First Mover Advantage - Essay Example

? First mover advantage First mover advantage (FMA) First mover advantage can be best explained as a form of competitive advantage that a company attains by being the foremost organization to announce its entry and thereafter, penetrate a specific market or industry (Thijssen, 2010). By being the first company to expand into a particular industry allows it to gain higher level of customer loyalty and satisfaction as well as better brand recognition. In addition to that, the organization also has more time to develop its product or service according to the needs and requirements of its customer base (Markides and Sosa, 2013). A perfect example of first movers includes companies such as, Coca-cola and eBay, who were the first companies to enter their respective market. Where Coca-cola was first company to produce cola and made their products available to the public in 1886, eBay was the first company to introduce the auction process online in 1995. Both these companies have been a recurrent powerhouse in their respective industries ever since they were founded. It has been witnessed very often that first movers are generally pursued by competitors who try to capitalize on the original company’s success, brand value and recognition. They try and acquire the market that has already been penetrated by the first moving company (Poulsen, 2007). The competitors try and bring about certain modifications and improvements in their product line and make them available to the public in order to market their products, as being better than the products offered by the first moving company. However, by the time the competitors lay their foundation in the already penetrated market, the first mover has already accumulated huge market share, customer loyalty, satisfaction and expertise in this particular field of work, which is required to stay at the pinnacle (Markides and Sosa, 2013). However, a contrary idea has been provided by Markides and Geroski (2005) who had said that first movers of a new market are not the ones that dominate the market. The first and foremost requirement for a first mover is to be able to predict the reaction of the second mover to a choice made by the first mover. This in turn sets forth the necessity for the first mover to understand and assess the characteristics of the second mover. One of the crucial characteristics as far predicting the second mover’s reaction is concerned, is the second mover’s payoff function. First mover advantage is associated with pioneering products that benefit from advantages attained from a long-term market share. In addition to that, they also enjoy advantages in distribution of those products, the improved product-line, breadth, and quality (Chen and Pereira, 1999). First mover advantages are characterized by a pioneering firm’s ability to earn positive economic profits (profits in excess of the cost of capital). First mover advantages transpire endogenously within multi-stage process (Lieberman and Montgomery, 2002). The multi stage process is depicted in figure 1. The first stage involves the generation of an asymmetry that enables a particular company to gain competitive advantage over the rival companies. This opportunity to make the first move is a result of the firm’s possession of some unique information sources or foresight or may be simply out of luck. Once this asymmetry is established, a firm may be able to exploit its advantageous position by following variety of mechanisms. These mechanisms thereby enhance the durability and magnitude of the first mover profits. Figure 1: Endogenous generation of first mover advantages (Source: Lieberman and Montgomery, 2002) Game theory Game theory is the process of modelling the strategic interaction between two or more players in a situation containing set rules and outcomes (Heap and Varoufakis, 2004). While used in a number of disciplines, game theory is most notably used as a tool within the study of economics. The economic application of game theory can be a valuable tool to aid the fundamental analysis of industries, sectors and any strategic interaction between two or more firms. Here, we'll take an introductory look at game theory and the terms involved and introduce a simple method of solving games, called backwards induction (Burns and Gomolinska, 2000). “Game theory was developed in the 1950s as a means of using mathematical models to analyze conflicting economic phenomena and to find points of possible cooperation among two or more actors who strategically interact with a view to maximizing their own returns” (Law and Pan, 2009). After its foundation, the theory has been extensively applied in the fields of economics, biology, military strategy, international relations, computer science, law, and sociology in spite of its mathematical intricacies (Correa, 2001; Burns and Gomolinska, 2000). The theory has been aptly used by researchers in order to explain composite situations that include decision-making where players have to make coherent choices that might affect the interests and decisions of another player (Burns, Gomolffiska and Meeker, 2001). In addition to that, game theory has been used particularly for examining social incidents on the basis of practical individualism (Heap and Varoufakis, 2004). The theory has also been used in order to study situations such as, conflicts of interest, cooperation, competition, social dilemmas, rational choices and coalitions in decision-making processes (McCarty, 2007). Moreover, researchers have also stated that game theory can provide people with a new way of thinking about law and help them to understand how their behaviour affects the law. Game theory has proved to be an analytical model which helps in assessing situations that involve the mutually dependent, planned interactions of several decision-makers who have their own interests and preferences, when making logic-based decisions (Heap and Varoufakis, 2004). Game theory also takes into account the influence of acquiring perfect and imperfect information related to decision-making and how each participant’s strategy can be affected by another participant’s strategy in the same game (McCarty, 2007). FMA's use in Game theory and International trade FMA has a very significant use in the Game theory and international trade. The best example to explain the significance of FMA in Game theory is when Royal Dutch Shell had announced that they were going to construct a floating LNG facility which will be the largest floating structure that has ever been built. This announcement can be interpreted from the first mover’s advantage as well as game theory perspective. RDS by announcing this plan and making a commitment to spend such a hefty amount had become the first mover in this situation. In doing so, they altered the options for their competitors. The rival companies of RDS, who were considering adopting a similar expansion plan but was uncertain about the implications of such strategy and was also unsure about investing such a large amount, will now have to modify their strategy. They will have to wait and observe the results of RDS’s expansion scheme. By being a first mover in this particular situation, RDS has stood as a barrier in the path of its competitors who were trying to justify a similar investment. If the plan of RDS works in their favour, then they will attain a significant competitive advantage over their rivals. However, on the flip side, if the expansion scheme fails by any chance, then the competitors of RDS will have an upper hand as they did not invest their money on a failed scheme. By being the first entrant, a company can alter the options that their competitors have, but that does not justify the fact that going first is always best. In any strategic situation, a company needs to know that committing first to a course of action will change the game for everyone else. Once the company has recognized this, then they need to evaluate whether going first will give a first mover advantage or not. This is an essence of First mover advantage and its implementation in game theory (Hughes, 2011). As far as explaining the relation between FMA and game theory is concerned, a firm can gain first mover advantage by implementing optimal models that considers the interaction between participating companies who intend to be the first mover in a particular market, alongside considering its own benefits of being the first mover as well as the costs associated with it (Zhao et al., 2012). From the game theory perspective, firms that want to achieve first mover advantage do an in-depth study of the relationship that exists between its potential competitors. This helps the firm to pre-empt its rival companies from being the first mover in a particular market or industry, thereby enabling the firm to implement effective strategies, whereby it can gain significant market share in a particularly unexplored market for ensuring the firm’s long term sustainability (Lozano et al., 2013). As far as international trade is concerned, experienced managers conducting international business are aware of the fact that political factors play a crucial role ensuring a successful early market entry (Head, 2007). This theory holds true in case of transition economies where free market competition did not prevail until recently. In such a context, the conceptual frameworks of FMA takes into account the market and non-market factors which create FMAs, thereby facilitating successful international trade. In international trade, first movers consider economic mechanism through which they can assess the cost advantages by scaling and experiencing economies and marketing cost asymmetries in order to gain significant competitive advantage over their rival companies. The conceptual frameworks of FMA also require companies to consider cost asymmetries in factor inputs such as, procurement contracts, which make sure that raw materials required facilitating international trade, are available at lower price to first movers. Moreover, in international trade, first mover advantage comes in the form where companies forestall their competitors by securing a specific geographic space as well as robust marketing channel (Frynas, Mellahi and Pigman, 2006). Furthermore, in order to conduct successful international trade, companies try to attain the first mover advantage by pre-empting the technology space, customer perceptual space and by modifying the cost structure of their products and services, according to the needs and requirements of the customers. In the field of international trade, companies seeking first mover advantage also consider the impact of government intervention in the country while the trade is being done. They pay vital attention to the importance of political resources, political capital and political competencies. Previous researches have suggested the positive impact of government policies on international trade which led to large number of early entrants, being rewarded handsomely for their partnership with the government. One of the examples cited was when Volkswagen attained the first mover advantage in China, as they followed the governmental policies very closely particularly because governmental policies in transitional economies are favourable for early entrants to conduct international trade. The conceptual framework of FMA, outlined for the purpose of international trade, consider political factors of countries with whom the trade is being done. This is because it gives them political resources such as, cognitive maps and intelligence, regarding non-market environment, alongside giving them better accessibility to opinion makers and decision makers. This provides pioneering firms with enhanced bargaining skills that is required to negotiate with foreign country governments in order to conduct international trade successfully. Moreover, first mover’s advantage in the field of international trade is also characterized by the reputation that the company builds in the new market. In addition to that, first movers specializing in international trade have coalition building ability and the ability to form political entrepreneurship. This attributes can be henceforth implemented in the field of international trade in order to improve a firm’s efficiency and profitability. FMA's use in formulating a business strategy First mover’s advantage plays a critical role for the pioneering firms to formulate business strategies for further expansion. With the first mover’s advantage, the pioneering firm can formulate business strategies that are directed towards enhancing their technological leadership in the market that they have just penetrated. By using its first mover advantage, the firm can formulate strategies that will strengthen its position in the research and development division, the position that it has achieved through a direct breakthrough in the field of technology. Technology plays a crucial role in ensuring the stability and sustainability of a first mover. The firm can use its advantageous position in a relatively new market and formulate business strategies directed towards attaining prolonged cost advantage, thereby enabling the firm to maintain its leading position as far as market share is concerned. The conceptual framework of FMA enables the early entrant to formulate and outline strategies that emphasize on countering dissemination of innovation. This is particularly because dissemination of innovation will diminish the first mover advantages over the due course of time. Strategies have to be laid down in order to control work force mobility, prevent informal technical communication and reverse engineering. FMA also helps firms to evaluate their R&D expenditures, thereby enabling them to plan strategies in such a way that will ensure their leadership as far as technology is concerned. FMA also enables an early entrant to formulate and implement business strategies through which the company can realize economies of scale and scope as well as create barriers to entry for other competing firms (Frynas, Mellahi and Pigman, 2006). Early entrants or first movers have important competitive repercussions provided that there are scopes of realizing economies of scale in those markets and that the market only supports few competing firms. FMA allows firms to outline plans that involve huge investments in order to shield them from being exposed to risk of suffering loss. Pre-emption of input factors is also another area that needs to be effectively strategized. FMA allows early entrants to formulate effective business strategies that ensure the same, provided that they have access to superior information. This first mover advantage is associated with the attainment of informational advantage. The early entrant can implement strategies that will enable the entity to acquire assets at market price, which is much lesser than the price that will prevail later when the market evolves or develops. First mover advantage gives an upper hand to the early entrant whereby they can outline well defined strategies through which they can choose the most attractive market as a niche for expanding their operations. This is an advantage in particularly those markets which supports very limited number of profitable firms who seek to expand their operations (Lieberman and Montgomery, 2002). Having chosen the most attractive market, the first mover can formulate and implement subsequent action plans that limit the amount of geographic and product characteristic space available for second or third entrants. Early entrants that have attained the FMA can also plan strategies in such a way that subsequent entrants find it unprofitable to occupy the interstices of an already penetrated market. In such cases, the first mover enjoys a prolonged duration of being the only one in that market, which in turn enhances its profitability and efficiency. FMA also allows early entrants to formulate effective pricing strategy for their products and services in accordance with the needs and requirements of their potential customer base. Reference List Burns, T.R., and Gomolinska, A., 2000. The theory of socially embedded games: the mathematics of social relationships, rule complexes, and action modalities. Quality & Quantity, 34, pp. 379–406. Burns, T.R., Gomolffiska, A., and Meeker, L.D., 2001. The theory of socially embedded games: applications and extensions to open and closed games. Quality & Quantity, 35, pp. 1–32. Chen, H. C. and Pereira, A., 1999. Product entry in international markets: the effect of country of-origin on first-mover advantage. Journal of Product & Brand Management, 8(3), pp. 218-231. Correa, H., 2001. Game theory as an instrument for the analysis of international relations. Ritsumaikan International Research, 14, pp. 187–208. Frynas, J. G., Mellahi, K. and Pigman, G.A., 2006. First mover advantages in international Business and firm-specific political Resources. Strategic Management Journal, 27, 321-345. Head, K., 2007. Elements of multinational strategy. Berlin: Springer. Heap, S. P. H., and Varoufakis, Y., 2004. Game Theory: A Critical Text. London: Routledge. Hughes, B., 2011. Shell and first mover advantage. [online] Available at: [Accessed 29 November 2013]. Lieberman, M. B. and Montgomery, D. B., 2002. First-mover advantages. Strategic management Journal, 9, pp. 41-58. Lozano, S., Moreno, P., Adenso-Diaz, B. and Algaba, E., 2013. Cooperative game theory approach to allocating benefits of horizontal cooperation. European Journal of Operational Research, 229, pp. 444-452. Markides, C. and Geroski, P., 2005. Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets. San Francisco: John Wiley and Sons. Markides, C. and Sosa, L., 2013. Pioneering and First Mover Advantages: The Importance of Business Models. Long Range Planning, 46, pp. 325-334. McCarty, N., 2007. Political Game Theory: An Introduction (Analytical Methods for Social Research). Cambridge: Cambridge University Press. Poulsen, A. U., 2007. Information and endogenous first mover advantages in the ultimatum game: An evolutionary approach. Journal of Economic Behaviour & Organization, 64, pp. 129-143. Thijssen, J. J. J., 2010. Pre-emption in a real option game with a first mover advantage and player-specific uncertainty. Journal of Economic Theory, 145, pp. 2448-2462. Zhao, Y. L., Erekson, H., Wang, T. and Song, M., 2012. Pioneering Advantages and Entrepreneurs’ First-mover Decisions: An Empirical Investigation for the United States and China. Journal of Product Innovation Management, 29, pp. 190-210. Read More