Competitive advantage and firm performance

TLDR: In this paper, the authors re-examine the notion of competitive advantage and formally assess its usefulness for theory building and testing in the field of strategic management and propose suggestions to refine and operationalize competitive advantage.

Abstract: Competitive advantage is perhaps the most widely used term in strategic management, yet it remains poorly defined and operationalized This paper makes three observations regarding competitive advantage and conceptually explores the various patterns of relationship between competitive advantage and firm performance First, competitive advantage does not equate to superior performance Second, competitive advantage is a relational term Third, it is context‐specific This paper examines three patterns of relationship between competitive advantage and firm performance: 1) competitive advantage leading to superior performance; 2) competitive advantage without superior performance, and 3) superior performance without competitive advantage The ultimate purpose of this article is to help generate a healthy debate among strategy scholars on the usefulness of the competitive advantage construct for our theory building and testing This paper proposes that we re‐examine the notion of competitive advantage and formally assess its usefulness for theory building and testing in the field of Strategic Management The notion of competitive advantage has been a cornerstone of our field As such, research on competitive advantage occupies a central position in strategy literature (eg, Porter, 1980, 1985; Rumelt, 1984, 1987; Barney, 1986, 1991; Ghemawat, 1986, 1991; Peteraf, 1993; Teece, Pisano, & Shuen, 1997) However, the notion of competitive advantage itself has rarely been systematically addressed and, to date, remains poorly defined and operationalized Is competitive advantage what it takes to compete, a characterization observed during competition, or an outcome of competition? Is competitive advantage contingent on the competitive situation or is it a more general trait of the firm? Put differently, how is competitive advantage different from competence, strengths and, ultimately, performance? This article, addressing the above questions, makes three observations regarding competitive advantage First, competitive advantage does not equate to (superior) performance Second, competitive advantage is a relational construct Third, competitive advantage is context‐specific In presenting these three observations, this article proposes suggestions to refine and operationalize “competitive advantage” It then conceptually explores the relationship between competitive advantage and performance, which is argued to be much more complex than it is currently being treated in the literature Concluding remarks follow