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First-mover advantage

In marketing strategy, first-mover advantage (FMA) is the competitive advantage gained by the initial ("first-moving") significant occupant of a market segment. First-mover advantage enables a company or firm to establish strong brand recognition, customer loyalty, and early purchase of resources before other competitors enter the market segment.

For the chess concept, see First-move advantage in chess.

First movers in a specific industry are almost always followed by competitors that attempt to capitalise on the first movers' success. These followers are also aiming to gain market share; however, most of the time the first-movers will already have an established market share, with a loyal customer base that allows them to maintain their market share.[1]

General conceptual issues[edit]

Endogeneity and exogeneity of first-mover opportunities[edit]

First-mover advantages are typically the result of two things: technical proficiency (endogeneic) and luck (exogeneic).


Skill and technical proficiency can have a clear impact on profits and the success of a new product; a better product will simply sell faster. An innovative product that is the first of its kind has 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 proficiency. An example of technical proficiency aiding first-mover advantage is Procter and Gamble's first disposable baby diaper. The ability to get ahead of the market through technical breakthroughs, the use of materials that were low in cost, as well as their general manufacturing proficiency and distribution channels, allowed P&G to dominate the disposable diaper industry.


Luck can also have a large effect on profits in first-mover-advantage situations, specifically in terms of timing and creativity. Simple examples such as a research "mistake" turning into an incredibly successful product (serendipity), or a factory warehouse being burned to the ground (unlucky), can have an enormous impact in some instances. Initially, Procter and Gamble's lead 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. Large increases in the birth rate, in the years that Procter and Gamble's first disposable diapers were released, also added to their industry profits and first-mover advantage.

vs. Nintendo;

Atari

's Newton PDA vs. Palm Pilot PDA;

Apple

vs. Amazon.com; although the public was largely unaware of Charles Stack Online Bookstore and a compelling argument can be made that Amazon has had much more success than the second-mover BarnesandNoble.com

Charles Stack Online Bookstore

Implications for managers[edit]

Different studies have produced varying results with respect to whether or not, on the whole, first-mover advantages exist and provide a profitable result for pioneers. There have been two outstanding conclusions that have been accepted. The first being that on average, first-movers tend to produce an unprofitable outcome (Boulding and Moore). Secondly, pioneers that manage to survive do enjoy lasting advantages in their market share (Robinson). Thus, the pioneer strategy is not necessarily a route that just any firm can take, but with the right resources, and the proper marketing approach, it can result in lasting profits for the company.


Managers can make a big difference for a firm when deciding whether or not they should be followers or pioneers. "Good generals make their luck by shaping the odds in their favor" (MacMillan). Making good decisions and acting upon them can help a firm, but in the end there are other factors that must be taken into account before making a final decision. One issue is that a firm must find a way to at least limit, if not prevent, imitation, by, for example, applying for patent(s), creating a product that is too complicated to reverse engineer, or taking control of resources that are important to the production of its product and any imitation.[4] The firm must also remember that first-mover advantages are not everlasting; eventually the competition will manage to take at least some piece of the market. Finally, a company must do its best to prevent incumbent inertia caused by self-righteousness, or possible changes in the market environment. One way to overcome such inertia is by expanding the product line. The advantages of having a wider product line are much easier to maintain compared to those of being a pioneer (Robinson).


Managers who opt to be followers have to pick the right method of attack on the pioneer of the product. Some attempt to go head-to-head against the product, hoping that increased spending in advertisement is enough to counteract the first-mover advantages. This technique has proven successful but usually against smaller pioneers that lack resources and recognition in the market (Urban 1986). Otherwise, this "me-too" strategy proves ineffective since the follower will most likely lack brand name and product awareness. An alternate method is to create an entirely new market segment and distribution channel, to establish a foothold in the industry, and then employ the me-too strategy.[4]

Scoop (term)

Arthur, Brian. "Competing Technologies, Increasing Returns, and Lock-in by Historical Events". , 99 (1988):116-131.

The Economic Journal

Boulding, W. and M. J. Moore, May 1987. "Pioneering and profitability: structural estimates from a nonlinear simultaneous equations model with endogenous pioneering". Research Paper, Fuqua School of Business, Duke University.

Lieberman, M.B. and D.B. Montgomery, "First-Mover (Dis)Advantages: Retrospective and Link with the Resource-Based View", , 19:1111-1125 (1998)

Strategic Management Journal

MacMillan, I. C., 1983. "Preemptive strategies", Journal of Business Strategy, 16-26.

Pierson, Paul, "Increasing Returns, Path Dependence, and the Study of Politics" , 94, 2 (June 2000): 251-67.

American Political Science Review

Robinson, W. T., September 1988. "Sources of market pioneer advantage: the case of industrial goods industries", .

Journal of Marketing Research

Sugden, Robert, "Spontaneous Order" , v. 3 no. 4 (1989).

Journal of Economic Perspectives

Urban, G. L., R. Carter, S. Gaskin and Z. Mucha, June 1986. "Market share rewards to pioneering brands: an empirical analysis and strategic implications", , 645-659.

Management Science