What is difference between scarcity and rarity? Some resource based examples!

Scarcity and rarity are widely used in economics terminology. A layman usually considers them, either as entirely identical or completely different terms. Both are inter-related, and their meanings are two overlapping concepts.

Here is a simple example: As a furniture manufacturer, you want to use a comparably expensive type of wood Himalayan cedar. While being satisfied with your cash reserves and about the return on investment, you think you can easily afford it. Such situation implies just as a lower level of scarcity issue. On the other hand, if that wood is not even available in the lumber market or there are remarkably few lumber-wholesalers offering logs of Himalayan cedar, then you are dealing with rarity!

Pushing limits to the next level!

Smart firms, in this dynamic world of business and cut-throat competition, exploit both scenarios regarding critical resources. While perceiving external threats in the form of new entrants and crumbling resource procurement power of existing competitors, they take a medium to high-risk measures and try to go beyond next level exploiting resources’ availability. A successful adventure like this may leave their competitors biting their fingers in despair.

Here is another simple example: Suppose, you see your competitors hesitating to invest more in critical resources (due to any real or perceived threats such as increasing inflation rate or devaluation of national currency). On the other hand, you took a step ahead of them and executed well, such business strategy or competitive adventure benefits you and your competitors have to pay the opportunity cost!

Exploiting scarcity for competitive advantage

You may “exploit” scarcity of certain resources against your competitors assuming, you and your competitors have similar access to same resources. Still, under this assumption, access is the same but not the talent and level of effort!

A resource-based view may help to focus that how a competitive firm can utilize its resources through its organizational capabilities, to create superior value against its competitors. According to (Barney, 2001) if a resource is valuable, rare and difficult to imitate, if there are no other strategically equivalent, it can be a source of competitive advantage.

In 1984, Birger Wernerfelt explained benefits lying under well-developed business strategy regarding the value, rarity, cost and imitable stature of a certain resource. Further researches expanded the topic, but for the sake of simplicity, I have related only the rarity and scarcity concept associated with it.

Analyze this model and see where your firm or business is standing and how the characteristics of resources may affect your position in business world.

scarcity

As in the example above, if you speculate an increase in demand for Himalayan Cedar wood furniture in near future, you will prepare yourself for taking risk for procuring this rare resource and even if you are facing financial pressure, you might still try to find some way to buy it (through loan perhaps), in order to exploit the profit opportunity, predicting that other competitors may not dare to imitate you.

Such pushing of limits may result in reaping out higher return as well as coverage of diverse customers, through making and selling cedar furniture, while enjoying seeing your rivals still sticking to the same rosemary wood (Shesham) furniture.

Keep in your mind that resources are not just limited to raw material, they can be:

Physical: Buildings, vehicles, machines, furniture, equipment, logistics Infrastructure

Intellectual: Patents, business secrets, trademarks, copyright, brands, databases

Human: Experience, skills and expertise of employees

Financial:  Banks, equity Investors, government loans or grants, crowd funding

Social: Networking, contacts & relationships political connections

Competitive Advantage – Making best of your efforts

Scarcity is the most influential factor hovering over almost every business decision for a firm. In order to make best possibly efforts pursuing desired organizational outcome, an analysis of followings may assist you to formulate a productive business strategy:

Opportunity cost: Rationally asses, what you have to sacrifice while making an economic choice under the sword of scarcity.

Absolute advantage: Don’t decide into adopting more product diversification without through analysis, because you may suffer scarcities' issues. Instead, if ONLY you have the capability to offer a certain product/service in contrast to your rivals, stick to it and use this advantage against them!

Comparative advantage: You have comparative advantage at producing something, if you can produce at lower cost than your competitors. What resources seem scarce to your competitors, might not scare for you!

Specialization: Always remember, specialization reduces production costs and increases product/service quality along building good repute for you.

Research, human resource development & technological enhancement:

Collecting competitive intelligence, focusing on improving the skills and efficiency of your employees, adopting or adapting better technology may reduce scarcity related limitation for your business.

Possibility Possibility Frontier

Production possibility curve & Shifts

Scarcities and business choices

The Science of Scarcity


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