Competitive Advantage  135
lower prices and attract more sales. This so-called free-rider issue makes it 
difficult to maintain price levels over long periods, even for the Organiza-
tion of Petroleum Exporting Countries (OPEC), the world’s largest and most 
prominent cartel.
Cost and Capital Efficiency Advantages
Theoretically, cost and capital efficiency are two separate competitive advan-
tages. Cost efficiency is the ability to deliver products and services at a lower 
cost than the competition. Capital efficiency is about delivering more prod-
ucts per dollar of invested capital than competitors. In practice, both tend to 
share common drivers and are hard to separate. (Is a company’s outsourc-
ing of manufacturing to Asia a source of cost efficiency or capital efficiency?) 
Consequently, we treat the following four sources of competitive advantage as 
deriving from both the cost and capital efficiencies they achieve.
Innovative Business Method  A company’s business method is the combi-
nation of its production, logistics, and pattern of interaction with customers. 
Most production methods can be copied, but some are difficult to copy at 
some times. For example, early in its life, Dell developed a new way of mak-
ing and distributing personal computers. Dell sold directly to its customers, 
made its machines to order with almost no inventory (by assembling machines 
with standardized parts that could be purchased from different suppliers at 
different times at very low cost), and received payments from customers as 
soon as products shipped. In contrast, Hewlett-Packard and Compaq, Dell’s 
dominant competitors at that time, were producing in large batches and sell-
ing through retailers. Dell’s cost and capital efficiency enabled the company 
initially to generate a much higher ROIC than its competitors, who couldn’t 
switch quickly to a direct-sales model without angering their retailers and 
reengineering their production processes.
Notably, Dell’s success formula eroded over time as its sales shifted from 
desktop to notebook computers. Notebook computers are built to much tighter 
part specifications, often using parts from vendors made expressly for Dell. 
Since everything must fit together just right, Dell needed more support from 
its vendors and saw its leverage over them diminished.
Sweden’s IKEA provides another example of advantage gleaned from an 
innovative business method. IKEA transformed the home furniture business 
around the world, driving innovations in all steps of the business chain from 
design to manufacturing and distribution to sales. Its concept of self-assembly 
furniture reduces production and storage costs. Close collaboration in design 
and manufacturing minimizes product development costs and time. Manu-
facturing costs are kept low by using a limited range of raw materials. Its 
automated distribution centers are highly efficient because its product meets