Is Competitive Advantage Intellectually Sustainable?

By Marvin Lieberman

The notion of a competitor gaining advantage over rivals has a deep, almost visceral appeal in
the human psyche. Such quest for “competitive advantage” may be genetically ingrained. It is
perhaps most prominent in the profusion of activity devoted to competitive sports, where
individuals or teams compete against each other, seeking to emerge as the winner.

Business competition is often viewed in a similar way. Firms strive to outperform their rivals.
Within the field of strategic management, the notion of competitive advantage is taught in
introductory strategy courses and is often invoked by researchers. Over the four decades since
Michael Porter introduced the concept in his pioneering books (1980, 1985), it has remained
central to the field.

The quest for sustainable competitive advantage is regarded by many as the holy grail of
business strategy. But what is competitive advantage, exactly? Is it, at the most general level,
about beating the other team? Beating the average? Winning the “game”? Earning large
profits? Or something else?

This ambiguity of competitive advantage has been troublesome for a long time (e.g., Rumelt,
2003). As Postrel (2018) recently put it:
One can never be sure what a finding about “competitive advantage” means unless one reads the “fine print”
of a particular work’s definition. … [W]hen people use the same term to mean many different things and/or
call the same thing by many different terms, it is hard either to have a conversation or to efficiently present
one’s findings. As Oxley, Rivkin, and Ryall (2010, p. 379) have suggested, one criterion for a piece of
theory in strategy to be high quality should be that “The theoretical claims [of the work] are unambiguous:
interpretation of its terms, premises and conclusions does not vary from scholar to scholar.” The strategy
field is clearly failing to meet that test with respect to “competitive advantage.” At least one scholar
(Lieberman, 2010) has called for abandonment of the term in research settings for precisely this reason.

I have indeed argued for such abandonment, but few have been receptive. After 40 years,
competitive advantage has become deeply imbued in the lexicon of strategic management. It
provides the language we commonly use to talk about performance comparisons and appears
prominently in countless research articles and textbooks. The term has, I admit, become
indispensable. To banish it from continued use is too drastic a goal. My aim in this essay is to
assert that competitive advantage is not a suitable topic for research or even for advanced
courses, although it can serve as a legitimate overarching theme in strategy.

I have no objection to the notion that firms should seek to assess and improve their
performance—this is central to strategic management. The use of a term such as superior
performance is perfectly fine.1 Unlike competitive advantage, superior performance

1
As Postrel (2018) has noted, “It remains unclear why ‘superior performance’ is not an adequate term for
describing superior performance, but perhaps its unadorned directness lacks the requisite touch of mystery.”

1
immediately introduces the question of measurement. A firm can be seen to have superior
performance only once performance has been defined. To say that Firm A > Firm B along a well-
specified performance dimension is clear and unequivocal, and it provides a basis for empirical
study and research. To identify and enhance the drivers of performance in a competitive
context is fundamental to strategic management.

Given that the field aims to be relevant to business practice, we often introduce concepts
before the underlying theory is ready. Arguably, this is a reasonable way to spur progress.
However, after 40 years of ambiguity about competitive advantage, enough is enough. If we
want to make headway toward clear and consistent ideas in strategic management, it is hard to
do so with competitive advantage continuing to be viewed as a central concept in the field.

I believe it is time to move beyond competitive advantage, an ambiguous notion that can be
defined in multiple ways. Some might claim that even though the strategic management field
has long been full of ambiguities (for example, it lacks uniform definitions of “business models”
and even what constitutes a strategy), such lack of precision has not impeded progress. While
this is true, few would maintain that ambiguity about core ideas is a strength. Within business
schools, strategic management often suffers by comparison with disciplines that are more
precise, such as finance. On the positive side, the strategy field has reached a stage where we
now deeply understand the sources of ambiguity underlying competitive advantage, as I point
out below. We have a multitude of concepts and measures that fall broadly under the
competitive advantage umbrella, as well as increasingly detailed awareness of how these
interrelate. We have, in fact, a much richer understanding of business performance—and how
it can be measured—than other fields within business schools. Sticking with competitive
advantage robs the strategic management field of potential power and influence. Forty years
after Michael Porter introduced the concept, it is time to move on. At this point, we can do
better.

Too Many Definitions

So, what exactly is the ambiguity problem with competitive advantage? It is that multiple,
alternative definitions have been proposed, with limited basis to rule them out. Authors have
suggested that competitive advantage is represented by

• the highest profit in the industry.

• above-average profit in the industry.
• sustained positive economic profit.
• the low-cost position (in an undifferentiated product industry).
• a gap between customer value and cost that is larger than the gap of competitors.

Beyond the obvious divergence, these definitions raise many nuanced questions of
measurement. One ambiguity relates to firm size (Levinthal and Wu, 2010; Wibbens and
Siggelkow, 2020). Does highest profit (or above-average profit) refer to profit rate or total
amount? For example, does a small retailer with a high profit rate have a competitive

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advantage over a much larger, successful competitor such as Walmart? Porter (1985) finessed
this problem by drawing a distinction between focused and broad-scope strategies, but today
this seems arbitrary. Another problem relates to the timing of measurement. New entrants
often grow rapidly and gain share from competitors, but such firms can take a decade or more
before they demonstrate sustained profitability, in part because accounting profitability is
depressed by firm growth. Do these firms lack competitive advantage in their early years?

Definitions of competitive advantage based on the concept of “value gaps” have become
increasingly popular (Stuart, 2016; Postrel, 2018), but they raise a fundamental question:
should advantage be defined at the level of a specific customer segment (where value gaps are
defined) or in a more holistic way? If the latter, how should one aggregate across segments?
Every viable firm in a market with differentiated products will enjoy a value-gap advantage with
at least one segment.

Such confusion about competitive advantage is reflected in prominent strategy textbooks as

well as the research literature. To cite just a few of the examples noted by Rumelt (2003)
almost two decades ago:

• Although Porter never actually defines the term in his 1985 book, Competitive
Advantage, he says that competitive advantage means having low costs, differentiation
advantage, or a successful focus strategy. He also argues that “competitive advantage
grows fundamentally out of value a firm is able to create for its buyers that exceeds the
firm’s cost of creating it.”
• In their textbook, Strategic Management, Saloner, Shepard and Podolny (2001) state
that “Most forms of competitive advantage mean either that a firm can produce some
service or product that its customers value more than those produced by competitors or
that it can produce its service or product at a lower cost than its competitors.” (They
also note, seemingly in reverse of Porter, that “In order to create and capture value the
firm must have a sustainable competitive advantage.”)
• Economics of Strategy, the textbook by Besanko, Dranove, and Shanley (2000: 389)
defines competitive advantage based on performance relative to the average within a
market: “When a firm earns a higher rate of economic profit than the average rate of
economic profit of other firms competing within the same market, the firm has a
competitive advantage in that market.”
• Barney’s textbook, Gaining and Sustaining Competitive Advantage (2002: 9) echoes
Barney’s seminal 1999 article: “A firm experiences competitive advantages when its
actions in an industry or market create economic value and when few competing firms
are engaging in such actions.”

The introduction of value-gap concepts in recent years has added more definitions, arguably
compounding these inconsistencies in the definition of competitive advantage. Thus, Rumelt’s
(2003) conclusion still applies: “The strategy area is in need of a clear definition of competitive
advantage, or it needs to stop employing a concept that cannot be defined.”

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Perhaps competitive advantage can be legitimately defined in multiple ways; alternative
definitions have strengths and weaknesses, and no consensus exists. Barney (2019) suggests
that competitive advantage can be viewed as similar to the economist’s notion of entry
barriers, where different groups of scholars maintain different definitions. In economics,
however, such alternative points of view are well recognized within the field, for example, the
“Chicago School” versus the “Harvard School” perspectives of the 1970s. Such distinct
intellectual schools have yet to emerge in strategic management.

Thus, with the notion of competitive advantage we have a problematic situation with multiple
definitions, alternative measures, and in general, a lack of precision. What might be the
solution, short of abandoning the term? I see two options.

The first option is for the field to broadly agree on a single definition (and a measurement
approach), perhaps by finding a logic showing the single best way to define competitive
advantage. Or, we could reach consensus on the definition via a vote of strategic management
scholars.

The second option is to regard competitive advantage as a useful phrase and broad conceptual
umbrella, but without a specific meaning. In effect, competitive advantage becomes a synonym
for superior performance. Underneath this broad umbrella, scholars and practitioners could
invoke a range of specific concepts and measures for comparing and assessing business
performance.

In my opinion, Option 1 is unachievable. As I demonstrate below, there is no single defensible

definition or measure of competitive advantage; thus, it seems highly unlikely that the strategy
field can ever reach a consensus.

That leaves Option 2, which may seem unattractive to some. But I argue that this option allows
us to organize the rich conceptual understanding and set of alternative measures accumulated
by the field under the banner of competitive advantage. Creating such a conceptual umbrella—
while fully recognizing that the term competitive advantage does not have, and most likely will
never have, a clear and specific meaning—would allow the field to move forward.

Below, I go beyond the prior discussions by Rumelt, Postrel, and others by pointing out specific
problems that make it virtually impossible to establish a single definition of competitive
advantage. I focus on conceptual issues but come back at the end to briefly consider
measurement.

A Deeper Look at the Problems

In strategic management today, the consensus is that the field should focus on economic value
creation, and notions of competitive advantage that are linked to value creation are often
perceived as legitimate. Barney (2019) builds upon the concept of economic value creation to
provide the following definition of competitive advantage:

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 A firm creates economic value when there is a positive difference between what its
customers are willing to pay for its products or services and its costs for delivering those
products or services. A firm has a competitive advantage when it generates more
economic value (higher differences between willingness to pay and costs) than firms
that sell similar products or services (e.g., are in the same industry). A firm has a
sustained competitive advantage when its competitive advantage is not competed away
through their strategies being imitated.

Barney thus defines competitive advantage in general terms based on the value gap between
willingness to pay and costs, a common approach in the literature today. While Barney’s
definition is appealing, it lacks precision, and I demonstrate below how it can lead to confusion
and inconsistency when applied in practice. But first, I lay out a series of conceptual examples
to illustrate in detail the problems that arise with virtually all definitions of competitive
advantage (other than narrow specifications that define it in a specific context, based on a
clearly identified measure of performance). I build my discussion using the fundamental idea of
economic value creation, starting with the case of homogeneous products, and moving on to
differentiated products.

Homogeneous Products Examples

Consider the following example, with five firms competing in a homogeneous product industry.
Each firm has capacity to produce one unit of output, but firms have differential costs. Firm 1
can produce at a cost of $2 per unit up to capacity. Firm 2 can produce at a unit cost of $4.
Similarly, Firms 3, 4, and 5 can produce at unit costs of $6, $8 and $10 up to capacity. Arranging
these firms in increasing order of cost gives the supply curve shown in figure 1.

5
 Each firm can produce one unit at the indicated unit cost.

F1 F2 F3 F4 F5
c=2 c=4 c=6 c=8 c=10

Industry Supply Curve

Price

10 -
Firm 4’s
Firm 3’s Profit
8- Firm 2’s
Firm 1’s Profit
Profit Industry Demand Curve
6 - Profit
4-
2-
0
0 1 2 3 4 5 Quantity
Figure 1.

Buyer willingness to pay defines the industry demand curve shown in the figure. Based on the
intersection of the supply and demand curves, the price of the product is $10, and total
industry output is five units. Firm 1 makes a profit of $8, Firm 2 makes $6, Firm 3 makes $4,
Firm 4 $2, and Firm 5 ekes out incremental or zero profit.

Comparing these profits among the firms, we note that

• F1 has the highest profit in the industry.

• F1 and F2 have above average profit in the industry.
• F1, F2, F3, and F4 have positive economic profit.
• F1 has the industry low-cost position.
• F1 has a gap between customer value and cost that is larger than the gap of its
competitors.

In this case, Firm 1 has an unambiguous competitive advantage in the sense that its advantage
is based on all the definitions noted above. Firm 1 “generates more economic value (higher
difference between willingness to pay and cost) than firms that sell similar products or
services,” so it satisfies Barney’s definition. Firms 2, 3, and 4 may also have competitive
advantage, depending on the definition that is applied.

Now, to modify the situation, let’s shrink the capacity of Firm 1 while expanding the capacity of
Firm 2, so that these two firms can still jointly produce two units of output (and each has the
same unit cost as before), but Firm 2 now becomes much larger than Firm 1. Let’s also raise the
unit cost of Firm 3, from $6 to $8. These transformations yield the following graph:

6
 Each firm can produce at the indicated unit cost.

F1 F2 F3 F4 F5
c=2 c=4 c=6 c=8 c=10

Industry Supply Curve

Price

10 -
Firm 3’s Firm 4’s
8- Profit Profit
Firm 2’s
6- Profit Industry Demand Curve

4-
2 - Firm 1’s Profit
0
0 1 2 3 4 5 Quantity

Figure 2.

Let’s consider whether the previous statements on competitive advantage still hold.

• F1 has the highest profit in the industry. (?)

• F1 and F2 have above average profit in the industry. (?)
• F1, F2, F3, and F4 have positive economic profit. (Yes)
• F1 has the industry low-cost position. (Yes)
• F1 has a gap between customer value and cost that is larger than the gap of its
competitors. (Yes)

Firm 1 continues to have the highest profit margin in the industry, but Firm 1 no longer earns
the largest total profit. Firms 1 and 2 still have above-average profit margins, but if Firm 1’s
capacity is sufficiently limited, its total profit could be the smallest in the industry. Firms 1
through 4 still earn positive economic profit; F1 still has the industry low-cost position; and F1
still has a gap between customer value and cost that is larger than the gap of its competitors.

So, does Firm 1 have a competitive advantage in this case? Based on most of the definitions,
the answer is yes. But if someone were to offer you the choice of one of the five firms as a gift,
most people would choose to own Firm 2. Firm 2’s costs are not quite as low as those of Firm 1,
but its large size combined with relatively low costs makes Firm 2’s position attractive. Among
the five firms, Firm 2 earns the largest total profit. Does that mean Firm 2 has the competitive

7
advantage in this industry? More specifically, does Firm 2 have competitive advantage relative
to Firm 1? Do firms 1 and 2 both have competitive advantage?

Michael Porter (1985) introduced the idea of generic “focus strategies” to deal with competitive
advantages held by smaller, focused firms. Arguably, this was Porter’s way to solve the problem
we are considering. While the focus-strategy idea may be valid in differentiated product
industries (focus on a small customer niche), it does not solve the problem of defining
competitive advantage in Figure 2. It is a stretch to claim that Firm 1 has advantage as a focused
competitor, whereas Firm 2 has competitive advantage with an industry-wide strategy. (For
example, if the industry illustrated in Figure 2 was ore-based mining, Firm 1 might own a small
but highly productive mine. Firm 1 would collect rents on its differential costs but without the
ability to leverage its advantage by expanding.)

Let’s return to the example of Figure 1, but now assume that the management of Firm 1 is able
to capture (in the form of elevated salary and bonus) most of Firm 1’s former cost differential.
As a result, Firm 1’s accounting profit now becomes the lowest of the first four firms; the bulk
of Firm 1’s efficiency differential now flows to the management team. (Alternatively, most of
Firm 1’s efficiency differential could be captured by unionized employees, who are able to raise
their wages above those paid by the other firms.) Does Firm 1 still have a competitive
advantage? Does it matter if Firm 1’s efficiency differential can be attributed to the managers’
firm-specific skills, as opposed to a situation where the managers (or the union) simply extract
surplus value from the firm’s owner(s)? Ongoing debate around such questions (Coff, 1999;
Campbell and Coff, 2012) makes it hard to draw a definitive determination about competitive
advantage.

This raises a general question of whether competitive advantage is about superior value
creation or value capture. Moreover, it raises interesting questions about allocation of the
surplus value that lies at the center of competitive advantage. Consider the two firms in the
following table, Firm A and Firm B, both of which produce identical units of output. Assume that
the two firms use identical equipment (e.g., computers) and employ identical workers, who we
classify simply as managers. Each manager is paid a salary of S, which is identical to the unit
price of the firms’ output. Firm A requires three managers, and Firm B requires four managers,
to produce five units of output. Firm A is thus more productive than Firm B and has twice as
much profit (2S versus S).

# Computers # Managers Units of Unit Price of Salary of

(capital) (labor) Output Output Managers
Firm A 1 3 5 S S
Firm B 1 4 5 S S

In this situation we can conclude without ambiguity that Firm A has a competitive advantage.
But since computers and managers are identical between the firms, what might give such an
advantage to Firm A? The advantage is likely to flow from firm-specific resources or capabilities
that are not market-traded (Barney, 1991). These could be technology (e.g., superior software

8
created by the firm’s founder, who is now its shareholder), or superior organization or methods
established by the founder. Managers at Firm A are unable to capture this value, because if
they attempt to bargain with the owner/founder they could be fired and replaced.

As an alternative, assume that the superior productivity of Firm A comes entirely from its
employment of higher-quality managers, who are paid higher salaries reflecting the value of
their superior skills in the labor market. If these managers are paid 33% more than managers at
Firm B, the profits of the two firms are identical, and neither has competitive advantage. The
firm’s productivity advantage comes entirely from market-based resources.

Now, assume that managers at Firm A had skills identical to those at Firm B prior to being hired
(and identical salaries should they leave the firm). However, after being hired, managers at Firm
A develop superior firm-specific skills (individually, or jointly as a team), which allows them to
bargain with shareholders for higher salaries. In this case Firm A’s superior productivity can be
attributed to the skills of the management team, which may allow the managers to capture part
of Firm A’s profit. If the managers capture half of the total profit, shareholder returns at the
two firms become identical, even though Firm A has superior value creation. Does Firm A have
a competitive advantage if its surplus value flows to managers? Alternatively, what happens to
competitive advantage if Firm A’s shareholders choose to give part of the firm’s output to
charity, thereby reducing profits to zero?

These are questions for which there is no consensus answer. They demonstrate the richness of
current thinking in strategy on issues relating to value creation and capture that can be lost in
simple definitions of advantage.

Differentiated Products Examples

In homogeneous product competition, such as the examples above, differences in buyer value
do not play out. Now let’s add heterogeneity in the products made by firms, and buyers’
willingness to pay for them. This makes assessment of economic value creation, and the
analysis of value gaps, more interesting and complex.

Let’s begin with two identical firms producing identical (i.e., homogeneous) products, as
depicted in Figure 3, and move toward a situation with differentiated products. For simplicity,
assume that both firms can produce at a unit cost of zero, and there are two (identical) buyers,
each able to consume one unit of the product, for which they are willing to pay at most $1.

9
Figure 3.

In this case with no product differentiation, competition drives the price virtually to zero, and
neither firm makes any profit. In general, it is hard to make money in a commodity product
industry unless there are capacity constraints, differential costs, or collusion among producers.
In this example, neither firm has a competitive advantage based on any definition.

Now let’s assume that Firm 2 improves its product to enhance the willingness to pay of both
buyers, who are now willing to pay $1.50 for Firm 2’s product but only $1.00 for Firm 1’s
product, as shown in Figure 4.

Figure 4.

In this case, Firm 2 is able to charge a premium equal to the difference in buyers’ willingness to
pay. With competition in the market, Firm 2 charges $0.50 for its product. (If it raised its price
further, Firm 1 would capture its customers.)

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By most of the definitions laid out earlier, Firm 2 enjoys a competitive advantage. Firm 2 has
the highest profit in the industry and enjoys a value-gap advantage in dealing with both buyers.
Indeed, Firm 2‘s advantage is sufficient to drive Firm 1 out of the market.

These two examples are uncontroversial; competitive advantage is straightforward and

comparatively well defined. But now let’s turn to a situation where both firms have improved
their products to appeal to different buyers, as shown in Figure 5. (Technically speaking, we
move from vertical product differentiation in Figure 4 to horizontal product differentiation in
Figure 5.)

Figure 5.

In this case, each firm captures a different buyer “segment,” and both firms can charge $1.00
for their products without losing their buyer to the other firm. (If either firm attempts to charge
more than $1.00, the other firm will undercut.) Thus, the equilibrium market price rises to
$1.00 from $0.50 in the previous case, and both firms earn a profit of $1.00. The firms can
capture two-thirds of the total economic value created. (The other third goes to the buyers.)

Compared with the situation depicted in Figure 4, industry prices and profits have doubled, and
Firm 2 is no worse off even though it has lost half the market to Firm 1. The result is a pretty
good outcome for both companies. But is there any competitive advantage in Figure 5? Both
firms have positive economic profit, so based on that criterion both firms have competitive
advantage. But neither firm has highest profit, above-average profit, or a gap between
customer value and cost that is larger than the gap of its competitors. So, by those criteria
neither firm has a competitive advantage.

Michael Porter would argue that Figure 5 illustrates the context of an “attractive industry.” In
such a view, firms’ superior performance can be attributed to industry structure, rather than
firm-specific advantage. By differentiating their products to appeal to different buyers, the two

11
firms have found a way to diminish the rivalry that drags down prices. Moreover, if the firms
can prevent new entry (say, both firms have patents on the technologies used to differentiate
their products), they may be able to enjoy sustained high profitability.

What would Barney argue about this case? Recall Barney’s definition,

A firm has a competitive advantage when it generates more economic value (higher
differences between willingness to pay and costs) than firms that sell similar products or
services (e.g., are in the same industry). A firm has a sustained competitive advantage
when its competitive advantage is not competed away through their strategies being
imitated.

By this definition, there is no competitive advantage in Figure 5, even though there is sustained
high profitability (assuming that the firms can prevent imitative entry).

One might object that by setting the firms and their underlying buyer segments equal in size, I
have artificially suppressed the existence of competitive advantage. So, let’s relax the equality
assumption; now assume that Buyer 2 corresponds to a customer segment ten times larger
than the Buyer 1 segment. For simplicity, let’s assume that price remains at $1.00.

Under these assumptions, Firm 2 enjoys total profits that are 10x larger than those of Firm 1.
Many would consider Firm 2 to have a competitive advantage based on this fact. But the firms
remain identical along many of the standard dimensions used to define competitive advantage.
Both have identical profit margins and both earn positive economic profits. The gap between
customer value and cost is identical for the two firms.

Of course, this example is stylized. Real firms that produce differentiated products typically sell
to multiple buyer segments and have fixed as well as variable costs. Let’s consider what
happens to our ability to identify competitive advantage when we add such elements.

Adding fixed costs to the example just described (where the Buyer 2 segment is 10x the size of
the Buyer 1 segment) removes some of the ambiguity about competitive advantage. Let’s
assume that Firms 1 and 2 must pay identical fixed costs to operate in each period. Because
Firm 2 can split these costs over many more units, it now enjoys lower unit cost and higher
margins (after accounting for the fixed costs) as compared with Firm 1. This leads to a clear
differential in both margins and total profits. In this case with fixed costs, Firm 2 gains clear
advantage. And if the fixed costs are high enough, Firm 1’s economic profits will disappear.

Now consider what happens when we add more buyer segments. I won’t do that formally, but
in principle it is clear that (similar to what is depicted in Figure 5) each new segment will be
captured by the firm that has the largest “value gap” with that segment. (See Stuart, 2016, for a
formal analysis.) In other words, firms capture segments when they have a value-gap advantage
with that segment.

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This principle holds with many firms in the market. We get a mapping between firms and
customer segments, with nonviable firms (lacking any value-gap advantage) knocked out. The
idea of value gaps has caught on in strategic management and is now commonly taught in
introductory courses, where the presentation generally assumes competition among single-
product firms in the absence of fixed costs, which simplifies the analysis.

But value-gap advantage is not competitive advantage. Real firms in differentiated product
markets tend to be multiproduct, multisegment firms, with fixed costs. Value-gap analysis
becomes complex when fixed costs are considered, particularly when those costs are nonlinear
and/or shared across products, which is normally the case in practice. Moreover, value gaps are
defined at the segment level. This raises the question: how can one aggregate across segments
to make an overall determination of a firm’s competitive advantage? Note that every viable
firm in a differentiated product market will have a value-gap advantage with at least one
segment of customers. So, every viable firm will demonstrate some kind of value-gap
advantage. In general, value-gap analysis provides an insightful tool that can be usefully applied
in strategic management to assess competitive rivalry and sources of profitability, but it does
not get us out of the conundrum of how to define competitive advantage.

Where Does This Leave Us?

The fundamental problem illustrated in the examples above is that we have multiple extant
definitions of competitive advantage, and it is not clear how we should select among them.
Should competitive advantage be defined by differences in profit rate, profit margin, value-gap
margin, total profits, or surplus going to shareholders or other stakeholders? While the notion
of value-gap advantage has gained support in recent years, it is a concept that applies at the
level of customer segments rather than firms. As I have shown, depending on the definition,
different firms may have competitive advantage, and any given firm may or may not have
advantage depending on the definition applied. In a given market, a single firm or multiple firms
may have competitive advantage, depending on the choice of definition.

Furthermore, competitive advantage cannot be assessed in the context of actual companies in

the absence of an empirical approach. The question of how to measure firm performance is an
important topic beyond the narrower question of defining competitive advantage. A large
literature exists on performance measurement (see, for example, Richard, et al., 2009). It is not
my intention in this essay to consider specific measures in any detail, but I will raise a few
issues.

First, empirical measures of business performance denote returns after accounting for historical
investments by the firm. However, the examples I have presented above are devoid of any
investment component. Such a simplified analytical approach is standard in theoretical work in
strategic management, given the complexity of incorporating a full-blown discounted cash flow
analysis. With zero fixed costs, all profits are economic profits, making comparisons relatively
straightforward. But real-world assessments of business performance need to consider returns

13
relative to investment costs. And as I have indicated for the value-gap theories, the introduction
of fixed costs can radically shift any advantage that is identified on the basis of variable costs.

Moreover, firms invest with the expectation of future returns, but intertemporal elements of
performance are seldom considered in the literature on competitive advantage. Most new
firms suffer years of accounting losses or low profitability, even if they successfully gain
substantial market share from established competitors. Among other factors, the financing
requirements of corporate growth act to depress accounting profitability as conventionally
measured. As a result, we often see a divergence between forward-looking, stock-market-
based measures of performance, and historical accounting measures, particularly for successful
young firms. (Consider Amazon and Tesla, for example.) Most of the extant definitions of
competitive advantage apply best to mature firms.

Although comparisons of firm performance in strategic management have typically been based
on simple, short-term ratios such as return on assets (Wibbens and Sigglekow, 2020), the field
has become sophisticated when it comes to performance measurement. We are now skilled in
applying a large toolkit of measures that have long been established. Various short-term
measures such as economic value added attempt to identify economic profits, thereby
supplementing ROA. Other measures such as Tobin’s Q are based on stock market
capitalization, incorporating expectations not only about profitability and its sustainability, but
also about future growth (a critical dynamic element that is left out of my stylized examples as
well as most discussions of competitive advantage).

Recently, there has been an outpouring of work in strategic management to develop innovative
measures of performance that relate to issues surrounding competitive advantage. For
example, Postrel (2018) introduces transaction surplus superiority (TSS), a measure that relates
closely to the value-gap theory. Wibbens and Sigglekow (2020) introduce a long-term investor
value appropriation (LIVA) measure that combines stock market capitalization with annual
investment and financial return in a way that reflects the firm’s objective of maximizing total
economic profit. TSS seems promising for assessing and comparing firms’ performance at the
level of transactions, whereas LIVA captures overall firm performance better than standard
ratios. Taking a broader perspective on performance measurement, my own work with
Balasubramanian and Garcia-Castro (2017, 2018) aims to assess firms’ total value creation and
how it is distributed to key stakeholders of the firm.

Thus, we have been making great strides with respect to our ability to evaluate and compare
firms’ performance. The field of strategic management has become much more sophisticated,
both theoretically and empirically, over the four decades since Porter introduced his ideas on
competitive advantage. We now have a deeper understanding of performance issues as
compared with scholars in finance, who remain locked into a narrow shareholder perspective. I
see a bright future in strategic management if we extend this trajectory, refining and
developing alternative measures of performance. By assessing and comparing multiple
performance dimensions, we gain a richer understanding of firms’ strengths and weaknesses.
Perhaps such measures can be combined for teaching purposes into a strategic performance

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scorecard, providing a toolkit for students and executives to assess competitive strength. In
contrast, efforts to refine competitive advantage lead to a dead end.

In my opinion, only by abandoning the belief that competitive advantage represents a core
concept can the strategic management field reach its potential. Again, I’m not suggesting that
we need to drop the term entirely; it can be hard to talk about strategy without invoking those
specific words. But we need to recognize that while competitive advantage serves as a useful
rhetorical phrase and conceptual umbrella for performance comparisons, it lacks precise
meaning.

We have broad consensus that strategic management should emphasize performance

comparison and assessment. While I prefer this descriptor, arguably it lacks visceral appeal.
Competitive advantage, by comparison, is a splendid phrase. Students and executives admire
this beguiling term, which helps to draw them in. Competitive advantage therefore plays a
beneficial role, despite the many ambiguities I have described. In short, competitive advantage
is useful but intellectually unsustainable. So, I am willing to make a deal: if we collectively
acknowledge that this “emperor” who has long reigned in the land of strategic management is
wearing no clothes, I see no harm in letting him keep a title and continue to reside. But after 40
years, it is time get him down off the throne.

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