Jun 22, 2009
First mover advantages (Lieberman and Montgomery, 1988)
First mover advantages (Lieberman and Montgomery, 1988)
Section 1: How do First-Mover Advantages Arise?
Technological leadership
- Though ‘learning curves’ (costs fall as cumulative output rises): Can constitute a large barrier to entry (see Spence, 1981, cited).
BUT: Competitors may enter and sell below cost in order to move along
the learning curve – this increases competition and reduces profits.
BUT: Interfirm technology diffusion (labor mobility, publication,
informal communication, reverse engineering etc) also reduces first-mover
advantages. Process technology may leak more slowly than product technology.
- Through success in patent/R&D races (where technology is a function of R&D expenditure): A firm with a head-start can deter rivals in a patent race.
BUT: Empirically these races only appear to be important in a few
industries (e.g. pharmaceuticals), because patents often provide weak
protection (can be invented around, have value only to the degree that the pace
of technology change is slow). See examples, p43-44
BUT: Process/managerial system etc innovation may be more durable.
Preemption of assets
- Preemption of inputs (buy now, they will be valuable later) – first-mover gains rents. Employees, suppliers, distributors can also be considered in this way if their mobility can be restricted.
- Preemption of locations (geographic, shelf and product spaces) – see p44 for literature related to this.
Entry is deterred by the threat of price war. Success in geographical space preemption is empirically rare (especially in cases where tech and entry opportunties are realtively equal), but sometimes very valuable (e.g. Wal-mart). The case for product differentaion space preemption is more convincing.
Preemptive investment in plants and equipment
- Higher production capacity signals ability/commitment to increase output in the future. This type of preemption is also not particularly strongly supported by empirical evidence. When scale economies are large (generally unreachable outside of public utilities) however, first-mover advantages can be increased.
Switching costs and buyer choice under uncertainty
- Switching costs – Late entrants must spend in order to take customers away from incumbents. Switching costs can be (1) initial transaction costs (time, resources), (2) supplier learning by the buyer, (3) contractual switching.
BUT: This does not imply that first-movers always make high profits. Additionally, first-mover inertia can make it vulnerable to late entrants.
- Buyer choice under uncertainty – “Better the devil you know”. Especially for low-cost ‘convenience goods’, the benefits of switching rarely outweight search costs. Further, first-movers often gain a disproportionate ‘mind-share’ and can define the important characteristics of the product. These effects are stronger for individuals than for corporates because the latter have more to gain from thorough search.
Section Two: First-Mover Disadvantages
Free-rider effects (it is often cheaper to imitate than innovate)
- Information spillovers
- Learning-based productivity improvements
- Labor maket based effects (exploit employee screening done by early entrants and acquire labour at lower cost).
- The strength of free-rider effects may depend somewhat upon the distribution of ‘complementary’ or ‘co-specialized’ assets (see Teece, 1986a,b, cited)
Resolution of technological or market uncertainty (when a firm can influence uncertain outcomes there are bigger gains to moving first – large firms may be more likely to have the ability to do this).
Concept: “Dominant design” – once this is set, price-based competition generally becomes important – with firms possessing cost advantages becoming more competitive (see Teece, 1986b, cited)
- Shifts in technology or customer needs
- Technology shifts (’creative destruction’ – see Schumpeter, 1961, cited) displace incumbents. The displacing firms can be viewed as first-movers into the new technological space.
- Customer needs are in flux, which provides opportunities for late-movers to profit.
Incumbent inertia
- Locked into fixed assets – it might be more profitable to milk existing sunk costs than to try to change radically.
- Reluctance to cannibalize – innovation eats at rents on existing offerings.
- Organizational inflexibility – routines, standards, internal politics, exchange relations all limit adaptive flexibility.
Section Three: Conceptual Issues
Endogeneity
- Firms do not just choose whether to be first movers, the opportunities to pioneer arise from proficiency (tech foresight, market research, product and process development) and luck. These also affect how well firms can exploit the mechanisms which influence first-mover advantages (Section 1, above).
BUT: What is proficiency? What is luck? How do you distinguish? – This is difficult, although conceptually profits from skill can be viewed as returns to ’superior entrepreneurship’; and luck can directly impact profits (e.g. factory fire) and indirectly through the quality of opportunities that a company faces.
Sample selection bias (See original text)
Definitional and measurement issues (See original text)
Future research (See original text)
Implications for Managers
- There are both benefits and risks to pioneering – moving first is not always the superior strategy.
- Luck plays a role – opportunities for moving first are not in the sole control of the firm.
- Decide whether to invest in search for first-mover opportunities – you can invest to be ready, and then enter only after others have proven the market
For pioneers
- How can you guard against imitation/free-riding? – think about patents, preemption of resources, switching costs.
- How can you guard against inertia?
- Initial success does not ensure sustainable competitive advantage.
- Protect your pioneering advantages – increase capacity.
- You may be able to leverage the quality and breadth of your product line to sustain your advantages
For followers
- Attack directly, or differentiate?
- Me-too strategies seem to be effective only when the marketing of the innovator has been inadequate.
Original Text:
Other Relevant Links:
First Mover Advantages (notes from enotes.com)
First Mover Advantages (Wikipedia)
