What in the World is Competitive Advantage

Abstract

In recent years the concept of competitive advantage has taken center stage in discussions of business strategy. Statements about competitive advantage abound, but a precise definition is elusive. In reviewing the use of the term competitive advantage in the strategy literature, the common theme is value creation. However, there is not much agreement on value to who, and when. According to one school of thought, value is created by favorable terms of trade in product mar-kets. That is, sales in which revenues exceed costs. However, scrutiny of the concept of “cost” quickly reveals problems. What is the “cost ” of a scarce resource? Another school of thought holds that advantage is revealed by “super-normal ” returns. Again, questions quickly arise. Internal returns are normally measured by some type of market-book ratio. Such ratios include return on capital1, return on assets, market-to-book value, and Tobin’s Q. Given such a measure, are supernormal returns “super ” relative to the expectations of owners, the economy as a whole, or the rest of the industry? A third school of thought ties advantage to stock market performance. According to financial economics, superior stock market performance stems from surprising increases in expectations.