What is Competitive Advantage?

Business strategists often emphasize two types of competitive advantage:

• Cost leadership – offering products/services of sufficient quality for the lowest cost (allowing lower prices while maintaining an adequate profit margin)
• Product differentiation – offering products/services of high quality that justify a price premium

It makes perfect sense that a company which leads its industry in cost controls probably has an advantage over it’s competitors. Similarly, high-quality products can enjoy market exclusivity among certain groups of consumers. However, this dichotomy is too superficial to actually understand competitive advantage. It lacks the necessary details to begin to comprehend how a company arrives at such an advantage.

Todd Zenger, a global expert on corporate strategy, steps outside the strategy box to evaluate how companies can use a “corporate theory of value creation” to experiment their way to successful strategies. In his book, Beyond Competitive Advantage, he presents three “pillars of corporate theory” that guide experimentation and discovery of value-creating strategic actions.

The pillars of corporate theory include:

• Insight – understanding a company’s unique resources, assets, and behaviors
• Foresight – understanding external market factors impacting a consumer segment
• Cross-sight – finding synergy, or complementarity, that lead to enhanced value

In essence, a corporate theory of value creation focuses managers’ perspectives with regard to insight, foresight, and cross-sight toward a constrained environment defined by the corporate theory. In this way, corporate theories are the “genesis” of value-creating strategic actions.

Zenger’s view on the importance of corporate theory aligns well with the “Jobs-to-be-Done Theory” presented by Clayton Christensen in his book, Competing Against Luck. Christensen and his co-authors present a clear explanation about how innovators find and create solutions around their customers’ “struggle for progress.” This is as applicable to strategists as innovators.

In essence, the jobs-to-be-done theory helps companies create products and services that customers want to buy. The jobs theory relies on identifying the causal driver between customer struggles and purchasing decisions. As an example, Christensen explains that people don’t buy McDonald’s milkshakes simply because they want milkshakes–they buy milkshakes in the morning because they need a convenient, fun, and filling breakfast during their commute to work, and they buy milkshakes in the afternoon as a reward and parental bonding opportunity for busy families. The milkshakes perform different “jobs” for different people at different times, and none of them is explained by simple demographic analysis. In a separate example, Christensen shares Bob Moesta’s experience identifying the importance of dining rooms and dining room tables in home purchasing decisions, based on buyer’s emotional attachment to family celebrations represented by gatherings around the dining room table. These milkshakes and dining rooms perform “jobs” which are specific to the circumstances in which customers are “struggling” for some type of “progress” towards a goal or aspiration.

Building on a corporate theory of value creation, strategists and executives can use insight, foresight, and cross-sight to discover the “struggle for progress” of their target market segment. This allows organizations to 1) articulate the job-to-be-done of their customers, and 2) design a corresponding combination of products and experiences to deliver a valuable solution to their customers.

It is precisely this combination of products and experiences–established through the deployment of resources and behaviors unique to each organization, or use of uniquely applied market resources–that catapults a company beyond its competitors toward a cost or quality advantage.

“[P]erfectly satisfying someone’s job likely requires not just creating a product, but engineering and delivering a whole set of experiences that address the many dimensions of the job and then integrating those experiences into the company’s processes….When you’ve done that well, it’s almost impossible for competitors to copy.”– Christensen et al., Competing Against Luck

Getting it right–creating consumer value through identifying the job-to-be-done correctly and deploying the product/experiences in the right way–is proven daily to be extremely difficult. That’s why Zenger touts the benefit of a corporate theory to drive deliberate experimentation toward value creation. Without a corporate theory, experimentation is random and unlikely to find success.

When we consider Zenger’s corporate theory with Christensen’s jobs theory and our prior explanation of the VRIO framework for assessing resources for deployment, we begin to form a more comprehensive understanding of how competitive advantage fits into the larger picture of strategy, generally. We can also begin to understand that “cost leadership” and “product differentiation” are simply broad categories of more specific competitive advantages that might result from a unique combination of a variety of factors, including at least the following:

• a consumer’s job to be done
• a company’s understanding of the consumer’s struggle for progress
• the unique assets and behaviors available within the company
• the company’s insight into those internal resources
• the company’s foresight into relevant market conditions
• the company’s ability to synthesize all of this into a product offering that the consumer actually wants
• the set of experiences the company deems most impactful on the consumer’s experience
• the company’s corporate theory that targets cost leadership over product differentiation, or vice versa
• the specific approach the company takes to achieve cost leadership or product differentiation

Considering that all of this, so far, relies on the company’s understanding of it’s position within a competitive industry, there are obviously many more factors that could be considered, even if imperfectly. Each competitor will be operating within its own corporate theory for value creation and with its unique set of resources and behaviors. A company’s perspective of it’s industry and competitors will add a further filter to this set of factors and decisions.

Although there are endless possibilities presented by this type of analysis, the use of a structured understanding of competitive advantage allows a company to methodically assess it’s own position and consider only the set of factors that are most influential to the company’s position.

We’ll explore more details in a subsequent post about how to find correlations between competitive advantage and specific IP assets.