Competitive advantage and performance: a value creation approach

Abstract

This theoretical paper discusses the concept of competitive advantage by identifying the challenges the field of business strategy faces in obtaining a precise and operational definition that links the concept to firm performance. Starting by the analysis and consolidation of literature in the area, we explicitly display the gaps and lack of differentiation between the constructs of competitive advantage and performance. This paper provides a definition based on the superior creation of value, with value defined as the difference between customers' willingness to pay and suppliers' opportunity cost. This definition suggests that the value created can be divided into three parts: the value appropriated by the firm, the customers' surplus, and the suppliers' surplus. Each part has implications for firm performance: while the appropriated value reveals the profit level, the value not appropriated can be translated into growth and operational performance. Regarding the operationalization of competitive advantage, we discuss aspects related to comparison between firms and the temporal observation of the event. As the main result of this discussion, we explore the causal logic between competitive advantage and performance and conclude that competitive advantage cannot be depicted by the observation of a unique variable, as it is imprecise and does not measure the extent of impacts strategic decisions have.

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