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First to Market vs. Late to the Game

February 10, 2011


Nathan Bedford Forrest, a Confederate general during the American Civil War, was once asked what he thought was the key to military success. His colorful but succinct answer was: “To get thar fustest with the mostest men.” Modern students of military strategy might state this doctrine this way: armies should seek to be first to occupy and hold defensible ground. In business strategy, the concept has been transformed into what is known as “first-mover advantage.” An article on first-mover advantage [“First-Mover Advantage,” Pearson Education] discusses the assumptions behind the concept:

“The basis of first-mover advantage is simple: by being the first to enter a new market, the business gains an advantage over its actual and potential rivals. This is true whether the business is seeking to develop new geographical/demographic markets or segments for existing products, or whether it is seeking to introduce new products to its existing market segments. If the business is first into a market, so the thinking goes, it can establish what the military thinkers would call ‘defensible ground’. First, it can capture market share much more easily without having to worry about rivals trying to capture the same customers. Second, when the rivals do come along – as they inevitably will – the first-mover and its management team will have advantages in the ensuing competition, such as familiar products, brand loyalty, the best retail outlets, up-and-running distribution systems, and so on. By beating rivals into the market, the first-mover can consolidate its position and compete more effectively, not only defending its previously acquired share but even continuing to expand.”

Another definition of “first-mover advantage” states that “sometimes [an] insurmountable advantage [can be] gained by the first significant company to move into a new market.” [“First Mover Advantage,” marketingterms.com] Marketingterms.com goes on to make an important point about this definition.

“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 a entrance into the online book market. 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. Basically, 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.”

As more evidence is obtained concerning first-mover advantage, the less sound the theory appears. Take, for example, the case of home movies. First there was the great battle between Sony’s Betamax format and JVC’s VHS format. The Betamax format was first to market (1975) followed a year later by the VHS format. One can’t argue that Sony was not a significant company — it was. And it can’t be argued that Betamax was an inferior format — it wasn’t. Most analysts believe that Sony lost its first-mover advantage to JVC because the VHS format could record 3-hours of programming while the Betamax format could (at first) only record 60 minutes worth of programming. In addition, VHS machines turned out to be simpler and cheaper to build. The Pearson Education article quoted above notes that even if first-mover advantages can be obtained there are drawbacks to moving first. It continues:

“First-mover status is not without its drawbacks. The first and biggest of these is cost. In order to be a first-mover, an organisation must be a pioneer, and this means incurring costs in terms of time and investment. Technology must be invented, distribution systems have to be established, knowledge about new markets must be learned from scratch, sometimes painfully. For those who come later to the market, the costs of acquiring all this knowledge can be much lower: products can be reverse engineered to discover their secrets and then improved on, experienced staff can be hired away from the first-mover firm to impart and share their knowledge, and so on. … First-mover advantage is not just about getting there first: speed is necessary to success, but not in itself sufficient. The advantages of being first must be consolidated with resources – money, people and knowledge – to enable the advantage to be maintained and enlarged upon. No advantage lasts forever, and the wise business knows that it is much harder to keep an advantage than it is to get it in the first place. First-mover status must never be a strategy in and of itself, only the prelude to a larger and longer strategic plan.”

Despite growing evidence to the contrary, some people still insist “the key to competitive advantage is to be first to market with exceptional ideas and exceptional service offerings.” [“Develop a ‘First Mover’ Advantage,” by Patrick J. McKenna, FindLaw, 1 January 2000]. Another article claims:

“There are two stages to developing first-mover advantages. First, a company must have an opportunity to be first at something, either through skill or luck. Second, the firm must be able to capture the benefits of being first. In their award-winning article, professors Marvin Lieberman and David Montgomery of Stanford University described three benefits of being first: technology leadership, control of resources, and buyer switching costs.” [“First-Mover Advantage,” Reference for Business/Encyclopedia of Business, 2nd ed.]

Of the three first-mover “benefits,” perhaps the most important is the last — buyer switching costs. I suspect that buyer switching costs is the primary reason that Microsoft has managed to maintain its first mover advantage in the PC software sector. Consumers, however, have become very wary when it comes to purchasing new products and that advantage is diminishing. The fact of the matter is, however, someone has to be first to market with a new product or idea. Today’s business motto seems to be “innovate or die.” But how does an individual entrepreneur or company decide whether to make the leap? John Tozzi reports that “new research offers fresh insight on when to launch a product or service, and shows that being first to market isn’t always a competitive advantage” [“Think Twice About Being First to Market,” Bloomberg BusinessWeek, 19 May 2009]. Tozzi continues:

“New academic research suggests one way entrepreneurs can evaluate whether they should enter a market first or wait on the sidelines. The decision depends on how hostile the learning environment is; that is, how much entrepreneurs can learn by observing other players before they launch compared to what they learn from participating after they enter, according to Moren Levesque, an entrepreneurship researcher at the University of Waterloo. Levesque, along with professors Maria Minniti of Southern Methodist University and Dean Shepherd of Indiana University, used a mathematical model to weigh the risks and benefits of entering the market early. Their research, published in March [2009] in the journal Entrepreneurship Theory and Practice is among the first to explore ‘how different learning environments may influence the entry behavior of entrepreneurs.’ The crux of the academics’ findings on timing is this: In a hostile learning environment, entrepreneurs gain relatively little benefit by watching others. For example, if the relevant knowledge is protected intellectual property, studying the market before entering wouldn’t yield much advantage. In these situations, the trade-off favors entering early. But in less hostile learning environments, where entrepreneurs gain valuable information likely to increase their success just by watching other companies, companies benefit from waiting and learning lessons from earlier players.”

Levesque says, “If you enter early, you are more of a pioneer.” Blogger Steve Blank reminds us that pioneers were often targets for adversaries [“Why Pioneers Have Arrows In Their Backs,” 4 October 2010]. He writes:

“The phrase ‘first mover advantage’ was first popularized in a 1988 paper by a Stanford Business School professor, David Montgomery, and his co-author, Marvin Lieberman.[1] This one phrase became the theoretical underpinning of the out-of-control spending of startups during the dot-com bubble. Over time the idea that winners in new markets are the ones who have been the first (not just early) entrants into their categories became unchallenged conventional wisdom in Silicon Valley. The only problem is that it’s simply not true. The irony is that in a retrospective paper ten years later (1998), [2] the authors backed off from their claims. By then it was too late. … First mover advantage (in the sense of literally trying to be the first one on a shelf or with a press release) is not real, and the race to be the first company into a new market can be destructive.”

At this point, new research debunking the first-mover advantage might be considered piling on. Nevertheless, the evidence continues to mount. Sarah E. Needleman reports, “Contrary to popular belief, being the first to market rarely pays off, a new research paper concludes.” [“In Race to Market, It Pays to Be Latecomer,” Wall Street Journal, 20 January 2011]. She continues:

“Pioneering firms commonly die young because consumers aren’t ready to embrace their business models, according to authors Stanislav Dobrev, a professor at the University of Utah’s David Eccles School of Business, and Aleksios Gotsopoulos, a professor at Boston University School of Management. And since market forerunners lack predecessors to look to for guidance, the unprecedented decisions they make often end up fatal. ‘If you have an idea for a new market, it’s extremely hard to pull off,’ says Mr. Dobrev. He and Mr. Gotsopoulos researched the life spans of 2,197 automobile companies that launched in the U.S. between 1885 and 1981. None of the initial 25 lasted for more than 15 years, and today there are just three dominant players in the U.S. auto industry—General Motors Co., Ford Motor Co. and Chrysler Group LLC. The professors’ findings were published in the October [2010] edition of the Academy of Management Journal.”

As a relevant topic of research, studying the fate of automobile companies in the U.S. seems a bit out of touch. Car manufacturers are companies that emerged and matured during the industrial age. Although they probably have lessons to teach companies that are emerging and maturing in the information age, I suspect that not all of the lessons are transferable. Needleman continues:

“Several modern examples also illustrate the consequences of being among the first—if not the very first—to penetrate an untapped market. Take Netscape, the now-defunct Web browser that preceded Internet Explorer, Safari, Firefox and Chrome. Or consider the fate of personal-computer manufacturers like Osborne Computer Corp., Kaypro Corp. and Commodore Business Machines. They’ve all long been replaced by current market leaders Hewlett-Packard Co., Dell Inc., Gateway Inc. and others. And while social-networking innovators the Well, Friendster and MySpace still exist today, none match the popularity or financial prowess of their successor, Facebook. If you’re unfamiliar with some of these, you’re not alone. Once so-called first movers disappear, they’re often quickly forgotten, says Mr. Dobrev. ‘You rarely hear about first movers who failed,’ he explains. ‘They don’t exist very long. They don’t leave a lot of records.'”

There are some exceptions I would think. I’ve already mentioned Microsoft. Its competitor Apple has certainly thrived and eBay is hanging in there. Needleman points to Coca-Cola as another successful pioneer. But successes appear to be the exception rather than the rule. Needleman continues:

“Though it may seem unfair, similar but improved versions of failed trailblazers are often credited with leading the pack, Mr. Dobrev adds. As a result, many entrepreneurs falsely assume that success lies in being the first to brave uncharted waters. ‘We like to hear a good story about someone who’s ingenious and comes up with a great idea and sees it through,’ he says. ‘That’s not true most of the time.'”

Needleman claims that “there is at least one major advantage to being the first to market—a lack of competitors. But solitude isn’t a guaranteed recipe for a hit.” She continues:

“‘You can be the first to market and fail,’ says Mr. Dobrev. ‘It boils down to having a good strategy.’ Isaac Barchas, director of the technology incubator at the University of Texas at Austin, says entrepreneurs looking to break into an untested or emerging market should consider taking a wait-and-see approach. ‘If you can watch other people and learn from them, that gives you the opportunity to figure out how to tweak the business on the margins to be better,’ he says. ‘You can learn a lot from the experience (someone else has) paid for.’ Attempting to make history can backfire on a young company, adds Mr. Barchas. ‘A colloquial way of looking at this is being the first soldier on the lip of the trench. It’s a glorious and noble position, but it’s also dangerous.'”

Needleman offers a case study to watch — a company called “Salescoop LLC’s Scoop St., a daily deal website, launched in October 2009, about a year after rival Groupon Inc. took off, and nearly a decade after online discounter Goldstar debuted.” Groupon appears to have a Google-like advantage over emerging competitors, but Scoop St. “co-founder David Ambrose says he and his partner, Justin Tsang, benefited by observing the competitive landscape prior to launching.” I guess we’ll find out. Needleman reports that Scoop St. “has so far raised $1.5 million in angel investments and projects to reach profitability by the spring or summer.” Groupon, by contrast, has raised over $375 million in investment capital. Needleman explains Scoop St.’s strategy:

“To distinguish their start-up, Mr. Ambrose and Mr. Tsang decided to offer deals on Scoop St. that encourage buyers to engage with one another, such as coupons for weekend-long festivals. By contrast, they say their competitors mostly offer deals for services or products that consumers are likely to cash in on their own. They also decided to limit their offerings to New York City where as many other online deal sites operate nationally. Still, Mr. Ambrose adds that spending too much time focusing on the competition can be distracting. ‘If you’re only looking at the people in front of you, you’re never going to grow your business,’ he says.”

If I were going to bet on an organization that could win in the battle against Groupon, I’d place my money on the suitor Groupon turned away — Google [“Google Offers coupon launch confirmed,” by Rob Pegoraro, Washington Post, 21 January 2011].

In some ways, the debate over first-mover advantage is a battle between adages. Proponents of first-mover advantage offer up “the early bird gets the worm” while opponents counter with “the second mouse gets the cheese.” The debate is likely to continue, but the evidence is mounting that being first isn’t always best.

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