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 moves are grounded in valid and insightful monitoring of the current competitive position coupled with evidence that reveals the skills and resources affording the most leverage on future cost and differentiation advantages. Too often the available measures and methods do not satisfy these 1 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 es well as the manifestations of superior customer value and cost superiority, and should be based on a balance of customer and competitor perspectives. IE notion that superior performance requires a business to gain and hold an advantage over com- petitors is central to contemporary strategic thinking Businesses seeking advantage are exhorted to develop distinctive competences and manage for lowest deliv- «red 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- Jow. Management first must understand the reasons for the current advantages of 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 Wensly is Professor of Marketing, Un versity of Warwick, UK Jounal of Marketing Vol. $2 (April 1988), 1-20 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- Buish 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 im 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). ‘Assessing Advantage / 1Relatively little attention 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 pattems, and acted ‘upon, Managers therefore adopt a customer-focused ‘of 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-run value of the business?). Finally, we propose steps that can 2/ Journal of Marketing, April 1988 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 li 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 skills 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 2 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 ony ifthe context {s properly defined. The chaice of product-market area is pay ‘ater of souepe choice, reflecting the definion of the business (Abell 1940) and the capabilities ofthe business, and pariy an empirical ‘gestion of whether the competing altematives are perceived to be Sbstitues (Day, Shocker, and Savastava 1979) Its possible that the choice of where to compete actually follows assessment of how to competeFIGURE 1 The Elements of Competitive Advantage POSITIONAL PERFORMANCE SOURCES OF ADVANTAGES OUTCOMES ADVANTAGE superior * satisfaction p>] ¢ superior skills customer value * loyalty * superior © lower relative market share resources costs © profitability Investment of profits |) to sustain advantage 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- Perr engierng or technical skills may lead to greater n oF reliability in the finished product. Other tks ae 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 tumaround 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 bbe 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formed in a way that leads to perceived superiority along dimensions that are valued by customers. For these activities to be profitable, the customers must be willing to pay a price premium for the benefits and the premium must exceed the added costs of superior performance. A business or its products can be dis- tinguished favorably in a myriad of ways: providing superior service, using a strong brand name, offering innovative features, and providing superior product, quality are some of the favored routes. Thus Procter & Gamble is regaining lost share in the disposable diaper market with a new super-absorbent contoured ‘model; Salomon has gained a dominant position in the ski bindings market with a stream of innovations such as step-in bindings that meet the needs of average rather than expert skiers; Digital Equipment has enhanced its position in the minicomputer market with an artificial intelligence system that dramatically reduces the time required to fill onders and increases accuracy. This view of differentiation as perceived superiority—and pos: sibly uniqueness—on some attributes that are impor- tant to customers is consistent with the position taken by Dickson and Ginter (1987). It goes beyond phys- ical product attributes to embrace all activities and linkages of the business, including the kind of com- prehensive support that Salomon provides its dealers to ensure they actively promote the superior features of its boots and bindings Performance Outcomes ‘The most popular indicators of marketing effective- ness and competitive advantage are market share and profitability. Is this popularity due to their ready availability, strong track record, or conceptually su- perior insights? Alternative measures such as cus- tomer satisfaction and the value of the customer fran- chise are little used, even though they afford the considerable benefit of reflecting customer responses to positional advantages and thus should precede the ‘market share and profitability outcomes, Market share. The premise of this measure is that we can distinguish winners from losers by the market shares they achieve, just as the outcome of a horse race is given by the final standings. This view of com- petition is simplistic; in reality competition is played out over many time periods within evolving markets. ‘There is a strong temptation to extend the use of mar- ket share from a measure of past performance to a reliable indicator of future advantages. Is this a rea- sonable extension? Though there are few markets in which current share does not have a strong relation- ship to future share, we seldom find an exact mapping of current market shares onto future shares. Instead a significant “regression toward the mean” effect has been found in the analysis of market share changes in 4/ Journal of Marketing, April 1988 the PIMS database (Buzzell 1981; Wagner 1984)? This phenomenon raises some fundamental questions about the interpretation of market shares. Market share and profitability. There are several ‘compelling reasons why the usual causal explanation is partially or completely wrong. Possibly the direc- tion of causality is from profit to share: businesses that are lucky or uniquely endowed select initially de- fensible and profitable positions, then reinvest the profits so they can grow faster than their less fortunate rivals. The most persuasive explanation is that both causal mechanisms are operating over time to yield the association of share and profit observed at any point in time. Early in the evolution of the market, first-mover advantages dominate. As the market matures, the question is whether management can capitalize on the initially strong position and build new skills and re- sources to keep abreast of changes in technology and ‘market requirements. This multiple-mechanism. view hhas support from several studies of changes in the PIMS database (lacobson and Aaker 1985; Rumelt and Wensley 1981). ‘What does this emerging view of market share, as largely an outcome of strategic moves to secure cost and differentiation advantages (Gale and Buzzell 1988), imply for the relevance of market share as an indicator of advantage? If itis to serve as more than simply an outcome measure we need to be sure that the observed share © was gained in a way that competitors will have difficulty imitating and © ‘refers to a market with relatively stable bound- aries. A dominant share of a market in which competitive forces are evolving rapidly affords litte assurance of future advantage. ‘The last caveat points up a further difficulty with ‘market share measures due to the ambiguity of market definitions, The answer to the question “share of what market?” often forces difficult compromises (Day 1981). A useful market definition should reflect the strategic choices of the business. To be a valid mea- "In more technical terms, this is merely the problem of distinguish ing between random walk behavior anda move complex causal siruc- ‘are, Some analysts who have looked at market share data have argued 42stong and pure random walk interpretation (Mancke 1974). Ino ‘Going they have ad to assume some complete form of capital market ‘alte 20 thatthe firms filing (relavely speaking) in earlier rounds have no access to addtional funds (even though they face exactly the sme opportunity set as their competitor. Others have attempted 10 Sola te random walk component either by inference (Caves, Gale tnd Porter 1977) or the application of more tighly specified models (Gumet and Wensley 1981), The fact remains thatthe mere auto omelation between curent and past marketshare isin itself equal onsstent with a pre random walk mode!sure of competitive forces, however, it also should relate to ways the competitors define the market and should reflect emerging commonalities and differ- ences in market segment behavior. A single market share measure is unlikely to satisfy these require- ments, Profitability. Current profitability is the reward from past advantages after the current outlays needed to sustain or enhance future advantages have been paid. Because profitability is influenced by actions taken in ‘many previous time frames, itis unlikely to be a com- plete reflection of current advantage. When the en- vironment is turbulent it may be a misleading indi- cation. Consequently, the same arguments used to ‘conclude that market share should be interpreted as an outcome can be applied to profitability. The interpretation of profitability is complicated further by limitations in the prevailing modes of val- uation. The cost-based approaches that underlie most accounting results are fundamentally different from approaches that estimate financial value from the stream of future benefits (Alberts and McTaggart 1984; Rappaport 1981, 1986). Accounting conventions ori- ented to allocating historic and current costs to satisfy tax requirements are ill-suited to the valuation of the sources of advantage. The consequences of the ac- ‘counting mindset are most evident in the treatment of intangibles. Goodwill becomes an arithmetic neces- sity rather than a genuine commercial asset with fu- ture value. Similarly, investments in the skill and knowledge base are treated as current overhead, with- ‘ut consideration of their contribution to long-run per- formance. However, the future value of an asset de~ pends critically on how it is used and whether the stream of benefits can be protected from competitive forces. ‘Thus we return full circle to the question of how in- ‘vestments in sources of advantage yield positional ad- vantages and superior performance outcomes. Convertin: into ‘Skills and Resources ior Positions and Outcomes Information on the relative standing of a business on the sources, positions, and performance dimensions of its competitive advantage is only a means to an ‘end. What managers really want to know is how to get the greatest improvement in performance for the Jeast expenditure. To do so requires identification of the skills and resources that exert the most leverage ‘on positional advantages and future performance, then selective allocation of resources toward those high le- verage sources. These are the key success factors of the business that “must be applied or controlled for the business to be successful” (Ohmae 1982). They are tailored closely to the type of business; the key success factors for machine tools do not apply to col- lege book publishing, as we see in Table 1. ‘The conversion of sources of advantage into pay- offs has been addressed only in a piecemeal way. The strategy literature generally asks how superior skills and resources are converted into positional advan- tages. These are the structural determinants or “driv- ers” of cost or differentiation advantages (Porter 1985). In contrast, marketers—as represented by those build- ing decision calculus and market share attraction models—generally skip the intervening positional stage. ‘The modeling is confined to the relationship of the input sources of advantage (relative advertising, sales, and promotion expenditures, for example) with the performance outcomes of market share or profit. Nei- ther the marketing nor strategy approach gives much attention to the conversion of positional advantages into superior outcomes. This is a serious gap, for the intervening stage does much to mediate the relation- ship of inputs to outputs. The remainder of this sec- tion examines the conversion steps in detail, Converting Sources into Positions of Advantage ‘The drivers of positional advantages are the high le- verage skills and resources that do the most to lower costs or create value to customers. Each activity in a firm's value chain is influenced by the combined ef- fect of these drivers (Porter 1985). Cost drivers are the structural determinants of the cost of each activity that are largely under a firm's control. The primary drivers are (1) the scale econ- mies or diseconomies for each activity, (2) learning that improves knowledge and processes independently of scale, (3) the patterns of capacity utilization, and ) the linkages that are present when the way one activity is performed affects another activity. Link- ages act as cost drivers when, for example, higher ‘quality materials and more costly product designs are used to reduce service costs. Drivers of differentiation are analogous to cost drivers but represent the underlying reasons why an activity is executed in a unique or superior way. They correspond directly to the sources of advantage that reside in superior skills or resources when mobilized by an effective strategy. The principal drivers are (1) policy choices about what activities to perform and hhow intensely to perform them, including features, performance, level of advertising spending, extent of services provided, and the skills and experience of personnel employed in the activity, (2) linkages within the value chain, such as coordination between sales and service to improve the speed of order handling or with suppliers and distributors, and (3) timing that gains first-mover advantages. Other drivers include loca- Assessing Advantage / 5TABLE 1 ‘The Nature of Key Success Factors” ‘Skill and Resource Factors thet Important Aspects of Value to Markot Create Value or Lower Costs the Customer College book Relationships with quality authors Quality of published books ‘publishing Strong editorial capabilities Publisher reputation Publisher strength in discipline Fit with other published works Backlist depth Sales per ttle Machine tools Raw material stock "Adapted from MacAvoy (1987) tion, interrelationships with other businesses, learn- ing, and scale that permits an activity to be performed in a unique way not possible at smaller volumes. Dif- ferent combinations of drivers interact to determine the extent to which an activity is unique or superior to that of competitors ‘The usefulness of the notion of drivers is difficult to assess. At best it is a descriptive tool, lacking any theory to clarify how drivers work or even how they can be isolated. It is not even apparent that they all ‘mean the same thing. For example, some drivers of differentiation correspond directly to sources of ad- vantage such as location, scale, or level of integra- tion. However, “policy choices,” the most prominent driver of differentiation, are discretionary decisions about activities to perform and how to perform them. ‘Though such decisions are critical, they are not sources of advantage. Instead they are mediating events that determine the degree of leverage an investment in a particular skill or resource has on cost or differentia tion Converting Sources Directly to Performance ‘The characteristic work on this conversion has been done by marketers with models that are variants on the “fundamental theorem of market share determi- nation.” The theorem holds that the market shares of various competitors are proportional to their shares of total marketing effort (Kotler 1984). This relationship is a pivotal feature of the so-called market share at- traction models (Little, Bell, and Keeney 1975) and hhas been integrated into the STRATPORT portfolio model by Larréché and Srinivasan (1982). The basic notion also has been applied directly to a game-the- oretic analysis of monopolistic competition assessing a firm’s competitive strength as the product of its functional expenditures and competencies (Karnani 1982). A recent effort (Varadarajan 1985) to classify strategic variables into success producers or failure preventers (where an increased level of effort above a threshold level will not increase performance) also ®/ Journal of Markatina, April 1988 Tool quality Parts availability ponse from central depots relies on the notion that relative effort levels roughly correspond to competitive advantages. The most extensive application of the theorem is by Cook (1983) in the “new paradigm of marketing strategies.” In this model, a firm has an advantage when its capacity to supply products is greater than the market demand for its output. The resulting slack can be applied to exploiting opportunities to gain share. ‘The size of this advantage is estimated by subtracting the firm’s share of strategic investments from its share of units sold. The central premise is that an equilib- rium is reached when the firm’s share of spending on conventional mix investments is the same as the mar- ket share. If the share of strategic marketing invest- ments falls below the current share of units sold, share of units eventually will decline in search of a new balance in consumer preferences. Though the structure of the Cook model can be faulted on many grounds,’ the flaws in the valuation mechanism are potentially more damaging. The basic valuation model proposed by Cook—and implicitly endorsed in many marketing models—presumes the current level of investment in terms of annual cash outlays is the proper basis for assessing the level of ‘market share a business can sustain. The resulting ‘market share has a net present value that relates cur- rent outlays to the discounted value of the future rev- enue stream (Cook 1985). In reality this model pro vides only @ partial picture of the potential value of The fundamental theorem as applied by Cook has numerous re: stictve astumptons. Relaxing them renders the theorem virtually un ‘manageable for diagnostic o prescriptive purposes. To be fully spec ied, # model based on this Deorem should incorporate (1) differences between firms in their ability to spend marketing dallas effectively (Q) he likelinood of diminishing returns to additional investments, (3) the canyover effects of pat investments, and (4) symerpstic elects ofthe marketing mix variables. None of these Consierations ae i ‘laded inthe Cook model. Further problems stem fom the assump ‘ions about the function relating marketshare responsiveness toc in share of investments (Chattopadhyay, Nedungadi, and Chak 1985)