International Business Strategy as the Concept of First-Mover Advantage - Literature review Example

? International Business Strategy (IBS) – the concept of first mover advantage (FMA Introduction The expansion of the businesses in the national or the global market has to be carefully designed so that risks and losses are minimized, as possible. The use of business concepts that have been successfully tested in markets around the world can increase the chances for the success of a business strategy, a phenomenon that has been verified in the literature. This study focuses on the use of the first mover advantage, a theoretical concept already popular in international trade, for building a business strategy. The literature related to this subject has been reviewed and it is presented below; case studies have been used in order to show the practical implications of the involvement of the specific concept in the strategy formulation process. It is proved that using the first mover advantage a firm can increase its competitiveness but the full success of this practice cannot be guaranteed, even for firms that are already established in their market. 2. International Business Strategy 2.1 The concept of first mover advantage - overview In the context of international business the first mover advantage theory can be related to the work of Markusen (2002). According to the above theorist, trade relationships are likely to be influenced by geography, meaning that businesses that are interested in entering the global market tend to prefer the markets of neighbouring countries, probably because risks and costs involved are expected to be lower (Sitkin and Bowen 2013). For FDI also a similar practice is used. Under these terms, the development of international business is based on two, critical, factors: a) learning effects; this term is used for showing the transfer of knowledge between ‘the research and development sector of each business and its other sectors/ departments’ (Sitkin and Bowen 2013, p.38); this strategy of knowledge transfer decreases risks since no external intervention on knowledge used for building business strategy can occur; b) the first mover advantage; the specific concept reflects the following idea: ‘the first firm to enter a new market and leverage its existing experiences is in a good position to shut out future rivals’ (Sitkin and Bowen 2013, p.38). According to the above, the first mover advantage involves in ‘introducing in the market a new product or service’ (Cullen and Parboteeah 2013, p.273). However, the benefits of the above concept are related to the following term: that the product/ service employed ‘is not only innovative but also comprehensive’ (Cullen and Parboteeah 2013, p.273). The term comprehensive is used for showing a product/ service that ‘meets the customers’ expectations’ (Cullen and Parboteeah 2013, p.273); only such product/ service would be able to result to profits. The concept of first mover advantage, as described above can be effectively used for developing a business strategy in regard not only to the international market but also to the local market (McDonald and Burton 2002). The terms of such use of the specific concept are described analytically in the next section. 2.2 The use of the concept of first mover advantage in formulating a business strategy In regard to the use of the concept of first mover advantage in practice the following fact should be highlighted: the specific concept can be incorporated in different business strategies, meaning that it can be used as the basis for developing business strategies of various formats, depending on the needs of each organization, the resources available and the conditions in the business environment (Cullen and Parboteeah 2013). Figure 1 – Franchising based on the first mover advantage – theoretical model (source: Michael 2013, p.62) The study of Michael (2003) refers to the use of the first mover advantage as part of a franchising strategy. The involvement of the specific concept in a franchising strategy should be based on certain rules; the relevant framework is presented in graph in Figure 1 above. As shown in the particular graph, when trying to enter a market through franchising an entrepreneur can use the first mover advantage as follows (Michael 2003): a) at the first level, the entrepreneur should choose a franchising that it is already successful in other markets, preferably in markets with similar characteristics, b) then, the resources required for securing a high outlet share should be identified; reference is made in particular to the funds necessary for supporting such project but also to the real estate chosen, if available, in regard to the establishment of the relevant branch. It is at this part of the process that the first mover advantage is critical. Indeed, the success of franchising, as an entry mode, highly depends on the lack of previous branches of the particular chain in the target market (Jansson 2007). Securing outlet share, which can be achieved mostly by having the exclusive rights on a chain that enters a market for the first time, can guarantee the success of franchising as an entry mode; c) having secured the outlet share, a business can also secure a high market share in regard to the target market; d) achieving a high market share a business which enters a new market can secure its high profitability, as this benefit is incorporated in the graph, as last element, in Figure 1. According to Teece (2010) the high competition in the global market has made the survival of businesses in their industry quite difficult. It is noted that the use of a business model can help businesses to limit the risks involved in their operations and to secure profitability, as possible. A business model that addresses all issues that a business has to face in the modern market is suggested in the study of Teece (2010). This model is presented in Figure 2, below; the potential incorporation of the first mover advantage can be evaluated after reviewing the parts of the particular model. Figure 2 – A business model available for firms operating in the global market (source: Teece 2010, p.173) After checking the elements of the business model presenting in Figure 2, the following comment could be made: in such model the first mover advantage could be successfully incorporated in the third and fourth parts of the process, i.e. when trying to identify the market segments to be targeted and to confirm the availability of revenue streams (Teece 2010). Indeed, identifying market segments that have not been addressed so far by other competitors, a term that reflects the existence of the first mover advantage, is a prerequisite for success in the new market ((Navaretti and Venables 2004). However, such success can be fully secured unless the next term, the high level of revenues from the product/ service involved, is met, as this issue is highlighted in the fourth part of the model in Figure 2. Li et al. (2003) supported that ‘entering a market at the ‘right’ time can often be critical for success’ (Li et al. 2003, p. 625). The above view highlights the following issue: the first mover advantage can offer its benefits only if it is used in the appropriate time point, meaning that after the end of a particular period of time the use of the first mover advantage is meaningless; probably, reference is made to the time point that a competitor enters the target market offering a product/ service of similar characteristics or even the same product/ service. Also, it has been proved that the first mover advantage can be supported by different tools: for example, there are firms that try to secure their first mover advantage by employing advanced technology (Li et al. 2003, p.625). At the same time, other firms can try to secure their first mover advantage by different strategies, such as by ‘unique channels of knowledge transfer’ (Li et al. 2003, p.625). It should be noted that the use of the first mover advantage cannot secure the success of a business in a new market. This issue is analyzed in the study of Sollars and Tuluca (2012). According to the above researchers, a first mover approach may have disadvantages especially if it is evaluated using the Resource based theory (Sollars and Tuluca 2012). If combined with the first mover advantage theory, the Resource based theory leads to the following assumption: that ‘a firm which is interested in achieving above –normal profits has to exploit resources already within its control’ (Sollars and Tuluca 2012, p.79). In a business strategy based on the above two theories, the following risks can exist: ‘a) technological uncertainties and b) unexpected environmental changes’ (Sollars and Tuluca 2012, p.80). From a similar point of view, Iaquinto (2011) noted that the instability of political environment worldwide can threaten the benefits expected from the first mover advantage concept. The benefits and the potential implications from using the first mover advantage when developing a business strategy are made clear through the case studies presented in section 2.3 below. 2.3 Concept of first mover advantage and business strategy – case studies The practical aspects of the first mover advantage concept have been checked in the literature through a series of empirical studies. Reference can be made primarily to the study of Iaquinto (2011). The above researcher sent a questionnaire to 305 firms operating in the manufacturing industry of Japan (Iaquinto 2011, p.11). The questionnaire included questions in regard to the strategies used by these companies for entering the market but also in regard to their performance, after using the particular strategies. About 79 firms accepted to participate in the study (Iaquinto 2011). It has been revealed that most of the firms preferred a pioneering strategy for securing their competitiveness; in most cases, this pioneering strategy has been based on the continuous development of new products for securing profits (Iaquinto 2011). It is at this point that the first mover advantage appeared. The firms that employed the above strategy managed to keep the interest of their customers under the terms that the business climate of the particular period, i.e. between 2005 and 2007 was a bullish climate, i.e. a climate based on the ‘willingness and the potential of customers to pay for the latest gadget’ (Iaquinto 2011, p.15). The above study verified that the success of the first mover advantage is depended not only on the first appearance of a product/ service in the market but also on the business climate, as related to the potentials of the consumers to pay for a product/ service that appears in the market for the first time. Bianchi (2009) has tried to check the internationalization strategy of Falabella, a major competitor in the retail industry of Chile. Through a series of interviews, about 32, with the firm’s managers the key strategies of the firm in regard to its expansion in the local and international market were identified. It was proved that the firm has based its expansion, both locally and globally, on the first mover advantage (Bianchi 2009). The key facts that verify the involvement of the specific concept in the firm’s strategy are the following: Falabella has been ‘the first Chilean retailer to expand nationally and internationally and the first Chilean retailer to launch his own credit card’ (Bianchi 2009, p.18). The firm was also ‘the first to establish an hypermarket’ (Bianchi 2009, p.18); this initiative was taken in 2002, while no retailer in Chile ‘has ever tried such retail format’ (Bianchi 2009, p.18). The above strategies, based on the first mover advantage concept, have helped the firm to secure its position as the most powerful retailer in Chile (Bianchi 2009). The effectiveness of the first advantage mover concept has been also tested in the study of Li et al. (2003). The above researchers collected data related to the ‘telecommunications equipment industry in China’ (Li et al. 2003, p.633). About 291 Chinese firms and 108 Western firms operating in China were reviewed (Li et al. 2003). The findings of the above study indicate that first movers cannot always keep their advantage; cultural issues seem to affect the potential of first movers to keep their competitiveness in a particular market. Indeed, in regard to the particular industry of the Chinese market it was revealed that ‘the firms originated from collectivist cultures were able to perform higher than their competitors from individualistic cultures’ (Li et al. 2003, p.638); this phenomenon appeared even when the former had entered the market later than the latter (Li et al. 2003). It was also proved that first movers that are not able to keep their technology at high levels, on a continuous basis, are likely to lose their advantage, as first movers (Li et al. 2003). The cases of Apple and Microsoft are critical examples for understanding the value of the first mover advantage. Both these firms have managed to introduce unique products which keep their uniqueness until today (Cullen and Parboteeah 2013). Also, these firms managed to develop their social relationships, a term used in international business for showing ‘the personal contacts available to a firm for securing the appropriate distribution of its products worldwide’ (Cullen and Parboteeah 2013, p.273). 3. Conclusion First mover advantage seems to be a quite valuable concept for business strategies of different structure and characteristics. Moreover, it seems that the success of the specific concept in strategic planning is not guaranteed. Indeed, in certain cases a business can fail in entering a new market even if it has the advantage of first mover; the lack of detailed planning and the inefficiency in resources required for supporting the particular plan are proved as the key reasons for such outcome (Head 2007). In any case, the benefits of the first mover advantage, as a concept used in strategic planning, seem to be more compared to its disadvantages. Also, it has been proved that the use of certain practices can limit the risks involved in regard to the specific concept. For example, securing a high outlet share in the new market can guarantee the high profitability of a business based on franchising, as an entry mode (Michael 2003). Also, the use of a detailed business model taken into consideration not only the needs of the business but also the needs of the customers (Teece 2010) can also lead to the success of a business strategy that it is based on the first mover advantage. The case studies presented in this paper have helped to highlight the benefits but also the risks related to the first mover advantage. Through these case studies it has been made clear that the first mover advantage can be a valuable element of a business strategy only under the following term: that emphasis is given not only to a detailed business plan but, mainly, to the close monitoring of the various phases of business strategy so that any threats or failures are identified early. References Bianchi, C., 2009. Retail internationalisation from emerging markets: case study evidence from Chile. International Marketing Review, 26(2): 221-243. Cullen, J. and Parboteeah, P., 2013. Multinational Management. Belmont: Cengage Learning. Head, K. 2007. Elements of Multinational strategy, Berlin, Springer. Jansson, H., 2007. International Business Marketing in Emerging Country Markets: The Third Wave of Internationalization of Firms. Cheltenham: Edward Elgar Publishing. Iaquinto, A. 2011. Intended Strategies and Firm Performance: The case of Japanese Manufacturers. 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