Small Business Economics: Comparative Advantage

Business Coaching and Small Business Economics

By: Santi Chacon
Business Coach

Comparative Advantage is a situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor.

As a CEO starting a business or attempting to establish your small business in your dream industry, what are the barriers of entry? What do you have to invest in terms of time, energy, financial and human capital to play the business game in your dream industry? or what must you continue to invest to earn the right to sell your products or services profitably? Can you afford to pay the price the market is asking over time?

Barriers to Entry

For example: there are industries that cost $40 (network marketing) to enter and industries that would cost multiple millions (McDonalds' Franchise) and still others that have tremendous barriers to entry, in which the price of admission make it impossible to enter, such as cartels (OPEC) and monopolies.

Is there an industry that is better suited for your knowledge, talents, and investment? or which your comparative advantage is much higher? or opportunity costs are much lower?

The Gift of Time

Regardless of what industry or business you choose, if you can overcome the barrier to entry and sustain your business for the next couple of years you are in a winning position. As you spend time in that industry you will eventually find ways of producing more with less, if that is your intention. The more you can work to lower your opportunity costs the greater your profits can be.

80% of businesses fail within the first two years. Executives lack prudence when it comes to counting the cost. These are gifted men and women who perhaps could have succeeded if they understood comparative advantages and opportunity costs. When a person takes time to gather insights regarding industry and competitors before entering into a market, then the chances at success increase.

What are you giving up to produce your product or service? Could you produce a product or service at lower opportunity costs than your competition? Or is your comparative advantage too low? And most important, are you in the right industry?

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