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First-Mover Advantage

Being first into a market brings rewards, but also risks.

During the American Civil War, the Confederate general Nathan Bedford Forrest was asked what is the key to military success. His answer was succinct and simple: 'To get thar fustest with the mostest men.' More refined students of military strategy refer this as the doctrine that armies should seek to occupy and hold defensible ground. In business strategy, the concept has been distilled into what is known as first-mover advantage.

The basis of first-mover advantage is simple: by being the first to enter a new market, the business gains an advantage over its actual and potential rivals. This is true whether the business is seeking to develop new geographical/demographic markets or segments for existing products, or whether it is seeking to introduce new products to its existing market segments. If the business is first into a market, so the thinking goes, it can establish what the military thinkers would call 'defensible ground'. First, it can capture market share much more easily without having to worry about rivals trying to capture the same customers. Second, when the rivals do come along as they inevitably will the first-mover and its management team will have advantages in the ensuing competition, such as familiar products, brand loyalty, the best retail outlets, up-and-running distribution systems, and so on. By beating rivals into the market, the first-mover can consolidate its position and compete more effectively, not only defending its previously acquired share but even continuing to expand.

This seemingly simple concept is linked to many other ideas current in management. Innovation, one of the great watchwords of the 1990s, is one of them. Companies should seek to constantly innovate so as to develop new products and processes that will allow them to stay ahead of rivals. Knowledge management is another area where the importance of first-mover advantage is often implicit. Consider Arie de Geus's famous statement in 1989 that in the future, a company's only sustainable competitive advantage may be its ability to learn faster than its competitors. Getting there 'fustest with the mostest' remains a key plank of much strategic thinking, regardless of whether the 'mostest' refers to people, products or ideas.

Always Chased, Never Caught

The advantages claimed for first-mover advantage are real ones, and have been known for a very long time. One of the great 'first-movers' of all time was Richard Arkwright, the inventor of the modern factory system. Having devised a complete mechanised system for the spinning of cotton yarn, based around his own original patent for the water-frame, Arkwright threw himself into the diffusion of this system. Not only did he build a number of factories of his own, he also entered into partnerships with other entrepreneurs to set up further factories, and licensed his technology to still others. Within five years there were fifteen Arkwright-patent mills operating around the north of England.

The inevitable happened, and Arkwright lost control of the technology; his designs were heavily pirated, and six years after his original patent a court declared it null and void, meaning the technology was now free for use by all. But Arkwright had used this six years to give himself a priceless first-mover advantage. Not only did he have a dominant position in the spinning market, but he also had six years of knowledge and experience in using the technology which he used to make continuous improvements and achieve greater efficiency. For the rest of his life, Arkwright would be chased by his competitors but never caught.

The Sony Success Story

In modern times, one of the most famous exemplars of first-mover advantage as a basis for corporate strategy is the Japanese electronics maker Sony. Set up by the legendary Ibuka Masaru in the ruins of Tokyo after the Second World War, Sony built not only its strategy but its entire corporate philosophy around Ibuka's idea of 'doing things that no one else is willing to do'. For Ibuka, as for his friend and successor Morita Akio, developing leading-edge products and getting them to market faster than the competition was not so much a strategy as a personal obsession, and is considered one of the cornerstones of Sony's rapid growth and continued success.

Yet for all this, first-mover status is not without its drawbacks. The first and biggest of these is cost. In order to be a first-mover, an organisation must be a pioneer, and this means incurring costs in terms of time and investment. Technology must be invented, distribution systems have to be established, knowledge about new markets must be learned from scratch, sometimes painfully. For those who comes later to the market, the costs of acquiring all this knowledge can be much lower: products can be reverse engineered to discover their secrets and then improved on, experienced staff can be hired away from the first-mover firm to impart and share their knowledge, and so on.

Another argument concerns risk. It is the first-movers who, without previous banks of experience to draw upon, usually make the worst mistakes in terms of judging whether a product or market will be suitable. Following companies can reduce risk by learning from these mistakes. The various strategies adopted by Western firms entering the China market over the last decade show clearly the divide. Some rushed in as soon as it became apparent that Deng Xiaopeng's 'open-door' policy was here to stay, aiming to stake out their own market positions and capture first-mover advantage. Others, more cautious, chose to wait, convinced that many of the first-movers would get their fingers burned, leaving the late arrivals to capitalise both on the ensuing problems for the first-movers, and the lessons to be garnered from their defeat.

First, But Not Necessarily Most...

Many first-movers do fail. Silicon Valley, the great hotbed of modern American entrepreneurship, is full of histories of companies that had first-mover advantage but still failed; it has been estimated that only about one in a hundred Silicon Valley start-ups survives for more than two years. Why do they fail? There are many reasons, but the most common is that having secured first-mover advantage, they do not devote sufficient resources to keeping it; the following companies learn rapidly from the first-movers and erode their competitive advantage before they are able to consolidate it. The second is that first-mover advantage is no absolute guarantee of success, and for reasons which must remain forever mysterious, late-arriving and sometimes inferior products often take over the market from the first-movers. Even Sony learned this to its cost, when its Betamax video recorder system was driven out of the market by VHS. One of the keys here is to remember another military axiom: 'never reinforce failure'. Once first-mover advantage is gone, it is gone, and no amount of money will get it back.

First-mover advantage is not just about getting there first: speed is necessary to success, but not in itself sufficient. The advantages of being first must be consolidated with resources money, people and knowledge to enable the advantage to be maintained and enlarged upon. No advantage lasts forever, and the wise business knows that it is much harder to keep an advantage than it is to get it in the first place. First-mover status must never be a strategy in and of itself, only the prelude to a larger and longer strategic plan.

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