Posted by Ray Poynter, 28 June 2014
This week’s Economist has an interesting article about the founders of Napster (Shawn Fanning and Sean Parker) and the difficulty they have had in coming up with a successful second presence in the market. Towards the end of the article the Economist refers to one of my favourite terms in the area of new business, “First-mover disadvantage”.
Whenever I meet start-ups, or people back from the latest hi-tech innovation fest, the talk is often about first-mover advantage. The idea is that a company gets in first and secures a long-term advantage. However, although there are examples of first-mover advantage (e.g. when a first mover can tie-up the market for scarce materials), it is much more common to see first-mover disadvantages.
Examples of first-mover disadvantage go back at least as far as the printing press, noting that in the 16 Century Gutenberg died bankrupt). The economist article quotes Motorola and the mobile phone along with Netscape and the browser. To this list we could add:
- Alta Vista had first mover status in search engines, but was overtaken by Yahoo! and then Google.
- When personal computers first appeared the early advantage was with companies like Commordore, then Apple, then IBM, and now the PC is largely a commodity item, with a range of manufacturers, and most of the early leaders no longer in the market (Apple is still making personal computers, but has a relatively small market share).
- Henry Ford appeared to have secured a first-mover advantage in 1908 with the Model T, but was overtaken in the 1920s by Chevrolet.
The awareness of first-mover disadvantage dates back a long way, for example here is a Forces article on it in 2007. In 2001 the Harvard Business Review reported a study that found that first movers in consumer goods and industrial goods tended to have a 4% LOWER ROI than later entrants to the market.
There are numerous causes of first-mover disadvantage, most of which relate to second mover advantage. The second mover can see what is working, they can aim to meet the unmet needs of the incumbent (which often means cost, but can mean efficacy, range, style etc).
Another source of first-mover disadvantage is that if a first mover is making money from its current model it often neglects the need to change, to disrupt itself, leaving it open to be disrupted by others.
So the next time somebody is pitching a product, investment, or job opportunity, watch out for that use of first-mover advantage.
When somebody is talking about first-mover advantages. It can be a good idea to check whether it represents and in-and-out opportunity. An in-and-out opportunity is where there is a short-term first mover advantage, and there is an understanding by the people running it that the optimum strategy is to ramp it up quickly, generate revenues, and then get out.
What are your examples of first-mover disadvantage?