SGG

I thought it would be useful to readers of these strategy blogs to understand what comparative advantage is, and that a firm(1) can generate competitive advantage from it.

Competitive Advantage: According to Porter(2) “competitive advantage is about how a firm actually puts the generic strategies into practice”. Porter further defines this into three areas, cost advantage, differentiation and segmenting and a focus on strategy. My previous posts on competitive advantage, give the reader the initial insights they need on how to achieve results in these three areas.

Comparative advantage: Unlike competitive advantage which is looking inside the firms SWOT, comparative advantage is about using resources and capabilities outside your firm. Peng(3) defines comparative advantage as the “relative, but not absolute, advantage in an economic activity that one [nation or] firm enjoys in comparison with others”. In today’s global economy and business connections it is unlikely that any one nation or firm has an absolute advantage in anything.

So what does this mean? Lets look at two global examples that can simplify comparative advantage both regionally and nationally. First lets look at a regional local firm based in Belgium, it is a logistics company that serves a €6.3B market across Europe. The firm works from a warehouse in Belgium and also has offices in London. They store goods and products associated with the supply and distribution of sports logistics to over 152 stadiums across the European continent. These stadiums need to be ready to host a game, at a given time in any of the countries that partake in the tournaments. There can be no delay as match dates are fixed, TV and advertising has been acquired, players dispatched, tickets sold to fans, and so on.

Yet the logistics company does not have a fleet of trucks to achieve this critical time sensitive deadline of delivery across Europe. Enter comparative advantage, which gives the logistics company competitive advantage. The logistics company serves the €6.3B industry through several trucking companies that have experience in sports management logistics distribution. These trucking companies also have cultural experience that allows them to understand the ethics and norms of the national roadblocks of achieving delivery at Eastern and Western European customs, which allows them to get into the countries and set up the venues for the games on time.

In this [simplified] example the competitive advantages can be clearly seen of both the logistics company and the trucking companies. The logistics company has competitive advantage in cost with no overhead in trucks or drivers, its operations are certainly different from most logistics companies, but may not be absolute, and they grow the business by focusing on strategic objectives to meet their stringent and critical customer demands.

The trucking companies have competitive advantage in the tacit management experience in sports logistics as well as the fleets of suitable trucks to manage the loads of delivering and setting up international sports tournaments. They have the drivers that operate the trucks, who are experienced at navigating round their respective European regions to ensure timed deliveries. The management and the drivers also have the experience of customs and excise in each of the many countries across both East and West Europe that are vastly different in their operating procedures. And they have the venue site managers to deliver, set up and dismantle the sports venues.

The comparative advantage is now evident. There is a need in each player, the need for distribution for the logistics warehouse, and a need to utilize the fleets of highly expensive trucks and drives of the trucking companies. The logistics warehouse company controls the business of international sports. The trucking companies have the means to distribute and return the products and services required. By complimenting each other with their resources and capabilities a €6.3B international industry is successful and still growing as each of the players focus on their strategy’s.

The second example is on a nation basis and I will be much more concise. This example exemplifies what happens around the globe in ever increasing amounts every day of the year, every year. If the UK is good at the production of high quality textiles, but not very good at making wine, and France is good at making wine, but may not be a good at making textiles? Then why would both the UK and France not trade with each other, for their [comparative] advantage?

Summary: You can derive a competitive advantage from comparative advantage. As I stated earlier there is probably no absolute advantage in a firms or nations resources and capabilities, so look at those firms or nations that can compliment the goals and objectives that each player needs to meet.

Footnotes:

1 The term ‘firm’ can be applied to any individual, groups, department or any institution.

References:

2 Porter, M (1985) ‘Competitive Advantage’ Free Press, New York

3 Peng, M. (2011) ‘Global Business’ South Western, Cenngage Learning 2nd Ed

 

‘Strategic Global Group (SGG) establishes your Competitive Advantage’.

Author: Phil Wilton has worked in MNC’s as well as developing start-ups and business expansion for SME’s. He received his MBA in International Business, Strategy, Marketing and Emerging Markets from the University of Liverpool. He also completed Business Strategy – Achieving Competitive Advantage at Cornel University.

Feel free to contact Phil (SGG) for a free intro consultation on how SGG can help your firm. philwilton@strategicglobalgroup.com 

All content © 2014. Permission to use with reference to author