First-mover advantage

From Wikipedia, the free encyclopedia

Jump to navigationJump to search
For the chess concept, see First-move advantage in chess.

hideThis article has multiple issues. Please help improve it or discuss these issues on
the talk page. (Learn how and when to remove these template messages)

This article possibly contains original research. (February 2014)

This article needs additional citations for verification. (February 2015)

In marketing strategy, first-mover advantage (FMA) is the advantage gained by the initial ("first-
moving") significant occupant of a market segment. First-mover advantage may be gained by
technological leadership, or early purchase of resources.
A market participant has first-mover advantage if it is the first entrant and gains a competitive
advantage through control of resources.[1] With this advantage, first-movers can be rewarded with
huge profit margins and a monopoly-like status.
Not all first-movers are rewarded. If the first-mover does not capitalize on its advantage, its "first-
mover disadvantages" leave opportunity for new entrants to enter the market and compete more
effectively and efficiently than the first-movers; such firms have "second-mover advantage."

Contents

 1Mechanisms leading to first-mover advantages

o 1.1Technological leadership
 1.1.1Examples of technological leadership
o 1.2Preemption of scarce assets
 1.2.1Examples of preemption of scarce assets
o 1.3Switching costs and buyer choice under uncertainty
 1.3.1Examples of switching costs
 2First-mover disadvantages
o 2.1Free-rider effects
o 2.2Resolution of technological or market uncertainty
o 2.3Shifts in technology or customer needs
o 2.4Incumbent inertia
 3General conceptual issues
o 3.1Endogeneity and exogeneity of first-mover opportunities
o 3.2Definitional and measurement issues
 3.2.1What constitutes a first-mover?
 3.2.2Alternative measures of first-mover advantage: profits vs. market share vs. probability of
survival
 3.2.3Magnitude and duration of first-mover advantages
 4Second-mover advantage
o 4.1Example of second-mover advantage: Amazon.com
 5Implications for managers
 6Issues for future research
o 6.1Theoretical and conceptual Issues
 o 6.2Empirical issues
 7See also
 8References
 9Further reading

Mechanisms leading to first-mover advantages[edit]

The three primary sources of first-mover advantages are technological leadership, preemption of
scarce assets, and switching costs / buyer choice under uncertainty.[2]
Technological leadership[edit]
The first of the three is technological leadership. A firm can gain FMA when it has had a unique
breakthrough in its research and development (R&D). A new, innovative technology can provide
sustainable cost advantage for the early entrant; if the technology, and the learning curve to acquire
it, can be kept proprietary, and the firm can maintain leadership in market share. The diffusion of
innovation can diminish the first-mover advantages over time, through workforce mobility, publication
of research, informal technical communication, reverse engineering, and plant tours. Technological
pioneers can protect their R&D through patents. However, in most industries, patents confer only
weak protection, are easy to invent around, or have transitory value given the pace of technological
change. With their short life-cycles, patent-races can actually prove to be the downfall of a slower
moving first-mover firm.[2]
Examples of technological leadership[edit]

1. In a 1981 paper Michael Spence discusses how the technological learning curve can be
kept proprietary, making for a huge barrier to entry on the part of others. Although the
starters in a FMA market have complete control for a period of time, the competition still
remains, trying to chase the originators. Spence states that firms trying to emerge as first-
movers will usually sell their products below cost in an effort to understand the market better
(i.e. gain intelligence); and then, once established, turn the market around and control the
market's cost. Though Spence states that this sort of competition reduces profitability, most
of the time it is needed to break into the new markets.[3]
2. Papers by Gilbert and Newbery (1982)[4] and Reinganum (1983)[5] illustrate what happens if a
first-mover firm, or close followers, were to assume what each other's R&D departments are
doing. This can result in the second- or third-movers surpassing the leaders because they
are out-thinking their competition.
3. Procter & Gamble is an example where a company's technology leadership helped propel
their product (disposable diapers) into the US market. They used a learning-based
preemption to help invest in low-priced European synthetic fiber, which helped keep costs
down, and allowed for selling the diapers profitably at a cheaper price.
4. Physical aspects of FMA are not the only way certain firms acquire this advantage.
Managerial systems that help the organizational and behavior aspects of the company may
prove to be highly beneficial to emerging companies. When a firm's management style is
unlike any other, and grasps certain concepts of management and the economy that other
firms do not, then they will benefit (e.g. American Tobacco, Campbell Soup, Quaker Oats,
Procter & Gamble).
Preemption of scarce assets[edit]
If the first-mover firm has superior information, it may be able to purchase assets at market prices
below those that will prevail later in the evolution of the market. In many markets there is room for
only a limited number of profitable firms; the first-mover can often select the most attractive niches
and may be able to take strategic actions that limit the amount of space available for subsequent
entrants. First-movers can establish positions in geographic or product space such that latecomers
find it unprofitable to occupy the interstices. Entry is repelled through the threat of price warfare,
which is more intense when firms are positioned more closely. Incumbent commitment is provided
through sunk investment cost. When economies of scale are large, first-mover advantages are
typically enhanced. The enlarged capacity of the incumbent serves as a commitment to maintain
greater output following entry, with the threat of price cuts against late entrants.[2]
Examples of preemption of scarce assets[edit]

1. Main (1955) provides an example of preemption of input factors achieved by controlling

natural resources.[6] He states that the concentration of high-grade nickel in a single
geographic area made it possible for the first company in the region to gain almost all of the
supply. It has since controlled a vast proportion of the world’s production and distribution of
the product.[2]
2. For the preemption of locations in geographic space, a theory developed by Prescott and
Visscher (1977)[7] and others states that the first-mover has a huge advantage in claiming a
certain geographic area so long as that area provides the firm with all the resources it needs
to thrive. If said area can be claimed and then made to flourish, then the cost of entry to
other firms would be too great. When a firm establishes itself on a certain plot of land, it can
gain full control of the market incorporated within that land, thereby holding on to that power
for a long period of time.
3. Preemption of investment in plant and equipment can prove to be another advantage for the
first-mover. Schmalensee (1981)[8] says that when scale economies are large, FMA is
usually larger and more profitable, sometimes enabling a monopoly position. He then states
that advantages also arise from scale economies which provide only minor entry barriers,
but also immense opportunities for future growth, development, and profit.
Switching costs and buyer choice under uncertainty[edit]
Switching costs are extra resources that late entrants must invest in order to attract customers away
from the first-mover firm. Buyers may rationally stick with the first brand they encounter that performs
the job satisfactorily. If the pioneer is able to achieve significant consumer trial, it can define the
attributes that are perceived as important within a product category. For individual customers the
benefits of finding a superior brand are seldom great enough to justify the additional search costs
that must be incurred. Switching costs for corporate buyers can be more readily justified because
they purchase in larger amounts.
Switching costs play a huge role in where, what, and why consumers buy what they buy. Over time,
users grow accustomed to a certain product and its functions, as well as the company that produces
the products. Once consumers are comfortable and set in their ways, they apply a certain cost,
which is usually fairly steep, to switching to other similar products.[9]
Examples of switching costs[edit]

1. A switching cost where the seller actually creates the cost is described in Klemperer
(1986).[10] For instance, in the case of airline frequent-flyer miles programs, many consumers
find it important that an airline provides this service; and they are actually willing to pay more
for an airfare ticket if it means they will earn points towards their next flight.
2. Buyer choice under uncertainty has developed into an advantage for first-movers, who
realize that by getting their brand name known quickly through advertisements, flashy
displays, and possible discounts, and by getting people to try their products and becoming
satisfied customers, brand loyalty will develop.[11] A study by Ries and Trout
(1986)[12] showed that newcomers that emerged into the market as far back as 1923 were
still at the top of their specific markets almost seven decades later.
First-mover disadvantages[edit]
Although being a first-mover can create an overwhelming advantage, in some cases products that
are first to market do not succeed. These products are victims of first-mover disadvantages. These
disadvantages include “free-rider effects, resolution of technological or market uncertainty, shifts in
technology or customer needs, and incumbent inertia.”[2]
Free-rider effects[edit]
Secondary or late-movers to an industry or market have the ability to study first-movers and their
techniques and strategies. “Late movers may be able to ‘free-ride’ on a pioneering firms investments
in a number of areas including R&D, buyer education, and infrastructure development.”[2] The basic
principle of this effect is that the competition is allowed to benefit and not incur the costs which the
first-mover has to sustain. These “imitation costs” are much lower than the “innovation costs” the
first-mover had to incur, and can also cut into the profits the pioneering firm would otherwise enjoy.
Studies of free-rider effects say the biggest benefit is riding the coattails of a company’s research
and development,[13] and learning-based productivity improvement.[14] Other studies[15] have looked at
free rider effects in relation to labor costs, as first-movers may have to hire and train personnel to
succeed, only to have the competition hire them away.[2]
Resolution of technological or market uncertainty[edit]
First-movers must deal with the entire risk associated with developing a new technology and
creating a new market for it. Late-movers have the advantage of not sustaining those risks to the
same extent. While first-movers have nothing to draw upon when deciding potential revenues and
firm sizes, late-movers are able to follow industry standards and adjust accordingly.[2] The first-mover
must take on all the risk as these standards are set, and in some cases they do not last long enough
to operate under the new standards.
Shifts in technology or customer needs[edit]
“New entrants exploit technological discontinuities to displace existing incumbents.”[2] Late entrants
are sometimes able to assess a market need that will cause an initial product to be seen as inferior.
This can occur when the first-mover does not adapt or see the change in customer needs, or when a
competitor develops a better, more efficient, and sometimes less-expensive product. Often this new
technology is introduced while the older technology is still growing, and the new technology may not
be seen as an immediate threat.[2]
An example of this is the steam locomotive industry not responding to the invention and
commercialization of diesel fuel (Cooper and Schendel, 1976). This disadvantage is closely related
to incumbent inertia, and occurs if the firm is unable to recognize a change in the market, or if a
ground-breaking technology is introduced. In either case, the first-movers are at a disadvantage in
that although they created the market, they have to sustain it, and can miss opportunities to advance
while trying to preserve what they already have.
Incumbent inertia[edit]
While firms enjoy the success of being the first entrant into the market, they can also become
complacent and not fully capitalize on their opportunity. According to Lieberman and Montgomery:
Vulnerability of the first-mover is often enhanced by 'incumbent inertia'. Such inertia can have
several root causes:

1. the firm may be locked into a specific set of fixed assets,

2. the firm may be reluctant to cannibalize existing product lines, or
3. the firm may become organizationally inflexible.[2]
Firms that have heavily invested in fixed assets cannot readily adjust to the new challenges of the
market, as they have less financial ability to change. Firms that simply do not wish to change their
strategy or products and incur sunk costs from "cannibalizing" or changing the core of their business,
fall victim to this inertia.[2] Such firms are less likely to be able to operate in a changing and
competitive environment. They may pour too much of their assets into what works in the beginning,
and not project what will be needed long term.
Some studies which investigated why incumbent organizations are unable to be sustained in the
face of new challenges and technology, pinpointed other aspects of incumbents' failures. These
included: "the development of organizational routines and standards, internal political dynamics, and
the development of stable exchange relations with other organizations" (Hannan and Freeman,
1984).
All in all, some firms are too rigid and invested in the "now", and are unable to project the future to
continue to maximize their current market stronghold.

General conceptual issues[edit]

Endogeneity and exogeneity of first-mover opportunities[edit]
First-mover advantages are typically the result of two things: technical proficiency (endogeneic) and
luck (exogeneic).
Skill and technical proficiency can have a clear impact on profits and the success of a new product;
a better product will simply sell faster. An innovative product that is the first of its kind has the
potential to grow enormously. Technically competent companies are able to manufacture their
products better, at a lower cost than their competitors, and have better marketing proficiency. An
example of technical proficiency aiding first-mover advantage is Procter and Gamble's first
disposable baby diaper. The ability to get ahead of the market through technical breakthroughs, the
use of materials that were low in cost, as well as their general manufacturing proficiency and
distribution channels, allowed P&G to dominate the disposable diaper industry.
Luck can also have a large effect on profits in first-mover-advantage situations, specifically in terms
of timing and creativity. Simple examples such as a research "mistake" turning into an incredibly
successful product (serendipity), or a factory warehouse being burned to the ground (unlucky), can
have an enormous impact in some instances. Initially, Procter and Gamble's lead was aided by its
ability to maintain a proprietary learning curve in manufacturing, and by being the first to take over
shelf space in stores. Large increases in the birth rate, in the years that Procter and Gamble’s first
disposable diapers were released, also added to their industry profits and first-mover advantage.
Definitional and measurement issues[edit]
What constitutes a first-mover?[edit]
Much of the problem with the concept of first-mover advantage is that it may be hard to define.
Should a first mover advantage apply to firms entering an existing market with technological
discontinuity, the calculator replacing the slide rule for example, or should it apply solely be new
products? The imprecision of the definition has certainly named undeserving firms as pioneers in
certain industries,[citation needed] which has led to some debate over the real concept of first-mover
advantage.
Another common argument is whether first-mover advantage constitutes the initiation of research
and development versus the entry of a new product into the market. Typically the definition is the
latter, since plenty of firms spend millions in research and development that never result in a product
entering a market. Many factors affect the answer to these questions; including the sequence of
entry; elapsed time since the pioneer's first release; and categorizations such as early follower, late
follower, differentiated follower, etc.
Alternative measures of first-mover advantage: profits vs. market share vs. probability of
survival[edit]
A commonly accepted way of measuring a first-mover advantage by pioneering firm's profits as the
consequence of its early entry. Such profits is an appropriate measure, since the sole objective of
stockholders is to maximize the value of their investment.
Still, some issues have risen with this definition, specifically that dis-aggregate profit data are seldom
obtainable.[16] In turn, market shares and rates of company survival are typically used as alternative
measures since both are commonly linked to profits. Still these links can be weak and lead to
ambiguity. Early entrants always have a natural advantage in market share, which does not always
translate to higher profits.
Magnitude and duration of first-mover advantages[edit]
Though the name "first-mover advantage" hints that pioneering firms will remain more profitable than
their competitors, this is not always the case. Certainly a pioneering firm will reap the benefits of
early profits, but sometimes profits fall close to zero as a patent expires. This commonly leads to the
sale of the patent, or exit from the market, which shows that the first-mover is not guaranteed
longevity. This commonly accepted fact has led to the concept known as "second-mover advantage".

Second-mover advantage[edit]
This section needs additional citations for verification. Please help improve
this article by adding citations to reliable sources. Unsourced material may be
challenged and removed.
Find sources: "First-mover advantage" –
news · newspapers · books · scholar · JSTOR (November 2011) (Learn how and when to
remove this template message)

First-movers are not always able to benefit from being first. Whereas firms who are the first to enter
the market with a new product can gain substantial market share due to lack of competition,
sometimes their efforts fail. Second-mover advantage occurs when a firm following the lead of the
first-mover is actually able to capture greater market share, despite having entered late.[17]
First-mover firms often face high research and development costs, and the marketing costs
necessary to educate the public about a new type of product.[18] A second-mover firm can learn from
the experiences of the first mover firm,[17] and may not face such high research and development
costs, if it is able create its own version of a product using existing technology.[18] A second-mover
firm also does not face the marketing task of having to educate the public about the new project
because the first-mover has already done so.[18] As a result, the second-mover can use its resources
to focus on making a superior product or out-marketing the first-mover.
Often second-movers are able to overwhelm first-movers by taking the first-mover's product from a
niche consumer market to a mass market. While firms may enjoy a first-mover advantage if they
jump out to an early lead and hold onto it, the notion that winners are always the first to enter the
market is a misconception. Markides and Geroski's Fast Second describes this effect in further
detail.
The following are a few examples of first-movers whose market share was subsequently eroded by
second-movers:

 Atari vs. Nintendo;

 Apple’s Newton PDA vs. Palm Pilot PDA;
 Charles Stack Online Bookstore vs. Amazon.com; although the public was largely unaware of
Charles Stack Online Bookstore and a compelling argument can be made that Amazon has had
much more success than the second-mover BarnesandNoble.com
Second-mover firms are sometimes called "fast followers".
Obviously, every market is different. Thus, while some markets may highly reward first-movers,
others may not.
Second-mover advantage can be summarized by the adage: "The second mouse gets the cheese."
Example of second-mover advantage: Amazon.com[edit]
In 1994, Jeff Bezos founded Amazon.com as an online bookstore, and launched the site in 1995.
The product lines were quickly expanded to VHS, DVD, CDs, computer software, video games,
furniture, toys, and many other items.
Unbeknownst to many, is that Book Stacks Unlimited or books.com, was founded in 1991, and
launched online in 1992. Founded by Charles M. Stack, it is considered to be the very first online
bookstore. It has been stated that Bezos, who had worked on Wall Street for eight years, found that
web usage was increasing 2000% each year. This inspired him to search for a web-based business.
Once Bezos decided to launch the largest online bookstore, he began advertising on over 28,000
other internet sites and has since dominated the business.[citation needed]
Amazon experienced what is known as a second-mover advantage, which has subsequently turned
it into an S&P 100 company, and America’s largest online retailer. BookStacks was subsequently
sold to Barnes and Noble.

Implications for managers[edit]

Different studies have produced varying results with respect to whether or not, on the whole, first-
mover advantages exist and provide a profitable result for pioneers.[citation needed] There have been two
outstanding conclusions that have been accepted. The first being that on average, first-movers tend
to produce an unprofitable outcome (Boulding and Moore). Secondly, pioneers that manage to
survive do enjoy lasting advantages in their market share (Robinson). Thus, the pioneer strategy is
not necessarily a route that just any firm can take, but with the right resources, and the proper
marketing approach, it can result in lasting profits for the company.
Managers can make a big difference for a firm when deciding whether or not they should be
followers or pioneers. "Good generals make their luck by shaping the odds in their favor"
(MacMillan). Making good decisions and acting upon them can help a firm, but in the end there are
other factors that must be taken into account before making a final decision. One issue is that a firm
must find a way to at least limit, if not prevent, imitation, by, for example, applying for patent(s),
creating a product that is too complicated to reverse engineer, or taking control of resources that are
important to the production of its product and any imitation.[2] The firm must also remember that first-
mover advantages are not everlasting; eventually the competition will manage to take at least some
piece of the market. Finally, a company must do its best to prevent incumbent inertia caused by self-
righteousness, or possible changes in the market environment. One way to overcome such inertia is
by expanding the product line. The advantages of having a wider product line are much easier to
maintain compared to those of being a pioneer (Robinson).
Managers who opt to be followers have to pick the right method of attack on the pioneer of the
product. Some attempt to go head-to-head against the product, hoping that increased spending in
advertisement is enough to counteract the first-mover advantages. This technique has proven
successful but usually against smaller pioneers that lack resources and recognition in the market
(Urban 1986). Otherwise, this "me-too" strategy proves ineffective since the follower will most likely
lack brand name and product awareness. An alternate method is to create an entirely new market
segment and distribution channel, to establish a foothold in the industry, and then employ the me-too
strategy.[2]

Issues for future research[edit]

There are several problems that do arise when one attempts to clearly define "first-mover
advantages". These prevent us from entirely accepting that a company gains a clearly defined
benefit from being the first to produce and market a particular product. Many studies have been
done that try to identify all possible "pioneering advantages" that are available to a first-mover, but
the results so far have provided only a basic framework without any clearly defined
mechanisms.[2] There is still much more research that can be done to provide future generations of
marketing teams with concrete evidence to show that first-mover advantage is well-defined.
Theoretical and conceptual Issues[edit]
The biggest issue that arises is that, despite the evidence of first-mover advantages, the
fundamental question of how or why these advantages occur is still unanswered. When attempting
to discover the answer, it became clear that it was too difficult to differentiate between an actual
advantage and just blind luck.[2] Before this research can be completed, crucial management
decisions, such as the optimal time for to produce and market a product, need to be studied.
Ultimately, some firms are more suited to be pioneers, others are more suited to wait and see how
the product does and then improve upon it, releasing a slightly modified reproduction.
As of now, we have a much clearer understanding of advantages that firms who move their product
much later have than those that first-movers enjoy. The biggest concern currently is that almost no
effort has been put towards determining the "resolution of technological and market uncertainty"
which are both considered to be major determinants in the optimal timing of product release. There
is, also, no methodology to establish whether inertia is or is not acceptable.[2]
Empirical issues[edit]
Determining the differences between the advantages of followers and first-movers may be a
conceptual issue, but empirical issues revolve around explicit strategies that first-movers employ to
improve upon their advantage. New information is needed to support any acceptable theories
relating to the mechanisms, advantages, and disadvantages that first-movers are thought to have at
their disposal.[2] Researchers in this field must avoid using the same data repeatedly, which is a trend
that has crippled the progress of this investigation.
A future study should better delineate the differences between first-mover advantages and other
advantages that a firm may have, such as superior manufacturing, or a better marketing scheme.
Funding such a study would be extremely useful to any company that has extra money to spend for
their next quarter. Furthermore, it would be useful to study how the strength of each advantage
varies as it translates from industry to industry. It is quite possible that each industry has its own
unique benefits that have yet to be formally documented. An example of one that has, is that first-
mover advantages have proven to be much more prevalent in consumer-goods, as opposed to
producer-goods industries.[citation needed] Lastly, better knowing the length of time that a first-mover
advantage lasts would be vital to any company trying to determine whether or not it should take the
chance of being the first to market a particular type of product, and how long the product would be
profitable.