• The first and second mover advantages

By: Daniel Lee | 8th September 2016


To entrepreneurs and investors, being the first mover comes with a plethora of benefits including the capturing and sustaining of market share upon launching their product(s). In a similar fashion to Neil Armstrong and Buzz Aldrin who were the first to walk on the moon, these pioneering companies were the first to step into their markets, some even going on to create entirely new industries, responsible for the molding and shaping of consumerism into what we now find familiar and commonplace. As Shankar and Gregory (2013) aptly points out, one of the great advantages of being a pioneer is that “you can become the psychological standard—the brand that consumers recall first and most frequently. And being the standard by which other brands are judged, pioneers are in a position to shape consumer tastes and preferences” (Kellogg Insight 2016). Who were these first movers? Think Friendster, Myspace, Amazon, Yahoo and Napster. How successful were these first movers, and where are they now? Being the pioneer of a product category does not necessarily translate to enduring success. The same can be said about being the second, or third movers for that matter. There is a real advantage in being the one who learns from the predecessor, observing and dissecting their processes to see what they have done wrong (and right). How true is this? What are the risks and pitfalls involved? In this entry, we will explore this concept and look at some ways it applies to your new business.


First mover advantages

1. Brand Recognition

Coca Cola, Kellogg’s, Amazon, do these companies sound familiar? These are multi-national brands that are widely recognized by consumers. Not only does brand recognition foster loyalty among existing customers, but they also draw new customers to a company’s product despite new entries into the market. From that very first sip of ice-cold Coca-Cola after a football game as a kid, or that mouthful of Kellogg’s Krispies for breakfast every morning, these brands have become so commonplace that they have become somewhat ‘inseparable’ from the market, making their absence feel out-of-place or to an extent incomprehensible to consumers


2. Scale economies

Although more relevant to manufacturing or technology based products, being in the market for so long have enabled these companies to find ever more efficient ways to maximize profit margins, optimize manufacturing processes and get their products delivered to their consumers more effectively. There is a real learning curve that acts as an effective deterrent to new players in the market in an attempt to go against these ‘giants’. Although, with the open market and the advent of new communication technologies, this learning curve gap is quickly closing, allowing entrepreneurs to launch new products at a fraction of the cost as compared to before.


3. Switching costs

More apparent in the technology industry, it may cost the consumer more to switch over to a competing brand. For example, if a company had been a long time user of the Windows operating system and its associated software, i.e. Office, Outlook etc, it will cost the company a substantial amount of time and effort to switch over to a different ecosystem, i.e. Apple and the Macintosh. This includes the training of employees to effectively use the new system, the cost of procuring new hardware etc. Also, Microsoft tend to offer loyalty discounts or promotions to long-time users to upgrade or purchase new iterations.


Second mover advantages

1. Acquiring new customers

Through some research, it is not too difficult to learn how a company acquire its customers. For the pioneer, it is often a meticulous and time and money consuming process of trying out different channels and combining these channels to see which works best. By observing and analyzing how the first movers do this, a second mover can implement their sales and marketing strategies with greater efficiency and precision to target their ideal consumers.


2. Knowing your customers

A first mover is able to provide valuable insights into learning about what your customers are looking for. With the Internet and social media, it is easy to go through the many feedback that customers provide to a product to see how you can tailor yours to meet their needs and expectations. You will be able to develop, with greater confidence a product that you know the market has an actual need for.


3. ‘Free rider’ effect

Late-movers or second-movers to a market have the ability to study off of first-movers and learn from their techniques and strategies. Lieberman & Montgomery (1988) states that the ability of follower firms to freeride reduces the magnitude and durability of the pioneer’s profits, and hence its incentive to make early investments. The underlying principle of this free-rider effect allows the second mover to benefit from not incurring costs which the first-mover had to sustain since “innovation costs” are a lot higher than “imitation costs”. Moreover, first-movers also spend on hiring and training personnel but late-movers free-ride through by hiring staff that has been educated by the first-mover.

With the free-rider effect in play, second mover benefits from not only time gained from research and develop (R&D) but the cost saved. Hoppe and Lehmann-Grube (2001) found that when R & D costs are low, second-movers can produce an improved quality product at a lower cost than the pioneer firm. Riding on first-mover’s expense on research and development improves the learning-based productivity making it their biggest benefit. Learning from the first mover’s success and shortcoming can allow the late-movers to use the time and resources gained to develop a more superior product. In other words, they would not need to spend the time and money on R&D which first-mover had to incur. Second- mover can use this to their advantage and be able to produce a better and more improved product.



Conclusions and impact to your new business

To be fair, some first movers have achieved sustainable success such as Sony with personal stereos and Gilette with personal razors, but others such as Xerox or Nokia with mobile phones have suffered a gradual decline over the years. As Suarez and Lanzolla (2005) explains: “First-mover status can confer advantages, but it does not do so categorically. Much depends on the circumstances” (HBR 2016). In this regard, being a second mover definitely boasts a wide range of benefits to your new business. Not only will you be able to observe everything that works or did not work with a predecessor, it also enables you to focus your business on filling an actual market need, offer a viable alternative, filling a gap or simply by finding new ways to maximize cost efficiency. Much of the research and development has also been done by the pioneering company in the time leading to their product launch. Time and money otherwise spent on formulating the best go-to-market strategy and R&D can now be spent on other aspects, such as building brand recognition, partnerships, marketing and keeping in pace with technological innovation. Of course, this is also dependent on the type of technologies involved. Computer processors for example evolve through a series of incremental innovations while some evolve disruptively such as CDs that started to replace cassettes or digital photography that started to replace film photography altogether.


References

Hoppe, H., & Lehmann-Grube, U, 2001, Fall, Second-mover advantages in dynamic quality competition. Journal of Management & Economics Strategy, 10(3), 419-433,

Lieberman, M.B., Montgomery, D.B.,1998, First-Mover (Dis)Advantages: Retrospective And Link With The Resource-Based View, Strategic Management Journal, 19: 1111-1125,

Suarez, F, Lanzolla, G 2005, The half-truth of first mover advantage, viewed 5 September 2016, , Harvard Business Review 2016.

Shankar, V, Carpenter, G 2013, The second-mover advantage, viewed 6 September 2016, , Kellogg Insight 2016

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