Competitive advantage in small to medium-sized enterprises

Competitive advantage in small to medium-sized enterprises

AODHEEN O’DONNELL, AUDREY GILMORE, DAVID CARSON ANDDARRYL CUMMINSSchool of Marketing, Entrepreneurship and Strategy, University of Ulster at Jordanstown, CountyAntrim, Northern Ireland BT37 0QB

Although the concept of competitive advantage has become the subject of increasingresearch, the majority of research has focused on competitive advantage in largecompanies with less attention being paid to smaller � rms. Building upon previousresearch into competitive advantage, this paper reports the � ndings of a qualitative studythat investigated how competitive advantage is assessed, created and maintained in smallto medium-sized enterprises (SMEs). The paper shows that, while some of the � ndingsfrom previous research are applicable in an SME context, overall SME owner–managers’perceptions and evaluations of competitive advantage differ from the models ofcompetitive advantage prescribed for large companies.

KEYWORDS: Competitive advantage; small to medium-sized enterprises; owner–manager

INTRODUCTION

It has been stated that there is no common meaning for competitive advantage in practice orin the marketing strategy literature (Day and Wensley, 1988). However, competitive advantagehas been de� ned simply as the unique position which a � rm develops vis-à-vis its com-petitors (Hofer and Schendel, 1978). Further, it is the role of competitive strategy to guide themanipulation of organizational attributes in order to achieve a competitive position (Porac andThomas, 1990).

While there are considerable prescriptions for developing such competitive strategies, lessattention has been paid to how managers actually develop a competitive positioning strategy(De Chernatony et al., 1993). Furthermore, the vast majority of research into competitiveadvantage has drawn on the experiences of large companies.

Based upon previous literature describing the sources and positions of competitive advantage,this paper examines how competitive advantage is assessed, created and maintained in small tomedium-sized enterprises (SMEs).

THE CONCEPT OF COMPETITIVE ADVANTAGE

Complete understanding of a competitive advantage requires a complex, multidimensionalportrayal of all points of superiority or de� ciency between a business and its competitors (Day

JOURNAL OF STRATEGIC MARKETING 10 205–223 (2002)

Journal of Strategic Marketing ISSN 0965–254X print/ISSN 1446–4488 online © 2002 Taylor & Francis Ltdhttp://www.tandf.co.uk/journals

DOI: 10.1080/09652540210151388

and Nedungadi, 1994). The identi� cation of the companies that comprise a � rm’s competitivemarket is inherent in such a portrayal and investigation into the competitor identi� cationprocess has become more apparent in recent literature (Clark and Montgomery, 1999).Accordingly, a discussion of competitive advantage should begin with a discussion of howmanagers identify which � rms constitute their competitors.

Competitor identi� cation process

The creation of a competitive advantage through the development of a competitive strategyimplies the ability to compare the ‘focal � rm’s’ position with its competitors. Accordingly,Porter (1991) argued that, when formulating a competitive strategy, managers should be ableto identify the competitors constituting their industry. However, there are practical problemsin appreciating which � rms constitute a particular industry (De Chernatony et al., 1993).Furthermore, there is no reason to assume that managers use the same criteria as researcherswhen de� ning competitors (Porac and Thomas, 1990).

The competitive strategy literature suggests that managers need a signi� cant amount of timefor analysing each of their competitors (Porter, 1991). At a general level, Shearman et al.’s (1993)study illustrated that complex relationships exist between competitor � rms involving manybroadly based perspectives, such as business strategy, organizational behaviour, economics andmarketing. However, research has shown that, in practice, managers simplify their competitiveenvironment by grouping together competitors that exhibit similar behaviour (Porac andThomas, 1990). Furthermore, recent research involving an array of industries has shown thatmanagers name relatively few companies as competitors (Clark and Montgomery, 1999). Inline with this, competitor identi� cation has been shown as a process of categorization ‘. . . inwhich the manager of a particular � rm, which we call the focal � rm, is observing other � rms,which we call the target � rms, to determine which of the target � rms are competitors of thefocal � rm’ (Clark and Montgomery, 1999, p. 68).

In order to simplify their competitive environment to such an extent, � rms adopt a customer-focused or competitor-centred perspective (Day and Wensley, 1988; Day and Nedungadi, 1994).While a balance of the two characteristics is preferable, research has shown that most businesseswill tilt towards one or the other perspective (Day and Wensley, 1988) and that this tilt isgenerally towards supply-based or competitor attributes rather than demand-based or customerattributes (Clark and Montgomery, 1999).

Sources, positions and outcomes of competitive advantage

Day and Wensley (1988) explained that competitive advantage has been used interchangeablywith ‘distinctive competence’ to mean relative superiority in skills and resources. Competitiveadvantage is often assessed in relation to industry structures, products, markets, customers,strategies and communication (Shearman et al., 1993). It has also been used for describingpositions of superiority based upon the provision of superior customer value or the achieve-ment of lower relative costs and the resulting market share and pro� tability performance.However, none of these de� nitions provides a complete understanding of competitive advantage,but taken together they describe the position of advantage and how it was gained. Accordingly,they argue that the sources of competitive advantage should be distinguished from a positionalcompetitive advantage that in turn determines the performance outcomes of competitiveadvantage.

206 O’DONNELL ET AL.

The sources of competitive advantage for � rms are superior skills and resources (Dayand Wensley, 1988). These sources of advantage act as structural determinants or ‘drivers’ ofcost or differentiation advantages (Porter, 1985) and this aspect of competitive advantage hasbeen examined mainly in the strategy rather than the marketing literature (Day and Wensley,1988).

Various research studies have sought to uncover the various positional advantages enjoyed bysuccessful � rms, either in domestic market settings or in export marketing.

Table 1 summarizes the key classi� cations of positional advantage arising from previousresearch.

The � nal consideration is the performance outcomes of competitive advantage. These havebeen examined mainly in the marketing literature and performance outcomes are usuallymeasured in terms of market share and pro� ts (Day and Wensley, 1988).

Based upon the synthesis of previous research into competitive advantage as just described, aconceptual model has been developed, primarily from the aspects identi� ed by Day and Wensley(1988) and this is presented in Fig. 1.

Small � rms and competitive advantage

There has been comparatively little research that explores competitive advantage in small � rms ascompared to studies of competitive advantage in large companies. One of the main reasons isthat competitive advantage in the smaller � rm often arises accidentally as a result of particularoperating circumstances surrounding the enterprise (Jennings and Beaver, 1997). Further, it isthought that traditional competitive advantage models are not wholly applicable for smaller� rms because they assume the existence of scale economies and it is recognized that small� rms cannot compete with larger organizations in terms of economies of scale (Carson, 1985;Maclaran and McGowan, 1999).

The prescriptions for achieving superior performance through the identi� cation of core skillsand resources and their management into positions of superior advantage are dif� cult to followeven for large � rms (Day and Wensley, 1988). Given the commonly cited characteristics of small� rms, such as lack of resources (Dodgson, 1984; Carson, 1990; Hogarth-Scott et al., 1996),uncertain market conditions (Mintzberg, 1979; Wynarczyk et al., 1993) and a reactive approachto marketing (Amer and Bain, 1990; Carson and Cromie, 1990; Carson, 1993), small � rms areless likely to be able to and inclined to follow such prescriptive models.

TABLE 1. Classi� cation of positional competitive advantage

Research Positional advantages

Roth and Morrison (1992) Complex innovation, marketing differentiation, product/market scopeand conservative cost control

Chandler and Hanks (1994) Innovation, quality and cost leadershipDay and Nedungadi (1994) Low cost processing, superior service, dealer strength, lowest costs,

broad market scope, segment focus and innovative featuresKatsikeas (1994) Production capability, marketing capability, product superiority and

competitive pricingHooley et al. (1998) Low price, superior quality, rapid innovation, superior service,

differentiated bene� ts and tailored offering

COMPETITIVE ADVANTAGE IN ENTERPRISES 207

https://www.researchgate.net/publication/235362798_Competitive_Advantage?el=1_x_8&enrichId=rgreq-9b068337-149d-4e35-9e52-67906daa1970&enrichSource=Y292ZXJQYWdlOzIzMzM0NDQzMztBUzo5NzQyOTYxNzY0MzUyNUAxNDAwMjQwNDM5NTMx

https://www.researchgate.net/publication/235360993_Assessing_Advantage_A_Framework_for_Diagnosing_Competitive_Superiority?el=1_x_8&enrichId=rgreq-9b068337-149d-4e35-9e52-67906daa1970&enrichSource=Y292ZXJQYWdlOzIzMzM0NDQzMztBUzo5NzQyOTYxNzY0MzUyNUAxNDAwMjQwNDM5NTMx

FIGURE 1. A conceptual model of competitive advantage adapted from Day andWensley (1988).


The purpose of this research was to build upon the � ndings from previous research, asconceptualized in Fig. 1, while allowing additional � ndings to emerge in order to develop amodel of competitive advantage that is appropriate for SMEs.

METHODOLOGY

This study sought an understanding of the assessment, creation and maintenance of competitiveadvantage in an SME context. This understanding was achieved by investigating thedecision-making behaviour of SME owner–managers and, in particular, focusing upon the SMEowner–managers’ perceptions of how their businesses operate in comparison with theircompetitors.

A qualitative approach was chosen since the aim of qualitative research is to explain ratherthan predict phenomena (Leavy, 1994) and to understand phenomena rather than measurethem (Gordon and Langmaid, 1988). Furthermore, qualitative methods are considered to beparticularly suitable for gaining an understanding of decision making in SMEs (Carson et al.,1998).

Based on the speci� c aims of this research, in-depth interviewing of owner–managers wasdeemed the most appropriate means for collecting the relevant data. As owner–managers ofSMEs strongly in� uence the way in which their � rms are run, interviews with owner–managerscan be regarded as an effective way of understanding how SMEs operate (Curran and Blackburn,1994). Furthermore, in studies of competitive advantage interviewing has been shown to be aneffective way of probing managers’ perceptions about the competitive structure of their industry(De Chernatony et al., 1993).

THE STUDY AND ANALYSIS OF THE DATA

The study focused on owner–managers of SMEs that operate in a typical, regional economy inthe UK. Three criteria were employed in selecting the � rms. First, the � rms should fall underthe de� nition of ‘small to medium-sized’. For the purposes of this study, small to medium-sized� rms were considered to be those that employed not more than 200 and not less than tenemployees. Second, the � rms should be owner managed. The third criterion for � rm selectionwas that the � rm had been in operation for more than 5 years so that � rms experiencing thegrowth volatility normally associated with the start-up phase, particularly in the � rst 4 years oftrading, were eliminated (Storey and Johnson, 1986; Storey, 1989).

Sixty owner–managers of SMEs that ful� lled these criteria agreed to participate in theresearch over a period of 18 months and a pro� le of the � rms is provided below in Table 2 andthe percentage of � rms by industry type in Table 3.

The nature and size of these � rms precluded them from involvement in many of thetraditionally accepted criteria for evaluating competitive advantage, such as the effectiveness andef� ciency of resources used for production, marketing and so on. By de� nition these � ndingsre� ect the personal views and perceptions of the owner–managers involved.

The in-depth interviews were tape recorded with the informants’ prior consent. The owner–managers were told that the purpose of the research was to gain an understanding of how they‘do business’ rather than to gain an understanding of their perceptions of competitive advantage.This was a crucial factor in the study as it avoided a scenario whereby the informants wouldprovide answers that they felt the interviewer expected (Hills and Muzyka, 1993). The inter-views were semi-structured insofar as the interviewers had a checklist of areas to cover rather


than a list of predetermined questions. As such, the interviewers gave the informants the fullestopportunity for relaying stories and events that they deemed relevant.

The taped interviews were transcribed and this yielded a large volume of rich, qualitative data.The key themes from the conceptual model (Fig. 1) helped to organize the data into manageablecategories. Content analysis was used for uncovering particularly dominant and signi� cantthemes pertaining to the four key parts of the conceptual model.

(1) The competitor identi� cation process.(2) Perceptions of sources of advantage.(3) Perceptions of positional advantage.(4) Performance outcomes.

In particular, the researchers sought to establish which themes recurred in the data and therelative importance attached to each. The � ndings are presented in four parts in accordance withthe conceptual model and an overview of the results of the content analysis is presented inTables 4–7.

Each of these components is now discussed and conclusions are presented in subsequent� gures of description.

Competitor identi� cation process

In keeping with previous research, the SME owner–managers in this study, although aware thatthere may be a large number of companies in their industry offering similar goods and services,tended to only regard a relatively small number of these, typically less than six, as competitors. Inmany industries with low barriers to entry very small companies including one- and two-manbands are in operation, but the owner–managers in this study did not regard such players as truecompetitors. The owner–managers commented that previous employees of larger companieswho were now starting out in business on their own usually establish such enterprises. These

TABLE 2. Characteristics of the 60 � rms in the study

Characteristic Minimum Maximum Mean

Number of years established 8 49 16Number of employees 10 140 31Turnover (£ million) 0.15 10 1.9

TABLE 3. Percentage of� rms by industry type

Industry type %

Manufacturing 67Service 18Distribution 8Retail 5Property development 2


very small � rms tend to have low overheads, allowing them to offer very low prices. However,as a consequence they tend not to offer high levels of service or added value and theowner–managers tended to regard the quality of their own offering as perceptibly higher and,accordingly, did not perceive them as a viable competitive threat. At the other end of thespectrum are much larger companies that were not treated as competitors. This is because SMEstend to serve a speci� c segment of the market, which their larger counterparts often neglectbecause it is uneconomical for them to serve.

The � ndings indicate that identi� cation of competitors was based upon the owner–managers’perceptions of the competing � rms. This lends further support to the conceptual framework,indicating a supply-based rather than demand-based process of competitor identi� cation.

Examining � rst the ways in which a supply-based approach is used, the � ndings indicate thatthe principal way that owner–managers form their perceptions of competing or, indeed,non-competing � rms is through direct communication with personnel from these � rms. Themost common forum for information exchange between an SME owner–manager and otherpersonnel from their industry is a trade or professional association. It was generally agreedamongst the owner–managers, most of whom were members of an industry association, that thegreatest bene� t of membership was the opportunity for meeting and conversing with personnelfrom other � rms. In conversing with such individuals, an SME owner–manager forms a percep-tion of how strong a competitive threat other � rms pose. Trade association events also keptthe SME owner–managers informed of any changes to their competitive set. In addition to newcompetitors joining trade associations and competitors leaving the association, the owner–managers indicated that general conversation amongst members would provide informationregarding new entrants to the market and recent exits from the market. Overall, however, theowner–managers indicated that they did not perceive that the group of � rms that they identi� edas competitors changed signi� cantly or rapidly over the course of time.

A further key supply-based way of identifying � rms constituting a competitive threat is toactually see the � rm’s offering. In markets and industries where it is possible, the owner–manager or a member of his/her staff endeavour to see what other � rms are offering at � rsthand. Even in these cases, there was little evidence of rigorous or periodic research. Retailerswere the only category where the SME periodically gathered market intelligence and this tookthe form of a member of the SME staff visiting the premises of their competitors.

There was variation in the extent to which the owner–managers were proactive in employingthese supply-based measures of competitor identi� cation. Typically, they employed a mixture ofproactive and reactive approaches.

With regard to demand-based approaches to competitor identi� cation, some but not all of theSMEs were aware of how customers perceive other � rms’ offerings. However, demand-basedapproaches tended to be adopted in a passive or reactive manner in that the owner–managers didnot proactively seek their customers’ views of competing offerings. Rather, the owner–managersknew about such perceptions from potential and existing customers through informal exchanges,either directly to the owner–manager or through a member of staff. Several of the owner–managers demonstrated how it was quite common for customers who had been approached bycompeting � rms or had bought from them in the past to comment upon their products, serviceand prices, as demonstrated below.

If we go to somebody and we try to sell a cast iron inset, if our price is not right, they will tell us whoseprice is right and what the quality is like and what our quality is like. This information � oods into you allthe time. It is not a problem getting that type of information (� replace distributor).


A demand-based approach was used to some extent for perceiving alterations to a small � rm’scompetitive set. The SME owner–managers indicated that a change in the level of customerdemand (usually a drop) provided a valuable indication of changes, both in terms of new � rmsentering their competitive sphere and existing � rms exiting it. Again, such a demand-basedapproach was adopted in a passive or reactive manner. Such a signal tended to be veri� ed orrefuted through the owner–managers’ interactions with other competitors, usually through themedium of a trade association.

In addition to what can be referred to as supply-based and demand-based approaches, theowner–managers indicated that they relied on observations and the occurrence of ad hoc eventsfor alerting them to the need for reassessing their competitive threat.

Here, one of the owner–managers discussed how, through various incidents, he discovered that� rms he previously had not regarded as competitors because they did not operate in hisgeographic area had started to do so.

Well what was happening is that we lost some deals. And we also started to see their (the competitors)vans in the area. Also, people that we know, people who work for us, were getting phone calls fromX and Y asking them did they want to replace their windows. And as well as that we were inter-viewing for sales people and sales people were telling us what they were doing (PVC windowmanufacturer).

This illustrates information stemming from both competitor-based and customer-basedactivity. ‘. . . (P)eople who work for us . . . ’ are customers in this sense. However, overall, theSME owner–managers relied mainly on supply-based approaches that are adopted in a reactiveor proactive manner for identifying their competitive set. To a lesser degree the ownersemployed demand-based approaches that are generally passive or pursued reactively as opposedto proactively. Such approaches were supplemented by ad hoc or chance events that increasedtheir knowledge of their competitive arena. The key � ndings pertaining to the competitoridenti� cation process are summarized in Table 4.

Perceptions of sources of advantage

In gleaning what SMEs perceive as the sources of their competitive advantage, a plethora ofskills, resources, internal variables and external variables emerged. However, on close analysis ofthe data, it became apparent that, overall, the SME owner–managers focused upon two keysources of competitive advantage, namely their personal network (and the networks of their staff)and their competencies (and those of their staff).

The value of networks and networking to SMEs is captured in an extensive literature. In brief,the key bene� ts of networking for SME owner–managers are the provision of environmentalinformation (Weick, 1969, 1991; Birley, 1985; Gilmore and Carson, 1999), support and con� rm-

TABLE 4. Frequency of items in the competitor identi� cationprocess

Competitor identi� cation process itemsNumber who raised issue(out of 60)

Regard less than six � rms as competitors 53Rely mainly on supply-based attributes 51Rely mainly on demand-based attributes 9


ation in decision making (Johannisson et al., 1994; Carson et al., 1995), generating new contacts(Birley, 1985; Dodd, 1997) and gaining ideas for new product offerings (Carson et al., 1995;Hansen, 1995). There was much variation in the range and diversity of the networks of the SMEowner–managers in this study, but their personal networks and the networks of their staff wereregarded as a unique source of advantage for their � rms.

Similarly, there is a growing literature focusing upon the competencies that SME owner–managers possess inherently and develop upon to aid in their decision making. Previous researchhas identi� ed the core competencies for SME marketing-related decision making as knowledge,experience, communication and judgement and over time these combine to create experientialknowledge through the development of the individual’s experiential learning (Carson andGilmore, 2000).

The � ndings from this study show that the owner–managers recognized their own strengthsand weaknesses in relation to these competencies. Furthermore and notwithstanding thepossibility of an element of ‘attribution bias’, the owner–managers indicated that much ofthe success of their organizations was attributable to the competencies of their staff. While these� ndings lend support to all of these competencies, they indicate that the owner–managersperceived the most valuable competency as experiential learning. Experiential learning wasregarded as a key source of competitive advantage because it enabled all other competencies tobe developed to suit the speci� c circumstances of the SME.

Overall, the SMEs’ unique networks and competencies were regarded as the key source oftheir competitive advantage. This represents a slight but nonetheless important re� nement ofthe conceptual model, which indicates that sources of competitive advantage are classi� edas superior skills and superior resources. The key � ndings pertaining to the owner–managers’perceptions of the sources of competitive advantage are summarized in Table 5.

Perceptions of positions of advantage

The conceptual model demonstrates the wide array of positions of competitive advantage a � rmcan occupy according to previous research. The empirical data found that some of the positionaladvantages were applicable either partially or wholly to the SMEs in this study, while otherswere not. The advantages that were supported are now discussed.

Product qualityQuality is very much a subjective concept, but virtually all the owner–managers in the studyexplicitly claimed that they offered products and services of high quality. As mentioned earlier,

TABLE 5. Frequency of perceptions of sources of advantage

Perceptions of sources of advantageNumber who raised issue(out of 60)

Owner–Manager’s network 50Employees’ networks 36Owner–Manager’s competencies 60Owner–Manager’s experiential learning 55Employees’ competencies 53Employees’ experiential learning 42


the perceived quality of other � rms’ offerings is fundamental in the competitor identi� cationprocess and, accordingly, only those � rms that offer goods and services above some looselyde� ned level are regarded as competitors. As such, the owner–managers generally discussedquality in the context of how their quality compared to that of their competitors. However,quality alone was rarely regarded as a suf� cient position of competitive advantage for the SMEs.Rather, there was a shared sense among the owner–managers that their quality was a ‘given’ andthat other positions of competitive position were required in order to allow the SME achieve anoverall competitive advantage.

Customer service

As a positional advantage, customer service was generally discussed in the context of otherpositional advantages of high-quality and tailored offerings. In some cases, the service essentiallyrepresents the � rm’s offering while in others customer service represents a secondary or addedvalue contribution to the product offering.

Personal contact with the customer was considered the key component of customer service.In many cases, the owner–managers themselves felt that they ought to deal personally with theircustomers. One owner–manager explained as follows.

. . . if someone wants to discuss the job with myself, they can do that with con� dence knowingthat I am not being a bit high handed and dismissive of their project. Really from the smallestto the biggest, I would almost always be able to take a telephone call and talk about it . . .(civil engineer).

Related to this was the shared feeling that the owner–managers should endeavour to maketheir customers feel important. As one owner–manager remarked ‘Any time that somebodyspends money, it is a big deal for them. So you have got to really look after them . . . ’ (buildingsurveyor).

By whatever means, the owner–managers made strenuous efforts to ensure that customerswere afforded individual attention and were made to feel valued by the SME.

Innovation through differentiation

Innovation as a positional advantage found mixed support in this study. The most commonconceptualization of innovation included and, indeed, focused upon new product develop-ment. However, in a small � rm context, innovation should incorporate ‘developingnew marketing methods where the product or service market remains the same, but thekey innovation comes from the marketing of the product to the customer’ (Stokes, 1995,p. 28). Hence, it seems appropriate to combine the positional advantages of marketingdifferentiation and differentiated bene� ts with innovation in an SME context. Whileapproximately half the � rms in this study described themselves as innovative, when innovationtakes account of all aspects of marketing activity, virtually all the � rms could be described asinnovative.

The data indicated that most of the SMEs in the study were very reluctant to compete onprice alone or enter into price wars with competitors and that innovation through differen-tiation was regarded as a way of avoiding price competition. One of the SME owner–managersin the study illustrated this point by describing how his � rm had been successful in a marketwhere the rate of exchange placed his � rm at a marked disadvantage in relation to localsuppliers.


What we are doing there is a bit unique. We are doing a complete service for people which ourcompetitors are not. And hopefully they will not catch on. And because of that people cannot compareour prices directly. Therefore the (British) pound and the (Irish) punt is not such a big issue (timberframe house manufacturer).

A further example of differentiated marketing is the development of a ‘one-stop shop’approach for customers by providing a package or portfolio of goods and services. Accordingly,several � rms had extended their range of product and service offerings as demonstrated by oneof the owner–managers below.

You more or less stock what the customer requires, the list they give you to price . . . there are very fewof our competitors who provide a complete package which is what we are attempting to do (timberdistributor).

Providing a complete package may require the � rm to join forces with external parties as thefollowing company did.

You � nd nowadays people like ourselves cannot cherry pick a job . . . You are either in or you are not in,it is as simple as that . . . We have now created an alliance with another company and their sole objectiveis just to do the design work . . . (precision engineer).

Those � rms for which differentiation provided a position of advantage had achieved this byproviding a unique set of bene� ts that their customers truly valued.

Competitive pricingAs noted earlier, a dominant characteristic throughout the � rms was recognition of the dangerof making price their only competitive weapon. One of the owner–managers commented asfollows.

You can try to make them cheaper than anybody else and sell them cheaper than anybody else. But thenyou run into the problem that you have to � nd somebody to take 1000 windows from you and, nomatter how good you are, somebody else will always do it cheaper (window frame manufacturer).

Hence, while a few of the companies claimed to be cost leaders (see below), none of theSMEs claimed to offer the lowest prices in their industry. However, all the � rms claimed to offerwhat they believed customers regarded as a ‘fair’ price. In fact, the owner–managers insisted thattheir prices represented good value for money.

Cost control

There was considerable evidence of cost control within the � rms that varied from conservativecost control to the owner–managers exhibiting a preoccupation with cutting costs. However,only a few � rms claimed to be cost leaders in their industry. More commonly, the � rms soughtto monitor costs continuously and to make additional expenditures only when absolutelynecessary. For � rms with competitors that were not as cost conscious, cost control allowed themto occupy a position of relative advantage.

Tailored offeringThe provision of a tailored or customized offering was commonly employed in order to achievea position of competitive advantage. This was viewed as particularly valuable when competingwith large � rms. However, the owner–managers admitted that there were limits to the degree oftailoring or customization they could provide. The following comment demonstrates this.


As long as it was practical we would endeavour to meet any customer’s needs, but obviously there is alimit to that. You know if every small customer wanted something different, it would not be practicalbecause of your cost basis . . . the more changes you have in the feed mill, the higher your costs basis goesup. So you really want to have as few lines as possible. But within those sorts of restrictions, you want tosatisfy your customers if at all possible (animal feed miller).

Segment focus

Prior research into small � rm marketing has found that small � rms tend to be more success-ful when they adopt concentrated marketing segmentation or niche strategies (Katz, 1970;Kinsey, 1987; Teach, 1990). The SMEs in this study operated in clearly de� ned market niches,which undoubtedly contributed to their acknowledgement of a relatively small number ofcompetitors. The owner–managers felt that, by focusing on narrow segments, they couldbecome more specialized in producing their products/services and enjoy the ef� ciencies and‘learning curve’ effects that this generates. Furthermore, the owner–managers were affordedthe opportunity for choosing a segment of the market that, within their recognized capabil-ities, provided the greatest opportunities for pro� table business. One owner–managerexplained as follows.

We are in a particular segment of the market . . . We are not particularly interested in the very top end ofthe market and we do not want to know the bottom end. They are too different and you cannot mixthem. You know it is very hard to mix them, the top to bottom or middle to top. I feel anyway. So it isone particular segment of the market we are after (home furnishing retailer).

However, while the SMEs focused upon their niche markets, there was evidence of the � rms’markets having changed over time. Many of the SMEs had moved into new markets either as areaction to decline in their original market segment and/or through the identi� cation ofopportunities in new markets. However, movement to new market segments is usually offset by amove out of an existing market segment, meaning that the small � rm still retains a fairly narrowmarket focus. Such moves rarely represent a marked diversion from their original marketpositioning.

Positional advantages that are not obtained by small to medium-sized enterprises

While many of the positions of advantage identi� ed in previous research are applicable to SMEs,the data indicated that several are not entirely applicable. The positions of competitive advantageshown in the conceptual framework that this study does not corroborate are cost leadership,production capability, marketing capability, broad market scope and dealer strength. Thesepositional advantages were not obtained due mainly to the SMEs’ size and attendant resourcelimitations.

With the exception of a few of the � rms, cost leadership was not regarded as a feasibleobjective for the � rms in this study. Similarly, none of the � rms perceived their production ormarketing capabilities as creating positional advantage. The SMEs focused on niche marketswhile demonstrating a willingness to move into closely related markets as circumstanceschanged. Accordingly, smaller � rms rarely adopted the competitive position of broad marketscope. The vast majority of the SMEs in this study adopted direct marketing channels anddid not employ the services of dealers or other middlemen and, hence, dealer strength was notgenerally perceived as a positional advantage for SMEs.

The key � ndings pertaining to the positions of competitive advantage perceived by the SMEowner–managers are summarized in Table 6.


Performance outcomes

The conceptual model indicates that the outcomes of competitive advantage are measured interms of market share and pro� ts. However, the literature reports that small � rms do not gener-ally use market share as an indicator of performance since they tend to serve niche markets andhave a small customer base (Carson et al., 1995). Indeed, the SMEs in this study rarely referred totheir share of the market in discussing their � rms’ objectives or their outcomes. Instead theymade reference to the ‘niche’ markets in which they operated and their focus on identifying themost appropriate customers for their product/service offerings. On the other hand, in keepingwith the conceptual model, there was considerable evidence that pro� tability was a key per-formance indicator. That is not to say that the small � rms aimed to maximize pro� ts in thetraditional economic sense. Rather, within the owner–managers’ personal ambitions for thecompany, pro� t, more than any other factor, was used as an indicator of organizational well-being.

In addition to pro� t levels, other key performance outcomes emerged. First, the level of cus-tomer loyalty was regarded as a signi� cant performance outcome since in virtually all of the� rms repeat business was accorded more importance than acquiring new customers.

Organizational growth was also commonly but not always regarded as a performance out-come. The � ndings revealed a mixed attitude to organizational growth amongst the owner–managers. Very few of the � rms indicated that they wished for what could be interpreted asrapid growth. A small minority of the owner–managers appeared to be happy to remain at theirpresent size. Such � rms tended to operate in highly competitive markets, where they were strug-gling to maintain their existing pro� t level. By far the most popular objective amongst the � rmswas for slow, steady growth. Furthermore, most of the � rms had identi� ed a size beyond whichthey did not want to grow. Hence, another competitive advantage performance outcome is sloworganizational growth towards this loosely identi� ed optimum size.

The SMEs in this study strongly supported the � ndings of prior research that found thatpositive word-of-mouth recommendations are the most important means of acquiring newcustomers (Watkins and Blackburn, 1986; Hogarth-Scott et al., 1996; Carson et al., 1998; Stokes,2000). While various factors contribute to the generation of positive word-of-mouth communi-cation, the SME owner–managers in this study claimed that providing a high-quality product

TABLE 6. Frequency of perceptions of positions of advantage

Number who raised issueNumber who considered this asa key positional advantage

Perception of position of advantage (out of 60) (out of 60)

Product quality 56 50Customer service 55 42

Personal contact 54 35Ensure customer feels valued 50 23

Innovation through differentiation 52 39Competitive pricing 51 47Cost control 48 27Tailored offering 45 23Segment focus 43 37


offering coupled with individual customer service is the most powerful way of encouragingtheir customers to recommend the � rm to others. Hence, a key performance outcome of SMEcompetitive advantage is the quantity and quality of word-of-mouth recommendations.

The last key performance outcome of competitive advantage relates to the overlap betweenthe owner–managers’ personal and business lives. Common to all the owner–managers was thefeeling that, although ideally there would be a de� nite demarcation between their business andpersonal lives, business did inevitably steal into their personal lives. Hence, a measure of theperformance of a � rm is the acceptability of this overlap between the owner–manager’s businessand personal lives.

The key � ndings pertaining to the performance outcomes identi� ed by the SMEowner–managers are summarized in Table 7.

All of these � ndings, alongside the key aspects relating to large companies from Fig. 1, areplaced in Fig. 2. This compares competitive advantage factors between large companies andsmall � rms. Based upon these empirical insights, the conceptual model (Fig. 1) can be amendedto produce a descriptive model (Fig. 3) that re� ects the special characteristics of competitiveadvantage in SMEs.

Comparing Fig. 1 with Fig. 3, it can be seen that there are differences in all aspects ofthe competitive advantage process: the competitor identi� cation process, perceptions of sourcesof advantage, perceptions of positional advantage and performance outcomes. Many of thedifferences between Figs 1 and 3 illustrate the subtle but important differences in the in� uencesupon competitive advantage and how the SME owner–managers perceived competitiveadvantage

There is a clear indication that supply-based attributes are obtained through direct interaction,which may be either reactive or proactive. This is in contrast to demand-based attributes, whichare largely passive in nature and process. The competitive environment is perceived to berelatively stable. While Fig. 1 indicates that sources of competitive advantage should be regardedas superior skills and resources, the data indicated that the SMEs emphasized their ownnetworks, the networks of their staff, their own competencies and the competencies of their staffas the key sources of competitive advantage. This shows how personal aspects of SMEs areaccorded higher priority than in large � rms. The � ndings indicate mixed support for the variouspositional advantages presented in the conceptual model. It appeared that several of thesepositions were not applicable because they implied large � rm marketing. However, the SMEowner–managers did indicate that they rely upon product quality, customer service, innovationthrough differentiation, competitor pricing, cost control, tailored offerings and segment focus inachieving positional advantage. Finally, the SME owner–managers indicated that, when assessing

TABLE 7. Frequency of performance outcomes

Number who raised issuePerformance outcome (out of 60)

Pro� t levels 60Customer loyalty 47Organizational growth 45Word-of-mouth recommendations 41Acceptable overlap between business and personal lives 37


performance outcomes, they did rely upon pro� t levels, which is in line with the conceptualmodel but, in contrast to the conceptual model, they did not use market share as a performanceindicator. Instead they focused on serving an identi� ed ‘niche’ market well while keeping a closewatch on pro� ts and maintaining customers. In addition to pro� ts, the owner–managers judgedperformance on customer loyalty, organizational growth, word-of-mouth recommendations andan acceptable overlap between their business and personal lives.

FIGURE 2. Comparison of competitive advantage between large companies andsmall � rms.


FIGURE 3. A descriptive model of competitive advantage in small and medium-sizedenterprises.

CONCLUSION

This study sought to gain an understanding of how competitive advantage is assessed, createdand maintained in SMEs. While competitive advantage has been debated extensively inthe literature, most theories and models have been derived from the experiences of large � rms.


As such, they are not wholly appropriate for smaller � rms and an understanding of the decisionsthat owner–managers of SMEs make in relation to competitive advantage was sought.

In order to achieve this, previous research into competitive advantage was reviewed andsynthesized into a conceptual model. The conceptual model indicated four key componentspertaining to competitive advantage: the competitor identi� cation process, sources of advantage,positions of advantage and performance outcomes. The empirical � ndings from a qualitativestudy of 60 owner–managers were analysed in line with these key themes.

The � ndings demonstrate that the conceptual model was not entirely appropriate in an SMEcontext. Speci� cally the � ndings indicate that SME owner–managers tend to regard only a few� rms as true competitors and this identi� cation process is based mainly upon their ownperceptions of these � rms (supply-based approach) as opposed to customer perceptions of these� rms (demand-based approach). Thus, the in� uence and driving force of owner–managers inSMEs is apparent in this ‘world view’.

The � ndings regarding competitor identi� cation largely support the conceptual framework.However, the � ndings regarding the owner–managers’ perceptions of the sources, positions andoutcomes of competitive advantage represent a divergence from the conceptual framework. Theempirical insights were incorporated into the original model in order to provide a descriptivemodel (Fig. 3). The � ndings illustrate the overall impact of owner–managers on companyperformance and the perceived importance of factors contributing to overall performancewere evident in the � ndings. In addition, the perceived performance outcomes re� ected the factthat SMEs traditionally feel they can deliver better than large companies given their closeness tothe marketplace. Whether these outcomes actually lead to ‘better’ performance is not an issuehere. What is important is that the performance outcomes re� ect the way SMEs do business inrelation to competitive advantage.

Due to the context-sensitive way in which the data were gathered and analysed, this descrip-tive model provides a deeper understanding of competitive advantage as perceived by SMEowner–managers than that discerned from previous research.

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Competitive advantage in small to medium-sized enterprises