First mover disadvantage

By William Boulding and Markus Christen

In business today, its universally assumed that speed is goodthat the eet thrive while the
laggards struggle just to survive. This belief is perhaps most strongly expressed in the
concept of first-mover advantage. The company that leads the way into a new market, the
thinking goes, locks in a competitive advantage that ensures superior sales and profits over
the long term. Its a nice theory, with a long pedigree. Unfortunately, the facts dont support
it. We recently completed an extensive study of the results turned in by market pioneers and
followers, in both consumer and industrial segments, and we found that over the long haul,
early movers are considerably less profitable than later entrants. Although pioneers do enjoy
sustained revenue advantages, they also suffer from persistently high costs, which eventually
overwhelm the sales gains.
No doubt, there are important top-line benefits to being a first mover. Early entrants tend to
make a large and lasting impression on customers, earning strong brand recognition, and
buyers often face high switching costs in moving their business to a later entrant. A great deal
of academic research conducted over the past 20 years indicates that a true demand premium
accrues to pioneers, which is directly attributable to the timing of entry.
The impact of early entry on costs is less well understood, however. On one hand, its been
argued, pioneers should gain cost advantages by moving through the experience curve ahead
of competitors, by gaining control over scarce inputs, and by establishing patents or other
forms of technology leadership. Also, because of the relatively high switching costs, pioneers
should have to spend less on advertising and other marketing efforts. On the other hand,
followers clearly have some cost advantages of their own. They can, for example, learn from
the mistakes and successes of their predecessors, reducing their own investment requirements
as well as their risks. In addition, followers can frequently adopt new and more efficient
processes and technologies, whereas pioneers often remain entrenched in their original ways
of doing things.
Until now, its been difficult to determine with precision the net effect of early entry on costs,
making it problematic to get an accurate read of the relative profitability of pioneers and
followers. To fill this knowledge gap, we studied the actual revenue and cost performance
over time of both pioneers and followers. We examined 365 business units competing in
consumer goods markets and 861 units competing in industrial markets, spanning the years
1930 to 1985. Drawing on the extensive PIMS database of corporate performance, we
modeled these companies relative revenues and costs as well as their profits as measured by
net income, return on investment, and EVA. We used various methodological controls to
isolate the impact of order of market entry, filtering out other variables such as level of
resources.
Our findings were dramatic. Pioneers in both consumer goods and industrial markets gained
significant sales advantages, but they incurred even larger cost disadvantages. We found that
pioneers in consumer goods had an ROI of 3.78 percentage points lower than later entrants.
And the ROI of first movers was 4.24 percentage points lower than followers in the industrial
goods sector. The bottom-line result: Pioneers were substantially less profitable than
followers over the long run, controlling for all other factors that could account for
performance differences.

Pioneers in both consumer goods and industrial markets gained significant sales advantages,
but they incurred even larger cost disadvantages.
Its important to note that the profit disadvantage kicked in only over the long run. In the
initial years of a new market, the first mover tended to maintain a profit advantage, as the
revenue benefit outweighed the cost penalty. But as years passed, the brand and marketing
advantages faded while the cost penalty persisted, which steadily eroded the profit edge. On
average, the profit advantage turned to a disadvantage after approximately ten years for
consumer businesses and 12 years for industrial businesses.
Our research should not be interpreted to mean that companies ought to dismiss the
importance of a speedy market entry. Rather, it suggests that executives need to cast a cold
eye on market entry plans that assume that being first will inevitably create long-run profit
advantages. The question that needs to be asked is not Can we be first? but How exactly
will being first affect our costs and revenues over the long run? In other words, are there
additional factors that will either create an especially large revenue advantage or prevent the
company from falling victim to a cost disadvantage? If its not backed up with clear and wellreasoned economic logic, a first-mover strategy should be approached with skepticism.
Source: https://hbr.org/2001/10/first-mover-disadvantage, accessed as on 19.5.2015

First mover disadvantage Forbes

Consider that most famous industrial success story of a century ago, Henry Fords massproduced Model T. By inventing the automated assembly line, he had a first-mover advantage
that was so great that he scared Englands Charles Stewart Rolls and Sir Frederick Henry
Royce, even though their luxury cars were at the other end of the spectrum. But Ford
overstayed the Model T. Remember, he insisted that they all be painted black and in the late
1920s lost leadership to more innovative Chevrolet.
In most cases entrepreneurs are better off building the second or third version of the better
mousetrap. Visicalc, the first desktop spreadsheet program, faded away as Lotus took over the
field with 1-2-3. In time the Lotus software was itself crushed by Microsofts Excel.
For that matter, Microsoft has a history of succeeding by not being first. Digital Research
developed the first desktop operating system, called CP/M. But Bill Gates upstaged it in the
competition to supply an operating system for ibms pc. Gates didnt even develop the
original DOS; he bought the program from Seattle Computer Works for $50,000. His genius
wasnt so much in coding as in marketing.
Getting in early on Web commerce was supposed to be a brilliant move. The business plan
was to raise a gargantuan sum in an initial public offering and use it to construct an
impregnable brand and Web presence. But roaring out of the starting gate didnt help many of
these dot-comsor their stockholders. Lord help you if you bought shares in financial news
site TheStreet.com at its $19 initial offering price in 1999, let alone at the $60 level to which
it leaped. You could have made some decent money if you had waited. The shares were
available at 99 cents in October 2001; today they go for $11.
Prodigy Communications was a first mover in online connections. And it had powerful
backers at its launch in 1984: IBM for technology, Sears Roebuck for online retail sales and
CBS for news and ad sales. Prodigys focus was on electronic shopping, but two decades too

early. Subscribers back then were more interested in chat rooms, e-mail and then Web
surfing. The firm was sold in 1996 to an investor group for only $250 million.
Dumont led the way in selling TV sets when they were new gadgets, but the company lost out
to latecomers like RCA and Motorola. Chux was the leading disposable diaper yet succumbed
to Procter & Gambles Pampers. Ampex had a commanding position in video recorders and
tapes for two decades until Sony took over. Rheingold Brewery brought out Gablingers lowcalorie beer in 1967, a cool summer with weak beer sales. So Rheingold lost interest and
Miller Lite later mastered the field.
Thomas Carter was a pioneer in competitive telecommunications services, one who lent his
name to a famous legal case. He invented the Carterfone, a device that connected the
telephone handpiece to an amateur radio transmitter or a mobile phone network. While only
4,000 Carterfones were ever installed, AT&T saw the device as a threat to its long-distance
monopoly and its ownership of all telephone instruments. Then came the legal struggle. In
1968 the Supreme Court ruled in favor of Carter Electronics. It was a turning point in utility
history, paving the way for MCI and other service competitors as well as hardware
manufacturers. Carter didnt get rich. His firm voluntarily dissolved in 1969.
Think twice about being first to invest in a new business, even if it boasts a 100% market
share. Right now Id be wary of pioneers who offer emergency medical services, staffing and
outsourcing, and environmentally safe home cleaning products, not to mention those involved
in the Internet and other new tech areas. Often its better to follow Alexander Popes advice:
Be not the first by whom the new are tried.
Source: http://www.forbes.com/forbes/2007/0618/154.html, accessed as o 19.5.2015

With
growth
slowing
in
the
$358 billion
smartphone
and
tablet
market, Apple(AAPL) and Samsung (005930:KS) are said to be developing digital watches
that allow users to make calls, check map coordinates, or monitor physical activity. They
might want to talk to Sony (SNE), whose feature-laden SmartWatch, on sale for more than a
year, isnt exactly mesmerizing the masses.
Priced at $130, Sonys 1.3-inch touchscreen watch wirelessly connects
to Android(GOOG) smartphones using Bluetooth technology. The gadget alerts users to
incoming calls and allows them to reply to e-mails or texts with an array of prewritten
messages. It even connects to Facebook (FB) and Twitter and controls a wearers phonebased music library. The SmartWatch, about the size of an iPod nano, is a slightly smaller
successor to Sonys LiveView watch. Introduced in 2010, LiveView had more limited
features and was hobbled by kinks.
Sony's First-Mover Disadvantage in Smart Watches
The newer model is more stylish, but users cant enter messages and it sometimes requires
daily recharging and a stable connection just to tell time reliably. Sony was ahead of its
rivals to release a watch, but it takes more than an idea to create a hit product, says Mito
Securities analyst Keita Wakabayashi. Its about bringing a product that has functionalities
that people would want and marketing the product in the right way. Technology market

research firm ABI Research estimates that 1.2 million smart watches will be sold globally this
year, generating roughly $370 million in sales. By 2015, ABI projects, sales will increase
more than twentyfold.
VIDEO: Sony's New Smart Watch
Sonys promotion of its watch has been tentative. It is an accessory for smartphones and not
a product we expected a huge shipment of, says spokesman Yu Tominaga, who declined to
say how many watches the company has sold. He says sales havent been bad at all. The
company expects sales to grow as Sony and other developers add to the watchs library of
200 apps. Its appeal is limited because its only compatible with Android devices. Roger Kay,
the president of market researcher Endpoint Technologies Associates, says the SmartWatch is
too expensive for an add-on, too power-hungry, and was too buggy at launch.
Sonys failure to gain traction with the SmartWatch is the latest in a long line of first-mover
advantages the electronics giant has squandered. The Walkman and Discman dominated the
global portable music player market for decades before the advent of the iPod in 2001. A year
earlier, Sony began selling the Cli, a Palm OS-based personal digital assistant that allowed
users to listen to music, play games, and watch videos. The Cli didnt catch on, and Sony
pulled it in 2005. Despite owning the distribution rights to thousands of popular songs and
films, Sony failed to rival Apples iTunes on smartphones and tablets.
Sony released its first e-reader, the Portable Reader System, in 2006, a year ahead
ofAmazon.coms (AMZN) Kindle. In 2009, Sonys e-book library carried 600,000 titles,
more than twice as many as Amazons, but the PRS wasnt a hit with consumers. Shoji
Nemoto, a Sony executive in charge of technology strategy, said last August that the
companys research has been too inward-looking and deliberative and should focus more on
customer feedback. I dont think the brand carries as much weight as it used to, says
William Stofega, a program director at market researcher IDC. They dont really market it as
well as they should.
STORY: How Apple's iWatch Can Be a Money maker
The first companies to win over consumers with smart watches could lock users into their
platforms, boosting sales of phones, tablets, apps, and TVs. Citigroup analyst Oliver Chen
estimated in March that Apple alone has a $6 billion opportunity in its iWatch. Other
competitors include Italian Im Watch, which is selling a $399 smart watch it says has access
to hundreds of apps, and Pebble Technology, which has raised more than $10 million on
Kickstarter for a $150 watch compatible with both Android and Apples iOS. By the end of
March, Pebble had shipped nearly 55,000 watches ordered over Kickstarter. ABI senior
analyst Michael Morgan says that Sonys watch would benefit from heart-rate measurement
and other biometric capabilities, and adds that the market leader will have to be more than an
accessory. We expect them to do things a smartphone does not, he says.
Source: http://www.bloomberg.com/bw/articles/2013-05-02/sonys-first-mover-disadvantage-in-smartwatches, accessed as on 19.5.2015