Is Comparative Advantage a Principle or a Dimension?
Kind of both. Division of Labor by Comparative Advantage is a principle that often gets shortened to "comparative advantage." It is one of several principles, highlighted in the Comparative Advantage dimension. Together, the principles in this dimension guide the division of labor so that everyone can best contribute to the long-term success of the organization.
Principle in Brief
A fundamental principle of human progress is the division of labor by comparative advantage and the resulting increase in cooperation. Specialization by comparative advantage with voluntary exchange and teamwork is much more effective at satisfying people's needs than any other form of organization.
Employees have a comparative advantage in a group when they can perform an activity at a lower opportunity cost than others. For example, selling is typically a comparative advantage of successful salespeople, even though they may also be very good at sales analysis. This gives sales analysts a comparative advantage at doing analysis, even when they are not as proficient at it as outstanding salespeople. Employees and groups who take account of their comparative advantages (not just competitive advantages) contribute more, thus are more successful.
In staffing, this principle calls for each of our organizations to begin with a clear vision of what capabilities are needed for making the greatest contribution. Contribution-motivated individuals with the optimal diversity of talents and interests can then be selected to build the needed capabilities.
Roles and responsibilities are designed not only to fit each employee’s talents and interests but in relation to the roles and abilities of other employees in a way that optimizes the group’s overall performance. This is accomplished through an ongoing dialogue between employees and supervisors with assistance from others. It includes supervisors giving employees frequent, honest feedback to help them understand their performance and how to increase their contribution. It is also essential that supervisors solicit feedback from employees regarding what would enable the employee, the supervisor and the group to improve.
Because conditions and people are always changing, roles and responsibilities need to be continually reassessed to maximize each individual’s contribution and the organization’s overall performance. When an employee leaves, is added, or changes roles, responsibilities throughout must be re-evaluated.
One way everyone can contribute is by identifying potential employees who would strengthen their team and other parts of Koch. A beneficial division of labor by comparative advantage requires a diversity of employees who are contribution motivated and have a variety of aptitudes or skills that will increase our ability to profitably expand our current businesses, solve existing or anticipated problems, or capture new opportunities.
Understand It Better
Videos to Explore
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Applying Comparative Advantage When a Team Member Leaves
Leaders share how comparative advantage helped employees have new opportunities and the team maximize its contribution.
Right Person, Right Role
Chase Koch discusses the missed opportunities when an individual — especially a supervisor — is in the wrong role.
Practicing Humility
Listen to leaders talk about the many facets and benefits of practicing humility.
Our Principle-Based Approach to Inclusion and Diversity
Leaders describe how our principle-based approach to inclusion and diversity is different.
Comparative Advantage — Confessions
This parody video highlights some misunderstandings and misapplications about comparative advantage.
Optimizing the Team When Hiring
See an illustrative example of how what it means to optimize the team before deciding what is needed in hiring.
Examples
Misunderstandings about division of labor by comparative advantage often happen because we lose sight of the fact that we’re trying to maximize TEAM results.
- Team Results, Not Individual Strengths
- It’s Not Static
Misunderstanding to Avoid
Some people think your comparative advantage is your greatest strength, but this isn’t always true. Your comparative advantage is what you can do — given the current oppotunities and team members — to maximize the TEAM's results.
Example
Fabian is the team’s best problem-solver, especially figuring out root causes of production line quality issues. He’s also good at new installations. For the past two years, Fabian has been working on a different team planning and executing a new production line. While the quality team missed Fabian's expertise, it helped the entire facility get better results.
Misunderstanding to Avoid
Some people think a person’s comparative advantage is fixed, but this is not true! A person's compartive advantage does change — and sometimes dramatically. One key reason is because the TEAM changes.
Example
Margie is part of a customer service group and has responsibility for their data management and tracking systems. However, during the busy season her comparative advantage shifts. She works directly with customers to help the team deliver excellent customer service, which drives a lot of value for the company.
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Comparative Advantage vs. Competitive Advantage
How Are Comparative Advantage and Competitive Advantage Different?
Sometimes people confuse comparative advantage with competitive advantage because both relate to how a business (or an entity) can achieve better results; however, they are different.
| Division of Labor by Comparative Advantage | Competitive Advantage | |
|---|---|---|
| What is it? | Arranging the responsibilities of a company, a group or individuals to maxmize overall results. | Applying superior capabilities to offer products and services customers value more than their alternatives. |
| What do we gain? | Better specialization and collaboration leading to more productive individuals and teams. | Long-term success due to capabilities that are difficult to replicate. |
| What is compared? | Relative ability of team members to contribute in different roles or with different responsibilities. | Relative performance of competitors who provide a specific product or service in the marketplace. |
| Continually, to optimize the division of labor among team members. | When determining where and how we should compete (or exit) and where we need to improve. |
|
| Who uses it? | Everyone, to discover how they can best contribute. Leading this effort is a critical responsibility of supervisors at all levels. |
All employees, especially those in management, business development, sales, marketing, investments and trading. |
Connection to the Five Dimensions
Here is how Division of Labor by Comparative Advantage shows up in the five dimensions:
- Virtue and Talents Dimension — it guides us to work with employees so each is in the right role with opportunities to self-actualize and increase their contribution.
- Comparative Advantage Dimension — it is critical when determining who should work on what so we achieve the best overall results.
Give It a Try
The power of these principles happens through application. There’s no substitute for learning as you apply.
- Find your own example of division of labor by comparative advantage (consider the current events, sports, and your own personal experience). Share it with your team.
- Talk to your supervisor about your current responsibilities. How do your responsibilities and efforts reflect your comparative advantage among the team? Should they be adjusted?
- Supervisors: List the key responsibilities of your team. Think through possible variations on who might work on what — be creative and open to rearranging things. Discuss the possibilities with your supervisor.
- What are some things happening now or in the future that might change the comparative advantage of one or more people on the team?
- What changes over the past year have affected the comparative advantages of our team members?
- Given the examples above, have you experienced these common misunderstandings? Why are these common misunderstandings? How do we overcome them?
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