Competitive versus Comparative advantage.
What is the difference?
Comparative advantage is attributed to David Ricardo and is an economic law which states that a market actor (individual, firm, region or country) has the ability to produce goods and services at a lower opportunity cost than another actor or market participant. This is a relative term as even if a market participant has a higher opportunity cost than another participant, by concentrating its efforts in the area where it has the least opportunity cost disadvantage it can still compete and produce output that would benefit its wealth creation possibilities.
Competitive advantage on the other hand is the theory of concentrating one’s efforts on producing the highest quality goods and selling them at the highest possible price. It has a purely price maximising focus with the hope of resulting in wealth creation. Therefore, note the subtle difference in approach where comparative advantage tries to maximise wealth creation, competitive advantage has wealth creation as a by-product of focusing on maximising price.
One can argue that comparative advantage has value creation at its centre, whereas competitive advantage has a more short-term profit driver motive behind it. Competitive advantage is attributed to Michael Porter in the 1990’s whereas comparative advantage has its roots in early 19th Century economic philosophy.
Now that we have the definitions out of the why, we can focus on the question of competitive advantage in UK plc. We are specifically interested in this aspect as a short-term approach is potentially needed to drag us back to the growth path we abandoned a few decades ago. Yes, it is our contention that growth and wealth creation is linked to underlying fundamental economic output and not monetary economics and financial engineering driven.
For a clue we might look at some of the major ‘Industrial Complexes’ dominating economic activity in the UK at the moment.
The usual suspects tend to be the Military Industrial Complex, but there are others include the Financial, Prison, Sports or Healthcare Industrial Complexes.
The phrase ‘Industrial Complex’ refers to all the organizations involved in the construction, operation, and promotion of that specific industrial complex.
In the UK the NHS alone as part of the total Healthcare Industrial Complex current employees around 1.2 million people, excluding all the pharmaceutical and other medical devices and facilities construction services and accounts for over £108bn or around between 8 – 10% of annual GDP (Gross Domestic Product), up from 3.5% of GDP back in 1949, when the National Health Services started. Putting this in ‘constant prices’ terms the NHS in 2006/2007 accounted for 9.6 times more in expenditure as it did back in 1949. Up to 1999/2000 the NHS total healthcare cost had risen by 582% versus 1949, but between 1997/98 and 2007/08, real-terms expenditure rose by 82%.
This question is off course open to debate and interpretation and more importantly political expediency.
However, we believe that there are many advantages to be gained from revitalising the Healthcare Industrial Complex, by applying innovation and an outward looking market driven focus and mentality to this important economic activity driver.
In future series of this introductory article we will explore some of the Innovations and opportunities the Healthcare Industrial Complex offers UK plc in driving both growth and wealth creation in Britain.
- What Is Competitive Advantage? (futurelab.net)
- The Top Ten Management Primer on What Do We Mean by Strategy: All That You Need to Know About Strategy and The Quest for Competitive Advantage (bizcovering.com)
- Cable calls for return of industrial policy (leftfootforward.org)
- The Strategic Advantage of Culture (brettboston.com)
- Facilitators and Institutions Defined? (henrytapper.com)