BEST PRACTICE

The Half-Truthof First-Mover Advantageby Fernando Suarez and Gianvito Lanzolla

First-mover advantage

is more than a myth

but far less than

a sure thing. Here's

how to tell when it's

likely to occur-

and when it's not.

SOME MANAGEMENT CONCEPTS

such intuitive appeal that theirvalidity is almost taken for granted.First-mover advantage is one such con-cept. Although the fate of its most-convinced adherents, the dot-coms, of-fers a cautionary lesson, managers'faiththat first-mover status brings impor-tant competitive advantages, even whennetwork effects are not available to ac-celerate and entrench it, remains un-diminished. Business executives fromevery kind of company maintain, almostwithout exception, that early entry intoa new industry or product categorygives any firm an almost insuperablehead start.

But for every academic study provingthat first-mover advantages exist, thereis a study proving they do not. Whilesome well-known first movers, such asGillette in safety razors and Sony in per-sonal stereos, have enjoyed consider-

able success, others, such as Xerox infax machines and eToys in Internetretailing, have failed. We have foundthat the differences in outcome are notrandom-that first mover status can con-fer advantages, but it does not do socategorically. Much depends on the cir-cumstances in which it is sought.

One possible explanation for Sony'ssuccess is that its strong brand name,substantial financial resources, and ex-cellent marketing skills allowed it tomake the most of its first-mover status.But Xerox, too, had a great brand name,deep pockets, and many valuable skills.And Sony, despite its brand and mar-keting muscle, could not translate beingthe first mover in home VCRs into any-thing approaching its success with theWalkman. Yes, a firm's resources - andluck-are important, but certain otherfactors and conditions can be decisiveas well.

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Our research, based on a thoroughexamination of the literature on first-mover advantage, as well as an analysisof more than 30 cases of early entry intonew product spaces, has enabled us toidentify situations in which companiesare likely to gain first-mover advantagesand those in which such advantages areless likely. Specifically, we identified twofactors that powerfully influence a firstmover's fate: the pace at which the tech-nology of the product in question isevolving and the pace at which the mar-ket for that product is expanding. Know-ing how fast or slow the technology andthe market are moving will allow youto understand your odds of succeedingwith the resources you possess.

What Kind of First-MoverAdvantage?A first-mover advantage can be simplydefined as a firm's ability to be better offthan its competitors as a result of beingfirst to market in a new product cate-gory. We find it useful to distinguish be-tween durable first-mover advantages,which improve a firm's market shareor profitability over a long period, andthose that are short-lived. Although noadvantage lasts forever, firms that suc-ceed in building durable first-moveradvantages tend to dominate their prod-uct categories for many years, froma market's infancy until well into itsmaturity. Coca-Cola in soft drinks andHoover in vacuum cleaners unmistak-ably demonstrate both the value andlongevity of early success.

But even when a company cannotbuild a durable first-mover advantage,it may obtain some benefits from earlyentry. The pioneering efforts of Net-scape, the first to market an internetbrowser, briefly produced enormous

Fernando Suarez (suarezf@bu.edu) is anassociate professor of management atBoston University. He is also a regular vis-iting professor at London Business Schooland at the graduate business school ofUniversidad de los Andes in Santiago,Chile. Gianvito LanzoUa (glanzotia®london.edu) is a faculty research fellowat London Business School.

First-mover status can confer advantages,but it does not do so categorically.Much depends on the circumstances.

gains for shareholders until the stockprice plummeted in 1997 following therise of Microsoft's browser. Explorer.Apple declined more gradually-it wasprofitable for several years before pres-sure from Microsoft and Intel took atoll, forcing it to restructure in the early1990s. Whether the end comes suddenlyor slowly, profits can be great enough tomake a short-lived first entry a worth-while investment-and perhaps to makeit a strategic objective. Of course, a busi-ness is free to choose not to enter a newmarket at all. But even a runner-up'smargins may look good compared tothe opportunity cost of staying out ofa new market.

Industry DynamicsAre CrucialMost students of first-mover advan-tages have concentrated on how firmsachieve them. One of the three mainways is by creating a technological edgeover competitors. By starting earliest,first movers have more time than laterentrants to accumulate and master

technical knowledge.The second way isby preempting later arrivals' access toscarce assets-for example, a location ona city's main street,talented employees,or key suppliers. The third is by buildingan early base of customers who wouldfind it inconvenient or costly to switchto the offerings of later entrants.

What has been largely ignored is theconditions under which those threetactics are most likely to succeed or fail.Just as a swimmer's ability to cross theEnglish Channel depends as much onthe water's roughness as on his or herown skill and experience, an early en-trant's prospects depend as much onbackground factors as they do on thefirm's resources and capabilities. Thetwo most important factors - the paceof technology evolution and the pace ofmarket evolution - are typically beyondthe control of any single firm.

There can be enormous variation inthe rates at which products' underlyingtechnologies advance. For example, thefirst manufactured glass dates back toabout 3500 BC, when Middle Eastern

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artisans heated crusbed quartz to makeglazes for ceramic vessels. But it tookthree millennia for tbe next importanttecbnological change, glassblowing, toarise, and 1,600 years more before En-glisbman George Ravenscroft inventedlead glass. No other important tecbno-logical change occurred until AlastairPilkington invented the float-glass pro-cess in tbe twentieth century. By contrast,a computer today bears little resem-blance to one made even ten years ago.

Some technologies, such as computerprocessors, evolve in a series of incre-mental improvements; others evolve

dismptively, creating a break from thenorm, as was the case when digital pho-tography began to displace film. Thefaster or more disruptive tbe evolutionof technology, tbe greater the challengefor any one company to control it. Evenin product markets dominated by firmswith large R&D budgets, new entrantsand other competitors tend to drivetecbnological progress.

Tbe pace of market evolution canvary as markedly as the pace of tecbno-logical evolution. For example, the mar-kets for automobiles and fixed tele-pbones developed much more slowly

tban, say, tbe markets for VCRs andcellular telephones. Fixed telephonesneeded more than 50 years to reacha household penetration of 70%; cellulartelephones achieved the same level inless than two decades.

The greater a new product's or cate-gory's departure from existing productsor categories, the more uncertain willbe tbe pace of the market's growth andits eventual shape-how many segmentstbe market will divide into, for exam-ple. Nokia launched the N-Gage, a gam-ing and music platform that includesa pbone, in October 2003. Despite a

The Pace of Change

The market penetration and

performance improvement of

most new product categories fol-

low similartrajectories-they

progress slowly at first, pick up

speed, then level off. But the rate

at which they change varies dra-

matically. Telephones and vacuum

cleaners became widespread

slowly, but VCRs caught on almost

overnight. PCs improved rapidly,

while personal stereos remained

little changed for years.

Market Penetration

100%

80

60

40

20

^ ^ VCRs

1 / PCs /

\ / .^ y

^ ^ Telephones

rVacuum

• cleaners

10 20 30 40 50 60 70

Years from Product Launch

80 90 TOO

Performance Improvement

Ihe yearly performance

improvetvent index shows

the factor by which each

product's technicat perfor-

tvance has multiplied

each year.

ndex

ctuE

g

_§

'arly

100,000

90,000

80,000

lOO'

90

80

70

60

50

40

30

20

10

0

PCs

Digital cameras

Personal stereos

Vacuum cleaners

5 7 9 n 13 15

Year5 from Product Launch

17 19 21

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BEST PRACTICE • The Half-Truth of First-Mover Advantage

massive marketing campaign, positivecomment from experts and the public,a superb brand, and market dominancein the related category of mobile phones,the company shipped in 2004 only afraction of the "several million" devicesit said it would.

The exhibit "The Pace of Change"shows how the rate of technology andmarket evolution can vary across prod-uct categories. The trajectories of bothtechnological improvement within aproduct category and that category'sexpansion in the market are roughlyS-shaped - slow progress at the begin-ning yields to rapid progress and thena flattening in the growth rate. But theprecise shape of the S varies from onecategory to the next.

The Likelihood of a First-Mover AdvantageThink about a new product categoryyour company recently entered. Areinnovations continually popping up? Ordo they appear infrequently enoughthat you can stay current? Now considerthe market for that product. Is it grow-ing so fast that you can hardly keepup with demand, or is it expanding onlygradually, giving you and others in theindustry plenty of time to plan andreach new customers?

The exhibit "The Combined Effectsof Market and Technological Change"illustrates the four possible combina-tions of slow and rapid technology andmarket evolution. We use the term"calm waters" for the upper left cellof the matrix, where the technologyand the market are evolving grad-ually. In the upper right, technologi-cal change is modest while the marketgrows rapidly-thus the market expandsfaster than the technology evolves. Inthe lower left, the technology leads -performance improvement is rapid com-pared with the evolution ofthe market.The lower right is the "rough waters"area, where both the technology andthe market evolve quickly.

When the Waters Are CalmGradual evolution in both technologyand markets provides first movers withthe best conditions for creating a domi-nant position that is long lasting. Thevacuum cleaner industry protectedits first mover by evolving slowly andsmoothly. In 1908, in Ohio, WilliamHenry Hoover produced the first com-mercial bag-on-a-stick upright vacuumcleaner, but it made little headway.As late as 1930, fewer than 5% of house-holds had purchased one. The technol-ogy changed as slowly as the market.

The Combined Effects of Marketand Technological Change

The pace of change in a

technology and a market

can have a profound effect

on a company's chances of

achieving a first-mover ad-

vantage. Four possible sce-

narios face a would-be

first mover.

Pace of Market Evolution

Slow Fast

Calm WatersScotch Tape

The TechnologyLeadsDigital cameras

The MarketLeadsSewing machines

Rough WatersPersonalcomputers

When innovation did occur, the changewas enduring. In 1935- Hoover designerHenry Dreyfuss encased the vacuumcleaner's components in a streamlinedcanister, creating a technological blue-print that more or less persists to thisday. In such a benign environment.Hoover had little trouble keeping up-to-date technologically and meetingdemand. The company's machines be-came the reference point within the cat-egory. The British even tumed the brandinto a verb-"to hoover."

A gradual pace of change in the tech-nology makes it hard for later entrantsto differentiate their products fromthose of the first entrant. Even if com-petitors discover some means of doingso, the differences are not rapid enoughor drastic enough to prevent the firstmover from mastering them and foldingthem into its product line in a timelyfashion, as Hoover did with the rela-tively few minor innovations introducedby competitors Electrolux and Eureka.(With globalization, however, the vac-uum cleaner market has fragmented,creating niches for European makers,such as Miele, that Hoover and othermass-market manufacturers are nowtrying to occupy as well.)

An initially slow pace of marketgrowth also tends to favor the firstmover by giving it time to cultivate andsatisfy new market segments. Thoughdevastating to most businesses, theGreat Depression was kind to ScotchTape, which was invented by 3M'sRichard Drew in 1930. At first. Drewthought the product would be used inindustrial settings - perhaps to seal cel-lophane wrapped around baked goods.Instead, it was taken up by ordinarypeople, who were looking to repairitems that in more affluent times theymight have discarded. The gradualgrowth of Scotch Tape's appeal gave3M time to organize production anddistribution. Technological change wassimilarly modest, enabling 3M to keepup-to-date and preventing later entrantsfrom both introducing superior versionsand "inventing around" 3M's patent.Indeed, the product remained basi-cally unchanged until 3M released the

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almost-invisible Magic Transparent Tapein 1961. As with Hoover, Scotch Tape sodominated its category it became syn-onymous with it.

The combination of a slowly chang-ing market and a slowly changing tech-nology makes company resources lesscritical than they would be in the othertechnology-and-market environments.By "resources" we mean the skills or ca-pabilities and the assets that organiza-tions develop over time. Among themost important capabilities are productdevelopment, production, and market-ing. One important asset is brand rec-ognition. Others are physical assets,such as strategic locations, and financialresources. Of course, having the mostabundant resources and the most valu-able skills is always desirable, but incalm waters, a first entrant lacking thoseadvantages may stii! have the latitudeand the means to defend its productagainst later competitors.

When the Market Leadsand Technology FollowsConsider the Walkman, the first productin a clever new category-the personalstereo. The Walkman, pioneered bySony in 1979, used mature technologiesreadily available at the time, and itsbasic technical design remained un-changed for a decade. By contrast, itsmarket grew abruptly, with sales reach-ing some 40 million units in less thanten years. Indeed, the personal stereois often cited among the most success-ful consumer-electronics innovations ofour time. Given the market's enormousexpansion rate and potential size, onemight think that only a short-termadvantage should have been availableto the first mover. Yet Sony's marketshare was close to 48% even ten yearsafter the Walkman's launch, thanks toits superior resources-in particular itsdesign skills, marketing muscle, andstrong brand.

A first entrant with limited resourcesand skills would probably have to settlefor a short-term first-mover advantage,however. Boston's Elias Howe intro-duced the first commercial sewing ma-chine in the late 1840s, but the machines

made by Isaac Singer, a later entrantwith greater resources, were soon able tofind more customers than Howe's. Thebasic sewing machine changed little overthe next half-dozen years, but demandincreased to such an extent that Singerbegan expanding into Europe. (AlthoughHowe could not achieve a durable first-mover advantage in the product cate-gory, the patents he owned on competi-tors' products allowed him to extractsubstantial rents for some time.)

When Technology Leadsand the Market FollowsWhat happens in the reverse situation,in which technology changes abruptlybut the market is slow to accept the newproduct category? A short-lived first-mover advantage is very unlikely here.Early entrants face many years of flatsales and operating losses and, conse-quently, the skepticism of stock marketanalysts. At the same time, the furiouspace of technological change brings innew competitors, who think their im-provements will draw customers awayfrom the incumbent and its dated prod-ucts. A durable advantage, for mostearly entrants as well as most later ar-rivals, is also unlikely.

Only a company with very deep pock-ets could enter such a market first,survive in its hostile environment, andwithstand a considerable delay before

obtaining durable first-moveradvantages. Deep pockets al-low a firm to wait until thepace of technological changeslows, or the fundamentallynew technology its productline embodies becomes thenew standard, and the markettakes off. Of course, the com-pany also needs a superb R&Dcapability to keep it at thetechnological forefront in themeantime.

In 1981, Sony launched thefirst digital camera, the Mavica.Sales of digital cameras didnot begin to gather momentumfor at least ten years, and salescontinued to be modest foranother decade, during which

the relentless pace of technological im-provement rendered products obsoletewithin a year. A key area of improve-ment was the density of Information adigital image could handle. In the early1980s, a high-end camera could produceimages with up to 60,000 pixels. By2000, the pixel count had reached 5 mil-lion. Sony's considerable financial re-sources and world-famous technologicalcapabilities allowed it to stay on top ofthe category and grab a commandingshare ofthe slowly evolving market. In2003, Sony was still the leader in the U.S.market, with about a 22% market share.

When the Waters Get RoughSometimes, both technological innova-tion and consumer acceptance advancerapidly, leaving first movers highly vul-nerable. AT&T and Netscape are exam-ples of companies capsized by the rapidchurning of technology and markets.AT&T was the first company to de-ploy a cellular telephone system in theUnited States. It built a prototype in1977 and a year later held the system'sfirst public trial, involving 2,000 cus-tomers in Chicago. However, in 1983,Ameritech, not AT&T, offered commer-cial analog cellular operations afterthey were authorized by the FCC. Asfor Netscape, Marc Andreessen, a co-developer of Mosaic, teamed up withJim Clark in 1994 to invent Netscape's

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BEST PRACTICE • The Half-Truth of First-Mover Advantage

l5 a First-Mover Advantage Likely?

Your company's odds

of succeeding with

the resources it pos-

sesses depend on

how well you under-

stand the market and

the technology. Use

this chart to match

your company's skills

and resources with

the environment you

face in a particular

situation.

The SituationYour Company Faces

Calm Waters

The Market Leads

The TechnologyLeads

Rough Waters

First-Mover Advantage

Short-Li ved

UnlikelyEven if attainable,advantage is not large.

Very likelyEven if you can't dominatethe category, you shouldbe able to hold onto yourcustomer base.

Very unlikelyA fast-changing technol-ogy in a slow-growingmarket is the enemy ofshort'term gains.

LikelyA quick-in, quick-outstrategy may make goodsense here, unless your

Durable

Very likelyMoving first will almostcertainly payoff.

LikelyMake sure you have theresources to address allmarket segments asthey emerge.

UnlikelyFast technologicalchange will give laterentrants lots of weaponsfor attacking you.

Very unlikelyThere's little chance oflong-term success, evenif you are a good swim-mer. These conditionsare the worst.

Key ResourcesRequired

Brand awarenesshelpful, but resourcesless crucial here

Large-scale marketing,distribution, and pro-duction capaci^

Strong R&D and newproduct development,deep pockets

Large-scale marketing,distribution, produc-tion, and strong R&D(all at once)

browser, which kicked off the era ofwidespread Internet access. Yet Net-scape today survives only as a small unitof Time Warner.

Neither AT&T nor Netscape was ableto make a profit in the new productspaces due to the strength of laterentrants' offerings. Our research sug-gests that a good part ofthe reason wasthe type of waters both had steppedinto. Cellular telephones and Internetbrowsers would fall in the lower rightcell of the matrix, with both the tech-nology and the market evolving rapidly(irregularly for cell phones, smoothlyfor browsers). In such conditions, it isvery difficult for companies to gaindurable first-mover advantages.

If a product's underlying technologychanges very rapidly, the item quicklybecomes obsolete. More often than not,such products are overtaken by versionsfrom new entrants, which aren't bur-dened by maintaining and servicingolder product lines and can innovate

without fear of cannibalizing prior in-vestments. Some researchers have usedthe term "vintage effects" to chararter-ize the tendency of new generations oftechnology to usher in winning en-trants. One can observe vintage effectsin many product categories. In the gam-ing console market, which MagnavoxOdyssey entered in 1972, at least six gen-erations of technology emerged in rapidsuccession, each pushing forward a newwinner. The same thing happened inhard drives and laptop computers. TheOsborne 1, generally considered to bethe first commercially available, trulyportable computer, weighed 24 poundsand was soon superseded by lightermodels. But laptop technology evolvedso quickly that each successor, afterbriefly achieving dominance, was soonsupplanted itself.

A fast-growing market adds to a firstmover's challenges by opening attrac-tive new competitive spaces for later en-trants to exploit The incumbent tends

to be at a disadvantage, since itlacks the production capacity or mar-keting reach to serve a rapidly expand-ing customer base.

A rapid pace of market evolutionmakes long-term dominance unlikely,but it does not necessarily bar a firstmover from achieving worthwhile short-term gains - provided it has an acutesense of when to exit. Consider oncemore the Internet browser market. In1994, the Internet started growing ex-tremely quickly. Within two years, thenumber of Web sites had increased 50-fold. This ftantic pace enabled later en-trants, chief among them Microsoft,with its enormous resources, to findplenty of space in which to grow. Butbefore competitors could destroy Net-scape's business, Netscape arrangedto be acquired by AOL in an amazing$10 billion deal.

Achieving a durable advantage undersuch conditions is not, however, impos-sible. Here is where a firm's resources

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can make a big difference. Only a firstmover with mighty resources, far supe-rior to those of competitors, has anychance of achieving longer-term first-mover advantages when both technol-ogy and markets are moving rapidly. Forinstance, all else being equal, a first en-trant with a very strong brand name willtend to be more successful in lockingin customers than one without a recog-nized brand name. A good example ofa firm today that makes the best of itsendowments in the most difficult ofcircumstances is Intel. By putting all itstechnical and marketing muscle behindits product development process andbeing "paranoid" about competition.

ever, the iPod mini has already im-proved upon its predecessor, and Dellis offering price cuts and a 12 hourbattery for its 20-gigabyte player. Eventhough the mini is Apple's own inven-tion, Apple will be hard-pressed to staythe leader for long.

To Be or Not to Be First?The four scenarios in the matrix placepremiums on very different sets of as-sets and capabilities. Large-scale mar-keting, distribution, and productioncapacity is key in situations where themarket leads; R&D, new product de-velopment, and deep pockets are keyin situations where the technology

A rapid pace of market evolution does notnecessarily bar an incumbent first mover fromachieving worthwhile short-term gains-provided it has an acute sense of when to exit.

Intel has been able to dominate a prod-uct category in which markets keepexpanding and technology keeps chang-ing at a furious pace.

But do not take the possession of sub-stantial resources as a guarantee of win-ning. When IBM, for example, intro-duced the hard drive in the late 1950s, itwas the largest computer maker in theworld. Since then, a sequence of fast-growing markets for minicomputers,personal computers, and laptops hasgenerated relentless demand for newversions ofthe device. Despite a superbbrand name and plenty of resources,IBM could not stay atop the hard-driveindustry for long. Neither could oppor-tunistic later entrants.

We expect Apple's iPod to face similarrigors. Famously strong in marketing,R&D, and design, Apple launched theiPod in October 2001 and by 2003 hadaround 70% of the market for digitalmusic players containing hard drives. Inthe first quarter of 2004 alone, the com-pany sold more than 800,000 units; bythe third quarter, it had increased itsshare of the retail market to 82%. How-

leads. If you step into a given environ-ment with the wrong type of resources,you can expect a rough time {see theexhibit "Is a First-Mover AdvantageLikely?"). Polaroid, for instance, hada great brand name in photography andexcellent access to distribution chan-nels in the early 1990s, but it was rela-tively weak in R&D and new productdevelopment, indeed, its leading prod-uct back then, the instant camera, em-bodied a 15-year-old design. After almosttwo decades of fruitless diversification,the company had to file for bankruptcyprotection. Even if Polaroid had beenthe first mover into digital cameras,a category it wanted to dominate, ouranalysis suggests its fate would havebeen the same. It didn't have the where-withal to triumph over or even survivefurious technological change, rapid andfrequent product obsolescence, and aslow market takeoff.

Right now, Symbian is contendingwith Microsoft to establish the operat-ing system for the new product categoryof "smart phones"-cellular phones ca-pable of multimedia and wireless broad-

band. Symbian's total revenues for 2003were slightly more than $100 million,whereas Microsoft spent $7 billion juston R&D. Although the leaders in thehandset market, including Nokia andSiemens, organized Symbian to keepMicrosoft at bay, margins are so thin intheir industry that they could very wellchoose Microsoft's operating systemover Symbian's if Microsoft were toprovide it for free or very little. AlreadyMotorola, a Symbian founder, has cho-sen Microsoft's OS. It remains to be seenwhether Symbian and its backers willbe able to stand up to Microsoft's supe-rior resources in a fast-growing marketfor a fast-moving technology.

New product categories are con-stantly emerging around us. In mostinstances, companies struggle not withwhether to enter a new product cate-gory altogether but with whether toenter early or later. Sometimes execu-tives wonder if it would be wise, forexample, to wait until the companiesin the first wave have been weakenedby competition and seen their techno-logical edge dulled. But by that point,there might not be enough time leftto master the technology in question.Still, in some situations, it may not makea tot of sense to try to be the first mover.In environments where a first mover'sadvantage is likely to occur only afteryears of losses, and then to be short-lived, discretion would probably be thebetter part of valor. After all, first-moveradvantage occurs not when you entera market, but when you start makingreal money in it.

To make real money in an evolvingmarket, you need to analyze the kindof environment that surrounds thenew category; to assess the characterand depth of your resources, compar-atively speaking; and then to decideon the type of first-mover advantage -short-term or durable, immediate ordelayed - that is most achievable, ifindeed any is. Remember, once you'vegone into the water, you have no choicebut to swim. ^

Reprint R0504JTo order, see page 135.

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