First Mover Advantages/Disadvantages
If you have a product or service that opens up a new market, as opposed to a new product for an existing market, you’ll want to consider “first-mover” advantages and disadvantages. The advantage may result in market dominance and higher-than-average profitability. A disadvantage can occur when a company entering the market later achieves superior results with “second-mover” advantage.
There are two steps required to be a first-mover: you must have the opportunity to create the market, either through cleverness or luck, then you must be able to reap the benefits. In their award-winning article, Professors Marvin Lieberman and David Montgomery of Stanford University described three first-mover benefits: technology leadership, control of resources, and buyer-switching costs.
First to market directs customers to an understanding of technology and its use, which is difficult for later market entrants to duplicate. The first mover learns how to reduce the costs of producing a product or service through experience, a “learning curve.” This usually leads to a cost advantage over the next company entering the market.
Another benefit of technology leadership derives from patent protection. The stronger the patent, the less likely others can compete. However, not all industries are created equal. Having a pharmaceutical patent is much stronger than patenting a disposable diaper that others too quickly can develop alternatives to, diminishing the value of first-mover’s patent protection. However, if technology leadership results in becoming the industry standard, it will be more difficult for later-market entrants to gain customer acceptance.
Control of resources:
Another first-mover benefit is control of a resource necessary for the business, which allows for an advantage over the resources available to competitors. In retail it’s all about location; being first will afford the best locations, which Walmart took advantage of when they started. An additional resource in retail stores could be control of shelf space; control of a product’s raw materials is another. First-mover firms also have the opportunity to build resources that may discourage entry by other companies. Increasing production capacity, or adding ancillary-product models or services can restrict competition.
This advantage occurs when it’s too costly or inconvenient for a customer to switch to a new brand. The first-mover creates the customer need, and follow-on market entrants may not be able to meet that need, or the customer has too much invested in the original. Then there’s brand loyalty—a powerful rationale for customers to stay with the original. Pioneering brands, such as Microsoft Windows and Coca Cola, have dominated their markets for decades.
There are circumstances where a second-mover can gain advantages over the first-mover. Since the market has already been educated, the cost of entry could be significantly less. Studying the first-mover’s mistakes can also lead to lower costs, and possibly a better mousetrap. First-movers may become complacent, thinking they have a lock on the market; a second-mover can swoop in and address unmet customer needs. Technology, such as 3D Printing, has made reverse-engineering so much easier; it’s not hard to duplicate products, as long as there’s no patent infringement.
There’s much uncertainty about first-mover advantages, so you must prudently consider your strategy. Do you want to make the investment a market trailblazer? If you think you’ve got that opportunity, is the market timing right? Which of the three benefits listed are likely to be available in this market? Do you have the resources to sustain the initial first-mover benefits? If you decide on a second-mover strategy, how difficult will it be to follow the first-mover? If you wait, will there be better or lower-cost technology, or a better understanding of customer needs? You must decide what will create the best long-term profit stream.
Ken Tasch is the inventor of the LAUNCH™ Selling and Business Capture System: a simple and easy way to significantly increase the odds of winning new business.
I retired this year from over 40 years of starting my own businesses and managing businesses for corporations. My goal is to help others succeed and grow to be everything they want to be; to give back and share my life experience.