In business, never underestimate the value of true first mover advantage. True first mover advantage reflects not the first actual mover, but the first mover to garner significant market share. In fact, the gains can be tremendous – become recognized as the leader in the space (whereas everyone else becomes the “me too”), get customers (and revenue) before any competitor can arrive on the scene, and reap great profits and possibly gain monopoly-like status. An entrepreneur’s (and the VC who backed the company) dream come true!
Typically, first mover advantage can arrive from three primary sources: technological leadership, preemptive allocation of resources, and high switching costs.
A company can garner technological leadership through many channels. For example, through the R&D process, it can create or uncover something radical – something that might revolutionize an industry or even create a new category altogether! In addition to intellectual capital gained through R&D, tools such as ‘information systems’ can also project a company far ahead of its competitors. For example, in the consumer Internet Service Provider space, profit margins are incredibly low because the product, Internet access, is a commodity. Now, in order to maintain those low margins, companies need to make capital investments into systems that will be able to do the work that a human (actually – what 1000 humans…) can do at the same time. To illustrate, if you have DSL service and your paying $14.95/month – the first time you call into tech support and speak to a live operator, the ISP has basically foregone the profit on your circuit for the entire year! If you call in a second time (or worse, repeatedly), they are actually paying to keep you on as a customer! So, not only can technology afford you a leadership position – it can actually help you stay in business. Side note: these economics are the catalyst behind the self-serve “figure it out yourself by looking at our website” business model.
Preemptive Resource Allocation
Having first mover advantage, you have the ability to acquire resources (which later become assets) potentially below market prices before the prevailing evolution of the market itself. One of the greatest examples that I can think of has absolutely nothing to do with technology at all. It’s real estate! Take Santa Clara, CA – what was it 50 years ago? Nothing… but then, a small company named Intel moved in and took over large parcels of land at very low costs. Palo Alto? Same thing until a company named HP decided to set up shop. What was the result? Welcome to Silicon Valley – some of the now most expensive real estate in the world!
Getting back to technology; if you were to take what both of these power house companies manufacturer, is it not safe to assume that the “widgets” they were buying originally were cheap and when the market came along to purchase, the suppliers realized what was going on so cost to the companies increased? Supply and Demand 101… if you have the advantage, you can cherry pick and leave others searching for crumbs!
High Switching Costs
I’m positive that every time someone uses this terminology, Peter Drucker gets a nickel… So, what are high switching costs? Well, if you are the customer, it’s the cost to you to switch to a new product. If you are the vendor, it’s the cost to pay to get customers to switch to your brand. First movers have already garnered market share so, in this case, the high switching costs will be imposed on the new company trying to take market share. This can become very expensive. For example, when a new (consumer) startup is launching, it has to raise a significant amount of capital – not necessarily because it needs money for paying salaries or rent, but because they realize that the sales and marketing function is going to be a cost center for the business during the time they are attracting new customers. Once the new company reaches critical customer mass, it can use earned revenue to pay for operations thereby allowing the company to stop digging into its coffers for support.
Follow the leader
Apple, despite not being a first mover at all, is a great example of an organization that has been able to leverage all three sources – superbly! Through technological leadership, they have created new products like the iPhone and iPad that paved the way for entirely new categories (which, by the way, Apple refers to as ‘Post-PC products). Through preemptive resource allocation, they were able to secure deals on components like flash memory that their competitors can’t come close to! And, by giving their customers an outstanding user experience, they’ve directly imposed high switching costs that leave their competitors longing for market share. Don’t believe me? Look at their stock price. (Dec 2008 – $86/share | Mar 2011 – $360/share). Need I say more?
Watch Your Step
First mover advantage, like most things, works great when you do it right. But what happens when you don’t? Welcome ‘second mover’ (or third) advantage. Or, better known as your de-facto Internet search engine. Google wasn’t the first mover at all. In fact, prior to Google (1998), you had Lycos (1994) and Yahoo (1995), and a bunch of other search providers that didn’t leverage all three requirements to maintain first mover advantage. For more information, just Google it…
So there you have it – first mover 101! The next move… is yours.