First mover advantage

University Degree Business and Administrative studies

Introduction

The idea of the first mover advantage is a simple one: “The first firm to market with a product will not only have the market to itself, but will be able to fend off all latecomers and dominate the market for some time to come”(McKenzie, Richard B.).

In this paper we will show how this concept works in practice and what the specific advantages of first movers are. In order to do so, we will present several examples and a case study, which will show how the first mover advantages work in practice.

Another important fact which has to be considered is that the term first mover can be used in two ways: a first mover in a certain industry, which means it is the first firm to invent some new technology or develop a new product.

A first mover in the market, on the other hand is the first firm to enter a certain market with already existing products. In this paper both situations will be taken into consideration.

First mover in a industry

When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages or disadvantages exist. Being first to initiate a strategic move can have a high payoff when:

Pioneering helps build a firm’s image and reputation with buyers;
Early commitments to new technologies, new-style components, distribution channels, and so on can produce an absolute cost advantage over rivals;
First-time customers remain strongly loyal to pioneering firms in making repeated purchases;
Moving first constitutes a preemptive strike, making imitation extra hard or unlikely.

The following graph summarizes those points:

http://uhavax.hartford.edu/DUDEK/chapter7/FirstMover.bmp

The bigger the first-mover advantages, the more attractive making the first move becomes. In e-commerce, for example, whoever is first with a new technology or a new network solution often enjoys lasting first-mover advantages in gaining the visibility and reputation needed to emerge as the dominant market leader. America Online, Amazon.com, Yahoo!, eBay, Broadcast.com, DoubleClick, Priceline.com, Inktomi, and several others have demonstrated the

power of moving first and forcing rivals into a desperate race to catch up. The case we added at the end of the paper discusses Toyota’s first-mover offensive in custom-built cars.

STRATEGY FOR COMPETING IN EMERGING INDUSTRIES OF THE FUTURE:

Dealing with all the risks and opportunities of an emerging industry is one of the most challenging business strategy problems. To be successful in an emerging industry, companies can pursue this strategy:

Try to capture any first-mover advantages associated with early commitments to promising technologies, allying with the most capable suppliers, expanding product selection, improving styling, capturing experience curve effects, and getting well positioned in new distribution channels.

STRATEGY FOR INDUSTRY LEADERS:

Industry leaders are typically well-known and have proven strategies. Some of the best-known industry leaders are Anheuser-Busch (beer), Starbucks (coffee drinks), Microsoft (computer software), Dell (assembling and marketing PCs), McDonald’s (fast food), Gillette (razor blades), Cambell’s Soup (canned soups), Gerber (baby food), AT&T (long-distance telephone service), Eastman Kodak (camera film), Wal-Mart (discount retailing), Amazon.com (online shopping), eBay (online auctions), and Levi Strauss (jeans).

For example, Dell Computer has proved a first-mover, a pioneer in revamping the value chain in assembling and marketing PCs. Whereas Compaq Computer, Toshiba, Hewlett-Packard, Sony, and several other PC makers produce their models in volume and sell them through independent resellers and retailers, Dell has elected to market directly to customers, building its PC’s as customers order them and shipping them to customers within a few days of receiving the order. Dell’s value chain has proved many advantages such as cost-effectiveness in coping with the PC industry’s blink-of-an-eye product life cycle (new models equipped with faster chips and new features appear every few months) – their first-mover built-to-order strategy enables the company to avoid misjudging buyer demand for its various models and being saddled with fast-obsoleting excess components and finished goods inventories.

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Partnerships with suppliers that facilitate just-in-time deliveries of components and minimize Dell’s inventory costs, coupled with Dell’s extensive use of e-commerce technologies further reduce Dell’s costs. Dell’s value chain approach is widely considered to have made it the global low-cost leader in the PC industry.

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During the rise of the Internet to center stage in the economy during the 1990s, a number of dot-com start-ups deployed business models and strategies that were either flawed or ill conceived. Many dot-coms erroneously believed that high switching costs on the part of the site users and “network effects” would give them durable first-mover advantage protection against competition from rivals. In fact, switching costs have proved weak, producing greater competitive rivalry than expected. At the same time, very few dot-com companies that were first to enter a particular market have been able to overwhelm other online rivals with the power of their brand name.

What the Dot-Com debacle has taught us is that being a first mover in some absolute sense is not nearly as important to strategic success as being a smart mover. It matters greatly whether or not a company’s actions are based on sound revenue cost profit economics.

The proper goal of a first mover is to be first to put together a combination of features, customer value, and revenue cost profit economics that unlocks an attractive market opportunity. In order to do so these first movers have to stress the importance of precisely timing their first moves and with them capturing the segment they are most interested in.

Only some of the internet first movers managed to keep the durable competitive advantage. They did so by having their own proprietary systems that have exploited network effects successfully. It is true that they are the exceptions rather then a rule but still they managed to keep their wits and the competitive market advantage.

The main strategic concern for a leader revolves around how to defend and strengthen its leadership position, perhaps becoming the dominant leader as opposed to just a leader. However, the pursuit of industry leadership and large market share per se is primary important because of the first-mover advantage and profitability that accrue to being the industry’s biggest company.

Online companies tried to use something called “stay on the offensive strategy”. This basically means that while in the market the first movers have to stay aggressive and make their rivals chase them and try to catch up. They are considered to be standard setters, but what this entails is that they need to continuously improve and innovate which can be hard because the rivals are quick on exploiting every mistake the leader makes. In order to stay on top new families of products have to be introduced as well as willingness to expand overall industry demands which means that in the end the companies on the offensive have to be the standard against which rival’s products are judged.

The stay on the offensive strategy also supposes for the users of the strategy to try and grow faster in the market than the whole industry does while continuously trying to take the rest of the market share from its rivals piece by piece. If you don’t grow fast enough in the market competition will eventually catch up and you will lose the ground currently standing on.

Also, there is a strategy called “fortify and defend” the main point of which is to make it harder for the competition to enter the market and for rivals to gain ground. Most of this strategy can be achieved by holding strongly on the current market share, strengthening the current market position and by protecting whatever competitive advantage the firm has. There are a lot of sub strategic options that can be used in order to gain higher ground while using a fortifying strategy. If the company increases the spending in advertising and R&D then it will be harder for new challengers to enter the market and usurp the share owned by the firm. Even introducing more versions of products or brands to match the product attributes that challenger brands have or to fill vacant niches that competitors could slip into would be considered a good fortifying plan. Building more capacity ahead of the existing demand can help discourage the competitors to do the same especially if they are smaller firms and by signing exclusive contracts with suppliers and dealer distributors can be a real threat for the competition because if the supply chain is working good and is synchronized with your company than it helps a great deal in achieving the advantage. The fortify and defend strategy is the first thing that the company “must” do, once they enter the market as a first mover because it will ensure their cash flow and create a better environment for the company to act in.

So these, are some of the points concerning first movers in an industry. Now we shall take a look at some more advantages for first movers in a market.

First mover in a market

When entering the new market, the first mover has some advantages which it can use not only against forthcoming competition, but also to increase the profitability of the whole operation. Therefore, competition would have to face some struggles in order to enter the market, or even to exist in it. First mover advantages which can be used to defeat competition are various and can extend from economic rents, market control, economies of scale to capital requirements and government regulations.

The first advantage is economic rents. Since the first mover is the only one in the market who offers some product or service it has the freedom to act as a monopolist, and it sets the prices as it desires. This however, does not present a barrier to entry. On the contrary due to the high prices it attracts competition to enter the market. What it does though is create high profitability in this first phase, as shown in the graph below.

Furthermore, market control is another benefit that the first mover has. The first mover has the opportunity to gain market control before competitors start entering the market and in that way they are creating a barrier for entry for the latecomers (Chari Narasimha). Amazon.com is a could example since their market control has not been seriously challenged by anyone ever since Amazon.com started their operations (Mellahi, K.; Johnson, M.).

Economies of scale are another possibility where the first mover has an opportunity to get some advantages compared with the competition. When the first mover gets the larger market share, it can decrease marginal cost of production. So, economies of scale can operate as a barrier of entry because new competitors would have to achieve the same scale which would be hard to accomplish.

One more thing a first mover can do in order to be the best in the market is switching costs. A good example is the first Croatian mobile phone operator Cro-net (which last year became T-mobile). Since it was the first one in the market it was hard to convince people to switch to the second operator Vip-net since people didn’t really feel like changing the numbers which they already had been using for a year or so. In order for Vip-net to attract customers they had to offer really cheap deals, which was connected to huge costs for them (Mrazovac, D.).

First movers also use Channel control where they create a barrier by using distribution channels which are strictly controlled. Especially if the number of those channels is limited it becomes hard for the competition to make use of those channels.

Control of scarce assets is another benefit for by first movers. Those resources can be natural resources, it can be land etc. The only problem the first mover can face is that it is only for a short period of time, that they manage to have total control of those assets. However in most case even that is enough the gain a sustainable advantage over the latecomers. Nevertheless in some industries, like diamond industry where De Beers created a continuous advantage, it is possible to sustain continuous control over scarce resources (Chari Narasimha).

Those listed above are the main advantages for first movers. In addition there are several other advantages the first movers can count on in the early phase of market entry.

Capital requirements can be barriers to entry because some industries demand large capital investments so smaller companies are often not able to fulfill a requirement needed to enter the market. This is especially true if they have to compete against a first mover who has already grabbed the market control.

Things like differentiated products or patents also present a barrier for a competition due to impossibility to compete with the companies which have acquired that.

Last but not least, government regulations can also be barriers when certain governments have a deal with a first mover company, where they (governments) protect first movers from the competition. This becomes very visible when entering the market of a transitional economy where a whole variety of deals are possible (Chari Narasimha).

Conclusion

First mover advantages exist for both cases – first movers within an industry as well as first movers in a market. However it is not enough to count on those advantages! Setting clear objectives, defining a strategy as well as long term commitment are essential for long term success (Yadong, L; Peng M.W). The advantages which can be gained from making the first move should therefore not be taken as a guarantee for success but rather as an additional incentive to be the first mover.

TOYOTA’S FIRST-MOVER OFFENSIVE IN CUSTOM-BUILT CARS

In fall 1999 Toyota Motor Company announced that it would begin a program to allow U.S. car shoppers to order custom-equipped vehicles for delivery within five days. The move was seen as an attempt to shift from a “build-for-dealer-inventory” business model, which was already relatively common in Japan and Europe. But the move was further interpreted as a shrewd strategic initiative by Toyota to gain competitive advantage by being the first North American manufacturer to make this transition.

Surveys of car buyers indicated that close to 50 percent were unable to find the model, color, or equipment configuration they preferred when shopping dealer lots. Traditionally, dealers made educated guesses as to what model, color, and equipment options buyers would prefer, placed their orders with manufacturers, and hoped that car buyers would find what they wanted from the array of vehicles they had in stock. To induce customers to compromise if what they wanted was not in stock, manufacturers offered rebates and dealers would make price concessions. Custom-ordered vehicles could be obtained, but delivery times often ranged from 30 to 60 days.

Toyota’s competitive move to five-day delivery on custom orders was intended not only to better satisfy car buyers and encourage brand loyalty but also gain the benefits of tighter supply chain management and reduce reliance on costly promotions to push sales of slow-selling models. A build-to-order business model (similar to that used by Dell, Gateway, and other PC makers) permitted tighter just-in-time delivery of parts and components to Toyota assembly plants, plus a reduced need for profit-eroding rebates and discounts on unpopular models and configurations. It also paved the way for dealers to drastically cut the number of vehicles kept in stock (thus driving down their inventory-financing costs). If the built-to-order approach caught on with car buyers, a dealer would only have to stock a minimal number of showroom models for inspection and test drives, a limited number of vehicles for immediate delivery, and function mainly as a pickup point for custom orders. Investing in acres of real estate at visible, high-traffic locations would be less necessary.

A built-to-order model would also work to the advantage of Internet car-buying services, since it would be easy for car shoppers to do their research online, make price comparisons, and place their orders.

From Toyota’s perspective, the issue was whether its first-mover offensive would provide a lasting competitive advantage. Would buyers respond in attractive numbers? Would Toyota realize significant cost-savings and gain a valuable cost advantage over rivals? How long would it take for rival manufacturers to develop the capability to match Toyota’s five-day delivery, build-to-order option?