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Executive Summary
There has been numerous contradictory theoretical and empirical research conducted about first mover advantages. The paper examines the existence of first mover advantages, the potential first mover advantages and disadvantages, and the influence of environment on entry strategy. Strategic management decisions need to be based upon the potential first mover advantages and disadvantages, and within the context of industry environment coupled with an assessment of the firm individual resources and capabilities, to ensure that their chosen entry strategy will lead to sustainable competitive advantage.
Introduction
First movers or market pioneering is when a firm “proactively creates or is the first to enter a new product market arena that others have not recognised or actively sought to exploit.” [Covin, Slevin, & Heeley 000 177] First mover advantage refers to the notion that the initial occupant of a strategic position gains access to resources and capabilities that a follower has difficulty matching. [Grant 18 184] Furthermore, pioneers, hope to achieve a basis for sustainable competitive advantage through their early or first mover entry strategy. Much of the past theoretical and empirical research indicates that the one or two firms that emerge as the industry leaders tend to be among the first to enter the industry. A large amount of the academic literature explores the extent to which entry order determines market share. [Miller, Gartner & Wilson 18, Mueller 17] Lieberman and Montgomery [10] as well as Mueller [17] highlight the existence of first mover advantages through identifying and categorising these sources. There is contradictory theoretical and empirical research on whether it is more effective strategically to pioneer or to follow. More recent entry strategy research emphasizes that achieving high performance involves much more than the choice to pioneer or to follow, but rather that the competitive tactics associated with pioneering and following can have “a strong impact on the ultimate effectiveness of the market entry order decision.” [Kerin, Varadarajan & Peterson 1 17] That is, for a successful pioneering and following strategy, the competitive tactics must fit the chosen market entry order strategy. [Covin, Slevin, & Heeley 000 177] Covin et al. highlights the crucial impact environmental conditions have upon success of pioneering or following tactics and entry order. Therefore the “best tactical determinants and discriminators of performance for pioneers and followers will likely vary with the environment.” [Covin, Slevin, & Heeley 000 177] Entry strategy decisions must be assessed on the basis of potential first mover advantages and disadvantages, the firm’s individual resources and capabilities, and within the industry environment, in the hope of creating sustainable competitive advantage. (Appendix Two)
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Do First Mover Advantages exist?
Pioneering advantages appear to exist empirically. [Lieberman & Montgomery 10 4]
However, pioneer advantage is not automatic, nor permanent, but a “head start”. [Cahill 167] Mueller [17 87] claims that “one of the empirical regularities of a product or industry’s lifecycle is that the one or two firms that eventually emerge as the industry leaders tend to be among the first to enter the industry.” Numerous studies have analysed the positive correlation between market pioneering and firm performance. Golder and Tellis [1] study lead to the conclusion that early market leaders (not necessarily pioneers) have a greater long-term success; those in their sample entered an average of 1 years later than the pioneers. Their results showed that close to half of the market pioneers in their sample of 500 brands in 50 product categories failed and that the survivors average market share is lower than that found in other studies. Robinson and Fornell’s research based on PIMS data showed that “on average market share advantages accrue to pioneers and early followers in both industrial and consumer goods.” [185 7] Furthermore, their results highlighted the advantage appears to be more substantial for consumer goods, based on differences in market share between pioneers and late movers, or in terms of the “statistical contribution of entry order to the explanation of market share differences.” [Robinson & Fornell 185 7] Many prior research including Carpenter and Nakamoto’s [18] study have shown that it is possible for pioneers to dominate a strategic position for decades. However, contradictory research does exist, in particular Schnaars’s [14] thesis. Schnaars’s study defined pioneer as a firm introducing a product to the market up to and including the first to sell it successfully and found that pioneer advantage does not exist. [14 14] Schnaars studied 8 product cases where the pioneer failed to hold a long-term market leader position. (Appendix 1) Furthermore Schnaars analysed several academic articles of pioneer advantage, and concluded that due to the flawed nature of the articles, which tend to be theoretical or experimental, it is better to be “fast second” than a pioneer. [Schnaars 1417] Schnaars work has been criticised for definitional and methodological problems, though his research shows that in some circumstances, later entrants can possess the ability to dominate the market. [Cahill 16 7] The majority of theoretical and empirical research appears to indicate the existence of first mover advantages; the issue is to define the potential advantages and disadvantages, and most importantly, the implications of these findings for strategic management.
Sources of First Mover Advantage
Theoretical and empirical research highlights several main sources of competitive advantage for first movers. Mueller (17) studied the nature of first mover advantage in terms of supply and demand, in order to account for the differences in performance across firms. Mueller (17) identified four demand related advantages; set up and switching costs, network externalities, buyer inertia due to habit formation, and buyer inertia due to uncertainty over quality. Furthermore Mueller identified three supply related advantages for the first mover as network externalities, scale economies and economies of learning. [Mueller 17 88]
Lieberman and Montgomery [10 6] identified the three key sources of first mover advantage as proprietary technology, pre-emption of resources and the ability to lock in customers through switching costs. First movers can gain and sustain competitive advantage with a new product or process technology provided that it can remain proprietary through patents, copyrights or secrecy for a reasonable period of time. [Lieberman & Montgomery 10 6] The second source of potential competitive advantage for the first mover is the potential to pre-empt late entrants by acquiring resources at relatively low cost. [Lieberman & Montgomery 10 ] There is the potential to acquire a broad range of key resources including; input resources, geographic space, product characteristics space, marketing and distribution channels, consumers perceptual space, filling production differentiation niches, and plants and equipment. [Lieberman & Montgomery 10] Lastly Lieberman & Montgomery [10] highlight the ability to lock in customers through switching costs associated with supplier specific learning by the buyer, contractual switching costs, uncertainty of buyers regarding product quality and therefore risk aversion, as well as compatibility advantages. [Lieberman & Montgomery 10 6]
First Mover Disadvantages (or Late Mover Advantages)
There is the potential for advantages for late movers, as shown the large number of first movers who failed initially or were later overtaken by competitors. [Lieberman & Montgomery 10 17] These late mover advantages can also been viewed as First Mover disadvantages. Pioneers face two primary areas of potential disadvantage, uncertainty over demand and uncertainty over technology. [Shepherd, Douglas & Shanley 18 ]
Pioneer Uncertainty over Demand
Pioneers face considerable demand uncertainty. Pioneers do not know the potential size of the market, how fast it will grow, the potential market segments, the keys success factors, or the most effective distribution channels. [Shepherd, Douglas & Shanley 18 ] This presents an advantage for late movers, in that they are able to base their decisions on industry demand and characteristics.
Furthermore, the uncertainty for late movers is reduced because they are able to learn for pioneer’s mistakes. [Shepherd, Douglas & Shanley 18 ] An example of this is when Toyota was preparing to enter the American market, they surveyed the customers of Volkswagen, who were the market leader of small cars, and then used the information to identify the needs of the market. [Lieberman & Montgomery 188 41] The late follower can use the access to superior information to better assess the key success factors as well as the attractiveness of the market and opportunity for niches within the market. [Shepherd, Douglas & Shanley 18 ]
Pioneer face the potential problem of underestimating the demand for a product, which invites new entry to the market. [Shepherd, Douglas & Shanley 18 ] This occurred in the personal computer and calculator industries in their early stages of development. [Shepherd, Douglas & Shanley 18 ]
Pioneers face demand uncertainty in that customer taste and preferences may change with market evolution. Customer needs are dynamic which creates opportunities for later entrants unless the pioneer is observant and able to respond. [Lieberman & Montgomery 10 1] Changing tastes of customers can arise because superior choices become available, customers demand new uses, or because other factors reduce the customers willingness to pay the price that the first mover is offering. [Shepherd, Douglas & Shanley 18 ] The pioneer must be alert to these subtle changes and be able to respond, or a later entrant has the potential to enter the market and better satisfy the “newly evolved market demands.” [Golder & Tellis 1, Keeley, Knapp & Rothe 16]
In addition, demand uncertainty can occur due to changes in the regulatory environment. [Shepherd, Douglas & Shanley 18 ] An example of this is the deregulation of financial markets, which led to new investment products. [Shepherd, Douglas & Shanley 18 ]
The implications for strategic management are that first movers have access to more advantages when demand is fairly stable or predictable. However, when demand is unstable, the first mover disadvantages may outweigh advantages, and therefore the decision to follow may prove more desirable. [Shepherd, Douglas & Shanley 18 4]
Pioneer Uncertainty over Technology
Pioneers face the risk when choosing a new technology that alternate and superior technologies will emerge or that their technology will fail to perform as expected. [Aaker & Day 186, Shepherd, Douglas & Shanley 18] The ultimate value of the investment in technology relies on the firm’s ability to accurately predict the evolution of technological developments. [Lieberman & Montgomery 10 18] Pioneers face two strategic decisions in relation to technological uncertainty. [Shepherd, Douglas & Shanley 18 4] Firstly, the decision regarding when to commit to commercialise an innovative technology. [Shepherd, Douglas & Shanley 18 4] Secondly, how to reduce the threat of entry from alternative technologies or products. [Shepherd, Douglas & Shanley 18 4]
A pioneer faces the decision of when to invest to commercialise a new technology or product. [Shepherd, Douglas & Shanley 18 4] If the pioneer commits too soon, the technology may not perform as expected, or may be quickly surpassed by superior technology. On the other hand, if the pioneer commits too late, a competitor may beat them to the position of pioneer, and therefore lose the potential for first mover advantages. [Shepherd, Douglas & Shanley 18 4]
Pioneers must also decide when the technology or product is ready to move to market. It is difficult to foresee when new products from outside the pioneer’s context could render their product obsolete. [Shepherd, Douglas & Shanley 18 4] Furthermore, “few entrepreneurs would have the depth of competencies to adjust to a threat from an entirely new technology.” [Shepherd, Douglas & Shanley 18 4]
Late followers benefit from a reduction of technology related risks of entry compared to the pioneer. [Shepherd, Douglas & Shanley 18 4] Research and development and “learning based advances diffuse to competitors” through avenues such as employees, suppliers, contractors and consultants. [Lieberman & Montgomery 10 16] Imitation is less costly than innovation in most industries; therefore later entrants usually possess a cost advantage in lower research and development expenditures. [Cahill 16 8]
Late movers can learn from pioneers research and development by reverse engineering the product and by observing the pioneers actions. [Shepherd, Douglas & Shanley 18 5] Late Movers also have the opportunity to employ key personnel from the pioneer firm, and can therefore avoid training costs as well as gaining inside information. [Lieberman & Montgomery 10 17]
However, being a late entrant does not eliminate all risks of technological uncertainty. [Shepherd, Douglas & Shanley 18 5] Peters and Waterman (18) suggest that ‘excellent’ companies are better able to meet the needs of customers by the deciding to wait until more information is available about the stability of key success factors rather than pioneering with unproven technology. The “intuition” is that followers can learn from pioneer’s mistakes. [Aaker & Day 186, Carpenter & Nakamoto 18, Prahalad and Hamel 10, Shepherd, Douglas & Shanley 18]
The implications for strategic management are that first mover advantages are more likely when technology is stable and relatively predictable. [Shepherd, Douglas & Shanley 18 5] First mover disadvantages may outweigh advantages if technology is unstable, and it is “difficult to foresee the direction of change.” [Shepherd, Douglas & Shanley 18 5]
Different Industry Environments and Influence on Entry Strategy
Past theoretical research indicates that pioneering is an environment specific phenomenon. [Covin, Slevin, & Heeley 000 175] Covin et al. (000 175) examined the theory that certain types of environments are more conducive to pioneering actions, where as, in different industries these actions may have limited success. Covin et al. (000 175) theory is that “competitive tactics that are expected to best predict growth among pioneers or followers in one environmental context (eg hostile or benign environments) will not necessarily be unrelated to growth among this same type of firm in the other environmental context.” In hostile environments, Covin et al. (000 178) propose that both pioneers and followers will “differentially benefit in achieving high sales growth rates from their reliance on relatively high prices, relatively broad product lines, relatively broad geographical markets, relatively advanced process technologies, and relatively advantageous purchasing arrangements.” [000 181] In benign environments, Covin et al. (000 18) propose that pioneers and followers will “differentially benefit in achieving high sales growth rates from their reliance on relatively high quality products, relatively strong product warranties, relatively strong product warranties, relatively high advertising and promotion expenditures, relatively strong control over distribution channels employed, and relatively large numbers of distribution channels employed.” [000 186] Covin et al. (000 187) concluded from their literature review and theoretical assertions that the implementation of effective pioneering and following strategies may require unique environment specific tactics. In hostile environments, pioneering can be used to “break out of the dominant price based mode of competition” due to the uniqueness of their product, and therefore grow despite “charging high prices.” [Covin Slevin, & Heeley 000 0] Furthermore, for pioneers in benign environments, it is suggested that offering superior warranties and utilizing large numbers of distributors somewhat positively affect sales growth. [Covin Slevin, & Heeley 000 04]
Followers in hostile environments should endeavour to reduce their cost structures so as to effectively maintain low price strategies. [Covin Slevin, & Heeley 000 04] The successful follower will be the firm with the most competitive price and a low cost structure. This leads to the conclusion that the use of advanced process technologies will support follower’s growth. [Covin Slevin, & Heeley 000 04]
The implications of Covin et al. (000 0) research for strategic management is that the effective implementation of pioneering and following strategies may different tactics in different environments.
Conclusion
There has been much theoretical and empirical research conducted about first mover advantages. Pioneers, hope to achieve a basis for sustainable competitive advantage through their early or first mover entry strategy. [Covin Slevin, & Heeley 000 177] Theoretical and empirical research highlights several main sources of competitive advantage for first movers. [Mueller 17 88] Lieberman and Montgomery [10 6] identified the three key sources of first mover advantage as proprietary technology, pre-emption of resources and the ability to lock in customers through switching costs. Pioneers face two primary areas of potential disadvantage, uncertainty over demand and uncertainty over technology. [Shepherd, Douglas & Shanley 18 ] Pioneers face considerable demand uncertainty and technological uncertainty. The implications for strategic management are that first mover advantages are more likely when technology and demand are stable and relatively predictable. [Shepherd, Douglas & Shanley 18 5] Pioneers and followers competitive tactics should be selected within the environmental context of their industry. [Covin, Slevin & Heeley 000 177] Strategic management decisions for position of entry should take into account the potential advantages and disadvantages of pioneering and ensure that they possess the necessary resources and capabilities to develop and protect a sustainable competitive advantage in their chosen entry position in their environment and industry.
Appendix 1 Product markets where imitators succeeded pioneers
Schnaars, S.P. (14), Managing Imitation Strategies, The Free Press, New York, USA.
5 mm cameras
Automated Teller Machines
Ballpoint pens
Caffeine-free soft drinks
CAT Scanners
Commercial jet aircraft
Computerized ticketing services
Credit/Charge cards
Diet Soft drinks
Dry beer
Food processors
Light beer
Mainframe computers
Microwave ovens
Money-market mutual funds
Magnetic Resonance Imaging
Non alcoholic beer
Personal computer operating systems
Paperback books
Pocket calculators
Projection TV
Spreadsheets
Telephone answering machines
Video Cassette Recorders
Videogames
Warehouse clubs
Word-processing software
Appendix Two � First Mover vs. Follower Decisions
Lieberman, M.B. and Montgomery, D.B. (10), “To pioneer or follow? strategy of entry order”, in Glass, H. (Ed), Handbook of Business Strategy, (nd Ed) Warren, Gorham and Lamont Publishing, New York.
Reference List
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11. Miller, A., Gartner, W. B., and Wilson, R., (18) “Entry order, market share and competitive advantage a study of their relationships in new corporate ventures.” Journal of Business Venturing, 4 17-0.
1. Mueller, D.J., (17) “First mover and path dependence”, International Journal of Industrial Organization, 15 87-850.
1. Peters, T.J. and Waterman, R.H., 18 In search of excellence. Harper and Row, New York.
14. Prahalad, C.K., and Hamel, G. (10) “The Core Competence of the Corporation.”, Harvard Business Review, 0 7-.
15. Robinson W.T. and Fornell, C. (185) “The sources of market pioneering advantages in consumer goods industries.” Journal of Marketing Research, vol , August, pp7-04.
16. Schnaars, S.P. (14), Managing Imitation Strategies, The Free Press, New York, USA.
17. Shepherd, D.A., Douglas, E., and Shanley, M. (18) “Pioneer performance timing of entry, demand uncertainty and technological uncertainty.” NEED TO FIND EXTRA HERE � Available www.sbaer.uca.edu/Research/18/ICSB/t00.html
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