Comparative Advantage

Awesome Music by: Matt West – “Let’s Move”

Show Transcript:

You’ve been staring at your computer screen for so long you can see your presentations, spreadsheets and documents when you close your burning eyes.  These tasks take forever.  You know there’s a better way, but how?  You want to improve your presence in meetings, but how?  Stop working so many hours.  Become the authority for reporting at work.  Fix word problems before they happen.  This is the Business Intelligence Podcast.  Plug into the Business Intelligence Reporting Community at www.getreporthelp.com.  You’re not alone, and yes, you need help.

So I thought I’d start off today talking about why I have started this podcast.  Part of the reason why I started this podcast is in conjunction with why I started Get Report Help.  The purpose that I have for this is to find other reporting experts. What I have found is that in reaching out to other companies and other people across the world there are a set of people that have a certain strong set of skills in terms of how to do reporting and usually there are only one or two of those within a company.  That’s probably you.  So what I have found is that trying to reach out to these people and get them excited about sharing what their best business practices are – I mean there are techniques that I’ve used that have saved me hours of time.  There are pieces of code that are put together that have made it so much easier to get pieces done and there’s just talking about the mindset of how you can manage data, you know, different strategies for this.  It allows you to start a project and have a good, clear vision for how you are going to finish this thing.  That saves you so much time having to rework an effort or project.  You know you start it and you say, I know what I need at the end but I don’t know how to organize it or structure it or put it together.  Well, that’s what I want to do is talk about those kinds of things.  This is for those people who are doing reporting.  Sometimes you put your reports together and you sit there and wonder “Is there a better way?”  “Is there may be a faster way?” Or even talking about your reports and giving them some sort of competitive edge.  I mean, you look at a report and you go “Wow.  That one -it tells the story, it’s clear, it’s understandable.”  Well that’s the kind of stuff that I want to put together.  That’s what the website is designed for.  That’s what this podcast is all about. Giving you these best business practices, showing you how to manage data and helping you with your reporting, giving you a competitive edge and making you stand out so that you are the business intelligence professional.

Let’s jump into our first segment.

And now the feature segment.

The theory of competitive advantage is an economic theory that’s very old, it’s very well researched, written out, and documented.  I’m going to spare you all the details about who came up with the term and which paper it was in and how it was tested out and proven and retested and how it’s become one of the cannons of economic theory, but what I want to do is talk about how it applies to you.  This year I am going to do something that’s very hard for me to do.  It’s not something that I think about.   I struggle over letting go of this task.  It’s not necessarily something that I am best at, but it is something that I do know how to do.  And so it makes it that much harder for me to just let it go.  I, this year, am going to let somebody else do my taxes.  You may have already decided to hire H&R Block or some other company to produce your taxes, but for me, with a background in accounting, it’s kind of one of those things I feel like I should be doing.  I know the tax code, I studied it, I researched it, I sat for the CPA exam, so when it comes time to do my 1040 and go through my Schedule C and all that, I know how to do it.  But the thing is that I find myself digging into more detail than I probably should.  I find myself researching different tax deductions; some of them are just wasted.  I go through and I realize “Oh, that doesn’t apply to me.”  I find that if I was working in accounting I probably would burn through my taxes in half an hour or maybe an hour of time.  But because they are my taxes and because I want to make sure I get every little deduction and every little piece in there it takes me a whole weekend.  And this is why the theory of competitive advantage, that’s why I’m going to not do my taxes this year.  Comparative advantage means this – if you have a certain set of skills, that are your core competencies, what you do best, that is what you should focus all of your effort and resources on and you shouldn’t be focusing on other tasks.  So, the way this works in most papers and the way this theory came about it was talking in terms of one country to another country. One country is say like, South Africa or something has a huge amount of diamonds as a resource within their country they will sit there and mine the diamonds, but after a point, how many diamonds can you really have or use?  Everyone’s got a diamond bracelet, everyone’s got a diamond earring set and then you still have all these diamonds but guess what?  You need food, you need corn, you need flour, you need food to eat.  Here you are sitting with this stockpile of diamonds.  The theory of comparative advantage summarizes into this tagline, “Do what you do best and outsource the rest.”  So in the South Africa example, what it means is they will in turn focus on mining diamonds.  They will focus on extracting them, and buffering them and getting them ready and selling them out to the market and in exchange they will get corn and flour and wheat and whatever else they need as a country.  It doesn’t make sense based on their land, I don’t know specifically, I’ve never been to South Africa, I’m just kind of speaking as an example.  Someone is welcome to clarify this, I would love to get some clarification if any of this is inaccurate but I am pretty sure it is the case that South Africa doesn’t have a great land, I mean the climate and all of that isn’t great for growing all these types of produce.  So what makes sense is for them to focus on what they do best, in this case using the natural resources that are in that area and then focusing on just getting or outsourcing the other things they need and in so doing it actually lowers their cost for all of their efforts.

I’ll give it to you in this example.  Nobody goes into their kitchen in the morning to eat breakfast and decides to go out and mine some copper and hammer it into a pan, go out and raise chickens and pull the eggs from the chicken, start their own fire by cutting down a log or a tree and starting a fire, put the copper pan over the fire with their homegrown egg and then take a stick or build some sort of resin mold and make their own spatula so they can flip the egg and have breakfast.  We just don’t do that, right?  We don’t do all the steps in order to have our breakfast.  Instead what we have done is that we bought the pan, we bought the stove, we bought the spatula, then we buy the eggs and we combine them.  So for us, and what we are concerned about is that we want the egg, we want to make breakfast,  but we don’t make all the things we have to make in order to have breakfast.  Instead, we’ve outsourced that.  I mean, buy a good or service – that’s outsourcing.  You are saying, I’m not going to do this myself, instead I am going to buy this.  And so that’s what the theory of comparative advantage focuses on and we do it all the time, we just haven’t necessarily used that label because we didn’t realize that.  So when you are at the office and you have a decision of whether your company is going to make or buy a product, you know, should we hire this company and have them turn around and produce the product and we’ll market and sell it?  Or should we fire up our manufacturing and adjust our equipment and make this product ourselves?  Well, let’s go back to the theory of comparative advantage.  Is this what your company does best?   Is this their core competency?  If the core of your business is to make products and make this wide variety of products or this type of product then yeah, by all means, go ahead and make the product.  But if it’s an add on product, it’s something that’s not necessarily in your skill set that will require new and different activities and you are not sure if it is going to work, all of those things are indicators that this is not necessarily your core competency.  It’s not what you do best so you should definitely buy that product.  Start off small and buy it and see if it works.  The theory of comparative advantage says, “Do what you do best and outsource the rest.”  So you walk into the office –  you’ve got your 9 o’clock meeting and the boss has everyone sitting at the table and says, “We need to decide how we are going to handle our marketing.  We need to decide how we are going to handle this situation.  Well, do we hire a marketing firm or is this something that our people can do?”  Again – mental checklist –  the theory of comparative advantage –  is our company the best at marketing?  Do we know how to do that the best?  If we don’t, if that’s not our specialty, if our specialty is really in manufacturing or customer service or some other area then we should be hiring a marketing firm to do this.  This isn’t something that we should be burning our time and resources on.  Refocusing our own people to do something that is not what we do best – we should be outsourcing that.  What we should be doing is having our people doing the best thing they do and they should be running gangbusters on that because that is what makes a competitive advantage when you focus on what you do best and you hammer that and you make that your core competency and you drive it so that is the thing that you do and you do it well, then the value is really released at that point because you are not getting tangled up in all the other pieces of the business all of the other pieces that you need for the product or all of these other distractions.  You focus on what it is that you do best.  So that is the theory of comparative advantage.  You can use that term now.

Alright, so let’s jump to the next section.

And now the actionable information you’ve desperately needed.

So in my reporting experience where I produce reporting for a wide variety of people in a lot of different companies, what I have found is that there is really a kind of a dividing line when it comes to using Excel and there are people on both sides of the fence and both groups of people will say that they know how to use Excel, that they are an expert in Excel and you know, it’s a term that’s easy to throw around and there are some tests that you can take to kind of prove your Excel skill set.  One of the simplest ones that I find both in interviewing people as well as just quickly gauging when you are talking with somebody or looking at how they are doing their work and how you can help them.  This formula just, it’s that clear dividing line.  If you know this formula, then you are on the side of the fence that says you have some pretty good Excel skills.  You’re teachable, you’re trainable, you’re kind of up a notch.  If you don’t know this formula then really all you are doing is you’re just moving the numbers around and you’re just kind of following along.  You’re treating it just like you would a glossary or index in a book.  You don’t actually know the material, you just know how to maybe find some of the material or maybe sort of work on it.  So knowing this formula really separates the groups of people and I find that just asking the question and having them demonstrate it just really draws that line.  You just go, “Okay, now I know kind of that you are beyond basic.” This is that dividing line.  The formula is called a vlookup.  So in a vlookup the “V” stands for vertical.  What it does is it allows you to take two sets of data and put them together based on one particular item.  So in your mind just picture that we have a set of data that is a “customer name” and a “customer number.”  So you’ve got this chunk of data that has a customer name and maybe some of the customer information, you know, maybe address or phone number or any of that stuff but it’s also got in your system the customer number, the unique number that’s assigned to that account.  So you’ve got that set of data.  Then you have another set of data which is you’ve got every sales order that you have ever had within the company for all time.  So you’ve got all these sales orders and you’ve also got the customer number and all these other attributes about the sale, like how much revenue it had, or parts, or all this stuff.  So you’ve got these two sets of data – you’ve got the customer and you’ve got the sales order.  So a lot of times what happens is that you need to combine these things.  You need to find which customer or phone number for a customer that made a purchase.  So you’ve got the customer, you’ve got the sales order but you need to get the customer information.  Now ERP systems and other tools usually combine these things.  So we’re not talking about the Sequel and we’re not talking about the joins between two data sets in an ERP system.  What I’m talking about is just a simple example to kind of give you an idea of how a vlookupworks and what it does.  So you’ve got customer data and you’ve got a sales order set of data.  What a vlookupallows you to do is take either one of those sets, we’ll say the sales order, and we can look up on that other chunk of data the customer information because we have one unique field or one item between these two.  If the sales order has the customer number and your customer set of information has the customer number you can use that in a vertical lookup, in a vlookup, to combine that information. This thing happens all the time when you deal with these large chunks of data or even small chunks but you need to look it up from one source to another source, a vlookupis a very powerful tool.  And it is really that dividing line between people that know how to use Excel and those that just deal with what Excel is presenting them.  Now the good news is, I actually have a video out on the website that shows you how to learn a vlookupin ninety seconds.  I walk through an example, you’ll see the screen, you’ll see the motions and I walk through all the details.  I’m not going to walk through that here because it’s a visual thing, you need to know how to use that formula, but I want you to understand it’s a very powerful formula and it’s a very clear dividing line in terms of where you are or assessing other people in where they are in their Excel skills.  So they may say they are advanced.  Do they know how to use a vlookup?  If the answer is no – they are not advanced.  This is the basic formula that separates people from basic use of Excel to intermediate and advanced.  Thanks for joining me and I’ll talk to you next time.

You have been listening to THE Business Intelligence Podcast.  Plug into the business intelligence reporting community at www.getreporthelp.com.   Go right now to the website.  Design reports that amaze your boss and co-workers.  Dominate spreadsheet tasks.  Get information you can use right now.  Go now to www.getreporthelp.com and get a free video “Three Formulas Everyone Should Know.”