First-mover advantage is more than a myth but far less than a sure thing. Here is how to tell when it's likely to occurc.
Some management concepts have such an intuitive appeal that their validity is almost taken for granted. First-mover advantage is one such concept.
For every academic study proving that first-mover advantages exist, there is another proving they do not. While some well-known first movers, such as Gillette in safety razors and Sony in personal stereos, have enjoyed considerable success, others, such as Xerox in fax machines and eToys in Internet retailing, have failed. First-mover status does not confer advantages categorically. Much depends on the circumstances in which it is sought.
What kind of first-mover advantage?
A first-mover advantage can be simply defined as a firm's ability to be better off than its
competitors as a result of being first to market in a new product category. It is useful to
differentiate between durable first-mover advantages, which improve a firm's market share or profitability over a long period, and those that are short-lived. Firms that succeed in building durable first-mover advantages tend to dominate their product categories for many years. Coca-Cola in soft drinks and Hoover in vacuum cleaners unmistakably demonstrate both the value and longevity of early success. A company may obtain benefits even from early exit when it is a first mover in the market.
Netscape, the first to market an Internet browser, briefly produced enormous gains for shareholders until the stock price plummeted in 1997 after Microsoft's success.
Industry dynamics are crucial
One of the three main ways to achieve first mover advantages is by creating a techn-ological edge over competitors. By starting earliest, first movers have more time than later entrants to accumulate and master technical knowledge. The second way is by preempting later arrivals' access to scarce assets - for example, a location on a city's main street, talented employees, or key suppliers. The third is by building an early base of customers who would find it inconvenient or costly to switch to the offerings of later entrants.
What has been largely ignored are the conditions under which those three tactics are most likely to succeed or fail. An early entrant's prospects depend as much on background factors as they do on the firm's resources and capabilities. The two most important factors - the pace of technology evolution and the pace of market evolution - are typically beyond the control of any single firm.
Some technologies, for instance computer processors, evolve in a series of incremental improvements; others evolve disruptively, creating a break from the norm, as was the case when digital photography began to displace film. The faster the evolution, the more difficult it is for a single company to control it.
When the waters are calm
Gradual evolution in both technology and markets provides first movers with the best conditions for creating a dominant position that is long lasting. The vacuum cleaner industry protected its first mover by evolving slowly and smoothly. In 1908, in Ohio, William Henry Hoover produced the first commercial bag-on-a-stick upright vacuum cleaner, but it made little headway. As late as 1930, fewer than five per cent households had purchased one. The technology changed as slowly as the market. When innovation did occur, the change was enduring. A gradual pace of change in technology makes it hard for later entrants to differentiate their products from those of the first entrant. An initially slow pace of market growth also tends to favour the first mover by giving it time to cultivate and satisfy new market segments.
When the market leads and technology follows
Consider the Walkman, the first product in a clever new category - the personal stereo. Pioneered by Sony in 1979, it used mature technologies readily available at the time, and its basic technical design remained unchanged for a decade. By contrast, its
market grew abruptly, with sales reaching some 40 million units in less than ten years. Indeed, the personal stereo is among the most successful consumer electronics innovations of our time. Given the market's enormous expansion rate and potential size, one might think that only a short-term advantage should have been available to the first mover. Yet Sony's market share was close to 48 per cent even ten years after the Walkman's launch, thanks to its superior resources - in particular its design skills, marketing muscle, and strong brand. A first entrant with limited resources and skills would probably have to settle for a short-term first-mover advantage, however.
When technology leads and the market follows
What happens in the reverse situation when technology changes abruptly but the market is slow to accept the new product category? A short-lived first-mover advantage is very unlikely here. Early entrants face many years of flat sales and operating losses and, consequently, the scepticism of stock market analysts. At the same time, the furious pace of technological change brings in new competitors, who think their improvements will draw customers away from the incumbent. A durable advantage, for most early entrants as well as later arrivals, is also unlikely. Only a company with very deep pockets could enter such a market first, survive in its hostile environment, and withstand a considerable delay.
When the waters get rough
Sometimes, both technological innovation and consumer acceptance advance rapidly, leaving first movers highly vulnerable. AT&T and Netscape are examples of companies capsized by the rapid churning of technology and markets. AT&T was the first company to deploy a cellular telephone system in the United States in 1977. Yet, it was Ameritech in 1983, not AT&T, which offered commercial analog cellular operations after they were authorised by the FCC. A fast-growing market adds to a first mover's challenges by opening attractive new competitive spaces for later entrants to exploit. The incumbent tends to be at a disadvantage, since it often lacks the
production capacity or marketing reach to serve a rapidly expanding customer base.
To be or not to be first?
The four scenarios place premiums on very different sets of assets and capabilities.
Large-scale marketing, distribution, and production capacity is key in situations where the market leads; R&D, product development, and deep pockets are key in situations where the technology leads.
New product categories are constantly emerging around us. In most instances, companies struggle not with whether to enter a new product category altogether, but with whether to enter early or later. Sometimes executives wonder if it would be wise, for example, to wait until the companies in the first wave have been weakened by competition and seen their technological edge dulled. But then there might not be enough time left to master the technology in question. Still, in some situations, it may not make a lot of sense to try to be the first mover.
In environments where a first mover's advantage is likely to occur only after years of losses, and then to be short-lived, discretion would probably be the better part of valour. First-mover advantage, after all, occurs, not when you enter a market, but when you start making real money in it.
To make real money in an evolving market, you need to analyse the kind of environment that surrounds the new category; to assess the character and depth of your resources, comparatively speaking; and then to decide on the type of first-mover advantage - short-term or durable, immediate or delayed - that is most achievable. Remember, once you've gone into the water, you have no choice but to swim.
How to achieve first mover advantage
- By creating technological edge over competition
- By preempting the later entrants' access to assets like location, employees, suppliers etc.
- Building an early base of customers
- Success depends on pace of technological evolution and market expansion
- The faster or more disruptive the evolution of technology, the greater the challenge for one company to control it
- The greater the product or category's departure the more uncertain will the pace of market's growth and shape be
The four scenarios:
When the waters are calm
Gradual evolution of technology and markets provides first movers the best conditions for creating a long-lasting dominant position
When the market leads and technology follows
A first entrant with limited resources and skills would probably have to settle for a short-term first-mover advantage
When technology leads and the market follows
Very deep pockets need to enter such a market first and survive for first-mover advantages
When the waters get rough
Sometimes, both technological innovation and consumer acceptance advance rapidly, leaving first movers highly vulnerable. A fast-growing market adds to a first mover's challenges by opening attractive new competitive spaces for later entrants to exploit
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