First-mover advantage or FMA is the advantage gained by the initial occupant of a market segment. This advantage may stem from the fact that the first entrant can gain control of resources that followers may not be able to match. Sometimes the first mover is not able to capitalise on its advantage, leaving the opportunity for another firm to gain second-mover advantage.
FMA is the sometimes insurmountable advantage gained by the initial or “first-moving” significant occupant of a new market segment. This advantage may stem from the fact that the first entrant can gain control of resources that followers may not be able to match. Originally made apparent by the ever booming Internet phenomenon, it has recently been on the decline due to the recent economic situation. It is important to note that the first-mover advantage refers to the first significant company to move into a market, not merely the first company. In order for a company to try and become a first-mover that company needs to figure out if the overall rewards outweigh the beginning/underlying risks. Sometimes first-movers are rewarded with huge profit margins and a monopoly like status. Other times the first-mover is not able to capitalize on its advantage, leaving the opportunity for other firms to compete effectively and efficiently versus their earlier entrants. These individuals then gain a second-mover advantage.
Many new product development and marketing authors refer to ‘first mover’ advantages; the first mover being the firm that first enters the market with a new development: For those products that made it to market, an important outcome is their speed to market and the ability to achieve first mover advantage.
The first mover advantage, if managed appropriately, conveys reputational benefits where the organisation or its brand become known as the preferred or even default term for the product category – such as all personal stereos being referred to as ‘Walkman’ a brand of Sony Corporation. Apart from the ability to charge premium prices if the conditions described above are met, the firm has an opportunity to pioneer a category (or segment of one) and, if adept, build a strong market position before it is attacked by competitors.
The first mover advantage derives from the fact that it is much more difficult for subsequent entrants to dislodge an existing competitor that has established a product technology and product standards, distribution channels, a brand name and other factors that support its position. These have been quantified by comparing the 3-year cumulative performances of two beverage products, as shown in Figure 11.6. The product that was second into the market had to offer higher discounts to the channel partners in order to secure shelf space (selling-in), and spent more on consumer advertising and promotion than originally planned (selling-out). As a consequence, it only generated 20% of the profit that it expected from the product during its first three years in the market.
Industries comprised of established organisations that manufacture products with a high degree of ‘technology churn’ and product obsolescence – that is, the technology constantly evolves at a rapid rate – present a special case. The factors mentioned earlier may not always apply to them. However, first movers within a particular technology are generally able to establish and defend their market positions against later entrants until the technology ‘churns’ again.
Advantages;
1. Consumer-related advantages with the organisation having first choice of profitable segments and positions.
2. Advantages related to occurrence of positive network effects (ie, first mover develops effective networks before competitors enter).
3. Advantages related to the high switching costs for ‘early adopters’.
4. Cost reductions through economies of scale and experience effects.
5. Advantages related to capacity of first mover to operate with greater pricing freedom.
6. Distribution advantages by virtue of having the choice of the best distributors.
7. Advantages related to being able to set technological standards.
8. Supply-based advantages related to pre-empting competitors in securing scarce resources and suppliers.
Disadvantages;
1. Higher costs due to potentially hidden costs of accelerated NPD, such as risk of trivial innovations driving out more profitable breakthrough innovations.
2. Higher costs as a result of the required investments in early versions of technology.
3. Elevated costs due to more thorough concept and prototype testing.
4. Consumer-based disadvantages related to inability to exploit opportunities arising from shifts in consumers’ preferences and purchase criteria as the market develops.
5. Disadvantages related to being locked in on first generation technology, which prevents firms from taking advantage of the latest technology.
6. Disadvantages related to possible positioning and pricing mistakes inherent with accelerated NPD.
