In a marketing strategy, the first-mover profit ( FMA ) is the profit earned by a significant primary ("first-move") marketer. The first mover advantage can be gained by technological leadership, or the initial purchase of resources.
A market player has the first mover advantage if it is the first participant and gains a competitive advantage through control of resources. With these advantages, first movers can be profited with large profit margins and monopoly status.
Not all first movers are rewarded. If the first mover does not take advantage of its superiority, the "first mover loss" leaves the opportunity for new entrants to enter the market and compete more effectively and efficiently than the first driver; companies like that have a "second mover advantage."
Video First-mover advantage
Mechanism that leads to first mover advantage
The three main sources of first-mover advantage are technological leadership, rare asset preemption, and buyer cost/diversion choices under uncertainty.
Technology leadership
The first of the three is technological leadership. A company can obtain FMA when it has a unique breakthrough in research and development (R & D). Innovative new technologies can provide a sustainable cost advantage for early migrants; if the technology, and the learning curve to obtain it, can be sustained, and the company can maintain leadership in market share. Innovation diffusion can reduce first-mover advantage over time, through labor mobility, research publications, informal technical communication, reverse engineering, and factory tours. Technology pioneers can protect R & D D them through patents. However, in most industries, patents only provide weak protection, are easy to find around, or have temporary value considering the rate of technological change. With their short life cycle, patents can actually prove to be the slowest moving company slump.
Examples of technological leadership
In a paper in 1981, Michael Spence discussed how the technology learning curve can be maintained exclusively, making it a great barrier to entry in other parts of the world. Although beginners in the FMA market have full control for a fixed period of time, the competition still remains, trying to catch up with the originator. Spence claims that companies that try to emerge as first movers will typically sell their products below cost in an effort to better understand the market (ie acquire intelligence); and then, once established, change the market and control the market costs. Although Spence stated that such competition reduces profitability, most of the time it takes to enter new markets.Preemption rare assets
If a first-mover company has superior information, it may be able to buy an asset at a market price below that will be applicable later in market evolution. In many markets there is room for only a number of profitable companies; First movers can often choose the most interesting niches and may be able to take strategic action that limits the amount of space available to the next entrants. The prime mover may establish a position in the geographical space or product in such a way that the newcomer finds it unprofitable to occupy the gap. Entrances are rejected through the threat of price wars, which are more intense as companies are positioned closer. The incumbent commitment is provided through a charred investment cost. When large-scale economies, the first mover advantage is usually improved. The greater capacity of the incumbent serves as a commitment to maintain greater output after entry, with the threat of price cuts on the final arrivals.
Example of a rare asset preemption
Main- (1955) provides an example of input factor preemption achieved by controlling natural resources. He stated that high-grade nickel concentrations in one geographic area enabled the first company in the region to get almost all of its supplies. Since then it has controlled most of the world's production and distribution of products.
- For preemption of locations in geographic space, the theories developed by Prescott and Visscher (1977) and others suggest that the first mover has a great advantage in claiming a given geographic area as long as the area provides the company with all the resources needed to develop. If the area can be claimed and then made to grow, then the cost of entry to another company will be too great. When a company builds itself on a particular piece of land, it can gain complete control over the market incorporated in the land, thus holding it for a long time.
- Preemption of investments in plant and equipment can prove to be another advantage for the first mover. Schmalensee (1981) says that when the scale of a large economy, FMA is usually larger and more profitable, sometimes allowing a monopoly position. He then stated that profits also arise from economies of scale that only provide small entry barriers, but also great opportunities for future growth, development, and profit.
Redirecting buyer costs and options under uncertainty
Shifting costs is an additional resource that endeavers must invest to attract customers away from the first movers. Buyers can rationally survive with the first brand they meet who do the job satisfactorily. If the pioneer is able to reach a significant consumer experiment, it can determine the attributes considered important in the product category. For individual customers, the advantage of finding a superior brand is rarely enough to justify the additional search costs that must be incurred. Shifting costs to corporate buyers can be more easily justified because they buy in larger quantities.
Shifting costs plays a big part where, what, and why consumers buy what they buy. Over time, users become familiar with certain products and functions, as well as companies that produce products. Once consumers feel comfortable and ready in their way, they apply a certain fee, which is usually pretty steep, to move on to other similar products.
Sample cost of redirection
- The seller's transfer charge actually creates the costs described in Klemperer (1986). For example, in the case of airline frequent-flyer miles, many consumers find it important that the airline provides this service; and they are actually willing to pay more for a plane ticket if that means they will get points to the next flight.
- Buyers' choices under uncertainty have evolved into profits for first movers, who realize that by getting their brand names known quickly through advertisements, flashy looks, and possible discounts, and by getting people to try their products and become satisfied customers, loyalty brand will flourish. A study by Ries and Trout (1986) suggests that newcomers who came into the market as far back as 1923 remained at the top of their special market almost seven decades later.
Maps First-mover advantage
First mover loss
Although being the first mover can create tremendous profits, in some cases the first product to market has been unsuccessful. These products are the victims of the first mover's loss. These losses include "free rider effects, technological or market uncertainty resolution, technological shifts or customer needs, and incumbent inertia."
Free rider effects
Secondary or final movers for an industry or market have the ability to learn the first movers and their techniques and strategies. "Late movers may be able to" hitchhike "to the company's pioneering investments in a number of areas including R & D, buyer education, and infrastructure development." The basic principle of this effect is that competition is allowed to get benefits and does not incur any costs that must be maintained by the first mover. This "imitation cost" is much lower than the "innovation cost" that the first mover has to incur, and can also cut the profit that the pioneering company will enjoy.
The study of the effects of free riders says the greatest benefit is riding coattails of company research and development, and increased learning-based productivity. Other studies have looked at the effects of free riders in relation to labor costs, as first movers may have to hire and train personnel to succeed, just to have their hiring competition.
Technology or market uncertainty resolution
The first mover has to deal with all the risks associated with developing new technologies and creating new markets for it. The late movers have the advantage of not maintaining those risks at the same level. While the first movers have nothing when deciding on potential earnings and firm size, the final drivers can follow industry standards and adapt them accordingly. The first movers must take all the risks when these standards are set, and in some cases they do not last long enough to operate under new standards.
Shift in technology or customer needs
"New entrants exploit technological discontinuity to replace existing petahana." Late arrivals can sometimes assess market needs that will cause the initial product to be lower. This can happen when first movers do not adapt or see changes in customer needs, or when competitors develop better, more efficient, and sometimes cheaper products. Often these new technologies are introduced while older technology is still evolving, and new technologies may not be seen as a direct threat.
An example is the steam locomotive industry that does not respond to the discovery and commercialization of diesel fuel (Cooper and Schendel, 1976). This loss is closely related to incumbent inertia, and occurs when firms can not recognize changes in the market, or if breakthrough technology is introduced. In either case, the first movers are in an unfavorable position because even if they create a market, they must defend it, and may lose the opportunity to move forward while trying to keep what they already have.
Inertia incumbent
While companies enjoy the success of being the first entrants in the market, they can also become complacent and not fully take advantage of their opportunities. According to Lieberman and Montgomery:
The first propulsion vulnerability is often enhanced by 'incumbent inertia'. Such inertia can have several root causes:
- companies can be locked into a fixed set of fixed assets,
- companies may be reluctant to remove existing product lines, or
- companies can become inflexible organically.
Companies that have invested heavily in fixed assets can not easily adapt to new market challenges, as they have less financial ability to change. Companies that do not want to change their strategy or product and bear the charred costs of "cannibalizing" or changing the core of their business, become victims of this inertia. Such companies tend not to operate in a changing and competitive environment. They may be pouring too much of their assets into what works early, and not projecting what will be needed in the long term.
Several studies are investigating why incumbent organizations can not be sustained in the face of new challenges and technologies, pointing to another aspect of petah failure. These include: "the development of routines and organizational standards, internal political dynamics, and the development of stable exchange relationships with other organizations" (Hannan and Freeman, 1984).
All in all, some companies are too rigid and invested in "now," and can not project the future to continue maximizing their current market base.
Common conceptual issues
Endogenity and exogenity of first mover chance
First-mover benefits are usually the result of two things: technical (endogeneic) and luck (exogeneic) abilities.
Technical expertise and expertise can have a clear impact on the profits and success of new products; Better products will only sell faster. Innovative products that are the first of its kind have 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 capabilities. Examples of technical skills that help the first mover advantage are the disposable Procter and Gamble baby diapers. The ability to advance from the market through technical breakthroughs, the use of low-cost materials, as well as manufacturing capabilities and their general distribution channels, allows P & G to dominate the disposable diaper industry.
Luck can also have a profound effect on profits in a first-mover advantage situation, especially in terms of time and creativity. Simple examples such as "fault" research turned into a very successful (accidental) product, or a factory warehouse that is burned to the ground (unlucky), can have a major impact in some instances. Initially, the leadership of Procter and Gamble 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. The large increase in birth rates, in the years when the first disposable diapers of Procter and Gamble were released, was also added to their industrial profits and the first mover advantage.
Problem definition and measurement
What is the first mover?
Much of the problem with the concept of first mover advantage is that it may be difficult to define. Should the first mover advantage apply to companies entering an existing market with technological discontinuities, a calculator replacing a slide rule for example, or should it apply only to new products? This inaccuracy of definition definitely calls the unfit company a pioneer in a particular industry, which has led to some debates about the real concept of first mover advantage.
Another common argument is whether the first mover advantage is the initiation of research and development versus the entry of new products into the market. Usually the definition is the last, because many companies spend millions in research and development that never produce products that enter the market. Many factors influence the answers to these questions; including incoming sequence; the time elapsed since the first release of the pioneer; and categorizations like early followers, late followers, different followers, etc.
A commonly accepted way to measure first-mover advantage by piloting a company's earnings as a consequence of initial entry. These benefits are the right measure, because the sole purpose of shareholders is to maximize the value of their investment.
However, some issues have increased with this definition, particularly that aggregate profit data are rarely available. In turn, market share and company survival rates are usually used as an alternative step because they are generally associated with profits. However this link can be weak and cause ambiguity. Initial arrivals always have a natural advantage in market share, which does not always result in higher profits.
The amount and duration of first-mover profit
Although the name "first mover advantage" suggests that pioneering companies will remain more profitable than their competitors, this is not always the case. Of course the pioneering firm will reap the benefits of early profits, but sometimes the profits drop near zero when the patent expires. This usually leads to the sale of a patent, or out of the market, indicating that the first mover is not guaranteed longevity. This commonly accepted fact has led to a concept known as the "second driving advantage".
Second mover advantage
The first mover can not always benefit from being the first. Though companies that first enter the market with new products can gain a large market share due to lack of competition, sometimes their efforts fail. The second driving advantage occurs when firms that follow the first mover's footsteps can actually gain a larger market share, even when it's late.
The first mover companies often face high research and development costs, and the marketing costs necessary to educate the public about new product types. The second propulsion company can learn from the experience of the first mover, and may not face the high cost of research and development, if able to create its own product version using existing technology. The second propulsion company also does not face the marketing task of having to educate the community about the new project because the first mover has done it. As a result, the second driver can use its resources to focus on making a superior product or marketing beyond the first mover.
Often the second mover is able to outperform the first mover by taking the first mover product from the special consumer market to the mass market. While companies can enjoy the first mover advantage if they jump to an early lead and hold it, the idea that the winner is always the first to enter the market is a misunderstanding. Markides and Geroski Fast Second describe this effect in more detail.
Here are some examples of first movers whose market share is then eroded by the second mover:
- Atari vs. Nintendo;
- Newton Apple PDA vs PDA Palm Pilot;
- Charles Stack Online Bookstore vs. Amazon.com; Although most of the public is unaware of the Charles Stack Online Bookstore and a convincing argument can be made that Amazon has been far more successful than BarnesandNoble.com the second mover
The second mover is sometimes called "quick followers".
Of course, every market is different. So while some markets may greatly appreciate the first mover, others may not.
The second driving advantage can be summarized with the saying: "The second mouse gets cheese."
Example of second mover advantage: Amazon.com
In 1994, Jeff Bezos founded Amazon.com as an online bookstore, and launched the site in 1995. The product line quickly expanded to VHS, DVD, CD, computer software, video games, furniture, toys, and many other items.
Unknown to many, whether Book Stacks Unlimited or books.com, was founded in 1991, and was launched online in 1992. Founded by Charles M. Stack, it is considered the first online bookstore. It has been stated that Bezos, who has worked on Wall Street for eight years, found that web usage increased by 2,000% every year. It inspires him to search for a web based business. After Bezos decided to launch the largest online bookstore, he began advertising on more than 28,000 other internet sites and has since dominated the business.
Amazon experienced what is known as the second mover advantage, which later turned it into the S & P 100 company, and the largest online retailer in America. BookStacks is then sold to Barnes and Noble.
Implications for managers
Different studies have produced mixed results with regard to whether or not, as a whole, the first mover advantage exists and yields favorable results for the pioneers. There are two incredible conclusions that have been received. The first is that on average, the first movers tend to produce unfavorable results (Boulding and Moore). Second, surviving pioneers enjoy a lasting advantage in their market share (Robinson). Thus, a pioneering strategy is not always a route that any company can take, but with the right resources, and the right marketing approach, can produce a lasting profit for the company.
Managers can make a big difference for companies when deciding whether they should be followers or pioneers. "The good generals make a fortune by forming opportunities that benefit them" (MacMillan). Making good decisions and acting on them can help the company, but ultimately there are other factors to take into account before making a final decision. One of the problems is that companies must find ways to at least restrict, if not prevent, replicate, by, for example, applying for patents, creating products that are too complex to reverse engineer, or take control of the resources necessary for the production of products and imitations even. Companies should also keep in mind that first-mover advantage is not lasting; eventually the competition will succeed in taking at least some part of the market. Finally, companies should do their best to prevent incumbent inertia caused by self-justification, or possible changes in the market environment. One way to overcome the inertia is to expand the product line. The advantage of having a wider product line is much easier to maintain than being a pioneer (Robinson).
The manager who chooses to be a follower must select the appropriate attack method on the product pioneer. Some try to go head-to-head towards the product, hoping that an increase in advertising spending is enough to counter the first mover advantage. This technique has proven to be successful but usually against the resource-poor pioneers and recognition in the market (Urban 1986). Otherwise, this "me-too" strategy proves ineffective because followers are likely to have no brand name and product awareness. An alternative method is to create entirely new market segments and distribution channels, to build a foothold in the industry, and then use too much strategy.
Issues for further research
There are some problems that arise when one tries to clearly define "first mover advantage". This prevents us from fully accepting that the company has a clear benefit from being the first to produce and market a particular product. Much research has been done that tries to identify all the possible "pioneering gains" available to the first mover, but the results so far only provide a basic framework with no clearly defined mechanism. Much more research can be done to provide future generations of marketing teams with concrete evidence to show that first-mover advantage is well-defined.
Theoretical and conceptual issues
The biggest problem that arises is that, apart from the evidence of first mover advantage, the fundamental question of how or why these profits happen is still unanswered. When trying to find the answer, it becomes clear that it is too difficult to distinguish between the real profit and the blind luck alone. Before this research can be completed, important management decisions, such as the optimal time to produce and market the product, need to be studied. In the end, some companies are better suited to be pioneers, others are more suited to wait and see how the product does it and then improve it, releasing a slightly modified reproduction.
Until now, we have a clearer understanding of the superiority that companies are moving their products much later than those enjoyed by first mover. The greatest concern today is that almost no effort has been made to determine the "technological and market uncertainty resolution" both of which are considered key determinants in the optimal time of product launch. There is also no methodology to determine whether inertia or unacceptable.
Empirical issues
Determining the difference between followers' profits and first mover may be a conceptual problem, but empirical issues revolve around the first explicit strategy-the hiring force to increase their profits. New information is required to support any acceptable theory with regard to the mechanisms, advantages and disadvantages considered by the first mover. Researchers in this field should avoid using the same data over and over, which is a trend that has paralyzed the progress of this investigation.
Future studies should better illustrate the difference between first-mover profits and other benefits that a company might have, such as superior manufacturing, or better marketing schemes. Funding such a research will be very useful for any company that has extra money to spend for the next quarter. Further, it will be useful to study how the strengths of each advantage vary when translated from industry to industry. It is likely that every industry has its unique benefits that have not been formally documented. One example of this is that the first mover advantage has proved far more prevalent in consumer goods, compared to commodity industries. Lastly, it is better to know the length of time that the first mover advantage will be vital for any company trying to determine whether it should take the opportunity to be the first to market a particular product, and how long the product will be profitable.
See also
- Spoons (terms)
References
Further reading
- Boulding, W. and M. J. Moore, May 1987. "Pioneering and profitability: structural estimates of simultaneous nonlinear equation models with endogenous pioneers". Paper Research, Fuqua School of Business, Duke University.
- Lieberman, M.B. and D.B. Montgomery, "First-Mover Profit (Dis): Retrospective and Link with Resource-Based View", Journal of Strategic Management, 19: 1111-1125 (1998)
- MacMillan, I. C., 1983. "Preemptive Strategy", Journal of Business Strategy, 16-26.
- Robinson, W. T., September 1988. "The source of the pioneering profit of the market: the case of industrial goods industry", Journal of Marketing Research.
- Urban, G. L., R. Carter, S. Gaskin, and Z. Mucha, June 1986. "Market share awards for pioneer brands: empirical analysis and strategic implications", Management Science, 645-659.
Source of the article : Wikipedia
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