first-mover-advantage

Is First Mover Advantage a Myth? When The Last Mover Takes It All

In the business world, it is usually believed that the first to market will retain a long-term advantage due to branding recognition, economies of scale, and switching costs. However, business history shows examples of tech companies that took over markets even though they were not first-mover, but the latecomers (see Google and Facebook as reference).

A business myth busted

When you get into business school, one of the first principles they teach you is about the story of the first-mover advantage. As the story goes, when you’re the first to enter a market; things like branding recognition, economies of scale, and switching costs allow the first player to retain that advantage for a long time.

This is the conventional part of the story business professors like to teach so much. There is another part of it, which makes less noise and might sound less appealing but in the real business world is more accurate than the conventional first-mover advantage story. I’m talking about the last mover advantage. My argument is that – first movers not only are not supposed to win, but they might have a few drawbacks that make their moves very risky. This makes the last comer, who makes the last move in the position to dominate the market. In this article, we’ll see why and how.

Timing can make or break your business

As specified by Tech Crunch:

Segways, and websites like Six Degrees or services like Webvan, we saw the stumbling start of great ideas that were ahead of their time. We learned that when starting a company being right and too early is the same as being wrong.

When you’re the first mover, you’re seen as bold. This isn’t a chance. In fact, you’re taking a huge risk. Indeed, if you failed to gain traction and conquer market dominance, chances are you’ll be kicked out by the last comers. Not only that. But also market dominance isn’t enough if you’re not able to capture enough profits to be able to acquire or kick out the latest comers. Think about Google. When he got in the search market, it wasn’t the first.  In fact, in the 90s Netscape held 90% of the browser market. Only to disappear by the turn of the century. Why? Well, Google arrived last, but it built a monopoly able to capture most of the market value. Who can afford to compete with that?

Why Metcalfe’s law like so much the last mover

As techopedia.com explains:

Metcalfe’s Law is a concept used in computer networks and telecommunications to represent the value of a network. Metcalfe’s Law states that a network’s impact is the square of the number of nodes in the network. For example, if a network has 10 nodes, its inherent value is 100 (10 * 10). The end nodes can be computers, servers and/or connecting users.

This means that when the last mover arrives on the market, it has one of the most important assets you can have in business: your competitors’ mistakes. In fact, if you are entering the market, you can do it by looking at what your competitors have done wrong. At the same time, you can also look at what they’ve done right to copy it! In this scenario, when growth picks up the effect of it will be more than exponential. So the first mover that seemed a giant will soon become the dwarf.

Peter Thiel’s law

In Zero to One by Peter Thiel, there is a whole chapter on the last mover advantage. As he explains, when looking for a successful business one should ask:

Will this business be around a decade from now?

In fact, what he means is that – this is true for the tech world – the ability of a company to be the dominant player depends upon two main things. First, the ability to monopolize the market. Second, the ability of that business to generate future cash flows.

He suggests to look at four main aspects:

In the end, being the first mover doesn’t mean anything if you’re not able to build any of those factors into your business. The secret then is to be the last mover but then make sure you create a monopoly. How?

How to build a monopoly in four steps

In the book Zero to One, Peter Thiel also explains how – in theory – to build a monopoly.

Start small to monopolize

The first objective is to start very small. We all like the grandiose project to conquer the world. Having that kind of vision is fine. Yet you want to be highly practical on a day to day basis. You need to start from a tiny group of people that might benefit from your product or service.

In fact, by targeting a tiny market, it will be way easier to monopolize it.

Scale-up

One example that Peter Thiel mentions in the book is about Amazon. When it started, it did as an online bookstore. This was, of course, a niche. Amazon could have tried to sell anything from day one. Instead, they focused on books. Until they dominated the market. As of now, Amazon has expanded so much also to sell grocery and gourmet food.

Thus, once dominated a niche, the time will be right to move to the next.

Stop with the BS of disruption

Looking like someone that is trying to innovate and challenge the status quo is cool. Yet it also brings a lot of attention and visibility. In the Silicon Valley startup stereotype visibility has become the goal rather than a means for growth. Instead, as Peter Thiel suggests in Zero to One, you don’t need to disrupt. In the long run, you will. But in the short term, you don’t have to challenge large organizations just for the sake of it. You need to work on dominating your niche and move on to the next. As quickly as possible; and with the slightest attention from the public as possible

Be like a chess player, think about the endgame

Having an ambitious long-term vision isn’t bad. Instead, this is the compass that will guide you toward the successful building of your business. In short, your long-term vision will be endgame. Just like the chess player starts with the last move in mind. However, targeting a small niche, dominating it, move to the next is your primary day to day goal.

First mover examples

First movers are companies that are first to market with a product and service, but they may also be companies that enter a market early and secure significant market share.

In any case, these companies tend to succeed because they enter a new market and rapidly secure a competitive advantage. In some cases, however, first movers have squandered this advantage and have faded into obscurity.

In this piece, we’ll discuss some examples from each scenario.

Coca-Cola

The first soda syrups emerged around 1881 from the likes of Dr. Pepper and Vernors, but it was not until 1886 that Coca-Cola debuted.

While The Coca-Cola Company was not the first to enter the soda market, it was the first to capture a significant market share.

Coca-Cola achieved this by mixing the soda syrup with carbonated water that was sold as a fountain drink in pharmacies.

When Pepsi entered the market in 1898, Coca-Cola was already selling 1 million gallons of the drink annually.

This early advantage would later prove to be an insurmountable lead. In the more than 120 years since the drink was released, Pepsi filed for bankruptcy twice and some believe was only saved when it merged with Frito Lay in the 1960s.

Amazon

When Amazon became one of the first online booksellers, it secured a critical head start on bricks-and-mortar retailers such as Borders and Barnes & Noble. 

Amazon maintained this advantage by expanding into unrelated products, which made its eCommerce site more attractive since consumers could purchase everything they needed in the one place.

The company also partnered with Borders in 2001 to launch a branded website powered by Amazon’s eCommerce platform and effectively stole its customers.

It’s also worth noting that Amazon was not the first ever online bookstore, but like Coca-Cola, it was the first to sell products at scale.

The first online bookseller was Books.com, which was founded three years earlier than Amazon in 1992 by Charles M Stack.

Grossly undercapitalized, Stack sold the business in 1996 for $4.2 million just a month before Amazon’s $32 million IPO. 

Netscape

The rise of Netscape was synonymous with the rise of the internet itself. As a first mover in web browsing, the company enjoyed over 90% of the market at one point in the mid-1990s before a precipitous decline started in 1998.

Before its demise, all appeared to be rosy at the company. Netscape was a strong brand name with a vast client base and profitable enterprise software.

But when the company went into battle against the much larger Microsoft, its product development suffered and Netscape ultimately alienated its core demographic.

eBay

eBay was founded in 1995 at the start of the dot-com area as the world’s first online auction site.

With users able to hawk everything from a used Cadillac to old vinyl records, the company proved that mass buying and selling online was feasible.

In addition to several copycat sites, eBay also inspired the creation of stock trading platforms and B2B networks.

As a first mover, one of the most significant hurdles the company faced was convincing consumers that the whole process was legitimate.

While most of us now take eCommerce for granted, this was a new frontier in the 90s and there were serious (and pertinent) concerns around payment security and functionality.

To recap:

  • First movers are companies that are first to market with a product and service, but they may also be companies that enter a market early and secure significant market share.
  • Coca-Cola was not the first or even the second company to sell soda, but it did enter the market early and establish sales volume and brand equity that no competitor has since been able to match.
  • Similarly, Amazon was not the first online bookstore, but it was far better capitalized than Books.com and had a strategy to sell unrelated items to lure consumers onto its platform.

Key takeaway: the last-mover takes it all

In this perspective, the last mover arrives at a stage when the public is ready to accept that product and service. It has learned from the first movers. It has copied them. It has avoided their mistakes. Used their strengths but also innovated. From that perspective, by starting small, dominating a niche, moving to the next. The network effects will allow the last mover to gain traction at an exponential growth rate that makes it impossible for the first mover to understand what’s happening and to stop its advancement. This is how the last mover takes it all!

A few other considerations about first vs. latecomer

When implementing a strategy, or building up a new market, a lot of work goes into educating this new market, perhaps around a technology. This effort takes years and it requires substantial resources. As the first-mover educates and builds up the market, if the market is not mature yet, the latecomer still has a wide space to attack the same market the first-mover dominates. 

As long as the market is still growing, and the first-mover can’t yet lock-in distribution, the latecomer can manage to steal market share quickly, and establish itself as leader in that market, thus building up a long-term competitive advantage.

Read Next: Business Model Innovation, Business Models.

Related Innovation Frameworks

Business Engineering

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Business Model Innovation

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Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Innovation Theory

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The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.

Types of Innovation

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According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Continuous Innovation

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That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.

Disruptive Innovation

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Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Business Competition

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In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

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Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Diffusion of Innovation

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Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.

Frugal Innovation

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In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.

Constructive Disruption

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A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.

Growth Matrix

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In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Innovation Funnel

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An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Idea Generation

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Design Thinking

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Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

The FourWeekMBA Business Strategy Toolbox

Tech Business Model Framework

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A tech business model is made of four main components: value model (value propositions, missionvision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

Blockchain Business Model Framework

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A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Business Competition

business-competition
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

technological-modeling
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Transitional Business Models

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A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.

Minimum Viable Audience

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Business Scaling

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Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.

Market Expansion

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The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.

Speed-Reversibility

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Growth Matrix

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In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Revenue Streams

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In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.

Revenue Model

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Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

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