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ABSOLUTE ADVANTAGE: THE FIRST STEP TO CREATING VALUE.

The English Premier League has been reported to have the highest global penetration amongst all league sports. Strange enough, it enjoys this unparalleled popularity despite its teams' relatively poor outing at continental competitions.

One reason why this is the case is the unmatched racial diversity of the league. And this reason partly explains the popularity that is also enjoyed by the US economy.

As you may have wondered, what has football got to do with the concept of absolute advantage? The answer: everything, although we have to look closely to see it.

The lesson from this article, in my opinion, is one of the most important and empowering concepts that can transform your life.

The underlying premise for this article is axiomatic: all nations have absolute advantages. Meaning they have things that come to them quite easily or naturally, so to speak. We may call the benefactor of these abilities nature, providence, or God; whatever we call Him is beside the point. But the fact remains that every nation is endowed with either a tangible or intangible resource that gives them a competitive edge over the others.

Quite naturally, we have come to take for granted the reality that individuals are born with a unique talent, or "gift" that makes them special – that's of course if they discover, hone, and put the talent to good use. The naming of the endowment is also revealing. A "gift" implies that it was given to the receiver freely, and not due to any merit.

So, like the individual, all nations have unique gifts. And whether it has been discovered and put to good use is also beside the point. But there is evidence to support that all nations have unique climates that enable them to grow certain stuff much easier than others. Or, that they have an uneven distribution of unique people who tend to see things more in a particular light than others, who may have high numeracy abilities than literary. Or a people who have collectively gone through a very difficult and painful history, it now empowers them with special motivations. It can also be geographical positioning. A nation can be so uniquely positioned that it finds itself along coastal lines where trade routes are, or its soil is unbelievably fertile. These advantages take different shapes or forms.

Generally speaking, what is true for both the individual and the nation is that this advantage makes it cheapest to produce a specific product or to render a specific service. It suggests that the inputs needed for the production or service rendering are relatively free. In some cases, it can be that all the inputs are free, and in some others, it may just be a few of the inputs. But what this confers on the beneficiary of this advantage, is that it can produce a good or render a particular service at a relatively cheapest cost. This is called the absolute advantage. We know that all individuals have it and as such, all nations should if they are to remain in existence.

To appreciate the practical side of this proposition, we shall consider three scenarios.

Let us make a comparison between Sudan and South Sudan: two African countries that share a common boundary and heritage. South Sudan has three times the oil reserves of Sudan, but is landlocked and needs access to the coastline for exporting its oil. In comparison, Sudan, disadvantaged in oil reserves, is compensated by her position along the coastline of the Red Sea which allows her to easily access the Mediterranean Sea through the Suez Canal.

Oil production may have potentially given South Sudan a higher revenue, but an absence of natural distribution channels has made it very costly to convey and sell the product to willing buyers from outside the continent. So, we can reasonably say that what the southern country lacks by way of access to trade routes, she makes up for in her crude oil reserves. And similarly, what Sudan lacks in reserves, is fairly and indirectly compensated for in access to trade routes. Strictly speaking, no state or individual is desolate.

A similar pattern is to be expected for any two random individuals. For the sake of argument, let us assume Person A and Person B decide to learn a programming language under the same tutor. We can predict with a fair degree of accuracy that they will each put this skill to a different use. And if we further add their backgrounds to the argument, noting that person A is grounded in statistics while person B in the fine arts. We can expect, as a result, person A to be more oriented to use the newly learned programming language for data analysis, while person B be inclined to use it for visualization.

Certainly, their end products will be original and spectacular in their rights, but they are not likely to return the same output. Safe to say, our backgrounds have made sure that we lean more towards certain interests, and less towards others. And the irony of it all is, whatever we do today forms the background for our tomorrow.

 

This principle of absolute advantage suggests that no two humans or states or entities can have the same experiences over time, and for this reason, everyone is granted autonomy in the creation of specific value. Across multiple levels of analysis, we can derive several lessons as a consequence of this concept and it will instruct us on the proper way to interact in society.

 

VALUE-CREATION

The general presumption that value-creation is exclusive is flawed. The door to value-creation is never shut to anyone. Nobody has the monopoly to create everything. Everyone has something only they can create at the lowest cost. You can create something the cheapest that the rest of us cannot. This is true because you have a very unique background from the rest of us.

Although nobody wants you in your run-of-the-mill state, your potential is not canceled out by inactivity. Everyone is fascinated by your self-actualized self. That's the 'you' that has sensed a unique bent in your interests and has applied yourself to such an extent, you create value that attracts mutually beneficial exchange.

Accordingly, pluralistic societies like the US will likely be more innovative and create more value than homogenous European nations. And the reason will not be far from the aggregation of a diversity of individual absolute advantages which enriches the pool of ideas. This behavior is also self-evident when we consider Abia and Lagos States in Nigeria, based on innovation and ingenuity. Lagos which is more innovative continues to burst with new ideas because it is a melting pot of diverse world-views. While Abia State – the more homogenous society – on the other hand, is not equally as innovative. Rather, she is known more for the ingenuity of her people; who are very creative in problem-solving.

 

Indeed, we understand that this idea-pool is not the sole determinant for economic progress, the point is still made. The implication is that we do not take anybody for granted. That a person is yet to actualize their potential because of failure to commit oneself to a course should by no means cancel their potential. It is helpful to remember that some people are late bloomers; taking time to sink their roots. But to create value is everyone's prerogative. And states that encourage free enterprise are better for it.

 

RESPECT

The social issue of treating every person with respect is an extension of the concept of absolute advantage. True, because if we accept the premise that no two individuals have the same quality and quantity of experiences and exposures, by implication, we should accept the inference that they each have the potential to create or produce a unique product at the cheapest cost. A product that will be costlier to anyone else with a different set of fortunes. Invariably, we are reminded that everyone is important because we each carry a spark of genius to birth something unique at the cheapest rate.

Any leader armed with the practical implications of the concept of absolute advantage will approach his/her team differently. Rather than discourage ideas, initiative, or free speech, they will be more open to listen to various perspectives and draw conclusions from the pool. Indeed, in a multitude of counsel, there is safety.

 

In the mid-2000s, when tech companies were racing for market share in mobile operating systems, the odds were stacked in Microsoft’s favour to leverage its personal computer success to expand its mobile OS market share. The then Android which was an alliance of smaller companies joined the race relatively late. But as of today, Android has over 70% of the market share for mobile operating systems in the world. We may not know the exact details of their standings in those early years, but we can certainly draw the conclusions that Android’s effort in edging out Microsoft mobile OS is optimal exploitation of a unique absolute advantage, irrespective of the huge war chest (a type of advantage) that Microsoft had brought to the game.

 

 

TRADE

Finally, the concept of trade can be abstracted from this same premise of absolute advantage (although more technically called comparative advantage and brought about by lower opportunity cost). Broadly speaking, a trade-off for a pay-off is the basic meaning of trade. To exchange something that you produced most cheaply and easily relative to others, with something that came easiest to another party, leaves both parties with the satisfactory feeling of cutting a superior deal.

Humans have been trading with each other for generations; an indication of the fact that value-creation is a venture that can never go out of trend.

Moreover, one might ask the question as to whether it is ok to produce everything you need simply because you can. And the answer is no. Some things will come too costly to produce and thus lead to a misallocation of a resource. Think of it, why should you spend $10 to produce 5 eggs when you can buy the same 5 eggs for the $6 from a third party? The extra $4 dollars could have returned a profit if invested.

 

In conclusion, the level of economic progress experienced in our world today is positively correlated with the amount of value being created. Our forefathers will find it beyond belief that two people at opposite ends of the world can have a real-time conversation without teleportation or black magic. They will find every modern experience incredible. These experiences that we now take for granted have come about because more and more people have chosen to give expressions to their aspirations. They have dared to be themselves and projected their uniqueness in their creations and services.

There is no telling how far around the world the values we create can go. Now and then, people will create value, but what will determine how far it can travel is the amount of diligence that has been put into it. If we incorporate excellence in whatever we do, be it singing, dancing, or cooking, soon enough, kings shall seek us out. Your uniqueness is your strength. Use it and make your advantage count.

 

Absolute advantage indeed. We see that in markets and domains: " Now and then, people will create value, but what will determine how far it can travel is the amount of diligence that has been put into it."

The absolute advantage is the first step to creating value. 

The absolute advantage is the first step to creating value. The whole point of this lesson is to teach you how to build your own absolute advantages. So let's get started!