First Mover Advantage? by Andrew Isherwood

As both Disruptive Innovation and Blue Ocean Strategy are first mover strategies, investigating the extensive First Mover Advantage (FMA) literature may give us some more insight. As business strategy has...

As both Disruptive Innovation and Blue Ocean Strategy are first mover strategies, investigating the extensive First Mover Advantage (FMA) literature may give us some more insight. As business strategy has its roots in the military:

Strategy coming from the Greek word strategos meaning the art of the general” Collis (2005)
As can be seen from this quote from The Art of War by Sun Tzu from the six-century BC there is a long tradition of strategists gaining from being first.

Sun Tzu said: Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted” Sun Tzu (~600 BC) 1

Someone always needs to be first, but is there an advantage in being first in business or is this just a left over concept from a military past?

There are many conflicting studies, some suggest there is a first mover advantage: Gabel (1994)2 Lieberman & Montgomery (1988)3 others suggest a second mover advantage Schilling (2002)4 , Tyagi (2000)5 . Other propose limitations on the FMA and suggest only sometimes is there a FMA Suarez & Lanzolla (2005)6 . This suggests FMA is not a simply proven subject.

The first complexity is in the definition of FMA, different papers use different definitions, some suggest it is the first company to have commercial success, while others say it’s the first company to develop the technology. Secondly as with Disruptive Innovation and Blue Ocean Strategy there are major criticisms with much of the research regarding selection bias, both survivor bias and industry bias seem to inevitably be given as dis-proof of the results of any one study.

Thirdly the selection of the parameters to denote success can also play a significant role and may be more important than first mover advantage VanderWerf (1997)7.

However a start-up company needs to convince its investors that being first, will give them an advantage otherwise, why be first and take all the risks of failure? Much of the strategy literature takes the view that FMA does exist.

Lieberman & Montgomery (1988)3 define first mover advantage as being when there is a First-mover opportunity, the firm have the proficiency to carry this out and there is an element of luck involved too. The following is an investigation into the FMA literature to gain a better understanding of the subject.

Lieberman & Montgomery (1988)3 suggest that there is both a first mover advantage and a late mover advantage, identifying that firms with diverse capabilities can take advantage at different times, the example given is of two firms one an R&D firm who can achieve first mover advantage by developing a new technology or product and a second firm who specialises in marketing, who can achieve mass product launches after any patents have expired.

Lieberman & Montgomery (1988)3 summarise by stating that first mover firm can, once obtained, prolong its first mover advantage by making it harder for other firms to follow. This can be achieved by increasing capacity to meet the market demand, continually innovating the ‘product’ and extending the quality and breadth of the product line.

However followers can aggressively attack first movers if the first mover is not in a strong position, otherwise the followers would be better to follow a strategy of differentiation or look for market niches where they can get a foot in the door. Then once they are established in the market direct competition is possible.

Network Externalities

Katz & Shapiro (1985)  ((Katz M.L. & Shapiro C. (1985), “Network Externalities, Competition, and Compatibility”, The American Economic Review, Vol. 75, No. 3 (Jun., 1985), pp. 424-440)) proposed the existence of “Network Externalities” or the effect that with an increase the number of customers, each customer gets more value out of the experience of the product. The typical example is the telephone, when the majority of people have access to the telephone it become essential to life. During the start-up phase of a new network the firm will subsidise the product until a critical mass of customers is reached at which point the take-up rate will increase Allen (1988)8 , he also suggests that to reach critical mass is reliant on potential customers ‘believing’ that critical mass will be reached. Also if an existing customer’s need can be incorporate into the new offering this helps to reach the critical mass sooner.

This suggests where there are Network Externalities at play the FMA is conditional on either gaining scale or customers believing there will be scale in the future. This narrows Lieberman & Montgomery (1988) ((Lieberman M.B. Montgomery D.B (1988), “First-Mover Advantages”, Strategic Management Journal, Vol. 9, 41-58)) initial FMA theory and explains the Dot.com bubble in 2000 when there was a land grab for customers (Porter 2001)9

Contradicting Stance

Schilling (2002)4 looked at firms learning orientation and timing as playing a significant role in the success of standard based technologies in winner take all networks. Specifically looking to see if unsuccessful technologies can be predicted by looking at which technologies were locked-out (failed and forced to leave the market) and which were successful. Schilling (2002)4 sampled 66 situations (66 locked-out and 66 successful firms) concluding that by creating a larger install base and enabling complementary products it is less likely that a technology will be locked out, however she also notes that:

Timing of entry will have a U shaped relationship with the likelihood of lockout: entering very early or very late increases the likelihood of technological lockout.” Schilling (2002) 4

This suggests that there is a second mover advantage (or first mover disadvantage) and that any follower advantage has a time limit. This is the exact opposite to Lieberman & Montgomery (1988)3.

Limiting Factors

Srinivasan et al (2004)10 assessed the following questions:

How do network externalities influence the survival duration of pioneers?” Srinivasan et al (2004)10

What factors moderate the effects of network externalities on the survival duration of pioneers (Moderating effects)?” Srinivasan et al (2004)10

Their research suggests that if the product is based on a radically new technology then although it’s more risky, the pioneer is more likely to survive. However many radically new technology intensive products fail before coming to market, therefore the pioneer is only more likely to survive if it is successful. They also suggest that the larger the firm, the better the survival rate, however incumbent inertia seems to be a limiting factor for companies that are already in the market. Again putting limiting factors on FMA.

Looking further into technology adoption when network externalities are present Katz Shapiro (1986)11 suggest that less optimal technology solutions which have sponsorship by strong firms can overcome more advanced technology offerings. The VHS / Betamax video wars of the 80’s is a very good example where Betamax (introduced in 1975) had arguably superior technology but ultimately VHS (introduced in 1977) won by having more retail video titles available for the customer, as the VHS format was easier to produce copies for the distributers (Matsushita developed high speed duplication machines that were 2.4 times quicker than Betamax) Cusumano et.al (1992)12. This adds the idea that the product and the marketing are also very important for new technology adoption and a company cannot rely on FMA.

Dominant Technology

Christensen et al. (1998)13 adds the idea of a dominant technology, at some point the industry decides X technology is the best way to do it. They recommend entrants to a market before the dominant technology is decided should concentrate on architectural innovations and if the firm is entering the market after the dominant technology has been selected then the firm should simply conform to this technology. However they did find that a firm can move too early and thus have capabilities to develop new and innovative technology locked within the culture of the organisation but lack the necessary capabilities to market and ramp production to survive. They proposed that a window of opportunity exists where new entrants can become successful, too early or too late increase the likelihood is failure. Again this contradicts Lieberman & Montgomery (1988)3 findings.

Keeping the Advantage

Looking back over history Gabel (1994)2 chronicles the US telephone industry where the first mover advantage can be seen as AT&T, they had a monopoly due to the patents they held from Bell. Once these ran out in 1894 competition battles were fought for 16 years with successive new comers failing to dent AT&T’s armour. Although some anti-competitive strategies were employed by AT&T its size and power kept it on top. This shows that once a very strong FMA is achieved then it is possible to keep it.

Which Market to attach?

Perceived wisdom would suggest the first mover should aim at the most lucrative market (Lieberman & Montgomery 19883 ) however Tyagi (2000)14 suggests if a first mover knows there is a stronger second mover about to enter the market then the first mover would be better to aim for a niche market where it can differentiate itself from the stronger second mover, however if the first mover is the strongest it should take the most lucrative part of the market. Therefore the choice of market and competition is a key factor in FMA.

FMA forever?

Henkel (2002)15 using a three staged game theory argues that a partial commitment by the first mover gives a better profit than full commitment, by playing a three staged game.

Ken et al. (2000)16 confirms FMA but states that it doesn’t last forever:

(1) early and fast movers achieve greater gains than late and slow movers, and (2) first movers suffer at the time of new product imitations”. Ken et al. (2000)16

Schoenecker & Cooper (1998)17 warn first mover advantage varies in nature and magnitude depending on which industry is looked at. However Makadok (1998)18 investigated an Industry with Low Barriers to Entry/Imitation; the money market mutual funds. As globalisation and advances in technology push the barriers to entry ever downwards this research may have implications within the technology arena. Makadok (1998)18 found that first and early movers had a sustained advantage with market size and could charge higher prices however he also found this advantage is only eroded when significant numbers of competitors join the market. Again suggesting a FMA is dependent on the market/sector and doesn’t last forever

FMA is Complex

Suarez & Lanzolla (2005)19summarise the first mover advantage literature nicely by saying:

“… for every academic study proving that first-mover advantages exist, there is a study proving they do not”, Suarez & Lanzolla (2005)19

They concentrate on giving advice for practitioners by looking at the market and technology evolution and categorising this as either fast or slow (see Figure – Suarez & Lanzolla (2005) p124 MATRIX19 ).

Suarez Lanzolla (2005) p124 Matrix

Suarez Lanzolla (2005) p124 Matrix

By looking at each of these four categories they examine if there is short term or durable first mover advantage and what the resource requirements are to make this a success (see Figure – Suarez & Lanzolla (2005) P126 fma19 ).

They suggest the key to first mover advantage is to know which market/technology combination are planned to be entered and match that with the correct resources for success. However this does not guarantee FMA as can be seen from the diagram only some of the categories even when the correct resources are applied give FMA.

This suggests that the market, technology and the companies resources are key factors influencing if there is a FMA.

Suarez Lanzolla (2005) p126 FMA

Suarez Lanzolla (2005) p126 FMA

FMA Summary

The FMA literature sites many instances of success and failure and advice about how to improve the chances of being successful. However most recommendations are based on very narrow research such as a particular market sector or product type, and are recognised as such by their authors, this limits their usefulness as general rules.

Lieberman & Montgomery (1988)3 defined the basics of FMA and since then some well researched and reasoned advice has been seen from many sources; some of this advice is however contradictory and can leave the reader wondering who to listen to. Suarez & Lanzolla (2005)19 advice appears the most sensible and the most complex; arguing that it depends on the situation whether there is a FMA. The research shows it depends on the players in the market as the ones with deep pockets can reduce the FMA (Gabel 1994)2 . The product itself especially if there are network externalities or patents involved seems to be a large factor in the success of an FMA.

In conclusion the FMA literature highlights the complex nature of business, being first, second, a follower or late entrant to the market all have their advantages and disadvantages. The secret is to make sure the product introduced, the resources within the organisation, the competition and the environment the product is introduced into fits the strategy chosen. The literature helps in this task but can only be a guide; individual circumstances and applying common sense from all this literature rather than dogmatically following any one author would seem a better strategy.

FMA does however help the Reconstructionist’s, especially Suarez & Lanzolla (2005)19 advice by focusing on suitable markets and technology with the correct resources they can reduce the likelihood of first mover failure. By adding the FMA Theories and tools to the Reconstructionist’s armoury it gives the weight to any strategy and would improve the odds of success.

 

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  1. TZU S (~600BC), “The Art of War”, Public Domain []
  2. Gabel D. (1994), “Competition in a Network Industry: The Telephone Industry, 1894-1910”, The Journal of Economic History, Vol. 54, No. 3, pp. 543-572 [] [] []
  3. Lieberman M.B. Montgomery D.B (1988), “First-Mover Advantages”, Strategic Management Journal, Vol. 9, 41-58 [] [] [] [] [] [] [] []
  4. Schilling M.A. (2002), “Technology Success and Failure in winner-take-all markets: the impact of learning organisation, timing and network externalities”, Academy of Management Journal, Vol. 45, No.2, 387-398. [] [] [] []
  5. Tyagi R.K. (2000) “Sequential Product Positioning Under Differential Costs”, Management Science, Vol. 46, No. 7 (Jul., 2000), pp. 928-940 []
  6. Suarez F. & Lanzolla G.(2005), “The Half-Truth of First-Mover Advantage”, Harvard Business Review April 2005 page 121-127 []
  7. VanderWerf P.A. Mahon J.F. (1997), “Meta-Analysis of the Impact of Research Methods on Findings of First-Mover Advantage”, Management Science, Vol. 43, No. 11, pp. 1510-1519 []
  8. Allen D (1988), “New telecommunications services: Network externalities and critical mass”, Butterworth & Co (Publishers) Ltd TELECOMMUNICATIONS POLICY []
  9. Porter M.E. (2001), “Strategy and the Internet”, Harvard Business Review, March 2001 pp. 62-78 []
  10. Srinivasan R. Lilien G.L. Rangaswamy A. (2004), “First in, First Out? The Effects of Network Externalities on Pioneer Survival”, Journal of Marketing, January 2004 [] [] []
  11. Katz M.L. & Shapiro C. (1985), “Network Externalities, Competition, and Compatibility”, The American Economic Review, Vol. 75, No. 3 (Jun., 1985), pp. 424-440 []
  12. Cusumano M.A. Mylonadis Y. Rosenbloom R.S. (1992), “Strategic Manoeuvring and Mass-Market Dynamics: The Triumph of VHS over Beta” The Business History Review, Vol. 66, No.1, High-Technology Industries, 51-94. []
  13. Christensen C.M. (1997) “The Innovator’s Dilemma”, Harvard Business School Press []
  14. Tyagi R.K. (2000) “Sequential Product Positioning Under Differential Costs”, Management Science, Vol. 46, No. 7 (Jul., 2000), pp. 928-940 []
  15. Henkel J. (2002), “The 1.5th Mover Advantage”, The RAND Journal of Economics, Vol. 33, No. 1, pp. 156-170 []
  16. Ken H.L. Smith G. Grimm C.M. Schomburg A. (2000), “Timing, Order and Durability of New Product Advantages with Imitation”, Strategic Management Journal, Vol. 21, No. 1, pp. 23-30 [] []
  17. Schoenecker T.S. and Cooper A.C. (1998), “The Role of Firm Resources and Organizational Attributes in Determining Entry Timing: A Cross-Industry Study”, Strategic Management Journal, Vol. 19, No. 12, pp. 1127-1143 []
  18. Makadok R. (1998), “Can First-Mover and Early-Mover Advantages Be Sustained in an Industry with Low Barriers to Entry/Imitation?”, Strategic Management Journal, Vol. 19, No. 7, pp. 683-696 [] []
  19. Suarez F. & Lanzolla G.(2005), “The Half-Truth of First-Mover Advantage”, Harvard Business Review April 2005 page 121-127 [] [] [] [] [] []

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