Sustainable Competitive Advantage

Sustainable competitive advantage

What not to do

Many entrepreneurs address the issue of competitive advantage by creating a competitive matrix. This is a table that looks like this:

Product A

Product B

Product C

Our product

Feature 1

Feature 2

Feature 3

Feature 4

Feature 5

This, of course is a description of how a team’s product is different from the competition, not how it is better.

To be a description of how the product is better, the features listed would have to be the critical factors for adoption by the target customer. And this point highlights the fact that one product is not generally better than another. Rather it is better for a particular user for a particular purpose. So a useful product competitive matrix would have to be based on an analysis of a specific customer segment and an understanding of the requirements or features that are valued by that customer. But having a superior product is not the same as having sustainable competitive advantage.

How to determine what is sustainable competitive advantage

There are three basic steps in determining what constitutes sustainable competitive advantage.

  1. Determine what is valuable. This comes from work with customers and the process of segmenting and choosing a target customer. It is important to keep in mind that the customer is always the reference in determining value.
  2. Determine what resources allow a venture to deliver value.

A simple picture helps us focus on this concept.

The question is what are the resources that the firm uses or leverages to create and deliver value. Resources include many things, including:

· Tangible assets such as financial resources, physical resources (real estate, equipment, etc.)

· Intangible assets such as IP, patents, copyrights, reputation, brand

· Expertise and motivation of individuals

· Relationships with customers, partners, suppliers, etc.

· Organizational design, routines, processes.

Here, to repeat, the question is how the firm delivers value to the customer.

3. Determine whether the resources the firm uses to deliver value pass the VRIN test.

We say that a set of resources or capabilities constitute sustainable competitive advantage if they are:

  • Valuable: this is in reference to the chosen customer segment. The resources and capabilities must produce something of value to the customers (really just repeating the points above).

  • Rare: Obviously, if the capabilities were wide-spread, they would not confer advantage.

  • Inimitable: If the capabilities were valuable and easily imitated, they would not remain rare.

  • Nonsubstitutable: If there were another way to produce the products, services, or other beneficial results of the capabilities, these capabilities would not remain a source of competitive advantage for very long.

Value chain analysis

Analyzing the firm's value chain is a useful way to identify the key activities necessary to deliver the venture's products to its customers. Identifying these activities will help the team of entrepreneurs decide which activities should be done within the firm and which can be outsourced. Some of the activities done internally should be based on capabilities that pass the VRIN test. These will be the core capabilities of the new venture.

Read more about value chain analysis here.