What is the "first mover" advantage? What are the benefits to being a market pioneer?
In business, being a “first-mover” means that a company has introduced a product or service before any other competitor has done do. The key word in “introduced,” as opposed to being the first to invent or develop a product or service. Being a first-mover frequently, but not always, can prove to provide a company with significant long-term benefits, and/or give that company competitive leverage. Another term for “first-movers” is “market pioneers.” Being a market pioneer can make the introducing company dominant and yield greater profitability in the long term. While these benefits may occur for first-movers and market pioneers, they are not guaranteed. In fact, there can be disadvantages in being a first mover, because competitors who enter the market later can solve first-generation problems, which often proves more attractive in the marketplace.
A company that has reaped the advantages of being a first mover is Amazon.com. Amazon was the first online bookseller. Its competitors, like the behemoth Barnes and Noble, and the lesser but still at one time powerful, Borders, scrambled to try to gain market share by hurriedly building their own websites. Amazon, however, partnered with Borders, eliminating on facet of its competition. Amazon then built on its success with selling books on line and expanded its inventory to include music, electronics, apparel, toys, and housewares. Today, there is virtually nothing for sale that a buyer cannot find on Amazon.
The stages of being a first developer are two-fold. Being first, of course, is key… and a company can become first either through skill or sometimes by sheer luck. Secondly, if a company is first, it must, according to Stanford University professors Marvin Lieberman and David Montgomery, must be ready to deal with the benefits that come its way. The company must be able to show technological leadership, it must be able to control its resources, and it control buyer switching costs.
When it comes to technology leadership, first mover can develop technology that is difficult for their competition to copy. One of the ways they gain advantage over these later entrants is that the developing company has learned, through often lengthy trial and error, how to reduce costs of production, otherwise known as the “learning curve.” Typically, later comers will not be able to produce the market-ready product quickly enough to be competitive; therefore, the market pioneer retains cost advantage.
An example of a first mover who maintained market advantage, and staved off later entrants for a long time, is Proctor and Gamble, who introduced the disposable diaper to the consumer. Products like this can be quite difficult to emulate; however, in technology-based products, like software, are much easier to figure out and first-mover advantage may not be long-lived for the introducing company.
Another way that a first mover may benefit from technology leadership is by applying for patents for their technology to try to prevent other companies from copying it. Patents appear to protect first-mover advantages in some industries, such as pharmaceuticals. In many industries, though, later entrants can invent their own technology quickly enough so that the first-mover's patent protection does not matter. A stronger advantage from technology leadership arises when the first mover can establish their product as the industry standard, making it more difficult for followers to gain customer acceptance.
Patenting their products is another way companies can maintain first-mover advantage. Patents are protective in some industries, like pharmaceuticals, but in other fields, like technology, they can be less so. Technology later-comers can invent their own copies so fast that the patent is not very useful. Becoming an industry-standard, however, can make it difficult for those who follow to gain consumer confidence.
The second type of advantage of being a first-mover is that first-movers are more able to control their resources. Wal-marts are fond of opening in small towns for this reason. Unlike their smaller, usually much smaller competitors, Wal-mart has enough resources to buy in great bulk, thus giving the company resource advantage. They pass their buying in bulk savings on to the consumer, something their competitors cannot do, as the competition does not receive the price cuts when they are unable to buy stock in such large quantities.
The third advantage of being a first-mover is controlling buyer-switching costs. Consumers often develop loyalty to a certain product and/or brand. Once this loyalty is established, it is often difficult to get them to switch, especially if doing so involves any sort of inconvenience, such as availability or additional travel. There also may be employee training involved for late entrants, further distancing that company from the advantages of being market pioneers. Some brands that have established loyalty are Coca-Cola, Kleenex, and Marlboro cigarettes. Users of these brands are rarely interested in pursuing other options or listening to new pitches. They are satisfied and see no reason to change.
Source: Encyclopedia of Management, ©2006 Gale Cengage. All Rights Reserved.
The first mover advantage is a phenomenon from the field of marketing. It is the set of advantages that is enjoyed by the firm that is first to move into a market.
When we speak of a “market” we can be referring to a physical location or to a type of good. For example, we can speak of the market in China, but we can also speak of the market for smart phones. We can also combine the two and speak of the market for smart phones in China.
Typically, there is competition in any given market. There will be many firms that all want to sell the same thing in the same area. This is where the first mover advantage comes into play. Research shows that firms that enter a given market first have some advantages. This does not mean that they will always succeed, but it means that they have a leg up on the competition.
There are two main benefits to moving first. First, your firm has the market all to itself as it tries to get customers to buy its products. If your firm is the first in a market, there will be no other firms selling your product. This makes it very easy for you to build market share. Second, your firm will have advantages even once other firms try to enter the market. This is because your firm knows the market and because it is known by consumers in the market. Your firm will be smarter about how to behave in the market because you have experience. Consumers will tend to prefer your firm because they are already familiar with you.
For these reasons, the firm that moves into a market first will have advantages over other firms.