The Essence and Measurement of a Competitive Advantage

Purpose: Despite its fundamental importance for management science, sustainable competitive advantage must be better defined and conceptualized. Apart from the terminological confusion, the lack of an agreed-upon definition of this term leads to several theoretical and practical problems. The article aims to clarify the concept of competitive advantage in its semantic content and operationalization. Design/Methodology/Approach: This study employs a qualitative research methodology grounded in a comprehensive literature review, logical inference, and insights derived from the researcher’s previous studies. The approach aims to synthesize existing knowledge with personal observations, highlighting patterns and developing a refined theoretical framework. Findings: This article identifies several drawbacks relating to the current understanding of competitive advantage that creates a need for an unambiguous definition of this concept that could be utilized in both empirical research and management practice. The article proposes a univocal definition of the term sustainable competitive advantage and its measurement. The Author proposes a distinction between the three concepts: advantage, competitive advantage, and sustainable competitive advantage. Practical/Implications: The proposal's contribution to developing the theory and practice of strategic management embraces two aspects. First, in the presented concept, the reference point of the company's activities to create a sustainable competitive advantage is value creation for customers and value capture for the company, with the secondary role of outperforming competitors. Secondly, a univocal measure of sustainable competitive advantage is submitted – the enterprise value to invested capital ratio (EV/IC). Adopting an EV/IC ratio based on economic profits as a measure of sustainable competitive advantage gives managers a helpful tool for making decisions about the efficient allocation of resources. When deciding whether to enter a new market, offer new products, restructure assets, engage in the acquisition, or invest in research and development or brand building, managers should analyze the impact of these decisions on the competitive advantage demonstrated by future economic profits. For researchers, the EV/IC ratio and economic profits can serve as endogenous variables in research on the determinants of competitive advantage. Originality/Value: To the best of our knowledge, the proposed concept is the first attempt in the subject literature that links the definition of sustainable competitive advantage with, simultaneously, knowledge building, value creation for customers, and value maximization as the primary objective of a company. The Author explains in detail the differences between concepts of advantage and proposes measures to analyze their types.