“The first man gets the oyster, the second man gets the shell” Andrew Carnegie. It sounds intuitively right but often turns out wrong. The first-mover advantage can pay handsomely but second-movers can also win big (Facebook, Google). But the playbook is different for both. Understand where the opportunities lie and how to apply them to your ideas.o
First-mover advantages: fascinating & deceitful
The first-mover advantage holds such intuitive fascination that it is taken as gospel in almost any situation. It appears we only have to be the first to market to get the oyster. First-movers such as Gillette and Coca-Cola have kept their initial advantage for more than a century.
But what if there is no oyster? That is when first-movers become first losers. This was demonstrated in 2015 when one of the most envied innovations, the Google Glass, sadly, ended in the glasshole debacle. And I hope their new approach will do much better.
And even if there is an oyster, it can also go to one of the late-movers. Apple did not develop the first smartphone, let alone the first mobile phone. Google was not the first search engine. And Microsoft did not produce the first operating system (and not even the first ‘windows’).
First-movers can win big …
The first-mover advantage is “the ability of a pioneering firm to earn profits” [professor Lieberman]. It is the ability to make profits before competition is established and retain the initial advantage.
If the pioneer understands and satisfies customer requirements well, they have good chances to establish themselves for a long time. This has been long-observed in the consumer product space. E.g., in the US 20 of the 25 leading consumer goods brands in 1923 were still leading 60 years later [professor Porter]. Coca-Cola and Gillette fall into this category. But it can also happen in the technology industry, think of Sony’s walkman.
If you become the first to own a substantial share of a new market, you can further enhance your first-mover advantage by:
- Building patent barriers to protect your IP to delay second-mover’s entry
- Maintaining technological lead and remain ahead of the competition with product improvements
- Influencing the product performance factors to set the product trajectory
- Setting industry/design standards or interfaces to align with your capabilities/patents
- Achieving lower unit costs earlier and improve your competitive advantage
- Creating a brand with a loyal customer base who become repeat buyers
- Establishing an install base and set-up switching barriers
- Optimising fixed asset configuration and processes to lower unit costs
- Influencing regulatory/legal decisions to align with your practices
- Building strong network effects that increase in value as more users join
- And doing more …
[Note] Don’t miss out to download your ebook on the first-mover advantage with more in-depth examples and tips at the end of this article.
… or fall off the cliff
But it can also come differently. Many companies raced to the edge of the cliff during the dot-com boom-bust cycle of the late 1990s and early 2000s chasing the advantages of the first-mover. How else do we explain acquisitions of hundreds of billion dollars that had to be written off within a few short years? How could CEOs and CFOs be so wrong? How could risk assessments be short-circuited that take place prior signing billion dollar checks? And how could common sense fail when some of the acquired companies did not even have an offering or stable revenues.
When technology is still developing at a rapid pace and doesn’t satisfy consumer requirements, the race will be long and the outcomes uncertain [professor Suarez]. Yes, most people had no internet until the 90s and you might say that slow internet is better than no internet. But faster internet is better than slower internet. A lot of early internet service providers (ISP) were among those that fell off the dot-com cliff because their internet speed was the fastest for a few months until it was too slow half a year later.
These phenomena are easy to see in hindsight but tough to spot in the excitement of the moment. Or how could Google Glass fail not over technical difficulties but over significant privacy and safety concerns? These could have been picked up by anybody in Google. And even the raving media could have commented upon long before product launch (but didn’t).
Be the first to get it right!
We are seeing similar races right now in new opening niches. Take the biotech industry, online learning, internet of things, wearable technology, software as a service among others. From an investor perspective, these protagonists have extreme valuation multiples (price/earnings ratios > 100). On the risk-return spectrum, they are at the upper-right hand corner. Some will win, many will lose.
The winners of these gold rushes will come from within the early group but are not necessarily the very first-mover. Some will have joined the race years after the first-entrant. MySpace was the first significant social media platform and had more page views than Google. At the same time, Facebook was a dorm-room start-up. The first to deliver the right customer value proposition will beat those who care for speed only.
There are debates whether or not we have entered a new winner-takes-it-all area. Here is one view believing this to be the case and one against this view. True is that applying the first-mover (let’s better call it first-arriver) advantages listed above, winners can enhance their lead substantially. The predominant type of advantage can differ:
- Coca-Cola: product performance (taste) and the brand
- Microsoft: switching barriers, network effects and market power
- Apple (iPhone): product performance and the brand
- Facebook: network effects
Complementary assets are crucial
Take the example of Facebook. Once they built working business model, i.e. generated real earnings and a huge user base, they are now using this as a base to not only grow but also defend from competitors. Professor David Teece has introduced the concept of “complementary assets” that are required to make a business model work (I am explaining this important concept in our article on how to manage your company’s intellectual property.) Facebook has built these assets relevant for social networks.
As Bloomberg points out they are now “winning the imitation game.” They point out how Facebook has copied features that new start-ups were considering to be their unique value proposition. “Facebook’s live video initiative has usurped Periscope, forced Alphabet Inc.’s YouTube to play catch up and helped kill live streaming at Meerkat. Facebook also created a messaging service for office workers that looks and feels much like Silicon Valley’s darling work app Slack. Heck, even Messenger itself and its nascent business model are borrowed from Tencent Holdings Ltd.’s hugely popular WeChat and other messaging apps in Asia.” They close pointing out: “Zuckerberg and Facebook don’t get enough credit for their cold-eyed business genius — and the company’s clever cloning is an important aspect of that genius. All hail the copycat king.”
Copying is a necessary mechanism for the holders of complementary assets that want to defend their lead. But is it the right strategy for new players that have no own value add?
Dying the ‘me too’ death
Imitators can save 35% of R&D costs and work around most patents well before they expire (60% of patented innovations were imitated within 4 years) [professor Mansfield]. It is tempting to be able to achieve low unit costs by saving on the upfront R&D CapEx investment. Returns are seemingly further enhanced by free-rider effects, such as using developed infrastructure, customer education and other efforts that the first-mover has paid for. But these temptations can be deceitful.
None of these savings have helped the over 1,000 smartphone companies that are trying to get a part of the huge smartphone pie. According to the Wall Street Journal Apple makes 92% of all profits on the smartphone market, Samsung 15% and the rest make enough losses to tally up to 100%. Yes, some are starting to make profits – finally – but many have fallen off the cliff already trying to “disrupt” Apple.
Being a copy cat in a fast moving technology industry without any own value add and always one or two steps behind the leaders may indeed reward you with the shell to Andrew Carnegie’s oyster. Some predict Apple will be disrupted. But even if 1-2 new players become successful, over 95% of the blunt copy cats will be bankrupt without having generated notable returns for their investors while Apple has done so significantly. The exception to this is to add your competitor’s novel offering (read: imitate) to your own unique, already existing, positioning.
Train wrecks in slow motion
A common opportunity late-entrants used was new technology that allowed to develop a cringeworthy imitation at a significantly lower cost (20%-50% less), not just a mere (3-5% lower cost). They did this by using their own proprietary manufacturing processes and integrated new, initially inferior technology. They won customer segments that did not participate in the market and often they did not even intend to disrupt the existing market.
Professor Christiansen lists Toyota who entered the US car market with “crummy cars,” Honda with “crummy motorbikes,” Sony with “crummy transistor radios” (original words). Low-cost airlines emerged when regulations were liberalising and the previously government-owned national carriers were unable to cut down their bloated cost structure which they had built under protective regulations. Low-cost carriers entered with a very different asset configuration (economy class only cabin), with no meals, no drinks and so on.
So-called mini mills entered the steel market with crummy products that were just good enough for the bottom layer of the market (rebar steel). Their cost base was 20% lower than the old-established integrated steel mills that held 100% of the market. The incumbents were more than happy to flee up-market enticed by higher profit margins. The mini-mills took layer by layer while the financial media was cheerleading the incumbent’s higher profit margins. The same process repeated about 4 times until there was no further tier to move up to. All but one integrated steel mill was eliminated as per Professor Christiansen’s researches.
Don’t miss the second-mover advantage
Another opportunity for late entrants comes when the prevailing performance factors outstrip the customer’s ability to take advantage of further improvements. What does that mean? In the late 80s and 90s, PCs were still at a point where more memory, larger hard drive and more computing power could offer the user tangible benefits. From the 2000s onwards further improvements along those, once-important, performance factors lead to no noticeable improvement for the user. Only power-users will use a 16 TB hard drive, most people will be happy with much less.
Long gone are the times where users brag with their PC’s memory size. Nobody cares about this anymore. It is more likely you remember the size of your first PC’s memory than that of your current mobile phone (or laptop). The moment laptops had enough computing power and memory to run the most common software smoothly, the decisive performance factors moved to battery life, laptop weight and size.
Incumbents on the old product performance trajectory (processor speed, memory size) found themselves like the roadrunner running from the cliff and still pedaling with their feet just to realise there is no ground below them anymore. And no point running further down that path. Volume and profits on the PC market are crumbling for a reason.
[Note] Don’t miss out to download your ebook on the first-mover advantage with more in-depth examples and tips at the end of this article.
Take the list from above on the first-mover and you can find advantages for late-movers for any of the factors listed. Not all be available at all times. The window of opportunity will present itself only to those who know about these innovation tactics. As a second or late mover you can (examples):
- Workaround patent walls and/or build your own patent walls (iPhone rather than a better Blackberry-type phone)
- Learn from first-mover and significantly improve rather than bluntly copying (hard drive miniaturisation)
- Anticipate shifts in the performance trajectory as the technology trajectory outstrips users abilities to use further improvements on the classical dimensions (MacBooks rather than Macintosh XYZ)
- Use and progress established standards or build your own drastically simpler proprietary technologies (ultrasound radiography instead of x-ray)
- Learn from the first-mover and improve or develop your own processes (Toyota Production System rather than faster moving line)
- Build your own brand with a more suited unique positioning (Vanguard Group)
- Build your own switch barriers (Nintendo Wii) or better offer your product to a new market and use rewarding switch barriers
- Outsourcing the less value-adding processes after studying the pioneer, or develop your own asset configuration best suited to your unique positioning (low-cost airlines)
- Look out for regulatory changes that open new opportunities (low-cost airlines) or try to lobby for new regulatory changes (repeal of Glass-Steagal leading to new financial instruments)
- Sufficiently distinguish yourself and avoid competing on the same network/target user (LinkedIn is a professional network rather than another social network)
Your chance to add massive value
Once competing companies spot the same innovation opportunity they try to outpace each other, often not realising they are trying to outrun others to the edge of the cliff.
Infographic to download & share
Take action now & boost your innovation skills
- Which innovation idea (yours or your company’s) can you apply some of the first-mover advantages on?
- What is one significant innovation idea (or a gold rush) within your industry that your company has joined (or is a late-mover in)?
- What are opportunities and risks for both of the above for your company?
This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
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