Beating the competition

Editor's note: John Barrett is vice president of Priority Metrics Group, Spartanburg, S.C.

The objective of building and sustaining competitive advantage is central to the long-term success and even survival of a business. While definitions vary, most agree that competitive advantage is the unique value a firm is able to create and deliver to its customers.1 If the business is to survive, that value must exceed the total cost of production.2

The difficult part, of course, is not in defining what competitive advantage is, but in actually creating it. How does a business create competitive advantage? Recent articles have espoused a wide variety of programs for creating competitive advantage. Some examples of business activities that are supposed to create competitive advantage are: creative pricing, output flexibility, technology, expense controls, customer service, reengineering, 360° feedback, people, information systems, information services, employment testing, compensation, packaging, innovation, electronic data interchange (EDI), quality, value-added service, and on and on.

But many of these ideas are championed by consultants trying to sell their services, or by practitioners who have limited experience outside of their current profession or industry. In this article, we will describe research we have recently completed to discover what has actually worked in creating competitive advantage for companies selling their products through business-to-business channels. The research was completed using a database of customer survey results from work conducted by Priority Metrics Group over the past few years.

Priority Metrics Group, Spartanburg, S.C., is an industrial consulting and market research firm that provides customer surveys and a variety of related services to corporate clients. A large majority of our clients market their products and services to other businesses. We have compiled results of customer surveys that have used a seven-point scale into a proprietary database. (See sidebar)

The specific design of the questionnaire used on each survey project, including the wording of attributes, is unique to each study. However, for the purposes of this research project we grouped the attributes into 17 categories as shown in Table 1.

Table 1

Attribute Category Examples of Specific Survey Attributes
Product Quality:
Adherence (to Spec.) caliper, moisture level, brightness, hardness
Appearance aesthetic quality, print registration, yarn defects
Consistency color consistency, width consistency' consistent quality
Performance runnability, bonding, flatness, yield, stacking strength

Service Quality:
Accuracy shipment accuracy, accuracy of information, invoices
Complaint Resolution handling of complaints, innovative packaging solutions
Customer Service inside sales, customer service. emergency response
Delivery on-time delivery, condition of goods, order lead-times
Design & Development product innovation, creativity in development efforts
Equipment, Systems condition of plant & equipment, effective us of SPC
Packaging, Labeling packaging & labeling, product identification
Personal Service accessibility, communications, responsiveness, knowledge
Price, Credit perceived value
Product Line breadth & variety of product line
Sales Representation contact frequency, sales representation, understanding needs
Technical Services technical assistance, field service
Time, Speed prompt assistance, responsiveness to customer requests

Most of the 17 categories are service-related. This is due to the fact that the "performance" category includes a large number of attributes which contain industry- and application-specific terms. These attributes cannot be further grouped or categorized in a meaningful way.

Research findings

Each of the studies included in this research asked participants to provide a numeric rating of the study sponsor (our client) and their "best alternate supplier" (BAS). By "best alternate supplier" we mean the supplier they consider to be the best option to the study sponsor in supplying the same or a substitute product. When we compare ratings given to the sponsor and the BAS, we can determine the extent of competitive advantage - by attribute.

Figure 1 shows the results of this analysis across the 17 categories. In aggregate, firms in the database are rated higher than their competition. In other words, the business conducting a survey of its customers has a measurable competitive advantage. There are two explanations for this positive performance gap:

1 ) Current customers will tend to rate an active or primary vendor higher than other vendors due to specific and objective knowledge of the vendors' product or service quality, or even as justification of a purchase decision.

2) Firms conducting customer surveys are, by nature, the leading firms in a given industry, and will be rated relatively high in performance. And, conversely, firms that do not conduct customer surveys are the followers in an industry and will be rated relatively low.

In the first case, the advantage is among current customers. In the second, it is industry-wide. In either case, the survey is a tool by which the perceived advantage held by one firm over another can be measured. As shown in Figure 1, the average positive gap - or competitive advantage - is 0.06, on a seven-point scale.3

Perhaps the most startling finding from this analysis is the contrast between product and service attributes: all of the product attributes are below or at parity with competition. Since the respondents behind these numbers are current customers, the product quality must de facto be perceived to be at or above some minimum level of performance. However, the implication clearly is that customers are willing to endure product quality that is somewhat inferior to competitive products if the supplier provides stronger service.

It is also interesting to note that the category of price and terms is rated, on average, below the BAS. In fact, it is the largest competitive disadvantage. From discussion with clients regarding low ratings on attributes related to price, we often hear two explanations:

1) Many contacts at customer locations are directly or indirectly responsible for the purchase of the product. As such, it is in their best interest to communicate to the supplier that the price is too high.

In those studies where we have been able to break out results by functional responsibility, it frequently is the case that buyers tend to rate the study sponsor below competition on attributes dealing with price, terms, value, etc. Conversely, users of the product and support personnel (in quality or technical job functions, for example) will often rate the sponsor ahead of competition on the same attributes.

2) One could argue that strategically, a company should be rated slightly below competition on price-related attributes, as long as the overall performance, and particularly overall satisfaction, is rated ahead of competition. If the customer is pleased with the product and service provided and perceives the price to be better than competition, money is probably being left on the table.

Finally, three categories stand out as having an average rating versus competition that is much higher than average - customer service, personal service, and sales representation. Out of the 13 categories of service quality, these three could be seen as those in which individual employees play the most important and most visible role.

To this point in our discussion of the results, we have assumed that each of the 17 categories are of equal importance. To determine the importance of attributes, a number of techniques may be used. In each of the studies included in this research, importance was determined statistically, by computing the square of the correlation (r2) between the ratings given the sponsor on each attribute and those given for overall satisfaction. The scale for importance (r2) ranges from 0 to 1.

Thus, if an attribute would tend to be rated high when satisfaction is rated high, and low when satisfaction is rated low, the importance would be closer to one. If there is little or no pattern between ratings for an attribute and ratings of overall satisfaction, the importance is at or near zero.

The average importance of each attribute category is shown in Figure 2. The fact that price is the single most important category is consistent with the sample make-up in many of the studies being dominated by buyers.

In the area of product quality, consistency stands out as being much more important than appearance, adherence to specification, or even performance. In many production environments, while the equipment is able to accommodate a variety of raw material specifications, machines are set at specific parameters with sometimes narrow tolerances. When the specifications of incoming raw material vary outside the tolerance limits, equipment must be recalibrated, set-up times increase correspondingly and productivity drops.

On the service side, product line and packaging/labeling stand out as being relatively lower in importance, while time and speed, customer service, complaint resolution, and technical services are of noticeably greater importance.

The implicit message appears to be that a superior product or a broad selection of products are of less importance than a reliable product offered by a responsive supplier who is able to solve problems, answer questions, and provide needed technical support in a timely manner.

Figure 3 summarizes this information in a form that may be thought of as a performance "map." The horizontal axis is the performance versus the BAS (or "net score"). All points on the left side of the map are competitive disadvantages, all on the right are advantages. The vertical axis is the average category importance. Moving up in the chart identifies categories that contribute relatively more to competitive position.

We have identified the points on the left side of the map that are behind competition. We have also identified the points towards the upper right corner of the map (average rating well ahead of competition and relatively important). Beyond price, product consistency is the largest source of competitive disadvantage. Stated differently:

For a company providing a competitive product (meeting the "table stakes" established by a given market segment) inconsistency in product quality is a larger determinant of competitive position in the segment than is the actual performance of the product.

At one company - a large, specialized producer of folding cartons - profitability was largely determined by their ability to keep production lines going. A major obstacle to this objective was inconsistency in the caliper (thickness) between rolls of purchased paperboard. As the huge rolls of paperboard are fed through machinery, individual cartons are cut out, scored along corners to allow a clean bend, and printed. Variation in caliper causes poor scoring or cutting which means the finished cartons will not fold properly, or will have rough, uneven edges where cuts were not made cleanly. While this company had a long-standing policy of dual or multiple sources for all major purchased material, they had agreed to sole source paperboard (which represents well over 50 percent of their total production cost) if a supplier could provide a board with consistent caliper.

While product inconsistency appears to detract from competitive position, three categories - customer service, personal service and sales representation - appear to be the largest contributors to competitive advantage. Not only do these three categories have the highest rating versus competition, they are also among the most important.

In large part because of the heavy "people" component in these performance areas, competitive advantage once attained is not easily usurped. And, unlike product attributes, elements of service can rarely be patented. One author noted recently that, "few service features (other than brand identification) can be patented against imitation by competitors. Competitive advantage usually emphasizes performance on the supplementary service elements."4

Conclusions

First, we should emphasize that the results presented here are based on a limited sample. The particular survey database we used:

  • includes only manufacturing businesses;
  • is further limited to relatively mature businesses most of which are in two industries - packaging and textiles;
  • is comprised of surveys completed for businesses selling to other businesses;
  •  including only surveys using a seven-point scale.

With these limitation, there are at least four important conclusions which may be drawn.

  • A business conducting a customer survey will likely be rated higher than its competition. Whether due to the presence of an established customer-supplier relationship, or actual superior performance, a firm conducting a survey of its customers is likely to be rated ahead of its best competition as identified by the same customers.
  • Among product attributes, consistency is more important than performance. In fact, consistency is more important than appearance, adherence to specification and performance.

One characteristic of industrial market for manufactured goods is that some value is added to the purchased product prior to being sold to the end user. The value may be relatively simple (e.g., applying a brand name) or complex (e.g., using a purchased good as one of hundreds of components or ingredients in a final product). For a business-to-business marketer, service is usually aimed at the immediate customer, not the end user. So the value that transfers to the end user is largely or exclusively product-related.

A consistent product may be thought of as one that operates smoothly within the customer's value-adding processes, creating fewer interruptions and surprises. It may not be the best looking or even offer the highest levels of performance, but it allows the customer to concentrate their resources on satisfying the end-user instead of solving problems with their supplier.

  • Service performance makes a larger contribution to competitive advantage than product performance. From the data examined in this research, it seems clear that competitive advantage is more a function of service performance than product characteristics.

As noted above, most of the businesses included in this study are "mature" in the sense that they compete against established and readily identifiable competitors, they are experiencing modest growth rates, and growth above a modest rate comes at the expense of a competitor (or, stated another way, industry growth is also modest). However, in some industries or markets, product characteristics may be a source of competitive advantage.

In fact, we have seen just that. One client, a large packaging business with a new, unique industrial product, conducted a customer survey one year after initial commercialization, then completed a second survey about two years after the first. During that two-year period, several competitors entered the market with similar products. In the first survey, product attributes were more important than service attributes. However, the importance of product attributes dropped dramatically in the second study compared to the first, while service attributes showed a corresponding increase in importance. As the market matured, the relative importance of product quality declined.

  • The performance of key individuals appears to be the primary source of competitive advantage. The categories of business performance that contribute most to competitive advantage are those in which individuals play a prominent role.

While this has some "romantic" appeal, it is also a result of sweeping changes in the world economy: the shortening of product life cycles, the deregulation of many markets, and increased access to financial markets, to name a few. These changes are decreasing the ability of companies to create and maintain competitive advantage on product characteristics, and heightening the importance of employees and how they work together in the organization to determine competitive success. Further, "people" skills and capabilities are more difficult to duplicate and thus more likely to be a sustainable advantage.5
While the conclusions of the research presented here may not be surprising to some readers, they are nonetheless important in understanding the process of creating competitive advantage and the role of customer surveys in providing critical data necessary to achieve that understanding. We hope to extend this research to explore other factors influencing the creation of competitive advantage and, by looking at survey results over time, to understand how to sustain competitive advantage.

Notes

1 Treacy, Michael and Fred Wiersema, The Discipline of Market Leaders, Addison-Wesley, 1995.

2 Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, 1985.

3 This difference is significantly different from zero at the 98 percent confidence level.

4 "Competitive Advantage Lies in Supplementary, Not Core, Services," Christopher H. Lovelock, Marketing News, v. 23, January 30, 1989, p.15.

5 Pfeffer, Jeffrey, Competitive Advantage Through People: Unleashing the Power of the Work Force, Harvard Business School Press, 1994.

Sidebar: About the database

Priority Metrics Group is an industrial market research and consulting firm based in Spartanburg, S.C., that provides customer surveys and strategic planning assistance to a variety of corporate clients. Most of our clients market their products and services to other businesses.

In our customer survey work, we normally ask our clients' customers to rate our clients' performance and the performance of a competitor, on a number of key performance attributes. We have found that a seven-point scale is particularly good when rating a supplier against competition since it provides three rating points on each side of the scale midpoint (4). This provides more flexibility than, say, a five-point scale (with only two rating points on each side of the midpoint) to accurately convey the competitive situation on any given attribute.

We have compiled results of completed customer surveys into several databases. For this analysis we used a database of surveys completed for manufacturing businesses, all of which used a seven-point scale. This database includes over 3,000 individual responses from over 30 separate studies completed in a number of industries, although textiles and packaging are most heavily represented. All of the surveys have been completed within the last three years, and all are of current customers only - we have excluded prospective or former customers.

A typical study would include performance ratings on 20-30 attributes, ranging from specific indicators of product quality to account representation, customer service, delivery, etc. The design of the questionnaire and selection and wording of attributes are unique to each study. However, for purposes of this research we have grouped the attributes into 17 categories as shown in Table 1.

Within each category, for example "sales representation," there are between 10 and 65 individual attributes that were used in various studies. Sometimes an attribute is used in multiple studies with the same wording. For example, in the delivery category the attribute "accuracy of shipments" was used in seven different studies.

Some attributes, particularly those used to evaluate product quality, are unique. For example, in the category of performance, "wet tack" is an attribute used to describe the performance of certain adhesives and appears in the database only once. The performance category in particular contains many attributes that are unique to an industry or even to a single business. Although the performance category has the largest number of attributes of any category, it is difficult if not impossible to break this category into smaller groupings. This is the primary reason why there are more service-related attributes than product-related.