First Mover Advantage Revisited

If you want to win you need to be the first, right? The first mover advantage theory states that the first company entering a certain market will gain massive market share and, thanks to the competitive advantages developed, it will also be able to defend its leadership position from new entrants. The reasoning behind it is quite intuitive, it goes along way with conventional wisdom and, if that was not enough, the principle has also been proposed by academics and managers around the world. Andrew Groove, Intel’s ex-CEO, defended that “the first mover and only the first mover, the company that acts while others dither, has a true opportunity to gain time over its competitors; and time advantage, in this business, is the surest way to gain market share”.

There is a lot of theoretical evidence supporting the model, but does this evidence emerge empirically as well? Not quite. Consider the markets for safety razors, disposable diapers, photographic film, laser printers, game consoles, VCRs, energy drinks, personal computers, internet browsers, operating systems, search engines, online bookstores, online auctions, VoIP services, and the list goes on. In each and every one of these markets the leader position is held by a company that entered after someone was already commercializing their products.

The question then becomes: why, despite the lack of empirical evidence, people still embrace the idea that being the first to enter a market is extremely important? There are three main reasons: the industrial age environment, natural monopolies and the bias towards winners.

Industrial age environment: until the 1980s the pace of change in some industries was much slower. Being the first to enter a market characterized by stability and predictable incremental changes could actually yield significant advantages. Under the information age, however, discontinuities and market innovations are in the face of the day. Success, as a consequence, comes no longer from being the first to market but from evolving rapidly the product to become the dominant design. JVC’s VHS recording technology came to the market almost two years after Sony’s Betamax. Nonetheless by licensing out the technology to other producers, creating alliances with content creators and adapting the features to address the needs of customers and rental stores JVC managed to establish the VHS as the standard for video recording, driving Betamax out of the market.

Natural Monopolies: some markets present predominant capital costs and infrastructure constraints, meaning that the first mover can actually build a strong competitive position by merely entering the market before other players. This is the case of oil and gas distribution, water services and electricity. Natural monopolies as the ones mentioned, however, represent exceptions in most countries. In our modern economy being able to understand customers, manage innovation and adapt quickly to market discontinuities are much more important then merely entering a market first. The most evident example is internet. Google was not the first search engine. Amazon was not the first online bookstore. Ebay was not the first online auction site. All these companies were focused in understanding their customers, innovating and adapting their strategies to reflect market changes, that is what granted them such strong leadership position.

Bias towards winners: over the long term there is a natural tendency to forget failures and to over celebrate successes. It is not surprising, therefore, that people wrongly associate long term market leaders with the first to enter a certain segment. Consider the case of laser printers. In 1971 Xerox developed the first working model in its Palo Alto Research Center. IBM on the other hand was the first company to commercialise it in 1976.. HP entered the market almost 10 years later. HP, however, evolved the product rapidly to suit mass market requirements and managed to become the clear winner. HP has sold more than 100 million units, no wonder people think it was the first company to commercialise laser printers. Even important people get confused. In the mid 1990s, during a visit to HP facilities in Idaho, an ex-president of the US congratulated HP engineers for “inventing the laser printer and maintaining the United States technological leadership”.

So, if being the first to enter a market is not important, what is then? Some of you might have already guessed. More important then entering the market first is to enter the market before a dominant design emerges and then understand better the customer needs, innovate and evolve your product or service to become the dominant design. Contrary to what most people think King Gillette was not the first to market safety razors. They were invented in 1880 by the Kampfe brothers, and a decade before King Gillette opened his company there were already commercial safety razors being sold. Gillette, however, evolved the product rapidly both by improving the design and by creating a business model where the profits would be made with the disposable blades. Neatly crafted business strategy, good understanding of customer needs and marketing enabled Gillette to dominate the safety razor market for such a long period, not being the first to enter the market.

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