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The Erosion of Comparative Advantage (Part II)

The Erosion of Comparative Advantage
(Part II):

Time, Brains, and EC

Quietly, the way information is being used today attacks long established ways companies compete.

Comparative advantage has often been scale driven, like plant size, experience, market share. But, as we argued in Part I, the traditional power of scale is diminishing in many businesses. As earning assets move from the physical and tangible (plants, warehouses, patents) to the cerebral, where you should look for key sources of comparative advantage is also shifting. Today, you need to look at response time, intellectual renewal and electronic commerce. to find advantage.
We think that electronic commerce enables response time and intellectual renewal so we’ll write about it first.

Electronic Commerce or “EC”refers to the seamless inter- and intra- company information systems that make possible much faster, more accurate decisions. These systems cut into “information resting time,” which allows corporate procrastination. When management groups defer decisions because information isn’t available, timely actions are stalled.

In a recent study of PC and office supplies purchasing, we calculated customers could save as much as 15% of revenues when electronic commerce eliminated wasted time and money, errors in ordering, lost schedules, misunderstandings in where to ship, and inventory obsolescence.

In the study, benefits not only accrued to buyers (Figure 1), but to suppliers as well. (Figure 2). EC cuts deeply into order fulfillment costs for large volume, broad product line suppliers, especially those serving fragmented, dispersed markets.

One expensive part of fulfillment, returns, was especially impacted. We discovered that implementing the usual first step, fax and key entry internal systems, eliminated errors in the seller’s operation and drove down returns. However, the cost of returns was still sensitive to volume and complexity.

By combining internal systems with electronic purchasing, customer errors were reduced, returns were lowered, and the return rate uncoupled from volume and complexity. In this case, larger more complex companies eliminate their comparative disadvantage. Adding “expert” systems-configuration standards for PC purchases, for example-eliminates careless errors, and also complex knowledge and decision errors.

Time and timing: A lot of companies have discovered that taking time out of operations actually lowers cost, raises quality, and encourages product development. One company we know improved productivity, lowered inventory and satisfied customers enough to actually increase share( Figure 3) after three years of manufacturing investment.

Time cutter companies focus on compressing setup costs, so while they are lowering costs, they can be more responsive to demand shifts and can broaden product lines. Giving customers more choice improves position. For consumer products companies, a broader line leads to lower distribution costs as they fill trucks. In many businesses line breadth gets more shelf space from retailers. Earlier acquisition and faster application of more complete information from customers, suppliers, and the field enables response time, product development, and breadth of product lines.Example of time based Sources of Comparative Advantage include:

  • Speed of customer communication
  • Speed of new product development from conception to introduction to refined reintroduction.
  • Speed of product, service, or store rollout
  • Order fulfillment: the correct merchandise, quicker processing, quicker delivery, with less inventory
  • Speed and accuracy of buying
  • Customer support

Intellectual Capital: As the marketplace changes and grows more complex, companies need to continually update the minds and memory of employees. In many companies, skills to deal with the market environment are typically developed casually by experience and on the job. Today there’s no time for that.
Investing in employee capability and knowledge is becoming more like leveraging fixed costs for advantage. Communications and training distributed to desktops throughout a company, have very low incremental costs. Bigger firms can deliberately enlarge the fixed costs of training and apply programs again and again, increasing the power and value of training and bringing down the costs. We think the future shift in the cost curves will look something like Figure 4, as information on new products, new programs and interactive skill building programs can be “sprayed” onto employees’ desktops.

Even in the face of new information technology, a few companies, maybe yours, have seemingly impregnable strategic advantage. Some may be tempted to sit tight until things settle down. That could be a big mistake. The changes we’ve been writing about will hit every business eventually. Searching out new Sources of Comparative Advantage will yield the experience and insights necessary to improve the chances for finding the next right strategy.

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Easton Consultants. All rights reserved.

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