Impediments to Imitation • 377

neous product and face the same long-run average cost function. The large firm’s volume of 5,000 units per year exceeds minimum efficient scale (MES), which is 4,000 units in the figure; the small firm’s volume—1,000 units per year—is less than MES. If the small firm invested in additional capacity and expanded output to MES to lower its average cost, the market price would fall below the minimum of long-run average cost ($5 in the figure). The small firm would thus be unable to earn an adequate rate of return on its investment in its new plant. Thus, although a small firm may theoretically imitate the source of a larger firm’s competitive advantage, it may nevertheless be unprofitable for it to do so.

Scale-based barriers to imitation and entry are likely to be especially powerful in markets for specialized products or services where demand is just large enough to support one large firm. This has been the case, for example, in the market for hot sauce, which has been monopolized by McIlhenny (producer of Tabasco sauce) for over a century. But a scale-based advantage can be sustainable only if demand does not grow too large; otherwise, the growth in demand will attract additional entry or induce smaller competitors to expand, allowing them to benefit from economies of scale. This happened in the market for personal computers, as Dell and Gateway expanded in a growing market in the late 1990s and virtually matched the scale advantages held by industry leaders Compaq and Hewlett-Packard. This led to intensified price competition, with the result that Compaq and Hewlett-Packard profits from personal computers failed to keep pace with the growth of the market.

Intangible Barriers to Imitation

Legal restrictions and superior access to customers or scarce inputs are tangible barriers to imitation. But barriers to imitation may also be intangible, especially when the basis of the firm’s advantage is distinctive organizational capabilities. We can identify these conceptually distinct intangible barriers to imitation:

•Causal ambiguity

•Dependence on historical circumstances

•Social complexity

Causal Ambiguity

Richard Rumelt uses the term causal ambiguity for situations in which the causes of a firm’s ability to create more value than its competitors are obscure and only imperfectly understood.14 Causal ambiguity is a consequence of the fact that a firm’s distinctive capabilities typically involve tacit knowledge. That is, capabilities are difficult to articulate as an algorithm, formula, or set of rules. Swinging a golf club in a way to hit the ball with long-range accuracy is an example of tacit knowledge: one could conceivably learn how to do it with enough practice, but it would be difficult to describe how a person should do it. Much of the know-how and collective wisdom inside an organization is of this sort. Tacit capabilities are typically developed through trial and error and refined through practice and experience; rarely are they written down or codified in procedures manuals. As a result, the firm’s managers may not even be able to describe persuasively what they do better than their rivals. For this reason, causal ambiguity not only may be a powerful impediment to imitation by other firms, but it also may be an important source of diseconomies of scale. For example, David Teece has pointed out that causal ambiguity might prevent the firm from translating the operational success it achieves in one of its plants to another.15

Just as superior firms may be unable to describe what they do especially well, ordinary firms may mistakenly believe they have superior skills. Their inability to articulate