What is the first-mover advantage? Is it still worth?
What Is a First Mover?
A first mover is a service or product that gains a competitive advantage by being the first to market with a product or service. Being first typically enables a company to establish strong brand recognition and customer loyalty before competitors enter the arena. Other advantages include additional time to perfect its product or service and setting the market price for the new item.
First Mover Advantage
The first-mover advantage is more of a business strategy that refers to an advantage gained by a company that first introduces a product or service to the market.
It is important to note that the first-mover advantage refers to the first significant company to move into a market, not merely the first company. For example, Amazon.com may not have been the first seller of books online, but Amazon.com was the first significant company to make an entrance into the online book market. The first-mover advantage was initially touted as crucial in the Internet economy, although now there is a growing backlash against it. First-mover advantage can be instrumental in building market share, but this may or may not translate into business success.
Professors Marvin Lieberman and David Montgomery, in their 1988 award-winning paper, First-Mover (Dis) Advantages: Retrospective and Link with Resource-Based View, list three main benefits of being a first mover, which are as follows:
First movers can make their technology/product/services harder for later entrants to replicate. For example, if the first mover can reduce the costs of producing a product (an “experience” curve effect), the first mover can establish an absolute cost advantage. Also, applying for patents can protect and establish a first-mover advantage.
Control of resources
The second benefit is the ability to control strategic and/or scarce resources. For example, Wal-Mart was able to locate its stores in small towns and prevent others from entering the market.
First-mover firms also have the opportunity to build resources that may discourage entry by other companies. For example, the first mover may increase production capacity or broaden their product line, signaling that there is not enough room for followers to enter and profit.
The final type of benefit that first movers may enjoy comes from buyer-switching costs. If it is costly or inconvenient for a customer to switch to a new brand, the first company to gain the customer will have an advantage. Switching costs include adapting to a new product (e.g., employee training), and penalties associated with breaking a long-term contract. Especially for consumer products, the first mover has the opportunity to shape consumer preferences. The first company to offer a product of acceptable quality may earn brand loyalty. Satisfied consumers tend not to spend time seeking information about other products, and tend to avoid the risk of being dissatisfied if they switch. The pioneering brands in many product categories, such as Coca-Cola soft drinks and Kleenex facial tissues, often dominate their markets for a long time.
Examples of First Mover Firms
Amazon.com was the first major online bookstore, seizing a head start on later entrants. Established book retailers Barnes & Noble and Borders were quick to develop their Web sites. Amazon maintained its first-mover advantage in two ways; by partnering with Borders and continuing to extend its product offerings into apparel, electronics, toys, and housewares. This negated any customer preference for purchasing from Barnes & Noble by becoming a much larger, one-stop-shopping destination. Company strategists need to decide if they are likely to benefit from being first, or whether it would be better to wait and follow the leader.
eBay built the first meaningful online auction website in 1995 and continues to be a popular shopping site worldwide. It ranked 43rd on the Forbes list of innovative companies. The company generates $287 billion in annual revenues, with a 2.8% annual sales growth rate.
Though first-mover strategy may seem alluring at first it can prove to be disadvantageous. Let’s see how.
What makes the First Mover strategy less advantageous?
Being first is expensive
R&D is expensive. Educating a new market is expensive. Navigating unknown regulatory & legal territories is expensive. Setting up production for a new product at scale is also expensive. As a first-mover, estimating these costs turns out to be difficult. With market-entry pricing levels that nearly always change. Not to forget the opportunity cost of these first-mover propositions.
The moment you successfully secured a sustainable first-mover position, everyone will come at you. Competitors, startups (often launched yesterday), corporate accelerators, governments, the whole bunch. Attacking your product specs, building similar solutions, developing unfavorable regulations, disrupting your pricing strategy and understanding the customer better than you do.
There’s no prior experience to fall back on
When you’re doing something new, you’re bound to make mistakes. Unfortunately, you may not be able to afford them in your business. Just look at what happened to Apple in the 80s and 90s.
Their first computer – the Macintosh – was a tremendous success. Unfortunately, their industry was new and volatile, and Steve Jobs wanted to continue innovating. This led to a string of failed projects, the departure of multiple key employees and the eventual near-bankruptcy of the company. This was, ironically, prevented by Microsoft: the same company that became big by copying Apple after learning from their mistakes.
Thus we can say that being a first-mover only makes sense if the rewards justify the risks. Some industries reward first-movers with near-monopoly status and high margins. Other industries do not offer similar rewards, allowing late-movers the chance to compete more effectively and efficiently against early entrants.
There’s one thing sure in this competitive world. First movers will not always be the only player in any industry. As they grow, a lot of new companies will enter that industry and try to eat their profits.
Further, a lot of big successful global giants were not the first movers. For example, Google was not the first search engine. It followed the model of Yahoo or Infoseek. Similarly, Facebook was a later entrant in the social media world after Friendster and Orkut. Even Starbucks or Cafe Coffee Day (CCD) is a copied business model of the famous local coffee chains. Still, these companies were able to dominate the market and establish a big brand and customer network.