A demand‐based perspective on sustainable competitive advantage

Abstract We develop an approach to analyzing the sustainability of competitive advantage that emphasizes demand‐side factors. We extend the added‐value approach to business strategy by introducing an explicit treatment of how firms create value for consumers. This allows us to characterize how consumer heterogeneity and marginal utility from performance improvements on the demand side interact with resource heterogeneity and improving technologies on the supply side. Using this approach, we address a variety of questions including whether technology substitutions will be permanent or transitory; the sequence in which new technologies attack different market segments; how rents from different types of resources change over time; whether decreasing marginal utility and imitation give rise to similar rent profiles; the extent of synergies within a firm's resource portfolio; the emergence of new generic strategies; and the conditions that support strategic diversity in a market. Our focus on consumer utility and value creation complements the traditional focus in the strategy literature on competition and value capture. Copyright © 2006 John Wiley & Sons, Ltd.