First mover disadvantageBy William Boulding and Markus Christen

In business today, it’s universally assumed that speed is good—that the fleet thrive while the laggards struggle just to survive. This belief is perhaps most strongly expressed in the concept of first-mover advantage. The company that leads the way into a new market, the thinking goes, locks in a competitive advantage that ensures superior sales and profits over the long term. It’s a nice theory, with a long pedigree. Unfortunately, the facts don’t support it. We recently completed an extensive study of the results turned in by market pioneers and followers, in both consumer and industrial segments, and we found that over the long haul, early movers are considerably less profitable than later entrants. Although pioneers do enjoy sustained revenue advantages, they also suffer from persistently high costs, which eventually overwhelm the sales gains.

No doubt, there are important top-line benefits to being a first mover. Early entrants tend to make a large and lasting impression on customers, earning strong brand recognition, and buyers often face high switching costs in moving their business to a later entrant. A great deal of academic research conducted over the past 20 years indicates that a true demand premium accrues to pioneers, which is directly attributable to the timing of entry.

The impact of early entry on costs is less well understood, however. On one hand, it’s been argued, pioneers should gain cost advantages by moving through the experience curve ahead of competitors, by gaining control over scarce inputs, and by establishing patents or other forms of technology leadership. Also, because of the relatively high switching costs, pioneers should have to spend less on advertising and other marketing efforts. On the other hand, followers clearly have some cost advantages of their own. They can, for example, learn from the mistakes and successes of their predecessors, reducing their own investment requirements as well as their risks. In addition, followers can frequently adopt new and more efficient processes and technologies, whereas pioneers often remain entrenched in their original ways of doing things.

Until now, it’s been difficult to determine with precision the net effect of early entry on costs, making it problematic to get an accurate read of the relative profitability of pioneers and followers. To fill this knowledge gap, we studied the actual revenue and cost performance over time of both pioneers and followers. We examined 365 business units competing in consumer goods markets and 861 units competing in industrial markets, spanning the years 1930 to 1985. Drawing on the extensive PIMS database of corporate performance, we modeled these companies’ relative revenues and costs as well as their profits as measured by net income, return on investment, and EVA. We used various methodological controls to isolate the impact of order of market entry, filtering out other variables such as level of resources.

Our findings were dramatic. Pioneers in both consumer goods and industrial markets gained significant sales advantages, but they incurred even larger cost disadvantages. We found that pioneers in consumer goods had an ROI of 3.78 percentage points lower than later entrants. And the ROI of first movers was 4.24 percentage points lower than followers in the industrial goods sector. The bottom-line result: Pioneers were substantially less profitable than followers over the long run, controlling for all other factors that could account for performance differences.

Pioneers in both consumer goods and industrial markets gained significant sales advantages, but they incurred even larger cost disadvantages.It’s important to note that the profit disadvantage kicked in only over the long run. In the initial years of a new market, the first mover tended to maintain a profit advantage, as the revenue benefit outweighed the cost penalty. But as years passed, the brand and marketing advantages faded while the cost penalty persisted, which steadily eroded the profit edge. On average, the profit advantage turned to a disadvantage after approximately ten years for consumer businesses and 12 years for industrial businesses.

Our research should not be interpreted to mean that companies ought to dismiss the importance of a speedy market entry. Rather, it suggests that executives need to cast a cold eye on market entry plans that assume that being first will inevitably create long-run profit advantages. The question that needs to be asked is not “Can we be first?” but “How exactly will being first affect our costs and revenues over the long run?” In other words, are there additional factors that will either create an especially large revenue advantage or prevent the company from falling victim to a cost disadvantage? If it’s not backed up with clear and well-reasoned economic logic, a first-mover strategy should be approached with skepticism.

Source: https://hbr.org/2001/10/first-mover-disadvantage, accessed as on 19.5.2015

First mover disadvantage – ForbesConsider that most famous industrial success story of a century ago, Henry Ford’s mass-produced Model T. By inventing the automated assembly line, he had a first-mover advantage that was so great that he scared England’s Charles Stewart Rolls and Sir Frederick Henry Royce, even though their luxury cars were at the other end of the spectrum. But Ford overstayed the Model T. Remember, he insisted that they all be painted black and in the late 1920s lost leadership to more innovative Chevrolet.

In most cases entrepreneurs are better off building the second or third version of the better mousetrap. Visicalc, the first desktop spreadsheet program, faded away as Lotus took over the field with 1-2-3. In time the Lotus software was itself crushed by Microsoft’s Excel.

For that matter, Microsoft has a history of succeeding by not being first. Digital Research developed the first desktop operating system, called CP/M. But Bill Gates upstaged it in the competition to supply an operating system for ibm’s pc. Gates didn’t even develop the original DOS; he bought the program from Seattle Computer Works for $50,000. His genius wasn’t so much in coding as in marketing.

Getting in early on Web commerce was supposed to be a brilliant move. The business plan was to raise a gargantuan sum in an initial public offering and use it to construct an impregnable brand and Web presence. But roaring out of the starting gate didn’t help many of these dot-coms–or their stockholders. Lord help you if you bought shares in financial news site TheStreet.com at its $19 initial offering price in 1999, let alone at the $60 level to which it leaped. You could have made some decent money if you had waited. The shares were available at 99 cents in October 2001; today they go for $11.

Prodigy Communications was a first mover in online connections. And it had powerful backers at its launch in 1984: IBM for technology, Sears Roebuck for online retail sales and CBS for news and ad sales. Prodigy’s focus was on electronic shopping, but two decades too

early. Subscribers back then were more interested in chat rooms, e-mail and then Web surfing. The firm was sold in 1996 to an investor group for only $250 million.

Dumont led the way in selling TV sets when they were new gadgets, but the company lost out to latecomers like RCA and Motorola. Chux was the leading disposable diaper yet succumbed to Procter & Gamble’s Pampers. Ampex had a commanding position in video recorders and tapes for two decades until Sony took over. Rheingold Brewery brought out Gablinger’s low-calorie beer in 1967, a cool summer with weak beer sales. So Rheingold lost interest and Miller Lite later mastered the field.

Thomas Carter was a pioneer in competitive telecommunications services, one who lent his name to a famous legal case. He invented the Carterfone, a device that connected the telephone handpiece to an amateur radio transmitter or a mobile phone network. While only 4,000 Carterfones were ever installed, AT&T saw the device as a threat to its long-distance monopoly and its ownership of all telephone instruments. Then came the legal struggle. In 1968 the Supreme Court ruled in favor of Carter Electronics. It was a turning point in utility history, paving the way for MCI and other service competitors as well as hardware manufacturers. Carter didn’t get rich. His firm voluntarily dissolved in 1969.

Think twice about being first to invest in a new business, even if it boasts a 100% market share. Right now I’d be wary of pioneers who offer emergency medical services, staffing and outsourcing, and environmentally safe home cleaning products, not to mention those involved in the Internet and other new tech areas. Often it’s better to follow Alexander Pope’s advice: “Be not the first by whom the new are tried.”

Source: http://www.forbes.com/forbes/2007/0618/154.html, accessed as o 19.5.2015

With growth slowing in the $358 billion smartphone and tablet market, Apple(AAPL) and Samsung (005930:KS) are said to be developing digital watches that allow users to make calls, check map coordinates, or monitor physical activity. They might want to talk to Sony (SNE), whose feature-laden SmartWatch, on sale for more than a year, isn’t exactly mesmerizing the masses.

Priced at $130, Sony’s 1.3-inch touchscreen watch wirelessly connects to Android(GOOG) smartphones using Bluetooth technology. The gadget alerts users to incoming calls and allows them to reply to e-mails or texts with an array of prewritten messages. It even connects to Facebook (FB) and Twitter and controls a wearer’s phone-based music library. The SmartWatch, about the size of an iPod nano, is a slightly smaller successor to Sony’s LiveView watch. Introduced in 2010, LiveView had more limited features and was hobbled by kinks.

Sony's First-Mover Disadvantage in Smart Watches

The newer model is more stylish, but users can’t enter messages and it sometimes requires daily recharging and a stable connection just to tell time reliably. “Sony was ahead of its rivals to release a watch, but it takes more than an idea to create a hit product,” says Mito Securities analyst Keita Wakabayashi. “It’s about bringing a product that has functionalities that people would want and marketing the product in the right way.” Technology market research firm ABI Research estimates that 1.2 million smart watches will be sold globally

this year, generating roughly $370 million in sales. By 2015, ABI projects, sales will increase more than twentyfold.

VIDEO: Sony's New Smart WatchSony’s promotion of its watch has been tentative. “It is an accessory for smartphones and not a product we expected a huge shipment” of, says spokesman Yu Tominaga, who declined to say how many watches the company has sold. He says sales “haven’t been bad at all.” The company expects sales to grow as Sony and other developers add to the watch’s library of 200 apps. Its appeal is limited because it’s only compatible with Android devices. Roger Kay, the president of market researcher Endpoint Technologies Associates, says the SmartWatch is too expensive for an add-on, too power-hungry, and was too buggy at launch.

Sony’s failure to gain traction with the SmartWatch is the latest in a long line of first-mover advantages the electronics giant has squandered. The Walkman and Discman dominated the global portable music player market for decades before the advent of the iPod in 2001. A year earlier, Sony began selling the Clié, a Palm OS-based personal digital assistant that allowed users to listen to music, play games, and watch videos. The Clié didn’t catch on, and Sony pulled it in 2005. Despite owning the distribution rights to thousands of popular songs and films, Sony failed to rival Apple’s iTunes on smartphones and tablets.

Sony released its first e-reader, the Portable Reader System, in 2006, a year ahead ofAmazon.com’s (AMZN) Kindle. In 2009, Sony’s e-book library carried 600,000 titles, more than twice as many as Amazon’s, but the PRS wasn’t a hit with consumers. Shoji Nemoto, a Sony executive in charge of technology strategy, said last August that the company’s research has been too inward-looking and deliberative and should focus more on customer feedback. “I don’t think the brand carries as much weight as it used to,” says William Stofega, a program director at market researcher IDC. “They don’t really market it as well as they should.”

STORY: How Apple's iWatch Can Be a Money makerThe first companies to win over consumers with smart watches could lock users into their platforms, boosting sales of phones, tablets, apps, and TVs. Citigroup analyst Oliver Chen estimated in March that Apple alone has a $6 billion opportunity in its iWatch. Other competitors include Italian I’m Watch, which is selling a $399 smart watch it says has access to hundreds of apps, and Pebble Technology, which has raised more than $10 million on Kickstarter for a $150 watch compatible with both Android and Apple’s iOS. By the end of March, Pebble had shipped nearly 55,000 watches ordered over Kickstarter. ABI senior analyst Michael Morgan says that Sony’s watch would benefit from heart-rate measurement and other biometric capabilities, and adds that the market leader will have to be more than an accessory. “We expect them to do things a smartphone does not,” he says.

Source: http://www.bloomberg.com/bw/articles/2013-05-02/sonys-first-mover-disadvantage-in-smart-watches, accessed as on 19.5.2015