If you recall your days studying economics, you may recall a character by the name of Adam Smith. He’s the guy that first came up with the notion of Absolute Advantage, in the context of international trade (“An Inquiry into the Nature and Causes of the Wealth of Nations“).

The essence of Smith’s point was that whomever can produce a good or service at the lowest cost (including cost of capital) will have the absolute advantage in a trading relationship – and the other party should abandon efforts to produce that item, and devote its resources to the development of services in which it holds the absolute advantage.

The concept of absolute advantage has borne itself out over hundreds of years of international trading (that’s why we import oranges from Florida, and export wheat from Saskatchewan, for example – the US has an absolute advantage in orange production, while Canada has an absolute advantage in wheat production).

Could it apply in a competitive market, where service providers compete for a finite number of buyers?

Maybe.

We just finished an assignment where our mandate was to assess healthcare service delivery in a tri-county area in a northern US state. While small hospitals routinely refer patients to large hospitals (for complex care requirements) the three primary acute hospitals in the region compete with each other across a broad spectrum of services. Records indicate that the acute-care sector is clearly a zero-sum market over the past three years. In the zip codes in which competition occurs between the hospitals, business is effectively traded back and forth (each hospital experiences roughly the same mid-range loyalty index).

So is this a see-saw-in-perpetuity, or is there a solution where the providers could (legally) collaborate to serve the residents of the region with a higher quality of service (while growing the bottom line)?

We propose that the absolute advantage theory could factor into the market planning – where one hospital takes the lead and throttles the capacity dedicated to services in which they do not have the absolute advantage – and repurpose the resources to marketing services where they do.

It’s a complex equation, and one that’s not without arm-twisting and a little indignant discussion “you mean, you want us to limit our revenue in this service line?”.

Net:

It’s not for everyone, and not for every situation. But knowing service delivery costs – and those of your competitors – puts you in the driver’s seat when planning a market strategy.