First Mover Versus Follower - Essay Example

? FIRST MOVER VERSUS FOLLOWER: WHICH IS A BETTER APPROACH WITH REFERENCE TO THE ECOMMERCE INDUSTRY INTRODUCTION It is quite interesting to that the way the order of entry of a firm or company in a business has been a subject of study and has undergone huge perceptual changes in last two decades. Many conceptual changes have been introduced too. The phenomenon itself has been a subject of research as to whether First mover advantage as was initially perceived exists or not, besides its scope and sustainability have long been discussed by both the business and academic community. First Mover advantage is the advantage gained by the first major entrant of a market. This advantage seems to be borne out of the fact that the First mover has access to extent of resources that later entrants might not have and thus gain advantage that the latter might not have. However, often, the first mover is unable to take make use of the advantage and that leaves space for the Second mover or the follower to move in to avail the advantage that still exists. The term first mover advantage means the first company to launch a new kind of product or service should have a competitive advantage over those that start afterwards . The advantage exists in the form of an opportunity that has to be made best use of. The opportunity can be availed successfully by first movers only if before the competitors enter the market, they build a customer base, build a strong brand, develop economies of scale and develop distribution channels such that a competitive edge is built and sustained. However, a follower may overtake a First mover especially if it has one or more of the following: A better product: If the follower is able to learn from the mistakes the first mover made, then it is able to build a better product and have an edge over the former. Better distribution system: A follower might be able to build a better distribution system in turn helping it gain a lead over the first entrant. A strong brand: The Follower might be able to build a stronger brand and thus help them position themselves ahead of the first mover. The internet boom of the Nineties was what made the First mover concept and became apparent as a phenomenon, obvious in business terms. Till then it was more of a notion. However, this phenomenon and its importance as a business concept has been on the decline since the recent economic downturn. The first mover is the first major or significant company to move into a market and not necessarily the first company to do so. For a company to attempt becoming the ‘first mover’, it should figure out whether the benefits are more than the risks. Many times, the first movers are rewarded with profits and a monopoly in the market. However, at other times, they are unable to build up on the advantage and this leaves the opportunity for other entrants to compete and effectively gain advantages and potential to capitalize on the same. The term “First Mover advantage” was made popular in 1988 in a paper by Professor David Montgomery and co-author Marvin Lieberman. Overtime this phrase and the underlying concept caught the attention of the industry and business community and prompted huge spending in new businesses or markets often ignoring the nature and extent of underlying risks. Researchers have shown that First movers have inherent advantages based on empirical and theoretical study of the various mechanisms that confer advantages to the early entrants. However, they withdrew their claims about the concept in a retrospective paper written 10 years later. In a research conducted in 1993, researchers concluded that almost half of the first movers in the market in their 500 sample brands had failed to gain advantage over competitors. The study also showed that followers who entered the market relatively early had greater success in the long run. As per their study, the said followers had entered the market on an average of 13 years later than the pioneers. As per studies, based on order of entry, the following is the categorization and a description of business failure rate. Innovator: First to develop or patent an idea, product or service. Product pioneer: They are the first to adopt a working model of a product or service. First mover: They are the first to sell the product or service. They have a 47% failure rate. Fast follower: They are the firms, who entered early not first though and have a relatively low failure rate of 8%. Across different industry segments, being a quick follower after the first entrant is increasingly proving to be the most reliable approach to gain and sustain market share Although, being the first mover has its merits, however, over emphasis on it and not taking care of other vital aspects of business like market needs, makes the business susceptible to avoidable risks. The most affected business due to this overemphasis on First mover approach was the e-commerce business as it was the quickest to adopt it since such businesses were easier to launch. The rush to start first took this industry into a trap of failure based on lack of fore sight. This study aims to explore this argument between the first mover versus the follower advantage. REVIEW OF LITERATURE As early as beginning of the 90’s a conceptual framework of First mover advantage was presented . They based their studies on empirical surveys that aimed to present a broader perspective of the First mover advantage and concluded that First mover advantage was a more complex phenomenon than was widely perceived till then. Based on empirical evidence they suggested that it was naive to believe that order of entry alone would endow First movers with overwhelming advantage and late entrants with a huge disadvantage. The sustainability of first mover advantages in industries where barriers to entry are low and possibility of product innovation being copied is higher was examined and concluded that both early movers and first movers enjoy a highly sustainable price advantage and a moderately sustainable market share advantage. A comparative study of Visicalc, Lotus 123 and excel, that being a first mover ultimately proves to be a liability rather than an advantage that could be sustained for long . Its argued that visicalc which was once the first major PC spreadsheet is not in existence any more. It was overtaken by Lotus 123. Lotus itself had to save itself by selling it to IBM. This example shows a better product is likely to overtake a pioneer sooner than later as a dominant product in the market. A classic example of how a late entrant took on a successful first mover and succeeded at it was Google , which challenged overture with adopting overture’s pay per click program. However, Google backed it up with a few innovative measures to take a lead in the search engine market. Measures like building Advertisement distribution system and doing away with insisting on charging money for its search results. It was observed in the early part of the 2000 decade, that Overture & Google were engaging in a legal tussle when Overture sued Google for infringing on its intellectual property rights with its ad placement tools . Often, it has been observed that early movers lose their advantageous position to later entrants. The advantage that they enjoy and bank upon does not last more than a few years, by which time the followers make up for the lead with their superior business ideas and/or resources and not only that they derive an advantage from the fact that they learn from the mistakes of their predecessors and are able to design offerings that exceed the expectations of the users. The example of Alta vista supports the above observation . Alta vista is one of the few brands that had completely lost the advantage it had enjoyed prior to when Google overtook it as the leading search Engine. Alta Vista had to close its free email accounts and focus on search as an activity that brought direct revenue. Traditionally First movers in an industry have been seen to enjoy an advantage emerging out of their early entry. The advantages could be many depending upon how the business is positioned with respect to the market. The Resources and the assets acquired by the first mover ahead of its competitors entails advantages in business. The resources like physical assets, geographic positioning, branding in consumers minds place the first mover at advantageous position. The physical assets like process, machinery, access to distribution channels and superior human resources with ease is virtually the most crucial aspect of first mover advantage. The product being new, the consumer expectations are volatile and can be shaped up according to the First mover. This puts the first mover in a unique position to develop capabilities to build and shape consumer preferences towards its own product to shape up consumer expectation. The first mover is in a position to set standards of performance. This can really benefit the first mover as it entails designing the offering according to its own competitive edge. A first mover has the capability to look for and choose as per its own preferences for development of its physical facilities. This is usually a great source of advantage for the first mover. Being a product and market pioneer also enables the First mover to be a technological pioneer in relevant field if the company is focused on innovation. The technology developed can be in terms of product or process innovation. Thus the first mover gains foresight of the way industry is poised at that point in time. There is essentially a learning curve that entails entering a new market and the longer an entrant stays there alone, the more it learns and improves its offering and infrastructure and the harder it is for the competitors to catch up with the same. Learning more and earlier enables a firm to develop cheaper and more efficient production process . There is also a legal way to safeguard the early mover advantage and that is through product patents. This makes the advantage exclusive to the firm. Although patents cant protect new products developed for an indefinite period of time. They can however, establish strong entry barriers for the late entrants. Although Followers in general face difficulties in catching up with First movers by virtue of the advantage First movers enjoy vis-a vis them, however, Its been observed that Followers as Second movers also stand to gain advantages vis-a vis the First movers as well as Third, fourth or later entrants. The ecommerce industry experiences lower barriers to entry as compared to the other industries or types of business. This essentially stems from the intangible nature of the internet. This means the establishment of an ecommerce business is comparatively less expensive. The issue of a new entrant’s ability to capture the attention of the target markets is also crucial to its success. The online as well as offline firms engage in promotional effort, it is comparatively cheaper and more efficient for an ecommerce business to reach out to the markets. These are typically the features that are available to all the entrants, however, the timing makes them more useful and advantageous for the second movers. Chronologically observing, by mid 1995, popular culture had started noticing the internet and Netscape was the default browser at that time . Netscape had all the advantage a first mover could have which it did bank upon hugely. The dotcom bubble came to the fore. Then the Internet Explorer by Microsoft appeared on the scene. For next two years there were fierce battles between the two to gain major portion of market share. Both competed through new product releases with Technical as well as marketing innovations. However, it was not until 1997 and advent of Internet Explorer 4.0, that the tide was turned in the favor of Microsoft. Microsoft owed this success largely to the greater financial capability and a monopoly in the operating system market. Thus a small first mover with limited resources though initially huge early advantage was eventually defeated by a Financial and Technological giant. This had ended the era of web browsers with dominant software company emerging on the front. Microsoft though a late entry has remained dominant till now and challenged recently only by Mozilla Firefox. Google it was observed, enjoyed a late mover advantage in terms of paid search listings . These listings were sold on a keyword triggered basis. Although Google had to continuously innovate for sixteen months and come up with the current pay per click auction format that changed the tide decisively in Google’s favour vis-a-vis its competitors. However, researchers have tried to identify the merits of First mover advantage concept. It was observed that ecommerce business had come to evolve itself to a position wherein the competition amongst the various companies was focusing more and more on being the first to introduce any kind of product, process or marketing innovation targeted at the end user of services . Citing Amazon as an example, which launched its online business store months ahead of the leading book chain Barnes & Noble, gained siginificant lead. Although Barnes Noble did launch its online version, it was never quite able to come close to Amazon in terms of the no. of copies sold. Examples like Charles Schwab Versus Fidelity demonstrate as to how the First mover advantage accrues to the ecommerce businesses . Charles Schwab and Fidelity were neck to neck in terms of business volume and market share in 1996. Schwab launched its online trade operations the same year. By 1999, whereas, Schwab became the leader in online trading business, Fidelity was in the fifth place. While on one hand efforts were being made to ascertain the true nature of First mover advantage, Strategic management research was striving to ascertain whether being a first mover in an industry is an advantage over the later entrants at the same time. There is evidently a significant amount of controversy surrounding the issue. Although, moving first, a firm can gain an early foothold in the market and a sizeable market share. It can also, by virtue of being first, establish a reputation as a pioneer, which has its own marketing appeal. It can as a result define standards with respect to its operational capabilities and establish customer expectations accordingly, putting later entrants at an inherent disadvantage. The market pioneers however, do incur some risks. It can usually be expensive to develop a new product. The costs incurred sometimes are equal to what could’ve earned as capital to improve market positioning through promotional effort. Besides, a pioneering product needs to cut ice with the customers as in it needs a familiarity effort on the part of the business for the product or service. Thus Expenses involve not just creation of recognition for the product and to an extent for the firm but also generation of interest and awareness for the particular category of product or service in general, which can be very costly at times . It has been argued that customers and investors don’t give much importance to the innovator or pioneer tag of the first mover firms. Instead they put much stake on the company that has the right product and/or service. Instead of a first mover advantage, the startups operating in new markets or offering new products in an existing market, usually face difficulties arising from lack of awareness about the market and the costs associated with creating market awareness about their product or service. Being first in entering a business is no doubt an advantage, however it is not a sustainable advantage. Establishing a viable business is usually always a challenge while being the first to enter a business. One of the problems with being first is that usually one might not be the only one who has thought of a new idea . The idea itself might be flawed or maybe some one has already thought of it and will enter quickly behind with a similar idea and that will take away the advantage with being first. Even if it is good idea and one moves first, then the advantage itself does not last long. Another risk that a new offering faces is that it is nearly impossible to figure out the exact nature, or form of product or service that customers are going to prefer. This usually results in a lot of Time, money and effort spent on redesigning the offering in order to suit customer needs. This also enables the competitors to lean about customer needs by virtue of the first movers’ mistakes and enter the market with a better product or service. Another problem with being the first mover is the need to create market awareness. A lot of campaigns to educate the customers as to why they should buy one’s products or services are required more so that such a product or service exists. The risk involved here manifests itself into a potential problem of cash flow, with higher marketing costs as well lower sales The matter is summed up with an advice on how to avoid the risks involved. It is concluded that if there is a need to enter a market with a new product or service, one must do a pilot test of the product or service on some sample customers. This will give some feedback on customers’ wants quickly and without much costs incurred. This will also help establish one’s concept and help in the long run to really enter the market. He goes on to suggest that once tested, the firm must move quickly since competitors might be working on similar ideas and once they have seen one’s product testing, they might move ahead and launch it closely. Next one must try to create some barriers of entry for the new entrants by measures like product patents, negotiating long term contracts with customers or identifying key locations to do business. It has been exhibited through an example as to how first movers can lose their advantage . Microsoft a second mover won its web browser war with Netscape which was not just a first mover but also a dominant player in the web browser market. However, another significant question has been posed and answered and that is whether Microsoft was successful at grabbing market share from Netscape because it had a technologically superior product in Internet explorer or whether it succeeded through better distribution by convincing PC companies to include internet explorer on all their PCs which some researchers argue was done through anticompetitive means. Since its inception in 1998, paid search has been the dominant form of online advertising. The most effective method to do so was quickly adopted by Google. This method involved the advertisers to bid for top listing results for themselves through bidding options on an ongoing basis. This form of advertising has come to solve the problem of revenue generation for the search engines in general and Google in particular, since users expect free search results. This was the innovation that Google banked upon as a late entrant, even as the earlier search engines were struggling to find suitable ways to generate revenue from the search function . Although, Google had long overtaken Overture, the early mover, Overture had kept pace with Google since then and Overture is close on the heels of Google. Here it is noted that both Google and Overture are innovation based companies and ahead of the rest of the pack and they figured out a way to place ads anywhere on the web . Moreover they both gave away the benefits of publisher friendly advertising formats like popup ads for consumer friendly text advertising formats. In the year 2000, Google, by launching its Ad words program gained a further lead over Goto.com the first mover in the industry as well as other big competitors like Microsoft. Its evident that once Overture was shaken by the innovative search and advertising techniques introduced by Google, it was struggling to find buyers for itself. This struggle in itself provided ample opportunity to Google to further consolidate the lead it had gained over overture as a fast follower . Researchers have argued that its very often that Fast followers, very often beat the First mover innovator firms . There are various reasons why this happens in spite of the initial advantage that first movers enjoy. The first movers usually give away the advantage to the later entrants by virtue of their faulty management and bad decision making, due to which they are unable to sustain their advantage. Notably, Napster was the first P2P file sharing application that had a brilliant inherent idea of bringing together search, FTP, and instant messaging. However, bad decisions accompanied and compounded by the legal battles and unfortunate timing led to Napster completely giving away its First mover and innovator edge. While comparing Google to overture on the paradigm of First mover vs fast follower, an interesting observation that has recently come to the fore is that while the Top position listings in Google are comparably expensive as compared due to the leading position it has attained, thus the higher price it can command . Google after gaining the lead as a fast follower has no doubt been working credibly to maintain the lead and the market share. Google bases its search on results specificity for the users. This is a very user friendly search pattern in a sense. This move has long kept users from switching to other search engines for their search . However, Competitors, particularly Overture have now redefined the problem in a new way and have converted their disadvantage into an advantage by defining the search mechanism around user freedom and away from results specificity. This approach has definitely cut ice with users and is surely poised to take away some market share from Google. It has often been argued that though barriers to entry for many ecommerce and other internet or software technology based business are relatively low . However, it is very important to understand that entry into a market is not akin to sustainability of business. Just by virtue of entering a business or the order of it, a firm can not ensure its survival or growth. ANALYSIS AND DISCUSSION The study is based on a thorough review of relevant literature on the topic. Based on the principles of marketing theory, the study strived to ascertain a. Whether First mover advantage has any empirical basis or not. b. To what extent the First mover advantage as stipulated in earlier studies is sustainable. c. How does First entry compare to late Entry as a business strategy d. Whether late entry or Fast follower advantage is more relevant and appropriate to ecommerce business than other forms of business. The study was conducted with the following First mover and Late entrant companies in the ecommerce industry. Google versus Overture (First Mover) versus Microsoft Google versus Alta vista (First Mover) Napster (First Mover) versus itunes Netscape (First Mover) versus Internet Explorer Amazon (First mover) versus Barnes & Nobel As result of study following observations came to the fore: In spite of losing the first mover advantage to Google, Overture is trying to catch up with Google with the help of fresh process and market innovations. Questions have been raised as to whether being a first mover is an advantage at all or not. Since almost all the above examples show that ultimately it’s the late entrants who have emerged as winners. At certain points in the history of ecommerce business the first movers were definitely able to bank upon the advantage and consolidate the lead. The study shows that through the example of Amazon versus Barnes & Nobel. That the First movers still have the potential to fight the onslaught of late entrants but have eventually been defeated. The study shows this through the example of Netscape Navigator versus the Internet explorer. The study has observed that in order to determine whether being a first mover is an advantage or not, factors like cost of new product development and its awareness to the target market as opposed to the long term benefits and their sustainability need to be ascertained. That the first mover advantage is eventually lost over a few years due to a. The learning curve advantage that late entrants enjoy. b. Bad management and faulty decisions and their timing. The study shows the above with example of Google versus AltaVista. CONCLUSION The extensive review of literature, the analysis of the review and its discussion brings us to the following conclusions. Firstly, First mover advantage concept is definitely based on empirical research. The First mover advantage as stipulated in earlier studies is sustainable to the extent the businesses are capable enough to mould their business decisions and management practices that can build upon the advantage that early entry brings. The First entry as compared to late Entry as a business strategy has so far not proved fruitful for the ecommerce businesses. Late entry or Fast follower advantage is definitely more relevant and appropriate to ecommerce business than other forms of business. References Brooks, N. 2011. How Search Engine Rank Impacts Traffic., Digital marketing Insights, Vol. 2011. Collins, J. 2000. Best beats First, Vol. 2000. 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