Two Faces of Competitive Advantage

Managers often have great difficulty figuring out where to start when analyzing the nature of their competitive advantage or lack thereof relative to competitors. Let’s say you’re trying to compare IBM vs. Accenture in IT services or Coke vs. Pepsi in cola-flavored sodas. Where would you start? How would you bring a structured approach to the analysis?

In analyzing your competitive advantage relative to one or more competitors, the key is remember that there are two faces of competitive advantage: “onstage” and “backstage.”

Onstage competitive advantage (or disadvantage) refers to the perceptions of target customers about how your goods and services compare with those of competitors along the criteria that are important to them in making their buying decisions. In the case of the enterprise customers targeted by both IBM and Accenture, these criteria might include the innovativeness and quality of IT solutions that each company offers, the responsiveness of each company to the customer’s unique needs, the prices associated with these services and so forth. In the case of Coke vs. Pepsi, customer buying criteria may include perceived taste, brand image, ubiquitous availability and price.

Onstage competitive analysis must always be the starting point in figuring out what competitive advantage you do or do not enjoy. Customers’ beliefs are far more important than what you believe. You may think that you are an innovative company or that you produce really high quality products. However, if the customer does not perceive that your products and services are better (or that your prices are lower for similar products and services), then you clearly do not enjoy any onstage competitive advantage.

Backstage competitive advantage (or disadvantage) refers to how your resources, capabilities and relationships compare with those of your competitors. Backstage advantages are what enable the company to create and sustain onstage advantages. Trying to create onstage advantages without the enabling backstage advantages is almost always a suicidal path. Take the case of Kmart vs. Walmart. Detailed case studies tell us that Kmart had a consistently higher cost structure than Walmart – a backstage disadvantage. Yet, during much of the 1980s and 1990s, Kmart tried to compete with Walmart on price. The outcome was entirely predictable. While, Walmart has gone from strength to strength, Kmart has withered and is today a shadow of its former self.

Backstage advantages refer to not just the advantages that the company is able to create within its four walls (e.g., the hardware and software that Apple is able to build into its iPhone vis-à-vis what Samsung can do) but also those advantages that the company can access via its relationships with suppliers and partners. In the case of the iPhone, it would refer to the suppliers of components as well as the thousands of app developers. Similarly, in the case of Samsung, its relationship with Google for the Android operating system would be an important part of backstage competitive analysis.

Building on the above ideas, here’s what you may want to think about: Take one of your product lines. For this product line, focus on the most important targeted customer segment. Identify the four most important buying criteria that are important to these customers. Along these criteria, how do these customers perceive your products, services and prices relative to those of your competitors? The answers will give you a sense for your company’s onstage competitive advantages and disadvantages. Now, think about the four most important enabling resources and capabilities for any supplier of these products and services. In terms of these enabling resources and capabilities, how does your company compare relative to your competitors? The answers will give you a sense for your company’s backstage competitive advantages and disadvantages.