During the American Civil War, the Confederate general Nathan Bedford Forrest summed up the secret of successful strategy in a single sentence. Strategy, he said, is about ‘gettin’ there fustest with the mostest men.’ Like many successful generals, Forrest believed that defenders have an advantage over attackers - whoever occupies a disputed territory first is more likely to win. In business, this concept is known as ‘first-mover advantage’. But is this always the case? Morgen Witzel, FSN writer and honorary senior fellow at the University of Exeter Business School explains.
Whether entering a new geographical market, exploiting a new technology or a launching a new product range or brand in order to increase market share, the principle is the same. If you can move faster than your rivals and get in first, then you will have an advantage over them and will be in a stronger competitive position.
Many writers on strategy argue for the importance of first-mover advantage, and offer case examples to support their belief. One of the most powerful examples of first-mover advantage is Volkswagen’s entry into China. In the late 1980s, when most companies were just beginning to think about China as a possible market, Volkswagen acted. Setting up a joint venture, Shanghai Volkswagen, with a local Chinese partner, Volkswagen built Western cars in China and sold them to the Chinese market.
Initial growth was slow, but in the 1990s the company secured contracts to provide fleet cars for the Chinese government and taxis for the municipalities of Beijing and Shanghai. Volkswagen Santanas became the most common car to be seen on Chinese streets.
Shanghai Volkswagen won these contracts because it had virtually no competition. It took Volkswagen’s international rivals another ten years to establishing a significant presence in China. At one point, Shanghai Volkswagen had nearly 70 per cent of the Chinese car market.
There are other famous examples too. Wang Laboratories, one of the most innovative companies in the computer industry in the 1970s and 1980s, was also one of the most successful. Far ahead of many of its rivals in terms of technological development, Wang brought in new products that literally shaped the market; even giants such as IBM were forced to follow Wang’s lead if they wanted to compete. Only after the retirement of the company’s iconic leader and founder, Wang An, did the company begin to decline.
Intel in semiconductors and Microsoft in computer software similarly broke new ground and led the way in new technologies. Today, other companies are arguably more innovative in both sectors, but Intel and Microsoft used their first-mover advantage to build powerful market positions.
First-mover advantage can be powerful because, as the case of Volkswagen shows graphically, first movers have, by definition, managed to break away from the competition. With few or no competitors, they have an opportunity to capture market share in a new region or for a new product, establish a brand, build brand loyalty and ensure that their brand becomes synonymous with the product. This in turn can form the basis for lasting competitive advantage.
But being a first mover does not automatically bring success. There are plenty of examples of companies squandering first-mover advantage and allowing rivals to push them out of the market – and plenty of examples too of companies that played the waiting game, letting other companies move first and make mistakes, watching what went wrong and adjusting their own strategies accordingly.
Today, Internet retailing is a growing industry. But most of the companies that first went into Internet retailing in the 1990s failed. Of those that did not, many others like Amazon took a very long time to become profitable. Very few can be regarded as unqualified success stories.
One of the most famous examples of a first mover failing to consolidate its position is the Sony Betamax videocasette recorder. Launched in 1975, the Betamax was an innovative and well-designed new product with a potentially very large market. By contrast, the rival VHS system launched by Matsushita the following year was perceived as being inferior in terms of quality and functionality. But Sony had failed to establish the Betamax brand, and although it had the edge in terms of design, Matsushita had the stronger marketing and distribution systems. More and more film distributors began to use VHS, and within a few years it had become the industry standard. Despite being first into the market, Betamax had lost the competition.
What had happened? Describing this case in his 2001 book Leading the Revolution, the consultant and academic Gary Hamel believed that Matsushita’s success lay in its ability to plan for the future and to play the long game. He pointed out that Matsushita had spent ten years planning and developing the VHS system, and had developed a business model that Matsushita executives knew would succeed. Sony’s first-mover advantage was entirely cancelled out by Matsushita’s meticulous approach.
Even Volkswagen has had to watch its apparently unassailable market position in China erode. According to Ashok Som, professor at the ESSEC business school in Poitiers, writing in European Business Forum in 2007, by 2004 Volksagen’s share of the Chinese car market had fallen to below 20 per cent. Other international players had moved in, while local Chinese car makers had emerged and were now undercutting Volkswagen on price. Foreign rivals such as General Motors freely admitted that they had observed Volkswagen’s early move, examined the problems and difficulties that had been encountered – in terms of distribution and sourcing of parts, for example – and learned lessons that enabled them to compete more effectively.
Gary Hamel believes that companies seeking to gain first-mover advantage often make one of three mistakes. First, they fail to appreciate how long it will take their product or brand to be accepted by the market. Second, they use existing business models to support new products and brands, failing to realise that a more innovative approach is needed. Or, third, they develop a new business model with so many faults that it dooms them to failure, as happened to many of the early Internet retailers. Hamel refers to these three mistakes as ‘dumb’, ‘dumber’ and ‘dumbest’, in that order.
First-mover advantage is nearly always temporary. Rivals catch up in the end, either with imitative but successful products of their own, or with new ones that change the market again. Henry Mintzberg, professor of strategic management at McGill University in Canada, is sceptical about the long-term value of first-mover advantage. Yes, he says, first-movers have an advantage, but so do those rivals that follow later. They can look at the first-mover’s position, then choose from a variety of strategic options – price, quality, distribution platforms – and develop their own strategy for eroding that advantage.
In his 1989 book Mintzberg on Management, he argues that the timing of market entry is less important than having the right strategy. How well has the company judged the market? How are customers reacting to the product? These are the key variables that determine strategic success. A sound strategy will usually succeed, and a weak one will usually fail, no matter who moves first.
The problem is that both those who believe in first-mover advantage and those who think it is an illusion can both point to examples that support their case. So which is right? In fact, they both are. First-mover advantage can be important, but only if it is carefully planned and then followed up and exploited. There is no particular virtue in merely being first: this is not a sprint race, and customers do not hand out gold medals to companies merely for being first across the line. Managers contemplating ways of gaining first-mover advantage need to think not only about how they will get ahead of the competition. They also need to think about how they are going to stay ahead.
