The term “competitive advantage” gets bandied about quite a bit in business literature, meetings as well as among any number of business-minded people. Regrettably, everyone gives it their own respective meaning and no one agrees on any of them.
I often feel the hairs on the back of my neck rise up when someone uses this term because they don’t use it the same way I do, and I use it quite often. In particular with regards to the Return On Key Component method and my particular definition of the key component:
“A key component is a company owned and/or controlled asset that provides a competitive advantage in the markets in which the company operates.”
Initially, this sentence expressed exactly what I wanted to say: it is an asset owned/controlled by the company, it provides a competitive advantage, and that competitive advantage can only be measured on the basis of the market in which the company operates. It was “perfect”. Or, so I thought.
In defining the key component I was actually falling into the same trap as everyone else. The term “competitive advantage” in this context was clear in my mind but was it clear in anyone else’s? The answer is “no”.
There are essentially two uses for this term. The first is inward-looking. For example, a business may develop a process that they say gives them a competitive advantage. If this were the case, the shareholders should fire management right away. Any process that gives the business a competitive advantage will interest a large number of customers. By spinning-off this new key component into a separate company management is fulfilling its fiduciary responsibility to shareholders by maximizing their return on investment. Therefore, a competitive advantage must be market defined. Conversely, if the competitive advantage can only be defined with reference to the internal processes of a company then it is an efficiency.
Thus, the second definition of competitive advantage is market-oriented. It is this definition which is at the basis of the ROKC methodology. A competitive advantage means that the company owns an asset that does not help it do a better job but that helps the customer do a better job. In other words, the competitive advantage the key component provides satisfies the needs of the client, it helps the client obtain a certain outcome. The business only exists to make the benefits of its key component available to its customers. The company uses its internal processes and manages the risks in an effort to make benefits of its key component available to its clients in the form of a product or service.
If we return to the definition of the key component it may be better to state:
“A key component is a company owned and/or controlled asset that facilitates and improves the way clients in a given market achieve a specific outcome.”
Well, this statement is good as a first stab but I’m sure it can be improved. Any suggestions? Please send them to me or write them in the comments below.
In any case, the next time you use the term “competitive advantage”, please be sure that you are using it with respect to a market – not an internal process.