment and with respect to a specific objective.”
I don’t what to get too theoretical in my discussion, but I I’ll pull apart some of ideas that are embedded in my interpretation of “competitive advantage:”
- IDEA 1: My definition starts with the phrase “an activity, position, or structure”, which is a very general way of defining the basis of a “competitive advantage.” The first idea that underlies “competitive advantage” is about defining the set of activities, positions, or structures that afford advantage. I’ll go into this in more detail below in the section entitled “Three Advantages”.
- IDEA 2: I use the term “outperform”, but what does that mean? Is “competitive advantage” about an advantage with respect to share price? Value for customers? Market share? I’ve addressed these questions by adding “with respect to a specific objective” to the definition, but this renders it meaningless in a general context. I also added “in the same market environment” to indicate that “competitive advantage” is always relative to a set of specific market conditions.
- IDEA 3: What is the time-period of “competitive advantage?” Does it simply refer to the relationship between two companies at a single moment in time, or is it a dynamic concept that applies over time? And, if it does apply over time, how must we set a specific period of time? How does the term apply to companies that restructure to outperform for a short period of time, but which ultimately collapse due to later consequences of the same tactics that produced the earlier advantage? I’ve addressed this by defining “competitive advantage” as pertaining to a single moment in time.
- IDEA 4: Does a “competitive advantage” require that other companies cannot replicate the activities, positions, or structures that afford advantage? This relates to idea 3 because it calls the period of time into question. I address this by stating that competitors cannot, and will not be able to, replicate the advantage, or some greater advantage, at the moment in time being considered.
- IDEA 5: Finally, what is the unit of selection that we’ll use to discuss “competitive advantage?” In other words, does the concept apply only on the organizational level, or also on micro (for example, inside a company) and macro (for example, between industries) levels? I believe it can be applied on many levels, but this can be addressed by simply specifying the relevant context.
As you can see, the ideas embedded within the term “competitive advantage” require extensive qualification. In essence, I think the real value of the term is within a specific context. The more specific the context, the more meaningful the term becomes, and inversely, the larger the scope of its application the less meaningful it becomes. Following this, it would be more meaningful to use the term “competitive advantage” to describe a specific activity, position, or structure that allows a company to deliver a specific value at a specific moment in time, relative to a competitor.
Sustainable Competitive Advantage
Intuitively, it seems that the word “sustainable” adds something about time and resources to the above definition. Both time and resources are key ideas embedded in the term “competitive advantage,” so my sense is that the concept of sustainability modifies, or relates to, these ideas. For example, we might say that “sustainability implies that competitors cannot, and will not be able to, replicate the advantage, or some greater advantage, within a specific context and throughout the defined period. And that the company must have the resources available to maintain the competitive advantage within the specific context and throughout the defined period.” Whew, that’s a mouthful.
Thus, sustainability really just adds a specified period to the definition. Following this, I could modify the above meaningful use of the term to say that it would be more meaningful to use the term sustainable competitive advantage to describe a specific activity, position, or structure that allows a company to deliver a specific value over a specific period, relative to a competitor.
If you’re interested in a more in-depth exploration of these ideas check out What Is the Meaning of Competitive Advantage? by Gerald David Flint, which unpacks the history of the term and offers an analysis of it’s different definitions. I’d also recommend Competitive Advantage: Creating and Sustaining Superior Performance, by Michael Porter who is a Harvard Business School professor who popularized the term in the 80’s.
Three Advantages
Now that I’ve defined my terms, it’s time to look at the various advantages that serve as the basis for a “competitive advantage” (to continue my thought from idea 1). For this, I’ll turn to Michael Porter’s model which defined three fundamental competitive positioning strategies that companies can pursue, they include:
- COST LEADERSHIP: This advantage is based on a company’s ability to drive down cost through efficient operations, supply chain management and distribution. This approach takes advantage of economies of scale to bring more generic or commoditized products and services to a mass market. The extended learning curves associated with this approach are a barrier to entry for competitors.
- DIFFERENTIATION: This advantage is based on a company’s ability to differentiate it’s products and services (non-generic/commoditized) such that it captures a unique mass market position. Differentiation is a viable strategy for earning above average returns because the resulting brand loyalty lowers customers’ sensitivity to price. Loyalty can also serve as a barrier to entry for competitors.
- FOCUS: This advantage is based on a company’s ability to serve a particular market segment better than competitors, rather than trying to expand market share. These companies tend to do one thing extremely well, allowing them to avoid competing on price with the cost leader whose products are not market segment specific. They will compete with differentiated products, but because they are not creating a mass market product they benefit from innovation opportunities that reside within specific market segments. The ability to innovate, move quickly, and develop strong brands serves as a barrier to competitors.
While I find these to be somewhat reductive, they are useful basic guidelines to consider when developing a marketing strategy. It’s also important to point out companies that pursue more than one of the above advantages simultaneously tend to be less competitive over all. Research about this can be found in Porter’s books.
So, Is Marketing 2.0 A Sustainable Competitive Advantage?
According the Porter, Marketing 2.0 is not one of the three base “competitive advantages.” That said, a marketing 2.0 approach could benefit all three strategies. Within that context I could rephrase what I said in my presentation as “companies being challenged by direct competitors, in the same market, and with similar market positions, can maintain a sustainable competitive advantage by adopting a marketing 2.0 approach, over competitors so long as they maintain a traditional approach to marketing.”
In other words, yes.
