The idea of the first mover advantage is a simple one: “The first firm to market with a product will not only have the market to itself, but will be able to fend off all latecomers and dominate the market for some time to come”(McKenzie, Richard B.). In this paper we will show how this concept works in practice and what the specific advantages of first movers are. In order to do so, we will present several examples and a case study, which will show how the first mover advantages work in practice.
Another important fact which has to be considered is that the term first mover can be used in two ways: a first mover in a certain industry, which means it is the first firm to invent some new technology or develop a new product. A first mover in the market, on the other hand is the first firm to enter a certain market with already existing products. In this paper both situations will be taken into consideration.
First mover in a industry When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages or disadvantages exist.1 Being first to initiate a strategic move can have a high payoff when: Industry leaders are typically well-known and have proven strategies. Some of the best-known industry leaders are Anheuser-Busch (beer), Starbucks (coffee drinks), Microsoft (computer software), Dell (assembling and marketing PCs), McDonald’s (fast food), Gillette (razor blades), Cambell’s Soup (canned soups), Gerber (baby food), AT&T (long-distance telephone service), Eastman Kodak (camera film), Wal-Mart (discount retailing), Amazon.com (online shopping), eBay (online auctions), and Levi Strauss (jeans).
For example, Dell Computer has proved a first-mover, a pioneer in revamping the value chain in assembling and marketing PCs. Whereas Compaq Computer, Toshiba, Hewlett-Packard, Sony, and several other PC makers produce their models in volume and sell them through independent resellers and retailers, Dell has elected to market directly to customers, building its PC’s as customers order them and shipping them to customers within a few days of receiving the order. Dell’s value chain has proved many advantages such as cost-effectiveness in coping with the PC industry’s blink-of-an-eye product life cycle (new models equipped with faster chips and new features appear every few months) – their first-mover built-to-order strategy enables the company to avoid misjudging buyer demand for its various models and being saddled with fast-obsoleting excess components and finished goods inventories.
Partnerships with suppliers that facilitate just-in-time deliveries of components and minimize Dell’s inventory costs, coupled with Dell’s extensive use of e-commerce technologies further reduce Dell’s costs. Dell’s value chain approach is widely considered to have made it the global low-cost leader in the PC industry. During the rise of the Internet to center stage in the economy during the 1990s, a number of dot-com start-ups deployed business models and strategies that were either flawed or ill conceived.
Many dot-coms erroneously believed that high switching costs on the part of the site users and “network effects” would give them durable first-mover advantage protection against competition from rivals. In fact, switching costs have proved weak, producing greater competitive rivalry than expected. At the same time, very few dot-com companies that were first to enter a particular market have been able to overwhelm other online rivals with the power of their brand name.
What the Dot-Com debacle has taught us is that being a first mover in some absolute sense is not nearly as important to strategic success as being a smart mover. It matters greatly whether or not a company’s actions are based on sound revenue cost profit economics. The proper goal of a first mover is to be first to put together a combination of features, customer value, and revenue cost profit economics that unlocks an attractive market opportunity. In order to do so these first movers have to stress the importance of precisely timing their first moves and with them capturing the segment they are most interested in.
Only some of the internet first movers managed to keep the durable competitive advantage. They did so by having their own proprietary systems that have exploited network effects successfully. It is true that they are the exceptions rather then a rule but still they managed to keep their wits and the competitive market advantage. The main strategic concern for a leader revolves around how to defend and strengthen its leadership position, perhaps becoming the dominant leader as opposed to just a leader. However, the pursuit of industry leadership and large market share per se is primary important because of the first-mover advantage and profitability that accrue to being the industry’s biggest company.
Online companies tried to use something called “stay on the offensive strategy”. This basically means that while in the market the first movers have to stay aggressive and make their rivals chase them and try to catch up. They are considered to be standard setters, but what this entails is that they need to continuously improve and innovate which can be hard because the rivals are quick on exploiting every mistake the leader makes. In order to stay on top new families of products have to be introduced as well as willingness to expand overall industry demands which means that in the end the companies on the offensive have to be the standard against which rival’s products are judged.
The stay on the offensive strategy also supposes for the users of the strategy to try and grow faster in the market than the whole industry does while continuously trying to take the rest of the market share from its rivals piece by piece. If you don’t grow fast enough in the market competition will eventually catch up and you will lose the ground currently standing on. Also, there is a strategy called “fortify and defend” the main point of which is to make it harder for the competition to enter the market and for rivals to gain ground. Most of this strategy can be achieved by holding strongly on the current market share, strengthening the current market position and by protecting whatever competitive advantage the firm has.
There are a lot of sub strategic options that can be used in order to gain higher ground while using a fortifying strategy. If the company increases the spending in advertising and R&D then it will be harder for new challengers to enter the market and usurp the share owned by the firm. Even introducing more versions of products or brands to match the product attributes that challenger brands have or to fill vacant niches that competitors could slip into would be considered a good fortifying plan.
Building more capacity ahead of the existing demand can help discourage the competitors to do the same especially if they are smaller firms and by signing exclusive contracts with suppliers and dealer distributors can be a real threat for the competition because if the supply chain is working good and is synchronized with your company than it helps a great deal in achieving the advantage. The fortify and defend strategy is the first thing that the company “must” do, once they enter the market as a first mover because it will ensure their cash flow and create a better environment for the company to act in.
So these, are some of the points concerning first movers in an industry. Now we shall take a look at some more advantages for first movers in a market. First mover in a market When entering the new market, the first mover has some advantages which it can use not only against forthcoming competition, but also to increase the profitability of the whole operation. Therefore, competition would have to face some struggles in order to enter the market, or even to exist in it. First mover advantages which can be used to defeat competition are various and can extend from economic rents, market control, economies of scale to capital requirements and government regulations.
The first advantage is economic rents. Since the first mover is the only one in the market who offers some product or service it has the freedom to act as a monopolist, and it sets the prices as it desires. This however, does not present a barrier to entry. On the contrary due to the high prices it attracts competition to enter the market. What it does though is create high profitability in this first phase, as shown in the graph below.