First-Mover (Dis)AdvantagesFirst-Mover (Dis)Advantages

Prof. Markus Christen

INSEAD SingaporeMay/June 2007

Prof. Markus Christen

INSEAD SingaporeMay/June 2007

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 13 - 2

First-Mover Advantage

“Be first to market” is one of the most enduring strategic principles in marketing• market share of mature consumer goods businesses (in the PIMS database)

– pioneers: 29%

– early followers: 17%

– late entrants: 12%

• market share of mature industrial goods businesses (in the PIMS database)– pioneers: 29%

– early followers: 21%

– late entrants: 15%

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 13 - 3

First-Mover Advantage

Definition• Pioneer: Firm that enters/creates a market first• Market Entry: Product launch at a large scale• Advantage: Long-term competitive advantage (sustainable)

Typical ExamplesPro AgainstCoca Cola Kirsch’s No-cal Cola

Sony Walkman Bowmar (pocket calculators)

Polaroid EMI CAT scan

Tagamet

Commodore

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 13 - 4

Consumer-Based Sources

Source Comments Research Results Examples

Consumer learning and preference formation

Follower products are not evaluated in isolation but relative to existing products Learning through usage Can become category standard, original

Generally exists, stronge r for consumer goods

VCR Hoover, Kleenex, Coke, Walkman

Switching costs Investments in product related knowledge, infrastructure, becomes obsolete

Generally exists qwerty vs. Dvorak keyboard, word processing, Markstrat 2 _ 3

Uncertainty about quality Risk of adopting new product when quality is difficult to observe

Generally exists, stronger for consumer goods

Detergent, toothpaste

Access to customers Advertising - less cluttered Distribution - location, shelf space

Generally exists Viagra, Starbucks Distribution of industrial products

Network externality Value of product is higher when more people use the same product

Exists when externalities matter

Many hi -tech products

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 13 - 5

Operation-Based Sources

Source Comments Research Results Examples

Experience effects Experience diffuses rapidly - hiring from competitors - reverse engineering - plant tours, observations - patent filings

No general advantageunless experience canbe kept proprietary

Sulzer weaving machinesDuPont Titanium Dioxide

Patent protection On average, patents areimitated at 65% of cost oforiginal developmentMust reveal informationwhen filing and enforcingpatent

Advantage only in afew industries

Pharmaceuticals

Preemption of resources Need to know whichresources to preemptIncreases value of resourceIncreases power of “owner”of resource

Difficult to gainadvantage

Minnetonka’s Softsoap (productpart - plastic pump)NorTel (10 million IP numbers)

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 13 - 6

First-Mover Disadvantage

Source Comments Research Results Examples

Free-riding Pioneers must spend a lot of effort to create a viable market: - find and educate customers - set up distribution - R&D - train employees

Generally exists Coffee shops in USA Producers of generic d rugs IBM PC vs. clone makers AMD, Cyrix

Production efficiency

Pioneers typically expand production incrementally and investing in the latest process technology is not always optimal

Generally exists

Incumbent inertia Later entrants have more information av ailable, early investments make it more difficult for pioneers to adjust

Generally exists IBM PC vs. Microsoft/Intel Dell Computers

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 13 - 7

Pioneering: Empirical Results

Long-term consumer advantage• higher market share

Long-term cost disadvantage• higher average cost

Short-term profit advantage that dissipates over time due to a declining market share advantage

time

profitadvantage

B-2-B

ConsumerGoods

approx.10 years

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 13 - 8

Rule 15: First-Mover Advantage

There is NO automatic

first-moverprofit advantage.