In this article, we will be studying the topic “What Is a First-Mover Advantage (FMA)?”. Also, we will look at the Introduction to the topic. Sources Of FMA. Consequences Of Being A First Mover. Internal and External First-mover opportunities. Interpretation and Dimensions Issues.
Introduction To FMA
A firm or organization that introduces a game-changing product or service into the market to obtain an advantage over competitors is known as a first-mover advantage (FMA). Although they enjoy brand leadership and devotion. They also have a competitive advantage over their competitors that comes with being the first to enter the market and establish brand recognition. They must continue to evolve to avoid being overshadowed by the competition. And this is what the first mover strategy is all about.
Because blockchain projects or crypto exchanges have a limited market and clientele. They make a huge benefit that makes crypto-space to be a hotbed of innovation and technological advancement. Since their success is primarily reliant on their reputation and recognition. Making their first move in the market is their best hope.
Due to the high risk and exchange rate of switching from one cryptocurrency network to another. Many consumers are hesitant to migrate even though the new one is much better and more efficient. A lot of effort is essential to persuade an existing consumer to switch from one crypto exchange to the other.
The primary methods of ensuring that a company as a first-mover remains relevant. And that new entry into the market is difficult to include:
- Technological Advantage: As the first entrant into the market, a first-mover has enough time to develop. And gather the required technical know-how.
- Access to rare assets: As a first mover, a company can prevent subsequent entry into the market by restricting access to uncommon assets. Like in the case of blockchain, digital assets, hiring efficient and experienced staff, or establishing a relationship with critical suppliers.
- Establishing a client base: This method involves forming an early client base. Such that when new entrants attempt to persuade them to the other side, it is very costly and difficult.
Benefits Of A First-Mover Advantage (FMA)?
When a company successfully establishes itself and its products according to the industry standard. Its name might become a famous brand such that less informed users might think its product name is the general name for all other brands. For example, in the world of cryptocurrency, due to Bitcoin’s first-mover advantage. It benefits greatly by being the first to create a blockchain technology to the extent that many tend to mistake cryptocurrencies like Bitcoin.
To be able to achieve this level of success, you must have the capacity to connect to your consumers. And make a good and lasting impression on them. Doing this might create brand awareness and loyalty. Resource management will also be possible if the company location is a strategic area. As it would make establishing a relationship with major suppliers easier as well as sourcing for professional personnel.
Although with its advantages, FMA also has some disadvantages. For instance, being the first product in the market doesn’t always guarantee an advantage. In addition, a lot of money is invested in trying to convince customers to patronize a new product. The outcome of this might be positive or negative base on customer sentiment. This heavy investment would not require new entrants. As the consumers of the product the industry offers would be informed by the tryouts done by the first-mover company.
Furthermore, as a new entrant, asides from the significant overhead cost attach to new markets. You are prone to making mistakes as you try to get a good understanding of your customer’s needs. These mistakes could bypass with better ideas by new entrants. Especially in a situation whereby the first mover is unable to hold the interest of the customers with their products.
In totality, emerging markets like blockchain afford FMA better advantages as there’s still room for advancement.
Additional Information on FMAs
When a company successfully establishes itself and its products according to the industry standard. Its name might become a famous brand. Such that less aware users might think its product name is the general name for all other brands. For example, in the world of cryptocurrency, due to Bitcoin’s first-mover advantage. It profits greatly by being the first to create a blockchain technology. To the extent that many tend to mistake cryptocurrencies like Bitcoin.
An FMA can be expressed as a competitive advantage enjoyed by the first company. That introduces a product or service into a new market. By being the first, a company enjoys the opportunity to establish market share, brand recognition, and consumer loyalty. Without competition from other companies and products that will still enter the market.
In the cryptocurrency industry, this advantage is significantly essential for blockchain-form projects. And cryptocurrency exchanges compete for the little market share and user base available. Capturing an early significant user base can contribute to a company being a market leader. Since the visibility and reputation of these companies rely on that.
Sources Of FMA
Advanced Technology Leadership:
By being a first mover, a company can make its technology difficult for new entrants to replicate. For instance, if a first-mover reduces their production cost. Then an absolute advantage of cost occurs and not a marginal cost. Also, by being a first mover, a company can apply for patents and copyrights with other advantages. To protect their technical know-how which will further better place them in the market.
In addition, a unique progression achievement in a first mover’s research and development(R&D). Can also serve as any of establishing technology leadership. If the innovative ideas are sustainable, it provides a sustainable cost advantage. We should note that the pace of technological change is high. And such as patents offer weak protection as the transitory value is low. The race for patents could be the downfall of a slow first-moving firm as technological advantages have a short lifespan.
Resources Control Management:
This method involves the ability of a first-mover to control the necessary high-quality resources. Important for production before the entrance of new companies. For instance, when it comes to location there’s an advantage to being the first. Walmart employs this strategy by being the first to open discount stores in small towns. Also, a first-mover by obtaining the standard chain can control the supply of raw materials essential for production. It also has the opportunity to build resources that may discourage entry by other companies. Increasing production capacity, for example, will increase product lines. Thereby making it difficult for new firms to enter and make profits. An example of a real-life example is Inditex. First-mover advantages usually improve with large economies of scale. With the threat of price cuts against late entrants, the increment capacity of the existing company (the first-mover). Acts as a commitment to maintaining larger output.
Buyer Converting Costs:
If the cost of changing to a new brand is inconvenient or too costly for a customer. The first company to have that customer has an advantage. When customers find a brand that performs the job and satisfies their needs, they tend to stay with such brands. With consumer products, consumer preferences are mostly shaped by the first company to offer such products which help to build brand loyalty. Customer satisfaction eliminates the need for more information about other brands. Coca-Cola, Nestle, and Kleenex are examples of pioneering brands in the product category. These brands have been acknowledged as ones dominating their markets for a long time. Since businesses tend to purchase products in bulk and as such seek lower-cost options to attain economy of scale. These brand preferences gears toward retail purchases by final consumers.
Consequences Of Being A First Mover
While having its advantages, there are also disadvantages to being a first-mover
The Free-rider effects:
Being a late entrant into a market can afford a company the opportunity of observing the strategies and techniques of first-movers. They may ‘free-ride’ on the investments of pioneering companies in areas like research and development, infrastructure development, and buyer education. The free-ride effect means that without incurring any sustainability costs competitors can benefit. The cost of innovation is much higher than the ‘imitation’ costs. And can result in a cut in profit for the first movers.
According to studies on this effect, the greatest advantage is in freely riding on the R&D of the first movers. And the learning-form productivity improvement. Regarding labour costs, some studies have a specific fact that while first-movers may hire and train personnel. The competition might end up hiring them away. For example, while Craigslist was a first mover in the short-term rental industry, it has been overthrown by AirBnB.
While first movers have to deal with the risk associated with creating a new market for a newly developed company. Late movers on the other hand have the advantage of not bearing those risks to some extent. At first movers have nothing to guide them when deciding on firm sizes and potential revenues. When the standards which late movers follow are set. They bear all risks and, in some cases, can’t withstand them and end up shutting down under these standards.
Shifts In client needs or Technology:
with growing changes in technological development. Late-comers may be able to address a market need that will make an existing product seem inferior. A situation like this occurs when first-movers don’t move with the changes in technology or customer needs. And a competitor(late-mover) can develop an improvement and sometimes cheaper version. New technology usually is introduced when the existing one is still growing. And as such, recognition may be difficult as an immediate threat.
This disadvantage happens when a firm can’t recognize a change in the market. Or if a highly progressive technology is launched. According to these two instances, first-movers are at a disadvantage. Because although they develop a market, their sustainability lies with them. And as such, they tend to miss opportunities to grow while trying to maintain what they currently own.
Initial asset costs:
substantial investment is required for the research and development of new products and services. As a result, enough funds are necessary to cover these costs. And some firms who can’t afford it turn to loans which result in debts. It then mounts great pressure on the success of the product.
Time Frame of the FMA:
while the name suggests higher profits for the first-mover than their competition, it doesn’t always happen like that. While first-movers will enjoy early profits, the profit sometimes falls close to zero as the patent expires. This usually leads to the sale of the patent or an exit from the market. And goes to show that long duration is not certain for the first mover. This generally conforms to the fact that has led to the concept of the ‘second-mover advantage’.
Firms that are the first in a market tend to become too comfortable. And as a result not take advantage of opportunities that arise. Lieberman and Montogomery identify three causes of the vulnerability experienced by first-movers
- The hesitation of the firm to alter existing product lines
- It may be locked into a particular group of fixed assets, or
- A firm may be rigid when it comes to organization
Because of the financial capability, it entails. Firms that have spent so much on fixed assets will not be willing to readily adapt to new challenges in the market. Also, firms that don’t wish to alter their strategy and incur irrecoverable costs from changing the focus of their business, experience this dormancy. Firms like these are less probable to function in a competitive environment.
Other aspects of this dormancy have been noted by studies that examined the reasons behind the failure of the incumbent organizations in the face of new technology. They include the development of stable exchange relations with other companies, internal political dynamics, and the development of organizational standards. Overall, some firms invest in the present and are too rigid. And as such are unable to make projections for the future to continue maximizing their current market share.
Internal and External First-mover opportunities
Technical proficiency which is endogenous and luck which is exogenous are the main causes of first-mover advantages.
With skill and technical proficiency, a better product will be produced. That not always sells faster but also increases profits as well as the success of that product. An initial innovative product has the potential to grow substantially as technically competent Companies. Can produce better products at a lower cost and with better marketing proficiency. An example, in this case, is the first disposable baby diaper introduced by Procter and Gamble.
In terms of timing and creativity, luck could have a significant impact on the profits of a first-mover. Cases of burnt warehouses or mistakes turning into a successful product could greatly affect profit. In the beginning, Procter and Gamble’s lead helps with its ability to hold a proprietary learning curve in manufacturing. And by being the first to hold shelf space in stores. An increase in birth rate over the years also increases their industry profits and first-mover advantage.
Interpretation and Dimensions Issues
What comprises a first-mover?
Defining what the concept of first-mover advantage entails is difficult. Is it applicable to firms entering an existing market with technological discontinuity? Like the case of slide rules replacement by calculators or is it applicable to new products alone? The fact that it has no precise definition. Causes many undeserving firms to be pioneers in certain industries and has been a topic of debate.
Another bone of contention is whether FMA includes. The initiation of research and development against the entry of a new product into the market. Usually, the definition covers the entry of a new product into the market. Since plenty of firms invests heavily in R&D that may never result in a product entering the market. Different factors affect the answer to these definitional issues. Factors like the sequence of entry elapse in the time since the pioneer’s first release. And categorizations like an early follower, late follower, distinct follower, etc.
Estimating first-mover advantage: Relationship Between Profits, Market share, And Probability Of Survival
The use of profits is a commonly accepted way of measuring the first-mover advantage. The profits use the ones as a result of a firm early entrance and not other profits. This type of profit is appropriate. Because the sole aim of any business is to maximize the value of their investment in the business.
There are still issues with this profit-measuring of the first-mover advantage as dis-aggregate profit data are rarely available. Due to this and the fact that they are close between profits, and market share. And the probability of survival is used as an alternative measure. Regardless, the links can be weak and lead to vague information. First-movers always have a natural advantage in market share which doesn’t always mean higher profits.
First-mover advantage is an example of some management concepts that have a natural appeal. Which authenticity is taken with levity. While the fate of its believers, the dot-coms, offers a deterrent example. The faith of managers that FMAs present an essential competitive advantage. Fails to diminish even in the absence of network effects to accelerate and establish it. It is a strong belief among business executives from any kind of company. That being an early entrant into a new industry offers any firm a virtually unconquerable margin.
As studies are proving the existence of FMAs, so are there studies proving their non-existence. While companies like Xerox in fax machines. And eToys in internet retailing were unable to achieve success as first-movers. Others like Gillet in safety razors and Sony in personal stereos have enjoyed substantial success. Differences in outcome are random as the first-mover status brings benefits but it doesn’t do so absolutely. It relies substantially on the conditions under which it follows.
Interestingly, Sony was able to enjoy the benefits of its first-mover status. Because of its strong brand name, sizeable financial resources, and remarkable marketing skills. But Xerox had all these too but yet wasn’t successful. Also, Sony was unsuccessful with its first-mover step in home VCRs but made it with the Walkman. This goes to show that a firm’s resources and luck too are important. But other factors and conditions are also vital.
According to research conducted on more than 30 cases of early entry into new product categories. It was revealed that two key factors greatly influenced a first mover’s fate. One is the pace of the evolution of product technology. And the pace at which the market for the product is expanding. Knowing these two factors aids the understanding of the likelihood of success with the resources a firm possesses.
Stable And Temporary FMAs
Although no advantages are forever, some firms experience durable first-mover advantages that improve their market share. And profitability over a long period while for some others it is short-lived. A firm that is successful at building a long-lasting first-mover advantage tends to dominate its industry. Or product categories for years. A perfect example of firms in this category is Hoover in vacuum cleaners and Coca-Cola.
In the absence of a durable first-mover advantage, a firm can still enjoy some benefits from an early entry. The pioneering efforts of Netscape as the first browser in the internet industry. Produce gains for the shareholders for a while until 1977 when the stock price fell drastically. Due to the rise of Explorer by Microsoft. Apple is in the same shoe although it fell gradually due to competition from Microsoft and Intel. Which cause restructuring in the early 1990s. Substantial profit can still be made that would make a first-entry move a profitable investment. And maybe a strategic objective irrespective of whether it is temporary. A business has the liberty to choose not to enter a new market at all. A runner-up’s margin may be more profitable than the opportunity cost of staying out of a new market.
Essentials Of Industry Advancements
The majority of students focus on how firms achieve first-mover advantages; this can be done in three ways. One of them is building a technological edge over competitors. Starting earlier enables them to amass and master technical knowledge. The second way is the prediction of later arrivals’ accessibility to scarce assets like exceptional employees or key suppliers. The final way is to build a customer base that will find it difficult or expensive. To switch to offers by the later entrants.
The conditions under which the three strategies can operate have been given little or no attention. Early entrants’ prospects rely on external factors like the pace of technology. And market evolution as much as they do on internal factors like the firm’s resources and capabilities.
There is a massive difference in the rates at which products’ underlying technologies advance. For instance, the manufacturing of glass was initially by heating crushed quartz to make glazes for ceramic vessels. But after several years, glassblowing was a new means of a device for production.
Which then ease the way for the invention of lead glass and then the float-glass process in the twentieth century. On the other hand, there is little similarity between a computer made ten years ago and a recent one.
Certain technologies have undergone positive evolution in the case of computer processors. While others have taken a break from the norm like the replacement of films with the advent of digital photography. Companies find it difficult to control disruptive or faster evolution of technology. New entrants and competitors tend to drive technological progress in product markets. With a large number of firms with huge research and development budgets.
The uncertainty of a market’s growth is between the rate at which new products leave existing product categories. A good example is the Nokia N-Gage launched in 2003; it functions as a phone, gaming, and music platform. Despite the great publicity and acceptance of the product. The company fails to ship in the proposed quantity in the following year.
The Possibility of A First-Mover Advantage
The first-mover advantage could arise in any of these scenarios:
- Innovations in a new product category
- Growth and expansion of the product market
First movers are provided with optimum conditions for maintaining a long-lasting prevalent rank in market and technological evolution. The evolution of the vacuum cleaner depicts a steady evolution by its first-mover, William Henry Hoover, who started with a bag-on-a-stick design and later evolved to a device with encased components which have now made waves in the industry and even earned it the verb by the British “to hoover”.
initial entrants have an edge over later entrants as it is difficult to differentiate products due to the pace of technological change. First movers have the advantage of mastering new tactics developed by the competitors in differentiating their products just as Hoover has incorporated innovations from competitors like Electrolux into its production.
First movers enjoy the benefit of exploring and fitting into new market segments as a result of initial creeping market growth which may be depressing to some businesses. However, this was of great advantage to the inventor of Scotch Tape, 3M’s Richard Drew, who experienced acceptance of the product while working on ways to improve the product. During this period, later entrants had no way of taking over the market and this gave Reed enough time for improvement which led to the production of magic transparent tapes several years later.
Slowly changing market and technology makes company resources less important than they would in be in other technology and market environment. Resources refer to the skills and assets that companies have developed over time; of the most important capabilities are production, development, and marketing with brand recognition being the most important asset. Having these resources is usually better but in calm waters, first entrants lacking these resources may still have a way of defending their products against competitors
Comparison Between Market Leads and Technology
Sony’s Walkman, a personal stereo launched in 1979 which was made using available technology and basic technical design had a stronghold in the market and made a lot of sales over the years due to the use of superior resources (design skills, marketing muscle, and strong brand). A short-term first-mover advantage is best suited to first entrants with limited resources. Isaac Singer, a later entrant in the sewing machine industry gained more ground than the first entrant Elias Howe due to the availability of greater resources.
In a situation where technology advances rapidly and the market takes time in accepting new product categories, a short-lived first-mover advantage is uncertain. Early entrants experience years of low sales and losses. The rapid technology change paves way for new competitors who try to use their strategy to overshadow early entrants but this doesn’t provide any advantage to both parties.
First mover advantage can be achieved by early entrants with deep pockets to endure the delay. This allows them to wait until technological change stabilizes and the market takes off which can be achieved by utilizing a good research and development strategy to keep it at the forefront.
Sony’s first digital camera, Mavica, which was launched in 1981 experienced very low sales in the first few years, and then sales became steady in the following decades during which the rapid technological improvement rendered products obsolete in a year. The major improvement was in the number of pixels an image produced had and this success can be attributed to their financial and technological capability which kept them at the top in the category even after several years.
Challenges Of First-Movers
First-movers are sometimes left vulnerable when technological innovation and customer acceptance improve rapidly. Examples of companies that couldn’t withstand the fast-paced changes are AT&T and Netscape. Although the first company to launch a cellular phone in the US after building a prototype in 1977, In 1983, Ameritech not AT&T offered commercial analog cellular operations after the authorization of the FCC. In the case of Netscape, in 1994, a codeveloper of Mosaic, Marc Andreessen, teamed up with Jim Clark to invent the Netscape browser which launched an era of widespread internet access. But today, Netscape exists as only a small unit of Time Warner.
Both AT&T and Netscape were unable to make a profit in the new product category due to the strength of the offerings of later entrants. With the market and technology rapidly evolving, it is very difficult for companies to achieve durable first-mover advantages.
An item becomes obsolete when its underlying technology keeps changing. In the gaming console market, while Magnavox Odyssey entered in 1972, a minimum of 6 generations of technology have emerged in rapid succession with each presenting a new winner. But the technology behind laptops changes quickly and as such new winners keep emerging.
A rapidly growing market adds to a first-mover’s problem by opening new competitive channels for secondary entrants to explore. The existing company tends to be at a disadvantage because it lacks the production capacity to serve a rapidly growing customer base.
Long-term dominance becomes unlikely with a fast-paced evolution of the market. But this doesn’t prevent a first-mover from making short-term gains once it has the sense to know when to exit. Using the internet browser market as an example again, in 1994, the internet started growing fast. In a matter of two years, the number of websites had grown to 50 times its size. This rapid pace enabled later entrants among them Microsoft with its large resources to find enough space to grow.
What Is A First-Mover Advantage (FMA)?
A fast pace of market evolution doesn’t necessarily prevent an existing first-mover from achieving consequential short-term gain provide it has a sharp sense to exit when needed.
Obtaining a durable advantage in such a situation is not impossible. This is where a firm’s resources can make a lot of difference. Only a first-mover with superior resources has a chance of achieving a long-term first-mover advantage when the technology and markets are moving slowly. For example, other things being equal, a first-mover with a strong brand name tends to be more successful in capturing and keeping their customers than one without. Intel is a perfect example of a company today that makes the most of its resources in difficult circumstances. Intel has been able to dominate a product category in a market that keeps changing and the technology too at a fast pace, by focusing all its technical and marketing resources on its product development process.
The possession of considerable resources is not a guarantee that a company will be successful. After that, a series of rapidly growing markets for minicomputers, PCs, and laptops has generated consistent demand for new versions of the device. Although having a strong brand name and a lot of resources, IBM couldn’t maintain the top spot in the hard-drive market for long. Although neither could later entrants.
Popularly known for its strong R&D as well as its design, Apple launched the iPod in October 2001 and by 2003 and by then it had close to 70% of the market for digital music players having hard drives. In the first quarter of 2004, it sold more than 800,000 units and by the third quarter, its share of the retail market increased to 20%. However, the iPod mini has already surpassed its predecessor with Dell now offering price cuts and a 12-hour battery for its 20GB player.
Contemplation On First Mover Advantage
The four scenarios in the matrix place importance on various sets of assets and capabilities. In a situation where the market leads, distribution, large-scale, and production capacity are vital while in a situation where technology leads, R&D, new product development, and enough funds are vital. Going into a market without the appropriate resources might be difficult. For example, Polaroid in the early 1990s had a great brand name in photography and remarkable access to distribution channels but it was fairly weak in R&D and new product development.
The instant camera which was its leading product incorporated a 15-year-old design. After almost 20 years of unsuccessfully trying to diversify, the company filed for bankruptcy protection. Based on some analysis, even if Polaroid had been the first mover of digital cameras, its fate would have still been the same. It didn’t have the resources to excel or even survive fierce technological change, fast and consistent product antiquity, and a creeping market takeoff.
At present, Symbian is competing with Microsoft to create the operating system for the new product category of smartphones. While Microsoft spent about $7 million on R&D, Symbian was struggling to amass a revenue of about $1oo million in 2003. Although market leaders including Siemens and Nokia set up Symbian to keep Microsoft at bay, the industry margins are so thin, that could easily choose Microsoft’s operating system over Symbian’s if Microsoft were to make it available for free or charge little for it. Motorola, a Symbian founder has already chosen Microsoft’s operating system. Everyone is still on the lookout to see whether Symbian and those backing it will be able to withstand Microsoft’s superior resources in a rapidly growing market for a fast-moving technology.
With new product categories always emerging, some companies struggle with the decision to enter early or not and not with the expected decision of whether to enter a new product category. But at that period, there might not be enough time to understand the technology in question. In other situations, it might be wiser to try to be part of the first wave.
There’s a need to analyze the environment that surrounds a new category to make actual money in a changing market. This analysis involves the assessment of the character and depth of the resources available. Remember when you are in, you have to see it through till the end.
“What Is a First-Mover Advantage (FMA)?”. Also, we will look at the Introduction to the topic. Sources Of FMA. Consequences Of Being A First Mover. Internal and External First-mover opportunities. Interpretation and Dimensions Issues.
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