There are many examples of comparative advantage in the real world e. Comparative advantage and competitive advantage an economics perspective and a synthesisathens journal of business and economics, january 2015. The concept of a competitive advantage is more rooted in strategic management and refers to distinctive assets or competencies of a firm. A country will specialise in that line of production in which it has a greater relative or comparative advantage. A competitive advantage is an advantage gained over competitors by offering customers greater value, either through lower prices or by providing additional benefits and service that justify similar, or possibly higher, prices. Key success of batik smes marketing performance in indonesia nuryakin, universitas muhammadiyah yogyakarta abstract the aims of this research is to contribute to literature and the conceptual model of the influence of marketing capabilities on competitive advantage and marketing performance, the. Competitive advantage can be attributed to a variety of factors including cost structure, branding, and the quality of product offerings, distribution networks, intellectual property, and customer service. There are two basic types of competitive advantage. A competitive strategy articulates a firms goals, how it will compete, and its policies for achieving those goals. Competitive advantage real competitive advantage implies companies are able to satisfy customer needs more effectively than their competitors. Comparative advantage and competitive advantage free download as pdf file. For example, if youre a great plumber and a great babysitter, your comparative advantage is plumbing. David ricardos theory of comparative cost advantage.
Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors. However, it must be noted that comparative advantage is a form of competitive advantage as having a comparative advantage. Strategies for competitive advantage cole ehmke, m. Comparative advantage occurs when a company or country can produce something at a relatively cheaper rate than can the competition or other countries. A competencebased view of industrialdistrict competitiveness. Porter 1995 emphasizes productivity growth as the focus of national strategies. Comparative and competitive advantage are different terms that mainly refer to what informs the decision behind the choice of what to produce in a competitive market. The essential complement to the pathbreaking book competitive strategy, michael e. Ricardo considered what goods and services countries should produce. This fundamental concept in explaining why countries engage in international trade and why they gain from trade can only be understood in terms of relative. Comparative advantage is widely believed by economists to be a key determinant of international production and trade patterns.
Compared to the alternative of producing cloth, wine was still portugals most competitive product. On the one hand, the competitive advantage has been defined as too much returns, and on the other hand, it has. Ruffin1 abstract this paper argues that ricardos discovery of the law of comparative advantage probably occurred in october 1816. Comparative advantage and competitive advantage atiner. In this article we will discuss about the david ricardos theory of comparative cost advantage.
Comparative advantage is what you do best while also giving up the least. Comparative advantage is a term associated with 19th century english economist david ricardo. It describes how the choice of competitive scope, or the range of a firms activities, can play a powerful role in determining competitive advantage. To achieve and sustain competitive advantage, a firm or industry need to create creativity. There is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a. Competitive advantage is defined in terms of cost and differentiation while. Competitive advantage includes ownership of assets and their positions. This book describes how a firm can gain a cost advantage or how it can differentiate itself. The apparent paradox between the globalisation of competition and a strong national or even. Ohlin, institutional and regulatory determinants of comparative advantage. An analysis for india and china amita batra zeba khan august 2005 the views expressed in the icrier working paper series are those of the authors and do not necessarily. Ali mahdi1, mohammed abbas2, taher ilyas mazar3 1,2,3mba student, university of bahrain, kingdom of bahrain dr. Old idea, new evidence by arnaud costinot and dave donaldson the anecdote is famous. That is surely not true, but it definitely is true of comparative advantage.
Strategies for competitive advantage valueadded ag. It is achieved if and when real value is added for customers. An economics perspective and a synthesis, authorsatya dev gupta, year2014 satya dev gupta published 2014 economics there is a considerable amount of controversy about the models of comparative. Comparative advantage if a country or individual is relatively more e. It is therefore important to distinguish between strategies based on competitive advantage and those based on comparative advantage. Absolute advantage and comparative advantage are two concepts in economics and international trade. An economics perspective and a synthesis by satya dev gupta there is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations andor firms in international markets. Porters competitive advantage explores the underpinnings of competitive advantage in the individual firm. There is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations andor firms in international markets.
A comparative analysis of strategies and business models. You can hire an hour of babysitting services for less than you would make doing an hour of plumbing. Comparative advantage and competitive advantage scribd. The volume of trade is shown by the shaded triangles. Competitive advantage represents any benefits and advantages that a company may have over its competitors. There are two main types of competitive advantages that exist and they are the. They include defining your brand, knowing your competition, identifying your customer preferences, and understanding your personal preferences. It is the interaction between comparative and competitive advantage in the international strategy of firms that is examined in this article. Comparative advantage is when a company can produce goods at a lower opportunity cost than its competitors.
Pdf shared, competitive, and comparative advantages. Competitive advantage is a theory that seeks to address some of the criticisms of comparative advantage. In autarky competitive behavior will lead to the general equilibrium solutions be along each countrys ppf. Theories for competitive advantage research online. Competitive advantage in a business entails exactly the same injunction. Transition to the innovation stage professor michael e. Using the competitive dimensions to achieve competitive. W e all have a good intuitive understanding of the power of trade. At its most fundamental, though, competitive advantage means achieving a bigger gap than your competitors between the value your customers see in your product and the costs you incur in providing that product. Portugal no longer had an absolute advantage in making wine but it still had a comparative advantage. It draws on a systematic analysis of the major insurance groups and markets in europe, as well as on our. A similar realworld trade situation exists today between the united states and bangladesh.
Although this is a widely accepted approach to analysing trade data and comparative advantage, the definition and empirical adaptation of rca are subject to controversies and thus some alternative measures now exist. Many organizations have achieved high levels of quality performance only to lose it later on. Since we are interested in the competitiveness of turkey within. Introduction to comparative advantage it has been said that everythings relative. The evolution of competitive or comparative advantage. In this paper, the explanation of the model is set out in a sectoral context so as to include services only. The process of building a competitive advantage need to offer capabilities, resources material and human, market and customers requirements, and acknowledge about the degree of competition in the market. An easier way to understand the lesson of comparative advantage is to see that there are two ways to get fish, the direct way and the roundabout way.
Pdf comparative advantage and competitive advantage. A number of students, indeed academics sometimes confuse comparative advantage to competitive advantage. Comparative and competitive advantage wiley online library. What is a competitive advantage and types of competitive. Porters groundbreaking concept of the value chain disaggregates a company into activities. Comparative advantage always determines the direction of trade, but both competitive and absolute advantage affect resource allocation, trade patterns and. How global supply chains change our understanding of comparative advantage abstract as global supply chains proliferate and countries use more intermediate imports to produce exports, gross export statistics paint an increasingly misleading picture of comparative advantage. What is the difference between comparative and competitive. This could include things like having a low cost structure, low cost of labor, better access to raw materials, etc. Extension educator, department of agricultural and applied economics university of wyoming overview a competitive advantage is an advantage gained over competitors by offering customers greater value, either through lower prices or by providing additional benefits and service that. The roundabout way is to collect water and trade it for fish.
Theory, empirical measures and case studies 61 that the autarky equilibriums are determined by ppf and cic. Difference between comparative and competitive advantage. The principle of comparative advantage postulates that a nation will export the goods or services in which it has its greatest comparative advantage and import those in which it has the least comparative advantage ricardo, 1817. The theory explores how to create mutually beneficial gains through trade between countries through comparing opportunity costs. Comparative advantage, economic theory, first developed by 19thcentury british economist david ricardo, that attributed the cause and benefits of international trade to the differences in the relative opportunity costs costs in terms of other goods given up of producing the same commodities among countries. As described in the course, gaining a competitive advantage is a result of a combination of planning and actions based on your business market. Saudi arabia and oil, new zealand and butter, usa and soya beans, japan and cars e. A comparative or cost advantage is one that allows a company to produce or provide a. Conventional economic analysis has stressed the relevance of the concept of comparative advantage as a guide to optimal resource allocation in open economies. These firms that were once quality leaders can no longer compete on the quality of their products or services. Competitive advantage theory suggests that states and businesses should pursue policies that create highquality goods to sell at high prices in the market. Strategic management theories give the concept of competitive advantage and explain the performance and ability of the firm and describe how we can run the firm in the right direction. Competitive advantage introduces a whole new way of understanding what a firm does. Nevertheless, providing a precise definition of competitive advantage is a difficult task.
David ricardos discovery of comparative advantage roy j. Comparative advantageit can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing. Comparative advantage is a companys ability to produce something more efficiently than a rival, which leads to greater profit margins. A comparative analysis of strategies and business models of nike, inc. Absolute advantage refers to the uncontested superiority of a country or business to produce a. Pdf a comparative case study of sustaining quality as a. The ricardo effect served as a red herring to cause scholars to possibly misread ricardos letters in a crucial period. Opportunity cost is the cost that must be endured when selecting one option over the other.
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