First-mover advantage

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First-mover advantage is the advantage gained by the initial occupant of a market segment. This advantage may stem from the fact that the first entrant can gain control of resources that followers may not be able to match.[1] Sometimes the first mover is not able to capitalise on its advantage, leaving the opportunity for another firm to gain second-mover advantage.

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[edit] First-mover advantage

There are several advantages that can be gained from entering first:[1]

  • Scarce resources can be preempted, e.g. occupation of prime retail locations
  • The ability to register patents and trademarks that will protect the first entrant from future competition.
  • Changing the economics of the market in a way that second entrants will not have an economic justification to enter.
  • Early profits can be re-invested in improving the resource base.
  • Reputation will likely have the advantages that come from suppliers, distributors and customers who are familiar with and loyal to their products.

Nevertheless, there are two obvious drawbacks to being the first mover: cost and risk. Not only is it expensive to be a pioneer - often investing in both R&D and market education, but it is risky, as the first company in a particular market cannot benefit from knowledge of successes and mistakes of others.

[edit] Mechanisms leading to first-mover advantages (Lieberman and Montgomery, 1988)

Technological Leadership
Learning Curve, sustainable cost advantage for the early entrant if learning can be kept proprietary and the firm can maintain leadership in market share. There is also the issue of diffusion which diminishes the first-mover advantages and they argue that diffusion occurs via workforce mobility, research publication, informal technical communication, reverse engineering, plant tours, etc. R&D and patents, pioneers can gain advantage if technology can be patented or maintained as trade secrets. However in most industries patents confer only weak protection, are easy to invent around or have transitory value given the pace of technological change.
Preemption of scarce assets
Preemption of input factors, 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. Preemption of locations in geographic and product characteristics space, 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-mover 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. Preemptive investment in plant and equipment, the enlarged capacity of the incumbent serves as a commitment to maintain greater output following entry, with price cuts threatened to make entrants unprofitable. When scale economies are large, first-mover advantages are typically enhanced.
Switching costs and buyer choice under uncertainty
Switching costs, late entrants must invest extra resources to attract customers away from the first-mover firm. Buyer choice under uncertainty, buyers may rationally stick with the first brand they encounter that performs the job satisfactorily. For individual customers benefits of finding a superior brand are seldom great enough to justify the additional search costs that must be incurred. It can pay off for corporate buyers since they purchase in large amounts. If the pioneer is able to achieve significant consumer trial, it can define the attributes that are perceived as important within a product category.

[edit] First-mover Disadvantages: (Lieberman and Montgomery, 1988)

Free-rider effects
Late movers may be able to free-ride on a pioneering firm’s investments in a number of areas including R&D, buyer education and infrastructure development.
  • Imitation costs are lower than innovation costs in most industries. However, innovators enjoy an initial period of monopoly that is not available to imitator firms.
  • Late-mover firms can acquire already trained skillful labor at lower cost
Resolution of technological or market uncertainty
Entry in an uncertain market obviously involves a high degree of risk. Early entry is more attractive when the firm can influence the way that uncertainty is resolved. For example, the firm may be able to set industry standards in its favor. Firm size may also be important, large firms may be better equipped to wait for resolution of uncertainty or to hedge by maintaining a more flexible investment portfolio.
Shifts in technology or customer needs
  • Technological progress as a process of ‘creative destruction’ in which existing products are superseded by the innovations of new firms. New entrants exploit technological discontinuities to displace existing incumbents.
  • Since the replacement technology often appears while the old technology is still growing, it may be difficult for an incumbent to perceive the threat and take adequate preventative steps.
  • Customer needs are also dynamic, creating opportunities for later entrants unless the first-mover firm is alert and able to respond.
Incumbent inertia
Vulnerability of the first-mover firm 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.
  3. the firm may become organizationally inflexible.
All three factors above inhibit the ability of the firm to respond to environmental change or competitive threats.
  • Incumbent monopolist is less likely to innovate than a new entrant, since innovation destroys rents on the firm’s existing products.
  • Under a broad range of conditions the incumbent’s optimal strategy is to develop an improved product but delay market introduction until challenged by the appearance of a rival product.

[edit] Second-mover advantage

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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 who follows the lead of the first-mover is actually able to capture greater market share, despite having entered late.

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. A second-mover firm can learn from the experiences of the first mover firm and may not face such high research and development costs if they are able create their own similar product using existing technology. 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. 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 mass markets. 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:

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.

[edit] Books

[edit] References

  1. ^ a b Grant, Robert M. (2003). Cases in Contemporary strategy analysis. USA, UK, Australia, Germany: Blackwell publishing. ISBN 1405111801. 
  • Shilling, Melissa A. (2005). Strategic Management of Technological Innovation. McGraw-Hill International Edition. 
  • Lieberman, Montgomery (1988). First-Mover Advantages. Strategic Management Journal. 

[edit] External links