When imitators can be kept out of the marketplace, supply can be restricted, and the market imperfection “demand without supply” can be preserved. Imitators attempt to add supply by entering the marketplace as new players in the economic game. Imitators include all those firms that offer products or services that do essentially the same thing in the same way. Thus, the goal is to prevent firm that do the same thing in a similar way from entering into the competitive arena.
But this prevention does not remove value from the market. This is in contrast to permanent market imperfections that are either imposed upon the market by monopolists, or which result from the employment of political advantage to permanently alter the rules of the game to the disadvantage of all, but one player. This type of scarcity preservation is brought about by productivity enhancing mechanisms that isolate the venture from its competitors without permanently damaging competition.
The positive market imperfections, or “isolating mechanisms” (Rumelt, 1987) occur because of something extraordinary that is:
1. Done within the venture to obtain and keep customer loyalty (usually customers do not give their loyalty without perceiving in the relationship, added value to themselves). 2. Done or permitted by society to encourage entrepreneurial discovery. 3. Or, a natural timing feature of a not quite perfect market working its way toward equilibrium.
Type 1 isolating mechanisms are customer driven. They include the effect of reputation for product or service quality and communication good effects (an advertising first mover advantage).
Type 2 isolating mechanisms are driven by incentive. Of course one of the most powerful incentives comes from property rights. Human beings tend to care a lot for the “things” that they “own.” Also in a Type 2 isolating mechanism, society chooses to reward certain types of entrepreneurial discovery to thereby encourage more. These incentives consist of patents, copyrights and other types of intellectual property protection. Other incentives come from the market itself through such isolating mechanisms as economies of scale-where the first efficiently-sized producer has a cost-based advantage, since additional producers (if efficiently-sized) will find prices to be depressed below full cost.
Type 3 isolating mechanisms are driven by timing differences that follow consequent to imperfect information. Type 3 differences include first mover advantages, buyer switching costs, informational asymmetry, buyer evaluation costs, advertising and channel crowding, producer learning, and response lags.
According to Rumelt, the isolating mechanisms that protect entrepreneurial rents (profits from discovery, emphasis added) from imitative competition normally appear as first mover advantages. That is, they are asymmetries, usually derived from informational inequalities or the costs of creating and enforcing complex multiparty contingent contracts, which, other things equal make it increasingly costly for followers to duplicate an innovator’s position (1987: 146).
Barney (1991) cites the effects of a unique history, causal ambiguity, and social complexity as also contributing to non-imitability. To the extent that the venturer can recognize and utilize these isolating mechanisms, the profit-creating scarcity-that is lost when imitators copy the innovation, can be preserved.
The big idea here is that there are tools that can be used to preserve the scarcity of your innovations. They center upon uniqueness, customer relationships, the incentives surrounding an innovation, and in timing.
Venturers who investigate each possibility for enhancing and preserving these unique elements of the innovation, usually find that one or more of these mechanism can help to “isolate” their innovation from imitators. When this happens, scarcity and profit can be the result.
Thus, where isolating mechanisms are in place to prevent imitation, then the answer to the sub-question: Is it non-imitable? The answer can be yes. If not, then the answer to Question D: Is it Scarce? NO-which implies, DON’T GO ON until this is fixed if this is a start-up venture.
If you are assessing an ongoing business, however, you can begin to affect scarcity by looking at reputation-especially at the level of service. Next, check the level of quality. (There does not appear to be a business that cannot isolate or differentiate itself on the basis of product or service quality.)
After checking these two “no brainers,” then examines the remaining elements in three types of isolating mechanisms to see which other mechanisms can be applied to preserve the scarcity of the entrepreneurial discovery. When you work on venture scarcity, you add the type of value to the economic system that begins as a market imperfection and ends in the form of profit. Through customer driven, incentive, or timing difference-based restriction of supply, you take the first step toward the perpetuation of your business. The next step is to prevent decreases in demand that occur when substitute products enter the marketplace.