First Mover Advantage
First Mover Advantage
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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
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. 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:
Second-mover advantage[edit]
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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: