First-mover advantages occur when pioneering firms can achieve profits that exceed their cost of capital, allowing them to establish a strong market position compared to their competitors (Hirschey, 2008). Factors that contribute to these advantages include a firm's unique foresight or resources (Hill and Jones, 2009), and sometimes even luck. However, first-mover firms can also face several disadvantages. This essay will explore both the benefits and drawbacks of being a first-mover in the market.
Advantages of first-mover firms
According to Lieberman and Montgomery (1998), the advantages gained by first-mover firms stem from three main sources: technological leadership, buyer switching costs, and the preemption of assets. Technological leadership provides a competitive edge to first-movers in two significant ways. First, these firms benefit from the "experience" or "learning" curve, where cumulative output results in lower costs over time, giving early entrants a sustainable cost advantage (Lieberman and Montgomery, 1998).
Patents play a crucial role in the success of first-mover firms, particularly in industries like pharmaceuticals. However, patents often offer only temporary value and weak protection due to rapid technological advancements (Birkinshaw, 2004). Although patent imitation can occur quickly, the benefits of the learning curve and lead time are often more critical in many industries. Robinson (1988) highlights that trade secrets and patents are more valuable to pioneer firms than to their followers. For example, Xerox leveraged patents to create entry barriers in its industry, patenting not only the main xerography process but also other technologies that prevented competitors from entering the market without resorting to anti-trust actions for mandatory licensing (Birkinshaw, 2004).
Similarly, General Electric (GE) maintained long-standing dominance in the electric lamp industry by holding the basic Edison patent. The firm further strengthened its industry dominance by acquiring additional patents related to electric lamps and accessories (Lieberman and Montgomery, 1998). Other companies have used innovation and R&D to enhance their managerial systems, gaining an edge in their industries. This approach can be advantageous since organizational innovations often take longer to diffuse than process or product innovations (Lieberman and Montgomery, 1998).
Firms that can preempt competitors by securing scarce resources also benefit from first-mover advantages. These firms gain by controlling existing assets rather than those created through technological advancements. For instance, by acquiring superior information, firms can purchase assets at below-market prices, positioning themselves advantageously as the market evolves (Lieberman and Montgomery, 1998).
Spatial preemption is another factor that favors first-mover advantages. It enables firms to strategically position themselves in geographic locations, making it difficult for latecomers to enter the market profitably. First-movers can deter new entrants by threatening price wars (Birkinshaw, 2004). Wal-Mart is a prime example of effective geographic preemption, as it targeted small towns in the southern U.S. that rivals considered unprofitable. By combining an efficient distribution network with spatial preemption, Wal-Mart established a strong market niche and achieved sustained high profits (Lieberman and Montgomery, 1998).
Buyer switching costs also contribute to first-mover advantages. When products have high switching costs, late entrants must invest significant resources to lure customers away from established firms (Triplett, 2007). These costs may include the initial investment buyers make to adapt to a new product, such as time and resources spent finding a new supplier, disruptions in operations, and the time required to train employees. Additionally, switching costs arise when buyers become accustomed to a supplier’s specific product attributes, making it difficult to switch to another brand (Lieberman and Montgomery, 1998). Contractual obligations may also prevent buyers from easily switching brands (Lieberman and Montgomery, 1998). For instance, airlines use frequent-flyer programs to discourage passengers from switching to rival airlines. When buyers have imperfect information about a product’s quality, they may choose to stick with the first brand rather than risk switching to a competitor. As a result, late entrants must employ creative advertising or develop superior products to capture consumer attention.
Disadvantages
Despite the various advantages enjoyed by first-mover firms, late-mover firms can also benefit in ways that pose limitations to the pioneers. These benefits include free-rider effects, the resolution of market or technological uncertainty, and various forms of 'incumbent inertia' (Lieberman and Montgomery, 1998). Late-movers can 'free-ride' on the investments made by first-movers in areas like infrastructure development and R&D, as the cost of imitation is often lower than that of innovation. This free-riding can reduce the longevity and scale of the profits enjoyed by first-mover firms (Jensen, 2003).
Additionally, late-movers can gain an advantage by resolving technological or market uncertainties. Entering an uncertain market carries high risks, but firms that can successfully navigate these uncertainties stand to benefit. This could involve, for example, establishing industry standards that are advantageous to the firm or adopting a 'dominant design' that favors those with low-cost manufacturing capabilities. 'Incumbent inertia' can also make first-mover firms more vulnerable. This inertia might stem from a reluctance to cannibalize existing product lines, limitations imposed by fixed assets, or organizational inflexibility (Wooley, 2009). As a result, the firm may struggle to respond effectively to competitive threats or changes in the environment.
Conclusion
In summary, first-mover firms often gain more advantages than late entrants in an industry. These advantages arise from investments in patents, innovation, and R&D. First-movers can also preempt competition by acquiring scarce resources, and they benefit from higher buyer switching costs. However, they face disadvantages such as free-rider effects, challenges in resolving market uncertainty, and the risks associated with 'incumbent inertia.
