First movers: How to make the most of an early advantage
For all the stories of successful business pioneers, there are countless more unheard stories of those who tried but failed. Yet the human spirit is such that we are constantly drawn to the challenge of discovering new worlds and exploring new opportunities. What is it about successful pioneers that enables them to spot new opportunities and grasp hold of them? How does a business implement the right idea at the right time?
Is there an inherent advantage in being the first? The idea has instinctive appeal. Whether as an explorer, inventor, sportsman or game player, the person who is first hopes to outwit the competition, leaving them scrambling to catch up. It is an ancient idea that has its roots in battle strategy. As the Chinese military strategist Sun Tzu put it in the 6th century BC, “Generally, he who occupies the field of battle first and awaits an enemy is at ease. He who comes later to the scene and rushes into the fight is weary.”
In the 1980s, the business community took the idea of the ‘first-mover advantage’ from the military arena and began to develop it as a marketing strategy. The premise was that pioneering companies that seek out new business terrain can redefine what the market is. This means they can stake a claim before others have realised its potential and build defences against subsequent attacks.
Although the warfare analogy has since gone out of fashion in business school thinking, there is still a strong belief that the smart thing for a business to do is to look for unchartered, currently non-existent markets where the water is blue and there is everything to play for. The idea is to avoid shark-infested waters where later entrants are likely to be gobbled up in a feeding frenzy.
It’s an enduring idea that the business that gets into a market first has the best chance of success. But is this always the case? In 1988, Marvin B. Lieberman and David B. Montgomery, then of the Stanford Graduate School of Business, published a seminal paper on the first-mover advantage, exploring exactly what first movers gain over their competitors, and the conditions under which this arises. They also asked the equally important related question: when is it better not to rush in, but to sit back and allow rivals to make the pioneering investments?
Gaining a head start
Lieberman and Montgomery examined some of the different ways that a first-mover company can attain an advantage. “First-mover advantage arises from three primary sources: (1) technological leadership, (2) pre-emption of assets, and (3) buyer switching costs,” they said. By being first, a company has the chance to get ahead of the learning curve in a new technology. It can also take ownership of scarce assets, making it more difficult for later arrivals to access them. Finally, it can start to build an early base of customers who would find it inconvenient or costly to switch to other companies’ offerings.
Pre-emption of assets is a good place to start. A smart company foreseeing future market developments might purchase real estate, natural resources or even shelf space at a relatively low price, simply because the competition has not yet woken up to the way the market is going. Lieberman and Montgomery cited the US multinational retail company Walmart as a good example. The company’s founder, Sam Walton, was the first to spot the potential opportunity of building supermarkets in small towns in the southern US that competitors found unprofitable to service.
Walton developed a more efficient distribution network and retailing system. Critically, he passed the savings on to the consumer and thereby pioneered the business model of selling products at low prices to get higher-volume sales at a lower profit margin. By undercutting the competition and keeping prices low, Walmart gained a leading position in the market. The model has since been adopted successfully by large retailers around the world who have effectively piggybacked on the original idea. But Walmart has succeeded in fighting the competition from later entrants by maintaining a relentless focus on efficiency and low prices. As the Walmart example shows, gaining the initial advantage is one matter, but sustaining it is quite another. In the field of technology, which is characterised by a rapid pace of change and constant upheavals, it might help to be first, but it is rarely enough for the long term. The initial benefits are clear: the first company to develop and use a new technology has more time than later entrants to accumulate and master the technical knowledge. This expertise can then translate into lower costs. In industries such as pharmaceuticals, it can mean being the winner in a patent race and securing the proprietary rights to the use of a new technology. “Learning curves can generate substantial barriers to entry. Fewer than a handful of firms may be able to compete profitably,” said Lieberman and Montgomery.
But patents and learning curves can only hold back the tide for so long if a profitable new market has been discovered. Learning soon leaks, new inventions can be reverse-engineered, and clever competitors can invent a way round a patent. GE is a good example of a company that gained a technological lead in several key areas, secured that lead through patents, and has gone on to grow and prosper over the long term. Founded on the basis of Thomas Edison’s inventions, the most famous of which is undoubtedly the incandescent electric light bulb, it maintains a lead today in many of its diversified businesses by working out quickly how to commercialise new ideas and turn new technologies into viable products. Its patents have given it protection from competitors, but it has been able to thrive thanks to its commercial strategy and its focus on the customer.
What is the value of early success?
The Internet boom of the 1990s was perhaps the closest thing in recent history to a gold rush. As the Internet grew and people began to see its vast potential, many entrepreneurs let their enthusiasm for the new technology carry them away. They latched on to the idea of the first-mover advantage. “The dotcom era was interesting,” explains Lieberman today. “The belief then was that the only winner would be the first mover.” In many ways it was like a land-grab. Every company wanted to be a first mover and get big fast. But not all of them did. In fact, many failed and the subsequent dotcom crash in 2000 caused some observers to claim that the first-mover advantage was an illusion. It is instructive to look back and examine what happened.
Lieberman revisited the issue in 2007 and asked the question “Did first-mover advantage survive the dotcom crash?” In a paper with this question as its title, he looked at a wide range of Internet markets and companies and concluded that, in the absence of certain other key conditions, the advantage of being a first mover was minimal. What also emerged was that many of the biggest names in the Internet that have survived until today were not, strictly speaking, market pioneers.
“Some first movers succeeded, like Amazon and eBay,” says Lieberman, “but others, such as Google, Facebook, and Apple were all followers.” In many cases, the first movers bore the extra costs of investing in buyer education and infrastructure, only to be overtaken by “fast followers”, who were able to free-ride on the hard work of the pioneers that had established the new market. Looking back, some of the main survivors of the dotcom crash were those who, like their pre-Internet predecessors, developed superior technology and maintained their leadership by patenting innovations and staying ahead of the learning curve. Lieberman today considers Amazon a great example of a first mover, with its patented one-click technology. “There were other booksellers online before Amazon,” he says, “but Jeff Bezos saw an opportunity in Internet retailing and decided that books were the place to start. Over time, Amazon evolved and broadened its retail presence. Now it’s a supermarket to the world. Bezos had a plan and carried out a systematic search to find the right place to begin. He was right about books – it was a perfect beachhead.”
In the case of eBay, Lieberman, who has been Professor of Policy at UCLA Anderson School of Management, says that the reason for their success lay in making the most of network effects. Network effects occur when the value of a product to the individual user grows along with the number of other users. With the rapid expansion of the Internet, for example, network effects were the key to success. The online auction site eBay became more attractive the bigger it grew – more bidders means that sellers have the chance of achieving higher prices, thus attracting more sellers which, in turn, increases the number of bidders. It is a virtuous circle. Lieberman described eBay as “market makers”. In a similar way, he points out that the new taxi service Uber also benefits from network effects. “Passengers want to use the service with the most cars so that they will be picked up fastest, while drivers want to be part of the service with the most passengers so that they have the least wait. Uber is able to deliver this via its innovative technology.” But will Uber, like eBay, be able to maintain its first-mover advantage? Lieberman is sceptical. “In Los Angeles there are already two apps offering a similar service – Uber and Lyft – and it’s easy to switch. Uber may currently have technological superiority, but others may be able to catch up.”
Technological superiority is clearly not enough on its own. Bezos himself has ascribed Amazon’s pioneering success to another factor, one that harks back to the pre-Internet era of traditional retailing. Like Sam Walton’s Walmart, Amazon put the consumer at the heart of its business strategy. “If you’re competitor-focused,” he told US News in 2008, “you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering.”
Staying the course
There is another factor as well – and that is persistence. “The first prospectors make lots of mistakes,” says Lieberman. To succeed requires resilience. Bezos has talked about the necessity of being willing to fail, repeatedly, and still continue experimenting and looking for the right solutions. Sir James Dyson said that it took more than 5,000 prototypes and 5 years to develop the first of his bagless vacuum cleaners. But continual experimentation is expensive and entry to any new, uncertain market involves a high degree of risk. With the breathtaking pace of technological change today, shifts in consumer demand can undermine a first mover very rapidly. In that sense, surely you need to be a big company with sufficient resources to experiment, or maybe it is better to be a fast follower? Often it helps to be both.
“First movers very rarely get it right immediately,” says Lieberman. “Clever fast followers watch the early entrants trying different things, and they figure out the right recipe.” While disruptive innovations can shake up existing industries in ways that dominant incumbents may be slow to catch on to, dominant incumbents can nevertheless be canny and aggressive followers. “When Apple launched the iPod there were already mp3 players on the market,” says Lieberman. “What Steve Jobs saw was the potential of connecting to the Mac and thus leveraging Apple’s capabilities.”
The Internet brought the ability to interconnect, and this meant that network effects became more important than ever. These effects relate not just to the use of the product itself, but to the entire web of related services and products associated with it. When these together provide clear benefits, consumers are less likely to switch to a competitor offering, particularly if this means learning new systems and changing habits. The consumer technology market is growing constantly, and the costs of switching have been a significant brake on later entrants. Apple has excelled in making the most of this factor by placing their products in an entire ecosystem of connected offerings. Once a consumer is invested in this ecosystem, it is painful to change.
Is it necessary for success in a new market to have the complementary assets and skills in marketing, distribution, and manufacturing of an established firm, in order to be able to scale up production quickly and efficiently? Has the advantage of being a first mover been entirely overrated? Not so, says Lieberman. “If you are a small start-up, a successful strategy is to stake out territory and defend it. Many are then bought by established firms. It can be a win-win,” he says, citing Instagram as a good example. Launched in October 2010 as a free photo and video-sharing mobile app, it quickly gained in popularity and in 2012 was bought by Facebook. Under its new ownership it has continued to grow, and by December 2014 had over 300 million users. “This is also a form of first-mover success,” says Lieberman.
Google is perhaps the company that disproves the rule. It was naturally not the first-ever search engine, but a classic case of a fast follower. Earlier text-based search engines included AltaVista and Netscape. Google only rose to prominence at the end of the 1990s, but has since been dominant, consigning the pioneers to early Internet history. But what is interesting about Google is that they are now looking at new opportunities well beyond Internet search, such as augmented reality headsets, robotics, and even cures for diseases of ageing. Established firms tend to lack the skills and the mindset needed for radical innovation and therefore tend to be less effective in the early phases than smaller start-ups. But in Google’s case, it could be different. “They are entering all kinds of new areas and could become first movers elsewhere,” says Lieberman. “They are doing what established firms normally shouldn’t do – but they are an unusual firm and perhaps they can succeed.”
Google is building on a long tradition of doing things for which there is no game plan (long, at least, in Internet terms). As its popularity soared through the early 2000s, it continued to innovate and scale up its infrastructure at an unprecedented pace, reinventing the way it handled web search and data storage many times over. In “Collective Genius”, a recently published book by business academic Linda Hill and co-authors Greg Brandeau, Emily Truelove, and Kent Lineback, the challenge of creating an organisation capable of continual innovation is described by Bill Coughran, Google’s Senior Vice President of Engineering from 2003 to 2011: “We were doing work that no one else in the world was doing,” he said. “So when a problem happened, we couldn’t just go out and buy a solution. We had to create it.” Coughran had to build a team and a culture that shared the will and the vision to meet this challenge over and over.”
Luck plays a role
There is another factor that plays a big role in all this: luck. How much of a first mover’s success comes down to exceptional foresight, and how much is down to pure luck, is a tricky question, more easily answered in hindsight. Whether or not a pioneering company can survive and even thrive will depend not just on its own resourcefulness, but also on external factors beyond its control – changes in society that can radically alter markets in ways that no one expected.
The lesson learnt from the dotcom era, Lieberman believes, is that there is no single best time to enter a market. It all depends on the characteristics of the emerging market as well as on the capabilities and resources of the company in question. If a company enters a market too early without sufficient resources to survive the initial vicissitudes, then it is likely to drown or, in the best case, be swallowed up by bigger fish. If a company decides to sit back, wait for the market to develop sufficiently, and then follow, it had better follow fast enough to gain any advantage. If it arrives too late, it will immediately fall victim to the competitive attacks of the companies that are already established.
But it is still clear today that what every pioneering company needs, besides luck, is a combination of appropriable technology and the ability to pre-empt the best resources and lock in customers. “If you have these and you can add to this network effect,” says Lieberman, “you have a good chance.”