Marketing & Biz

Using The Power Of Comparative Advantage In Startups

David Ricardo, who lived in the late 18th and early 19th century in Great Britain, and who was one of the most influential classical economists, coined the term comparative advantage in 1817. He had a very counter-intuitive insight – it benefits economic agents to engage in trade even if one of the agents is objectively better at producing everything more efficiently.

The reason this happens is opportunity cost. The economic agent can focus all of its efforts on producing the good or service in which it has the biggest comparative advantage while buying all other goods and services.

Ricardo’s theory implies that comparative advantage rather than absolute advantage is the reason for most international trade – i.e. a highly industrialized country could theoretically do low value-added activities just as well or even better than non-industrialized countries, however, focusing on the high value-added activities and importing the rest just makes more economic sense.

While the classical economists were most interested in countries, a lot of economic concepts can be highly applicable to startups. Comparative advantage is something that happens not only on the level of international trade – it happens between businesses, even small ones.

Startups require work in many verticals on their way to becoming self-sustaining businesses – design, marketing, finance, accounting, legal, raw materials, development and tech solutions, etc. At the same time, startups have limited resources. Because of this, the correct allocation of said resources is critical.

The natural instinct of most founders is that they want the very best for their business in every vertical. However, this is simply not possible – the reality is that some aspects have to see less attention and care for others to receive extra attention.

This is where a crucial decision needs to be made – what is the true comparative advantage of your startup? What is the intersection of knowledge, insights, and skills you have, that are very rare to find in other companies?

Knowing the answer to that fundamental question will give you a great clue where it makes sense to put most of your focus.

For example, if what makes your project special is your experience in design and your ability to apply it innovatively to your industry, then it would make a lot of sense to spend most of your focus and time in that vertical. You can outsource the accounting and finance of your company, even if you are good in this regard as well. The second vertical is something that wouldn’t set you apart – it just needs to be done adequately, and there are a lot of people that can do the job just fine.

This is true even if you don’t have the resources to outsource a job – it is better to be outstanding in the important vertical and to put the minimum viable effort into another one at least until you get the resources to do it properly. The market can forgive a lot of imperfections in a startup in case the unique value proposition is powerful enough.

Not everything is equally important in startups, so one of the biggest keys to success is to prioritize and allocate resources properly.

Forbes – Entrepreneurs

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