First-mover advantage
In marketing strategy, first-mover advantage is the competitive advantage gained by the initial significant occupant of a market segment. First-mover advantage enables a company or firm to establish strong brand recognition, customer loyalty, and early purchase of resources before other competitors enter the market segment.
First movers in a specific industry are almost always followed by competitors that attempt to capitalise on the first movers' success. These followers are also aiming to gain market share; however, most of the time the first-movers will already have an established market share, with a loyal customer base that allows them to maintain their market share.
Mechanisms leading to first-mover advantages
The three primary sources of a first-mover advantage are technology leadership, control of resources, and buyer switching costs.Technology leadership
First movers can make their technology/product/services harder for later entrants to replicate. For example, if the first mover reduces the costs of producing a product, then they will establish an absolute cost advantage, not just a marginal cost advantage. Not only this, but the first mover will be able to apply for patents, copyrights, and any other protective advantages that will further enhance their establishment in the market.Another way technology leadership comes into play is when a firm has had a unique breakthrough in its research and development, providing sustainable cost advantage if the innovative idea can be sustained and protected. It must be taken into consideration that technological changes are happening at an incredibly rapid pace. Therefore, patents are a weak protection as the transitory value is low. With the short lifetime of any technological advantage, patent-races can actually prove to be the downfall of a slower moving first-mover firm.
Control of resources
The second type of first-mover benefit is the ability to control resources necessary for the business that are of a higher quality than resources later entrants will be able to use. An example would be the advantage of being the first company to open a new type of restaurant in town and being able to obtain a prime location. This strategy was used by Walmart when they were the first to locate discount stores in small towns. The first entrant could also control the supply of raw materials needed to make a product, as well as obtaining the ideal supply chain. First-mover firms also have the opportunity to build resources that may discourage entry by other companies. An example of this is increasing production capacity to broaden product lines, therefore deterring following firms to enter and successfully make profits. This strategy is often used by Inditex with their fashion retail supply. 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.Buyer switching costs
The final type of benefit that first movers may enjoy comes from buyer-switching costs. If it is costly or inconvenient for a customer to switch to a new brand, the first company to gain the customer will have an advantage. Buyers will rationally stick with the first brand they encounter that performs the job adequately. Especially for consumer products, the first mover has the opportunity to shape consumer preferences and to earn customer loyalty. Satisfied consumers tend not to spend time seeking information about other products, and tend to avoid the risk of being dissatisfied if they switch. Some examples of pioneering brands in product categories include Coca-Cola soft drinks, Kleenex tissues, and Nestlé foods. These brands are known to often dominate their markets for a long time. These brand preferences appear to be more important for retail purchases by consumers than for products purchased by businesses, as businesses buy products in larger volume and have more incentive to search for lower-cost options that will contribute to an economy of scale.Disadvantages of being a first mover
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.General conceptual issues
Endogeneity and exogeneity of first-mover opportunities
First-mover advantages are typically the result of two things: technical proficiency and luck.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, or a factory warehouse being burned to the ground, 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
What constitutes a first-mover?
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, 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
A commonly accepted way of measuring a first-mover advantage is by measuring the 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. 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
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
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.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 will spend less on R&D, spend less on market education, deal with less risk of failure to gain product acceptance and spend less on customer acquisition. As a result, the second-mover can use its resources to focus on making a superior product or out-marketing the first-mover.
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