First-mover advantage

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.[2]

Another way technology leadership comes into play is when a firm has had a unique breakthrough in its research and development (R&D), 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.

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.[3] 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.[4]

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.[3][5]

First-mover advantages are typically the result of two things: technical proficiency (endogeneic) and luck (exogeneic).

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 (serendipity), or a factory warehouse being burned to the ground (unlucky), 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.

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.

A commonly accepted way of measuring a first-mover advantage by 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.[6] 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.

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".

In 1994, Jeff Bezos founded Amazon.com as an online bookstore, and launched the site in 1995. The product lines were quickly expanded to VHS, DVD, CDs, computer software, video games, furniture, toys, and many other items. However, an earlier online bookstore — Book Stacks Unlimited, or books.com — was founded in 1991 by Charles M. Stack, and launched online in 1992. It is considered to be the very first online bookstore; despite this, Bezos and Amazon were more successful due to the concurrent dot-com bubble and prudent marketing strategies. Amazon has since come to dominate the online bookstore business, while Book Stacks was sold to Barnes and Noble in 1996.[10]

The biggest issue that arises is that, despite the evidence of first-mover advantages, the fundamental question of how or why these advantages occur is still unanswered. When attempting to discover the answer, it became clear that it was too difficult to differentiate between an actual advantage and just blind luck.[4] Before this research can be completed, crucial management decisions, such as the optimal time for to produce and market a product, need to be studied. Ultimately, some firms are more suited to be pioneers, others are more suited to wait and see how the product does and then improve upon it, releasing a slightly modified reproduction.

As of now, we have a much clearer understanding of advantages that firms who move their product much later have than those that first-movers enjoy. The biggest concern currently is that almost no effort has been put towards determining the "resolution of technological and market uncertainty" which are both considered to be major determinants in the optimal timing of product release. There is, also, no methodology to establish whether inertia is or is not acceptable.[4]

Determining the differences between the advantages of followers and first-movers may be a conceptual issue, but empirical issues revolve around explicit strategies that first-movers employ to improve upon their advantage. New information is needed to support any acceptable theories relating to the mechanisms, advantages, and disadvantages that first-movers are thought to have at their disposal.[4] Researchers in this field must avoid using the same data repeatedly, which is a trend that has crippled the progress of this investigation.

A future study should better delineate the differences between first-mover advantages and other advantages that a firm may have, such as superior manufacturing, or a better marketing scheme. Funding such a study would be extremely useful to any company that has extra money to spend for their next quarter. Furthermore, it would be useful to study how the strength of each advantage varies as it translates from industry to industry. It is quite possible that each industry has its own unique benefits that have yet to be formally documented. An example of one that has, is that first-mover advantages have proven to be much more prevalent in consumer-goods, as opposed to producer-goods industries. Lastly, better knowing the length of time that a first-mover advantage lasts would be vital to any company trying to determine whether or not it should take the chance of being the first to market a particular type of product, and how long the product would be profitable.