Evaluating First-mover and Second-mover Advantages

Critical Thinking on First-mover Advantages

The first mover is a pioneer based on entrepreneurship (Covin and Slevin, 1989; Miller, 1983; Zahra and Garvis, 2000) pursuing radical innovation and finding a way around the red ocean for sustainable competitive advantages (SCAs) (Lambkin, 1992). The FMAs arise from three primary sources (Lieberman and Montgomery, 1988) such as technology leadership with scale and learning curve effects as seen in Procter & Gamble's disposable diaper case (Ghemawat, 1991), the preemption of strategically valuable assets as seen in the case of Royal Dutch Cell, which secured oil mining rights in several regions (Main, 1955), and the creation of customer-switching costs as seen in OS Windows users' lock-in phenomenon (Gross, 1995). Scale effects and experience effects driven by the cumulative decrease in costs along with the learning and experience curve in the innovation process result in configuring the valuable, rare competitive advantages (Barney and Hesterly, 2019).

In addition, in the presence of imperfect information on product quality, FMAs induce customers to make rational choices through the brand equity such as brand recognition and corporate reputation (Aaker, 1991; Berry, 2000; Lieberman and Montgomery, 1988). These FMAs tend to be strengthened in an emerging industry or market such as microprocessors, computers, medical diagnostic devices, and biotechnology, in which an industry newly created or recreated (Barney and Hesterly, 2019). It is, however, noteworthy that the failure rate (47%) of first movers is higher than that (8%) of fast followers (Snow and Bergmann, 2014).

Source: Holmes (2017), https://invoker.medium.com/debunking-the-first-mover-advantage-myth-in-business-dbf62cd1e9c9.

Incumbent Inertia

The mechanisms that benefit the first-mover may be counterbalanced by ‘incumbent inertia’ rejecting alternative valuable innovation strategies. It is caused by ‘path dependency’, ‘competency trap’, ‘inability in importing knowledge from outside’ and ‘the innovator’s dilemma’ (Christensen, 1997; Leonard-Barton, 1995). The innovator's dilemma explains the reason why Polaroid Corporation did not properly respond to the digital technology revolution in the 1990s despite its early investing history (Tripsas and Gavetti, 2000).

Short-lived and Unsustainable Competitive Advantages

Contextual factors such as the rapid speed of technological and market evolution also offset the FMAs by shortening the life cycle of technology and increasing opportunity cost along with the deferred efficiency of R&D investment in making a profit (Anagnostopoulou and Levis, 2008; Xu and Zhang, 2004). Therefore, given that FMAs are easy to be short-lived advantages (Suarez and Lanzolla, 2005) and only 2% to 5% of companies maintains sustainable competitive advantages (D’Aveni and Gunther, 1994; Wiggins and Ruefli, 2002), being a pioneer without SCAs is a trap.

The tendency of FMAs to become stronger in the emerging industry is due to a high level of market uncertainty. In such a highly uncertain market, securing strategic flexibility rather than becoming a first-mover can be a reasonable strategic alternative.

Strategic Flexibility and Real Option

Samsung Electronics, which is famous for the first-mover in the semiconductor market, has traditionally pursued a second-mover strategy in the electronics market aiming for flexibility (Choi, 2011; Shin, 2008). Second-movers may benefit from the ability to freeride on such first-mover investments (Lieberman and Montgomery, 1988) resulting in reduced uncertainty, capitalization on experience and low imitation costs (Mansfield, 1981). SMAs can also be seen in the real option approach accompanied by sequential investment (Bowman and Hurry, 1993). Wal-Mart, which entered Mexico in 1991, can enjoy the risk-avoidance from future market environment deterioration through a sequential investment (Kogut, 1991).

Conclusion

Proceeding from what has been said above, the following conclusions can be drawn. The innovation and implementation strategies for successful companies aiming at timing, flexibility, and dynamism have the face of Janus. A company must realize both short-term survival and long-term growth by implementing aggressive competitive moves as well as defensive competitive moves corresponding to environmental dynamics.

Few companies have sustainable competitive advantages. Rather, the most innovative performance can be achieved by a company that implements an open innovation to avoid incumbent inertia along with superior DCs in appropriately linking temporary competitive advantages to environmental dynamics, and managing an ambidextrous organization that promotes knowledge exploitation and exploration in a balanced way.

References

Aaker, D. A. (1991) Managing Brand Equity: Capitalizing on the Value of a Brand. New York: The Free Press.

Anagnostopoulou, S. C. and Levis, M. (2008) ‘R&D and performance persistence: Evidence from the United Kingdom’, The International Journal of Accounting, 43(3), pp. 293-320.

Barney, J. B. and Hesterly, W. S. (2019) Strategic Management and Competitive Advantage. 6th edn. Upper Saddle River, NJ: Pearson Prentice Hall.

Berry, L. L. (2000) ‘Cultivating Service Brand Equity’, Journal of the Academy of Marketing Science, 28(1), pp. 128-137.

Bowman, E., and Hurry, D. (1993) ‘Strategy through the Option Lens: An Integrated View of Resource Investments and the Incremental Choice Process’, Academy of Management Review, 18(4), pp. 760-782.

Choi, H. N. (2022) ‘2nd Place Strategy Faster than 1st Place, Write ‘14 Million Myths’’, Donga Business Review, 12(2), pp. 1-5. Available at: https://dbr.donga.com/article/view/1202/article_no/4665/ac/magazine (Accessed: March 29, 2022).

Christensen, C. M. (1997) The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston, Massachusetts: Harvard Business Review Press.

Covin, J. G., and Slevin, D. P. (1989) ‘Strategic management of small firms in hostile and benign environments’, Strategic Management Journal, 10(1), pp. 75-87.

D’Aveni, R. A. and Gunther, R. E. (1994) Hypercompetition: Managing Dynamics of Strategic Maneuvering. New York: Free Press.

Ghemawat, P. (1991) ‘Market incumbency and technological inertia’, Marketing Science, 10(2), pp. 161-171.

Gross, N. (1995) ‘The technology paradox’, Business Week, March 6, pp. 691-719. Available at: https://www.afr.com/politics/the-technology-paradox-how-companies-can-thrive-as-prices-dive-19950313-k6b54 (Accessed: March 27, 2022).

Holmes, R. (2017) ‘Debunking the “first-mover advantage” myth in business’, Available at: https://invoker.medium.com/debunking-the-first-mover-advantage-myth-in-business-dbf62cd1e9c9 (Accessed: January 01, 2023).

Kogut, B. (1991) ‘Joint Ventures and the Option to Expand and Acquire’, Management Science, 37(1), pp. 19-33.

Lambkin, M. (1992) ‘Pioneering new markets: A comparison of market share winners and losers’, International Journal of Research in Marketing, 9(1), pp. 5-22.

Leonard-Barton, D. (1995) Wellsprings of knowledge: Building and sustaining the source of innovation. Boston: Harvard Business School Press.

Lieberman, M. B., and Montgomery, D. B. (1988) ‘First‐mover advantages’, Strategic Management Journal, 9(S1), pp. 41-58.

Main, O. W. (1955) The Canadian nickel industry. Tornoto: University of Toronto Press.

Mansfield, E. (1981) ‘Composition of R and D expenditures: Relationship to size of firm, concentration, and innovative output’, The Review of Economics and Statistics, 63(4), pp. 610-615.

Miller, D. (1983) ‘The correlates of entrepreneurship in three types of firms’, Management Science, 29(7), pp. 770-791.

Shin, D. Y. (2008) ‘Destroy Yourself, the Beginning of Creative Management’, Donga Business Review, 2(1), pp. 10-16. Available at: https://dbr.donga.com/article/view/1101/article_no/114 (Accessed: March 29, 2022).

Snow, S. and Bergmann, E. (2014) Smartcuts: How Hackers, Innovators, and Icons Accelerate Success. HarperCollins Publishers.

Suarez, F. F. and Lanzolla, G. (2005) ‘The role of environmental dynamics in building a first mover advantage theory’, Academy of Management Review, 32(2), pp. 377-392.

Tripsas, M. and Gavetti, G. (2000) ‘Capabilities, Cognition, and Inertia: Evidence from Digital Imaging’, Strategic Management Journal, 21(11), pp. 1147-1161.

Wiggins, R. R. and Ruefli, T. W. (2002) ‘Sustained Competitive Advantages: Temporal Dynamics and the Incidence and Persistence of Superior Economic Performance’, Organization Science, 13(1), pp. 81-105.

Xu, M. and Zhang, C. (2004) ‘The Explanatory Power of R&D for the Cross-section of Stock Returns: Japan 1985-2000’, Pacific-Basin Finance Journal, 12(3), pp. 245-269.

Zahra, S. A. and Garvis, D. M. (2000) ‘International corporate entrepreneurship and firm performance: The moderating effect of international environmental hostility’, Journal of Business Venturing, 15(5-6), pp. 469-492.