Theory of Competitive Advantage


Competitive Advantage theory suggests that everyone is better off if decisions are made based on the competitive advantage at all levels – national, corporate, local, and individual. Simply stated, it is nothing more than asking for optimal utilization of resources and the globalization of manufacturing and services across the world as if we lived in a borderless (read: flat) world. Unfortunately, we don’t live in a borderless world since there are politicians and thick boundaries that define the territory of nations and politicians; hence the issues surrounding the loss of jobs due to offshoring and use of protectionist measures.

In a perfect world, letting someone do the work who has an advantage over you (due to natural or human resources, unique capabilities, competencies or cost) is not a zero sum game as it offers better pay off for everyone involved, thereby creating a win-win situation. However, this does assume that resources and capital can flow freely across the world. If market forces were allowed to operate freely, that would automatically be the case.

In the real world, that is not necessarily the case as there are several frictions which prevent not only the free flow of resources but also the ability to capitalize on gains resulting from the use of competitive advantage. Let me dwell on this a bit more.

The theory is based on a fundamental assumption that adequate employment opportunities are available to those who are engaging themselves to leverage competitive advantage of others to the degree that they can optimize their own potential – for instance, move up the value chain if they were constrained so far due to capacity instead of capability. Similarly, it assumes that resources will move to where they find their best employment opportunities irrespective of socio-cultural differences (water will find its level if there’s no man-made obstruction). That’s not necessarily the case in the real world, but it’s not altogether untrue either.

What we observe is that, at a macro level, those forces will be at play – people will redeploy themselves to the best possible opportunities available and relocate if necessary. However, at an individual level, there may be adjustment pains due to lack of societal support, capability gaps and personal financial situations. While that is true at the micro level, the trend does not negate the fact that it is beneficial to everyone at a macro level. Man-made obstacles can slow it down but not reverse the trend that offers a beneficial outcome to everyone involved. Hence, I conclude that offshoring services to the nations and locations which offer a competitive advantage is an irreversible trend. That said, you will be better off embracing it than standing in its way.