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S ustaln

" a b l e C o m p etmve
"
Advantage-What It Is,
What It Isn't
Kevin P. Coyne

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Kevin P. Coyne is an associate in Mc-


Kinsey & Company's Washington, D.C., Sustainable Competitive Advantage is the
office. Formerly he was executive assistant
to the Deputy Secretary of the Treasury. goal of every competitive strategy. But how
do you know when you've got it? And what
are its implications for business strategy?

I shall not today attempt to define a question rarely asked. Most corpo-
the kinds of material to be em- rate strategists are content to apply
braced within that shorthand de-
scription; and perhaps I could never Justice Stewart's test; they know an
succeed in intelligibly doing so. But SCA when they see i t - - o r so they as-
I know it when I see it. sume.
But perhaps an SCA is not always
Supreme Court Justice Potter Stewart
so easy to identify. In developing its
(]acobellis v. State of Ohio) liquid hand soap, Minnetonka, Inc.,
focused its efforts on building an ad-
vantage that was easily copied later.
lthough it was p o r n o g r a p h y , In the wristwatch market, Texas In-

A not sustainable c o m p e t i t i v e
advantage, that the late Jus-
tice Stewart d o u b t e d his ability to de-
struments a t t e m p t e d to exploit an ad-
v a n t a g e o v e r its c o m p e t i t o r s t h a t
t u r n e d out to be u n i m p o r t a n t to tar-
fine, his r e m a r k neatly characterizes get consumers. RCA built barriers to
the c u r r e n t state o f thinking about the competition in the v a c u u m tube mar-
latter-subject as well. Explicitly or im- ket in the 1950s only to find these
plicitly, sustainable competitive ad- barriers irrelevant when transistors
vantage (SCA) has long occupied a and semiconductors were born. CB
central place in strategic thinking. radio p r o d u c e r s built capacity to fill a
Witness the widely accepted defini- demand that later evaporated. In each
tion o f competitive strategy as "an in- case, the companies failed to see in
tegrated set o f actions that p r o d u c e a advance that, for one reason or an-
sustainable advantage over competi- other, they lacked a sustainable com-
tors. ''l But exactly what constitutes petitive advantage.
sustainable competitive advantage is Perhaps it is because the m e a n i n g
of "sustainable competitive advan-
1. "Competitivestrategy," as the term is used tage" is superficially self-evident that
in this article, is exclusivelyconcerned with de- virtually no effort has been m a d e to
feating competitors and achieving dominance define it explicitly. After all, it can be
in a product/market segment. It is thus--in a r g u e d that the dictionary's defini-
concept, and usually in practice--a subset of
business strategy, which addresses the broader tions o f the three words bring forth
goal of maximizing the wealth of shareholders. the heart o f the concept. But every

Business Horizons/January-February 1986


Sustainable CompetitiveAdvantage What It Is, What It Isn't

"For a producer to enjoy a


competitive advantage in a product/market
segment, the difference or differences between him and
his competitors must be felt in the marketplace" that is
they must be reflected in some product~delivery attribute
that is a key buying criterion
for the market."
55
strategist needs to discover whether 3. Both the difference in impor- marketplace--the "strategic triangle"
an SCA is actually or potentially pres- tant attributes and the capability gap where the producer meets his cus-
ent, and if so, what its implications are can be expected to endure over time. tomers and competitors. It is here that
for competitive and business strategy. In earlier strategy work, these con- the competitive contest for the scarce
Therefore, this article will describe ditions have been jointly embedded resource, the sales dollar, is directly
a number of established strategic con- in the concepts of "key factors for suc- engaged.
cepts and build on them to develop a cess" (KFS), "degrees of freedom," Just as differences among animal
clear and explicit concept of SCA. and "lower costs or higher value to species that are unrelated to scarce
Specifically, we will examine: the customer." In the interest of clar- resources do not contribute to the
• The conditions for SCA. When ity, however, they deserve separate survival of the fittest, so producer dif-
does a producer have a competitive consideration. ferences that do not affect the market
advantage? How can the strategist test do not influence the competitive
whether such an advantage is sustain- process. Differences among compet-
able? Differentiation in itors in plant locations, raw material
• Some implications of SCA for Important Attributes choices, labor policies, and the like
strategy. Does having SCA guarantee matter only when and if those differ-
success? Can a p r o d u c e r succeed bviously, competitive advan- ences translate into product/delivery
without an SCA? Should a producer
always pursue an SCA? O tage results from differen-
tiation among competitors--
but not just any differentiation. For a
attributes that influence the cus-
tomers' choice of where to spend their
sales dollars.
Conditions for SCA producer to enjoy a competitive ad- "Product/delivery attributes" in-
vantage in a product/market segment, clude not only such familiar elements
A n Y p r o d u c e r who sells his the difference or differences between as price, quality, aesthetics, and func-
goods or services at a profit him and his competitors must be felt tionality, but also broader attributes
undeniably enjoys a compet- in the marketplace: that is, they must such as availability, consumer aware-
itive advantage with those customers be reflected in some product~delivery at- ness, visibility, and after-sales service.
who choose to buy from him instead tribute that is a key buying criterion for Anything that affects customers' per-
of his competitors, though these com- the market. And the product must be ceptions of the product or service, its
petitors may be superior in size, differentiated enough to win the loy- usefulness to them, and their access
strength, product quality, or distri- alty of a significant set of buyers; it to it is a product/delivery attribute.
bution power. Some advantages, how- must have a footprint in the market. Anything that does not affect these
ever, are obviously worth more than perceptions is not.
others. A competitive advantage is Product/Delivery Attribute Having lower costs, for example,
meaningful in strategy only when may well result in significantly higher
three distinct conditions are met: Customers rarely base their choice of margins. But this business advantage
1. Customers perceive a consistent a product or service on internal char- will become a competitive advantage
difference in important attributes be- acteristics of the producer that are not only if and when the producer di-
tween the producer's product or ser- reflected in a perceived product or rectly or indirectly recycles the addi-
vice and those of his competitors. delivery difference. Indeed, they usu- tional profits into product/delivery
2. T h a t difference is the direct ally neither know nor care about those attributes such as price, product qual-
consequence of a capability gap be- characteristics. Almost invariably, the ity, advertising, or additional capacity
tween the producer and his compet- most important contact between the that increases availability. Only then
itors. customer and the producer is the is the producer's competitive position
enhanced. Two examples illustrate tentially at the expense of the current market segment and is not offset by
this point. market leader, an independent com- a negative differentiation in any other
• For years, the "excess" profits of pany occupying the low-cost position key buying criterion. In the end, com-
a major packaged goods company-- in the industry. The resources that petitive advantage is the result of all
the low-cost producer in its indus- the new parent is willing to invest are net differences in important product/
try--have been siphoned off by its far larger than the incremental prof- delivery attributes, not just one factor
corporate parent for reinvestment in its generated by the market leader's such as price or quality. Differences
other subsidiaries. T h e packaged lower costs. Because the new subsid- in other, less important attributes may
goods subsidiary has therefore been iary can invest more than the market be helpful at the margin, but they are
no more able to take initiatives or re- leader in product design, product not strategically significant.
spond to competitive threats than if quality, distribution, and so forth, it Key buying criteria vary, of course,
it did not produce those excess prof- is the subsidiary that has, or soon will by industry and even by market seg-
its. Thus, business advantage may ex- have, the competitive advantage. ment. In fact, because market seg-
ist, but competitive advantage is In short, it is the application, not ments differ in their choice of key
lacking. If risk-adjusted returns avail- just the generation, of greater re- buying criteria, a particular product
56 able from investments in other busi- sources that is required for competitive may have a competitive advantage in
ness exceed those of additional advantage. some segments while being at a dis-
investment in the packaged goods advantage in others. Price aside, the
subsidiary, the corporate parent may Key Buying Criterion elaborate technical features that
be making the best business decisions. professional photographers prize in
However, thepackaged goods subsid- Every product has numerous attri- Hasselblad cameras would baffle and
iary has gained no competitive advan- butes that competitors can use to dif- discourage most of the casual users
tage from its superior position. ferentiate themselves to gain some who make up the mass market.
• The corporate parent of a newly degree of advantage. To be strategi- In any one product/market seg-
acquired, relatively high-cost pro- cally significant, however, an advan- ment, however, only a very few cri-
ducer in an industrial products mar- tage must be based on positive teria are likely to be important enough
ket has decided to aggressively expand differentiation of an attribute that is to serve as the basis for a meaningful
its subsidiary. This expansion is po- a key buying criterion for a particular competitive advantage. These criteria
are likely to be basic--that is, central
to the concept of the product or ser-
SOMETIMES A vice itself, as opposed to "add-ons" or
COMPETITIVE "features." For example, in the tu-
ADVANTAGE bular steel industry, there are just two
IS N O T key product/delivery attributes: a sin-
SUSTAINABLE. gle measure of quality (third-party
testing reject rate), and local availa-
The Far Side, bility on the day required by the cus-
by Gary Larson. tomer's drilling schedule.
Reprinted by Texas Instruments (TI) apparently
permission of
Chronicle Features, did not fully understand the impor-
San Francisco tance of differentiation along key
buying criteria when it entered the
wristwatch market. Its strategy was to
build upon itg ability to drive down
costs--and t h e r e f o r e prices (the
product attribute)--beyond the point
where competitors could respond. But
this competitive strategy, which had
worked in electronic components,
failed in wristwatches because price,
past a certain point, was no longer a
key buying criterion: customers cared
more about aesthetics. TI had sur-
passed all of its competitors in an at-
tribute that did not matter in the
marketplace.
"Footprint in the Market"
'~/ouldn't you know i t ! . . . There goes our market
for those things!" To contribute to an SCA, the differ-
Sustainable Competitive Advantage--What It Is, What It Isn't
q

"An advantage is durable only if


competitors cannot readily imitate the
producer's superior product/delivery attributes.
In other words, a gap in the capability underlying the
differentiation must separate the producer from his
competitors; otherwise, no meaningful
competitive advantage exists."
57
ences in product/delivery attributes petitors can erase the differentiation entiated product/delivery attribute is
must command the attention and loy- at will. one that only the producer in ques-
alty of a substantial customer base; in For example, Minnetonka, Inc., tion can perform, or one that com-
other words, they must produce a created a new market niche with petitors (given their particular
"footprint in the market" of signifi- "Softsoap." As a result, its stock price limitations) could do only with max-
cant breadth and depth. more than doubled. Before long, imum effort. So defined, capability
Breadth, How many customers are however, 50 different brands of liq- gaps fall into four categories.
attracted to the product above all oth- uid soap, some selling for a fifth of • Business system gaps result from
ers by the difference in product at- Softsoap's price, a p p e a r e d on the the ability to perform individual func-
tributes? What volume do these market. As a result, Minnetonka saw tions more effectively than competi-
customers purchase? its earnings fall to zero and its stock tors and from the inability of
Depth. How strong a preference has price decline by 75 percent. competitors to easily follow suit. For
this difference generated? Would mi- An advantage is durable only if example, differences in labor-union
nor changes in the balance of attri- competitors cannot readily imitate the work rules can constitute a capability
butes cause the customers to switch? producer's superior product/delivery gap resulting in superior production
Breadth and depth are usually as- attributes. In other words, a gap in capability. Superior engineering or
sociated in marketing circles with the the capability underlying the differ- technical skills may create a capability
concept of "branding." Branding can entiation must separate the producer gap leading to greater precision or re-
indeed be a source of competitive ad- from his competitors; otherwise no liability in the finished product.
vantage, as shown by Perrier's spec- meaningful competitive advantage • Position gaps result from prior
tacular advantage in a commodity as exists. (Conversely, of course, no decisions, actions, and circumstances.
prosaic as bottled mineral water. meaningful advantage can arise from Reputation, consumer awareness and
But the importance of breadth and a capability gap that does not produce trust, and order backlogs, which can
depth are not limited to branding an important difference in product/ represent important capability gaps,
strategies. Even a producer who is delivery attributes.) are often the legacy of an earlier man-
pursuing a low-price strategy must Understanding the capability gap, agement generation. Thus, current
ensure that his lower price will cause then, is basic to determining whether competitive advantage may be the
customers to choose his product and a competitive advantage actually ex- consequence of a past facilities loca-
that changes in nonprice attributes by ists. For example, an attribute such as tion decision. BHP, the large Austra-
competitors would be unlikely to lure faster delivery does not constitute a lian steel maker, enjoys important
them away. real competitive advantage unless it is production efficiencies because it is the
based on a capability gap such as may only p r o d u c e r to have located its
Durable Differentiation exist if the company has a much big- smelter adjacent to its iron ore source,
ger truck fleet than its competitors can eliminating expensive iron ore trans-

p ositive differentiation in key


product/delivery attributes is
essential to competitive advan-
afford to maintain. Higher product
quality does not in itself constitute a
competitive advantage. But unique
portation costs.
• R e g u l a t o r y / l e g a l gaps result
from government's limiting the com-
tage. However, a differentiation that access to intrinsically superior raw petitors who can perform certain ac-
can be readily erased does not by itself materials that enable the producer to tivities, or the degree to which they
confer a meaningful advantage. Com- deliver a better-quality product may can perform those activities. Patents,
petitive advantages described in such well do so. operating licenses, import quotas, and
terms as "faster delivery" or "superior A capability gap exists when the consumer safety laws can all open im-
product quality" are illusory if com- function responsible for the differ- portant capability gaps among corn-
,i I

"The most important condition


for sustainability is that existing and
potential competitors either cannot or will not
take the action required to close the gap. If the
competitors can and will fill the gap,
the advantage is by definition
not sustainable."
58
petitors. For example, Ciba-Giegy's physical, differences. It is likely to be vantage is simply a function of the
patent on a low-cost herbicide allowed prosaic and measurable, not intangi- durability of both the attributes and
it to dominate certain segments of the ble. Abstract terms, such as "higher the gap.
agricultural chemical market for years. labor productivity" or "technological There is not much value in an ad-
• Organization or managerial leadership," often serve as useful vantage in product/delivery attributes
quality gaps result from an organi- shorthand, but they are too general that do not retain their importance
zation's ability consistently to innovate for precise analysis. Moreover, they over time. Manufacturers of CB ra-
and adapt more quickly and effec- implicitly equate capability gaps with dios, video games, and designer jeans
tively than its competitors. For ex- marginal performance superiority, saw their revenues decline and their
ample, in industries like computers or rather than with discrete differ- financial losses mount not because
financial services, where the compet- ences--such as specific work rule dif- their competitors did anything to
itive environment is shifting rapidly, ferences or technical resources erode their capability advantages, but
this flexibility may be the single most capacity--that are not easily imitated. because most of their customers sim-
important capability gap. In other in- For example, if marginal perform- ply no longer valued those products
dustries, the key capability gap may ance superiority constituted compet- enough to pay the price. In each case,
be an ability to out-innovate compet- itive advantage, one would expect industry participants believed that
itors, keeping them always on the de- "focus" competitors--those who have they had benefited from a permanent
fensive. no capability advantage but excel in shift in consumer preferences and be-
Note that only the first category, serving a particular niche through gan to invest accordingly. In each case
business system gaps, covers actions sheer concentration of effort--to win they were wrong.
that are currently under the control out over more general competitors Whether consumers will continue
of the producer. Frustrating as it may who decide to invade that niche. But to demand a product over time, and
be to the strategist, competitive ad- as American Motors learned when how they can be influenced to prefer
vantage or disadvantage is often the Detroit's "Big Three" began produc- certain product attributes over time,
result of factors he or she is in no ing small cars, and as some regional are essentially marketing issues, sub-
position to alter in the short term. banks are learning as money center ject to normal marketing analytical
The broad concept of a capability banks enter their markets, "trying techniques. How basic is the customer
gap becomes useful only when we suc- harder" is no substitute for the pos- need that the product meets? How
ceed in closely specifying a producer's session of unique capabilities. central to its function or availability is
actual capability gap over competitors Only by understanding specific dif- the attribute in each question? These
in a particular situation. Analysts can ferences in capability can the strate- may be the key questions to ask in this
detect the existence of a capability gap gist accurately determine and measure connection.
by examining broad functions in the the actions that competitors must take The sustainability of competitive
business system, but they must then to eliminate the gap and the obstacles advantage is also a function of the du-
go further and determine the root and costs to them of doing so. rability of the capability gap that cre-
cause of superior performance in that ated the attractive attribute. In fact,
function. Lasting Advantage (Sustainability) the most important condition for sus-
Individual capability gaps between tainability is that existing and poten-
competitors are very specific. There f a meaningful advantage is a tial competitors either cannot or will
must be a precise reason why one pro-
ducer can outperform another, or
there is no competitive advantage. The
I function of a positive difference
in important attributes based on
an underlying capability gap, then the
not take the actions required to close
the gap. If competitors can and will
fill the gap, the advantage is by defi-
capability gap consists of specific, often sustainability of the competitive ad- nition not sustainable.
Sustainable Competitive A d v a n t a g e - - W h a t It Is, W h a t It Isn't

Obviously, a capability gap that sor of the advantage did not retaliate. American Motors learned to its cost).
competitors are unable to close is For example, the danger of canni- In addition, competitors will always
preferable to one that relies on some balizing existing products may pre- be searching for ways to fill the ca-
restraint. Unfortunately, a producer clude effective response. MCI, Sprint, pability gap without creating offset-
cannot choose whether a particular and others were able to create the low- ting gaps. Only if the creation of
capability gap meets the former or the price segment of the U.S. long-dis- offsetting gaps is an automatic and
latter condition. tance telephone market largely be- inevitable consequence of any such
Consider the two cases more closely. cause A T & T did not choose to action will the producer's advantage
• Case 1: Competitors cannot fill the respond directly for some time. Most be assured of sustainability in the long
gap. This situation occurs when the likely it considered that the cost of run.
capability itself is protected by specific cutting prices for 100 percent of its 3. Fear of reprisal. Even though it
entry and mobility barriers such as an customers in order to retain the 1 to initially would appear worth doing so,
important product patent or unique 2 percent in the low-price segment was competitors may refrain from filling
access to a key raw material (for ex- simply too high, and that only when the capability gap for fear of retalia-
ample, DeBeer's Consolidated Mines). the segment grew to sufficient size tory action by the producer. The sus-
In a Case 1 situation, sustainability is would a response become worthwhile. tainability of the producer's existing 59
assured at least until the barrier is Other examples of situations where advantage depends, in this case, on
eroded or eliminated (converting the a payoff is not worth the required in- the competitors' continuing to exer-
situation to Case 2). Barriers can erode vestment include investing in capacity cise voluntary restraint, accepting in
or be eliminated over time, unless they to achieve "economies of scale" when effect the producer's position in this
are inherent in the nature of the busi- the capacity required to achieve the market segment.
ness. z required economy exceeds the likely For example, Japanese steel makers
A more significant danger to Case additional demand in the industry; voluntarily refrain from increasing
1 advantages, however, probably lies and labor work rules, where the ad- their U.S. market share for fear that
not in the gradual erosion of barriers, ditional compensation demanded by American producers can and will per-
but in the possibility that competitors the union in return for such changes suade the U.S. government to take
may leapfrog the barriers by a new would more than offset the potential harsh protectionist measures.
game strategy. savings. "Fear of reprisal" is probably among
For example, the introduction of the The inadequate-potential situation the most common strategic situations
transistor in 1955 did nothing to erode represents a sustainable advantage in business, but it must be considered
the barriers that RCA had created in because the "end game" has already unstable over time, as competitors' sit-
vacuum tubes; it simply made RCA's been reached: there are no rational uations and managements shift.
leadership irrelevant. Therefore, al- strategic countermoves for competi- 4. Management inertia. Finally,
though sustainability can be estimated tors to take until conditions change. there are cases where competitors
by (1) considering all the changes (en- 2. Corresponding disadvantage. would benefit from closing the capa-
vironmental forces or competitor ac- Competitors may believe that acting bility gap but fail to do so, either be-
tions) that could erode the barriers, to close the capability gap will open cause m a n a g e m e n t has incorrectly
and (2) assessing the probabilities of gaps elsewhere (in this or other mar- assessed the situation or because it
their occurrence over a specified time ket segments) that will more than off- lacks the will, the ability, or the energy
horizon, there will, of course, always set the value of closing this one. to take the required action.
be uncertainty in the estimate. For example, a "niche" competitor For example, Honda's success in
• Case 2: Competitors could close the often relies on this factor to protect dominating the British motorcycle in-
capability gap but refrain from doing so. him against larger competitors, who dustry is generally attributed to Nor-
This situation might occur for any one (or so he hopes) will reckon that an ton Villiers T r i u m p h ' s failure to
of four reasons. effective attack on his niche advan- respond to a clear competitive threat
1. Inadequate potential. A simple tage would divert resources (includ- until too late.
calculation may show competitors that ing m a n a g e m e n t time) n e e d e d Psychologists tell us that managers
the costs of closing the gap would ex- elsewhere, destroy the integrity of will implement real change only when
ceed the benefits, even if the posses- their own b r o a d e r p r o d u c t lines their discomfort with the status quo
(opening gaps in other segments), or exceeds the perceived personal cost
create some other gap. of taking the indicated action. This
2. For example, if the business is a "natural A "corresponding disadvantage" may well explain why competitors
monopoly." A natural monopoly exists where situation constitutes at least a tem- often tolerate a performance gap that
either (1) economies of scale cause marginal porarily sustainable advantage, be-
costs to decline past the point where produc-
they could profitably act to close. But
tion volume equals m a r k e t d e m a n d (that is, cause for the moment an "end game" it is risky for a producer to rely for
where the most efficient economic system is to has been reached. However, as the at- long on the weakness or inertia of
have only one producer); or (2) the social costs tractiveness of competitors' other competitors' management to protect
of installing duplicate production/distribution
systems outweigh the benefits, a situation usu-
markets changes, so does their esti- a competitive advantage; by defini-
ally leading to the establishment of a legal mo- mate of whether a corresponding dis- tion the end game has not been
nopoly by g o v e r n m e n t fiat. advantage is present in the niche (as reached.
"Unimaginative direct cost-reduction
efforts (cutting overhead or staffs, for example)
may improve profitability in the short term. But if
competitors can and will imitate these efforts,
the only long-run effect may to be raise
the general level of misery
throughout the industry."
60

In all four cases, how long com- Losing with an SCA result only in intensified competitive
petitors will tolerate capability gaps rivalry. And, where the producer's
they are capable of closing depends Although an SCA will help a pro- advantage is unimportant, he will have
largely on the relationship between the ducer to achieve, over time, higher little cushion against the competitive
value of the advantage created by the returns than his competitors, there are repercussions. For example, recent
gap and the cost (to each competitor) at least three circumstances where its airline pricing policies and "frequent
of closing it. The worse the cost-to- possessor can fail financially: flyer" programs have done nothing to
benefit ratio, the longer the advan- contribute to the long-term profita-
tage is likely to be sustainable, because 1. If the market sector is not via- bility or competitive positions of their
greater changes in the environment ble. In many cases (including most originators. Unimaginative direct cost-
are required before value would ex- new-product introductions), the min- reduction efforts (cutting overhead or
ceed cost. Coupled with an informed imum achievable cost of producing staffs, for example) may improve prof-
view of the rate of environmental and selling a particular product or itability in the short term. But if com-
change in the industry, this ratio thus service exceeds its value to the cus- petitors can and will imitate these
allows the analyst to estimate sustain- tomer. In this situation, an SCA will efforts, the only long-run effect may
ability. not guarantee the survival of its pos- be to raise the general level of misery
sessor; it will tend merely to ensure throughout the industry.
SCA and Strategy that his competitors will fare even
Competing Against an SCA
worse.
he classic definition of com- By definition, not all producers can

T petitive strategy as "an inte-


grated set of actions designed
to create a sustainable advantage over
2. If the producer has severe op-
erational problems. An SCA can al-
low m a n a g e m e n t the luxury of
possess an SCA in a given product/
market segment. Other competitors
face the prospects of competing (at
competitors" might suggest that pos- focusing more fully on achieving op- least for some time) from a handi-
sessing an SCA is synonymous with erational excellence, but thousands of capped position. Under certain cir-
business success--that those produc- companies have failed for opera- cumstances, however, it is still possible
ers who have an SCA are guaranteed tional, rather than strategic, reasons. for some to succeed.
winners, and that those competitors Rapidly growing markets constitute
who lack one should simply exit the 3. It~ competitors inflict tactical one such situation. As long as real
business to avoid financial disaster. damage. An SCA rarely puts a pro- market growth over a given period
This apparently reasonable conclu- ducer completely beyond the reach of exceeds the additional capacity ad-
sion is, however, incorrect. Although competitor actions such as price cuts vantaged competitors can bring on
an SCA is a powerful tool in creating and "buying" market share, which may line during that time (due to organi-
a successful business strategy, it is not be unrelated to the SCA itself. A pro- zational constraints, risk aversion, and
the only key ingredient. In fact: ducer will be particularly vulnerable so forth), even weak competitors can
to such competitive tactics if the SCA thrive. For example, the b o o m i n g
• Possessing an SCA does not is not very important, either because market for microcomputer software
guarantee financial success. the depth of the "footprint" described over the past five years has enabled
• Producers can succeed even when earlier is shallow or because the gap many weak competitors to grow rich.
competitors possess an SCA. in capability is minor. Only when market growth slows or
In these cases, producers must se- the advantaged competitors increase
• Pursuing an SCA can sometimes lect their actions very carefully. Ac- the rate at which they can grow will
conflict with sound business strategy. tions that can and will be imitated may true competition begin and the ira-
Sustainable Competitive Advantage--What It Is, What It Isn't

pact of an SCA make itself felt. ing with each other, by taking share ample, if all the remaining producers
In markets where true competition from weak competitors rather than have similar costs). In this case, even
for scarce sales dollars is taking place, each other. the producer who added the new ca-
the number of disadvantaged com- Weak competitors, of course, are pacity will face declining profitability
petitors who can succeed, the degree likely to fare badly when competition on his pre-existing capacity; in ex-
to which they can prosper, and the is intense and the depth of the ad- treme cases his total profit on new and
conditions u n d e r which they can vantage enjoyed by others is great. old capacity may fall below the profit
prosper will vary, depending on the Their choices are: he had previously earned on the old
value of the advantage held by the (1) To leave the business; capacity alone. While gaining share
"number-one" competitor. (2) To endure the situation until and eliminating a competitor (good
I f the number-one competitor has only the advantage is eroded; or competitive strategy), he has invested
a shallow or unimportant advantage, (3) To seek to create a new advan- more to profit less (bad business strat-
many disadvantaged competitors can tage. egy).
prosper for long periods. As noted If a weak competitor chooses to • Aggressive learning-curve pric-
earlier, each competitor is Unique. pursue a new advantage, then he must ing strategies that sacrifice too much
When all attributes are considered, ensure that it will be preemptive, or current profit. Under these strate- 61
each will have a competitive advan- that competitors will not notice his gies, prices are reduced at least as fast
tage in serving some customers. The move and will fail to respond until he as costs in order to buy market share
disadvantaged competitors are more has consolidated his position. Other- and drive out competitors. The as-
likely to receive lower returns than wise, his action is virtually certain to sumption is that the future payoff
the number-one producer, but they be copied and the intended advan- from market dominance will more
certainly may be viable. tage erased. than offset the costs of acquiring it.
I f the number-one competitor has an im- Pursuing the Wrong SCA The value of new business, however,
portant advantage in a given product/ is likely to be very sensitive to the pre-
market segment, some theorists assert Although its attainment is the goal of cise relationship between prices and
that over the long run there will be competitive strategy, sustainable com- costs. This is true particularly in the
only one viable competitor. Others petitive advantage is not an end in early stages of the learning curve,
may remain in the segment, but they itself but a means to an end. The cor- when the absolute levels of prices,
will be plagued by losses and/or very poration is not in business to beat its costs, and margins are relatively high
inadequate returns. If there are six competitors, but to create wealth for and the profit consequences are
different ways to achieve a major ad- its shareholders. Thus, actions that therefore greater for any given vol-
vantage, this reasoning runs, then the contribute to SCA but detract from ume. Especially in high-tech indus-
market will split into six segments, creating shareholder wealth may be tries such as electronics, where the
each ruled by a different competitor, good strategy in the competitive sense lifetime of technologies is short, the
who uniquely excels in the attribute but bad strategy for the corporation. long-term value of the market share
most valued by the customers in that Consider two examples. bought by overly aggressive learning-
segment. • Low-cost capacity additions in curve strategies can be less than the
Be that as it may, in practice other the absence of increased industry de- profit eliminated in the early stages
strong competitors may also profita- mand. Adding low-cost capacity and by pricing too close to costs.
bly exist alongside Number One un- recycling the additional profits into
der two conditions: product/delivery attributes that at- he framework for SCA pro-
1. I f the number-one producer's ad-
vantage is limited by a finite capacity that
is significantly less than the size of the
tract enough customers to fill that ca-
pacity is usually a sound business
strategy. However, as industry cost
T posed in this article is far from
complete. Its t r e a t m e n t of
product/delivery attributes and ca-
market; that is, he may expand fur- curve analysis has demonstrated, if the pability gaps (notably organizational
ther, but will not retain his advantage capacity addition is not accompanied strength) is impressionistic rather than
on the incremental capacity. Obsta- by increases in industry demand, the detailed. It leaves other aspects of the
cles to continued advantaged expan- effect may well be to displace the high- topic (for example, the sustainability
sion are common: limited access to cost, but previously viable, marginal of competitive advantage at the cor-
superior raw materials, finite capacity producer. When this happens, prices porate level) unexplored.
in low-cost plants, prohibitive trans- in the industry will fall to the level of But a major concern of the business
portation costs beyond certain dis- the costs of the new marginal pro- unit strategist is to determine whether
tances. Antitrust laws also tend to act ducer, costs which by definition are the enterprise (or a competitor's) pos-
as barriers to expansion beyond a cer- lower than the costs of the former sesses or is in a position to capture an
tain level by number-one competitors. marginal producer. Thus, the profit SCA, and, if so, to examine its stra-
2. I f the size of the individual compet- per unit sold of all participants will be tegic implications. The conditions for
itors is small relative to the size of the reduced. SCA and the implications of SCA for
market. In this case, a number of Depending on the cost structure of strategy that have been proposed pro-
strong competitors can expand for the industry, the declines in the profit vide an initial framework for these
many years without directly compet- per unit sold can be dramatic (for ex- tasks. []