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BEST PRACTICE

.. .."' .

The Half-Truth

of First-Mover Advantageby Fernando Suarez and Gianvito Lanzolla

First-mover advantage

is more than a mythbut far lessthan

a sure thing. Here'show to tell when it's

likely to occur-and when it's not.

SOME MANAGEMENT CONCEPTS have

such intuitive appeal that theirvalidity is almost taken for granted.First-mover advantage is one such con-cept. Although the fate of its most-convinced adherents, the dot-coms, of-fers a cautionary lesson,managers' faiththat first-mover status brings impor-tant competitive advantages,even whennetwork effects are not available to ac-celerate and entrench it, remains un-diminished. Business executives fromevery kind of company maintain, almostwithout exception,that early entry intoa new industry or product categorygives any firm an almost insuperablehead start.

But for every academic study provingthat first-moveradvantages exist,thereis a study proving they do noto Whilesome well-known first movers, such asGillette in safetyrazors and Sonyin per-sonal stereos, have enjoyed consider-

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APRIL 2005

able success,others, such as Xerox infax machines and eToys in Internetretailing, have failed. We have foundthat the differencesin outcome are notrandom-that first-moverstatus can con-fer advantages, but it does not do socategorically.Much depends on the cir-cumstances in which it is sought.

One possible explanation for Sony'ssuccess is that its strong brand name,substantial financial resources, and ex-cellent marketing skills allowed it tomal<ethe most of its first-moverstatus.But Xerox,too, had a great brand name,deep pockets, and many valuable skills.And Sony, despite its brand and mar-keting muscle,couldnot translate beingthe first mover in home VCRsinto any-thing approaching its successwith theWalkman. Yes,a firm's resources - andluck - are important, but certain otherfactors and conditions can be decisiveas well.

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BEST PRACTICE . The Half-Truth of First-Mover Advantage

Our research, based on a thoroughexamination of the literature on first-

mover advantage, as well as an analysisof more than 30 cases of early entry intonew product spaces, has enabled us toidentify situations in which companiesare likely to gain first-mover advantagesand those in which such advantages areless likely. Specifically, we identified twofactors that powerfully influence a first

"ffiO\leI'¡;fate: the pace at which the tech-nology of the product in question isevolving and the pace at which the mar-ket for that product is expanding. Know-ing how fast or slow the technology andthe market are moving will allow youto understand your odds of succeedingwith the resources you possess.

What Kind of First-Mover

Advantage?A first-mover advantage can be simplydefined as a firm'sabilityto be better offthan its competitors as a result ofbeingfirst to market in a new product cate-gory.Wefind it useful to distinguish be-tween durable first-mover advantages,which improve a firm's market shareor profitability over a long period, andthose that are short-lived.Although noadvantage lasts forever, firms that suc-ceed in building durable first-moveradvantagestend to dominate their prod-uct categories for many years, froma market's infancy until well into itsmaturity. Coca-Colain soft drinks andHoover in vacuum cleaners unmistak-ably demonstrate both the value andlongevityof early success.

But even when a company cannotbuild a durable first-mover advantage,it may obtain some benefits from earlyentry. The pioneering efforts of Net-scape, the first to market an Internetbrowser, briefly produced enormous

Fernando Suarez (suarezf@bu.edu) is an

associate professor of management atBoston University.He is also a regular vis-iting professor at London Business Schooland at the graduate business school ofUniversidad de los Andes in Santiago,Chile. Gianvito Lanzolla (glanzolla@

london.edu) is a faculty research fellowat London Business School.

122

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First-mover status can confer advantages,but it does not do so categorically.Much depends on the circumstances.

gains for shareholders until the stockprice plummeted in 1997followingtherise of Microsoft's browser, Explorer.Apple declined more gradually- it wasprofitable for severalyears before pres-sure from Microsoft and Intel took atoll, forcing it to restructure in the early1990s.Whether the end comes suddenlyor slowly,profits can be great enough tomake a short-lived first entry a worth-while investment-and perhaps to makeit a strategic objective.Ofcourse,a busi-ness is free to choose not to enter a newmarket at alI. But even a runner-up'smargins may look good compared tothe opportunity cost of staying out ofa new market.

Industry DynamicsAre CrucialMost students of first-mover advan-tages have concentrated on how firmsachieve them. One of the three mainwaysisby creating a technological edgeover competitors. By starting earliest,first movers have more time than laterentrants to accumulate and master

technical knowledge.The secondwayisby preempting later arrivals' accesstoscarceassets-for example,a locationona city'smain street, talented employees,or keysuppliers.The third isbybuildingan early base of customers who wouldfind it inconvenient or costly to switchto the offeringsof later entrants.

What has been largely ignored is theconditions under which those threetactics are most likelyto succeedor faiI.Just as a swimmer's ability to cross theEnglish Channel depends as much onthe water's roughness as on his or herown skill and experience, an early en-trant's prospects depend as much onbackground factors as they do on thefirm's resources and capabilities. Thetwo most important factors - the paceof technology evolution and the pace ofmarket evolution - are typically beyond

the control of any single firmoThere can be enormous variation in

the rates at which products' underlyingtechnologies advance. For example, thefirst manufactured glass dates back toabout 3500 BC,when Middle Eastern

HARVARD BUSINESS REVIEW

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The Half-Truth of First-Mover Advantage . BEST PRACTlCE

artisans heated crushed quartz to makeglazes for ceramic vessels. But it tookthree millennia for the next importanttechnological change, glassblowing,toarise, and 1,600 years more before En-glishman George Ravenscroft inventedlead glass.No other important techno-logical change occurred until AlastairPilkington invented the float-glasspro-cessin fue twentieth century.Bycontrast,a computer today bears little resem-blance to one made even ten years ago.

Sometechnologies,such as computerprocessors, evolve in a series of incre-mental improvements; others evolve

disruptively, creating a break from thenorm, as was the casewhen digital pho-tography began to displace film. Thefaster or more disruptive the evolutionof technology, the greater the challengefor any one company to control it. Evenin product markets dominated by firmswith large R&D budgets, new entrantsand other competitors tend to drivetechnological progress.

The pace of market evolution canvary as markedly as the pace of techno-logicalevolution. For example,the mar-kets for automobiles and fixed tele-phones developed much more slowly

than, say, the markets for VCRs andceIlular telephones. Fixed telephonesneeded more than 50 years to reacha householdpenetration of 70%;ceIlulartelephones achieved the same level inless than two decades.

The greater a new product's or cate-gory's departure from existingproductsor categories, the more uncertain wiIlbe the pace of the market's growth andits eventual shape- how many segmentsthe market wiIl divide into, for exam-pIe.Nokia launched the N-Gage,a gam-ing and music platform that includesa phone, in October 2003. Despite a

The Pace of Change

The market penetration and

performance improvement of

most new product categories fol-

low similar trajectories-they

progress slowly at first, pick upspeed, then level off. But the rate

at which they change varies dra-

matically. Telephones and vacuum

cleaners became widespreadslowly,but VCRscaught on almost

overnight. PCs improved rapidly,while personal stereos remained

little changed for years.

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10 20 30 40 50 60 70

Years from Product Launch

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Theyearly performance

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massive marketing campaign, positivecomment from experts and the public,a superb brand, and market dominancein the related categoryofmobilephones,the company shipped in 2004 only afraction of the "several million"devicesit said it would.

The exhibit "The Pace of Change"shows how the rate of technology andmarket evolution can vary across prod-uct categories.The trajectories of bothtechnological improvement within aproduct category and that category'sexpansion in the market are roughlyS-shaped - slow progress at the begin-ning yields to rapid progress and thena flattening in the growth rateoBut theprecise shape of the S varíes from onecategory to the next.

The Likelihood of a First-

Mover AdvantageThink about a new product categoryyour company recently entered. Areinnovations continuallypopping up? Ordo they appear infrequently enoughthat you can staycurrent? Nowconsiderthe market for that productoIs it grow-ing so fast that you can hardly keepup with demand, or is it expandingonlygradually,giving you and others in theindustry plenty of time to plan andreach new customers?

The exhibit "The Combined Effectsof Market and Technological Change"illustrates the four possible combina-tions of slow and rapid technology andmarket evolution. We use the term"calm waters" for the upper left cellof the matrix, where the technologyand the market are evolving grad-ually. In the upper right, technologi-cal change is modest while the marketgrowsrapidly-thus the market expandsfaster than the technology evolves. Inthe lower left, the technology leads -performance improvement israpid com-pared with the evolution of the market.The lower right is the "rough waters"area, where both the technology andthe market evolvequickly.

When the Waters Are Calm

Gradual evolution in both technologyand markets provides first movers withthe best conditions for creating a domi-nant position that is long lasting. Thevacuum cleaner industry protectedits first mover by evolving slowly andsmoothly. In 1908, in Ohio, WiHiamHenry Hoover produced the first com-mercial bag-on-a-stickupright vacuumcleaner, but it made little headway.Aslate as 1930,fewer than 5%of house-holds had purchased one. The technol-ogy changed as slowly as the market.

The Combined Effects of Marketand Technological Change

The paceof change in a

technology and a market

can have a profound effect

on a company's chances of

achieving a first-mover ad-

vantage. Four possible sce-narios face a would-be

fi rst mover.

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When innovation did occur,the changewas enduring. In 1935,Hoover designerHenry Dreyfuss encased the vacuumcleaner's components in a strearnlinedcanister, creating a technological blue-print that more or less persists to thisday. In such a benign environment,Hoover had little trouble keeping up-to-date technologically and meetingdemandoThe company's machines be-came the referencepoint within the cat-egory.The Britisheventurned the brandinto a verb-"to hoover:'

A gradual pace of change in the tech-nology makes it hard for later entrantsto differentiate their products fromthose of the first entrant. Even if com-petitors discoversome means of doingso,the differencesare not rapid enoughor drastic enough to prevent the firstmoverfrom mastering them and foldingthem into its product line in a timelyfashion, as Hoover did with the rela-tivelyfewminor innovationsintroducedby competitors Electrolux and Eureka.(With globalization, however, the vac-uum cleaner market has fragmented,creating niches for European makers,such as Miele, that Hoover and othermass-market manufacturers are nowtrying to occupy as well.)

An initially slow pace of marketgrowth also tends to favor the firstmover by givingit time to cultivate andsatisfy new market segments. Thoughdevastating to most businesses, theGreat Depression was kind to ScotchTape, which was invented by 3M'sRichard Drew in 1930. At first, Drewthought the product would be used inindustrial settings - perhaps to seal cel-lophane wrapped around baked goods.Instead, it was taken up by ordinarypeople, who were looking to repairitems that in more affluent times theymight have discarded. The gradualgrowth of Scotch Tape's appeal gave3M time to organize production anddistribution. Technologicalchange wassimilarly modest, enabling 3M to keepup-to-date and preventinglater entrantsfrom both introducing superiorversionsand "inventing around" 3M's patent.Indeed, the product remained basi-cally unchanged until 3M released the

HARVARD BUSINESS REVIEW124

-

--

Calm Waters The Market5cotch Tape Leads

Sewing machines

JI The Technology Rough Waters.. Leads Personal

Digital cameras computers

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The Half-Truth of First-Mover Advantage . BEST PRACTICE

- almost-invisibleMagicTransparentTapein 1961.Aswith Hoover, Scotch Tape sodominated its category it becarne syn-onyrnous with it.

The combination of a slowly chang-ing market and a slowlychanging tech-nology makes company resources lesscritical than they would be in the othertechnology-and-market environments.By"resources"we mean the skillsor ca-pabilities and the assets that organiza-tions develop over time. Among themost important capabilities are productdevelopment, production, and market-ing. One important asset is brand rec-ognition. Others are physical assets,such as strategiclocations, and financialresources. Of course, having the mostabundant resources and the most valu-able skiIls is always desirable, but incalmwaters,a firstentrant lackingthoseadvantages may still have the latitudeand the means to defend its productagainst later competitors.

'-'When the Market Leadsand Technology FollowsConsiderthe Walkman,the firstproductin a clever new category - the personalstereo. The WaIkman, pioneered bySonyin 1979,used mature technologiesreadily available at the time, and itsbasic technical design remained un-changed for a decade. By contrast, itsmarket grew abruptly,with sales reach-ing some 40 million units in less thanten years. Indeed, the personal stereois often cited among the most success-fuI consumer-electronicsinnovations ofour time. Giventhe market's enormousexpáIlsion rate and potential size, onemight think that only a short-termadvantage should have been availableto the first mover. Yet Sony's marketshare was close to 48%even ten yearsafter the Walkman's launch, thanks toits superior resources- in particular itsdesign skills, marketing muscle, andstrong brand.

A first entrant with limited resourcesand skillswould probably have to settlefor a short-term first-moveradvantage,however. Boston's Elias Howe intro-duced the first cornmercial sewing ma-chine in the late1840S,but the machines

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APRIL 2005

obtaining durable first-moveradvantages. Deep pockets al-low a firm to wait until thepace of technological changeslows, or the fundamentaIlynew technology its productline embodies becomes thenew standard, and the markettakes off. Of course, the com-pany alsoneeds a superb R&Dcapability to keep it at thetechnological forefront in themeantime.

In 1981,Sony launched thefirstdigitalcamera,the Mavica.Sales of digital cameras didnot beginto gathermomentumfor at least ten years, and salescontinued to be modest foranother decade, during which

the relentless pace of technological im-provement rendered products obsoletewithin a year. A key area of improve-ment was the density of information adigital image could handle. In the early1980s,a high-end camera couldproduceimages with up to 60,000 pixels. By2000,the pixelcount had reached 5mil-lion. Sony's considerable financial re-sourcesand world-famoustechnologicalcapabilities allowed it to stay on top ofthe category and grab a cornmandingshare of the slowlyevolvingmarket. In2003,Sonywasstillthe leader in the US.market, with about a 22%market share.

made by Isaac Singer, a later entrantwith greater resources,weresoon able tofind more customers than Howe's.Thebasicsewingmachine changedlittle overthe next half-dozen years, but demandincreased to such an extent that Singerbegan expandinginto Europe.(AlthoughHowe could not achieve a durable first-mover advantage in the product cate-gory,the patents he owned on competi-tors' products aIlowed him to extractsubstantial rents for some time.)

When Technology Leadsand the Market Follows

What happens in the reverse situation,in which technology changes abruptlybut the market isslowto acceptthe newproduct category? A short-lived first-mover advantage is very unlikely here.Early entrants face many years of flatsales and operating losses and, conse-quently, the skepticism of stock marketanalysts. At the same time, the furiouspace of technological change brings innew competitors, who think their im-provements wiIl draw customers awayfrom the incumbent and its dated prod-ucts. A durable advantage, for mostearly entrants as weIl as most later ar-rivals,is also unlikely.

Onlya company with very deep pock-ets could enter such a market first,survive in its hostile environment, andwithstand a considerable delay before

When the Waters Get RoughSometimes,both technological innova-tion and consumer acceptance advancerapidly,leaving first movers highly vul-nerable. AT&Tand Netscape are exam-pIes of companies capsizedby the rapidchurning of technology and markets.AT&T was the first company to de-ploy a ceIlular telephone system in theUnited States. It built a prototype in1977and ayear later held the system'sfirst public trial, involving 2,000 cus-tomers in Chicago. However, in 1983,Ameritech, not AT&T,offered cornmer-cial analog ceIlular operations afterthey were authorized by the FCC.Asfor Netscape, Marc Andreessen, a co-developer of Mosaic, teamed up withJim Clark in 1994to invent Netscape's

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BEST PRACTICE . The Half-Truth of First-Mover Advantage

Is a First-Mover Advantage Likely?

Your company's odds

of succeeding withthe resou rces it pos-

sesses depend onhow well you under-stand the market and

the technology. Usethis chart to match

your company's skillsand resources with

the environment you

face in a particularsituation.

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browser, which kicked off the era ofwidespread Internet access. Yet Net-scapetoday survivesonly as a smallunitof Time Warner.

Neither AT&Tnor Netscape was ableto make a profit in the new productspaces due to the strength of laterentrants' offerings. Our research sug-gests that a good part of the reason wasthe type of waters both had steppedinto. Cellular telephones and Internetbrowsers would fall in the lower rightcell of the matrix, with both the tech-nology and the market evolvingrapidly(irregularly for cell phones, smoothlyfor browsers). In such conditions, it isvery difficult for companies to gaindurable first-moveradvantages.

If a product's underlying technologychanges very rapidly, the item quicklybecomes obsolete.More often than not,such products are overtaken byversionsfrom new entrants, which aren't bur-dened by maintaining and servicingolder product lines and can innovate

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without fear of cannibalizing prior in-vestments. Some researchers have usedthe term "vintage effects"to character-ize the tendency of new generations oftechnology to usher in winning en-trants. One can observe vintage effectsin many product categories.In the gam-ing console market, which MagnavoxOdysseyentered in 1972,at least sixgen-erations of technology emerged in rapidsuccession,each pushing forward a newwinner. The same thing happened inhard drives and laptop computers. TheOsborne 1, generally considered to bethe first commercially available, trulyportable computer, weighed 24 poundsand was soon superseded by lightermodels. But laptop technology evolvedso quickly that each successor, afterbriefly achieving dominance, was soonsupplanted itself.

A fast-growingmarket adds to a firstmover's challenges by opening attrac-tive new competitive spacesfor later en-trants to exploit. The incumbent tends

to be at a disadvantage, since it oftenlacks the production capacity or mar-keting reach to serve a rapidly expand-ing customer base.

A rapid pace of market evolutionmakes long-term dominance unlikely,but it does not necessarily bar a firstmover from achievingworthwhileshort-term gains - provided it has an acutesense of when to exit. Consider oncemore the Internet browser market. In1994, the Internet started growing ex-tremely quickly.Within two years, thenumber of Web sites had increased 50-fold.This frantic pace enabled later en-trants, chief among them Microsoft,with its enormous resources, to findplenty of space in which to grow. Butbefore competitors could destroy Net-scape's business, Netscape arrangedto be acquired by AOLin an amazing$10billion deal.

Achievinga durable advantageundersuch conditions is not, however, impos-sible. Here is where a firm's resources

HARVARD BUSINESS REVIEW

First-Mover AdvantageThe Situation Key ResourcesYour Company Faces Short-Lived Durable Required

Calm Waters Unlikely Very likely Brand awarenessEven if attainable, Moving first will almost helpful, but resourcesadvantage is not large. certainly pay off. less crucial here

The Market leads Very likely likely Large-scalemarketing,Even ifyou can't dominate Make sure you have the distribution, and pro-the category, you should resources to address all duction capacitybe able to hold onto your market segments ascustomer base. they emerge.

.,Unlikelyi The Technology Very unlikely Strong R&Dand new

¡ leads A fast-changing technol- Fast technological prod uct development,

¡ ogy In a slow-growing change will give later deep pocketsmarket is the enemy of entrants lots ofweaponsshort-term gains, for attacking you.

Rough Waters Likely Very unlikely Large-scale marketing,A quick-in, quick-out There's little chance of distribution, produc-strategy may make good long-term success, even tion, and strong R&Dsense here, unless your ifyou are a good swim- (all at once)resources are awesome. mer.These conditions

are the worst.

.The Half-Truth of First-Mover Advantage . BEST PRACTICE

~

can make a big difference. Only a firstmover with mighty resources, far supe-rior to those of competitors, has anychance of achieving longer-term first-mover advantages when both technol-ogy and markets aremovingrapidly.Forinstance, all else being equal, a first en-trant with a verystrong brand name wiIltend to be more successful in lockingin customers than one without a recog-nized brand name. A good example ofa firm today that mal<esthe best of itsendowments in the most difficult ofcircumstances is Intel. By putting aIl itstechnical and marketing muscle behindits product development process andbeing "paranoid" about competition,

ever, the iPod mini has already im-proved upon its predecessor, and DeIlis offering price cuts and a 12-hourbattery for its 20-gigabyte player. Eventhough the mini is Apple's own inven-tion, Apple wiIlbe hard-pressed to staythe leader for long.

To Be or Not to Be First?

The four scenarios in the matrix placepremiums on very different sets of as-sets and capabilities. Large-scale mar-keting, distribution, and productioncapacity is key in situations where themarket leads; R&D, new product de-velopment, and deep pockets are keyin situations where the technology

Arapidpace of market evolution does notnecessarily bar an incumbent first mover fromachieving worthwhile short-term gains-provided it has an acute senseof when to exit.

'--" Intel has be en able to dominate a prod-uct category in which markets keepexpanding and technology keeps chang-ing at a furious pace.

But do not take the possession of sub-stantial resources as a guarantee of win-ning. When IBM, for example, intro-duced the hard drive in the late 1950S,itwas the largest computer maker in theworld. Since then, a sequence of fast-growing markets for minicomputers,personal computers, and laptops hasgenerated relentless demand for newversions of the device. Despite a superbbrand name and plenty of resources,IBM could not stay atop the hard-driveindustry for long. Neither could oppor-tunistic later entrants.

We expect Apple's iPod to face similarrigors. Famously strong in marketing,R&D, and design, Apple launched theiPod in October 2001 and by 2003 hadaround 70% of the market for digitalmusic players containing hard drives. Inthe first quarterof 2004 alone, the com-pany sold more than 800,000 units; bythe third quarter, it had increased itsshare of the retail market to 82%.How-

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leads. If you step into a given environ-ment with the wrong type of resources,you can expect a rough time (see theexhibit "Is a First-Mover AdvantageLikely?"). Polaroid, for instance, hada great brand name in photography andexceIlent access to distribution chan-nels in the early 1990s,but it was rela-tively weak in R&D and new productdevelopment. Indeed, its leading prod-uct back then, the instant camera, em-bodied a 15-year-olddesignoAfter almosttwo decades of fruitless diversification,the company had to file for bankruptcyprotection. Even if Polaroid had beenthe first mover into digital cameras,a category it wanted to dominate, ouranalysis suggests its fate would havebeen the same.It didn't have the where-withal to triumph over or even survivefurious technological change, rapid andfrequent product obsolescence, and aslow market takeoff.

Right now, Symbian is contendingwith Microsoft to establish the operat-ing systemfor the new product categoryof "smart phones" - ceIlular phones ca-pable ofmultimedia and wirelessbroad-

bandoSymbian'stotal revenues for 2003were slightly more than $100million,whereas Microsoft spent $7billion juston R&D. Although the leaders in thehandset market, including Nokia andSiemens, organized Symbian to keepMicrosoft at bay,margins are so thin intheir industry that they could very weIlchoose Microsoft's operating systemover Symbian's if Microsoft were toprovide it for free or very little.AlreadyMotorola, a Symbian founder, has cho-sen Microsoft'sOS.It remains to be seenwhether Symbian and its backers willbe able to stand up to Microsoft'ssupe-rior resources in a fast-growingmarketfor a fast-movingtechnology.

New product categories are con-stantly emerging around usoIn mostinstances, companies struggle not withwhether to enter a new product cate-gory altogether but with whether toenter early or later. Sometimes execu-tives wonder if it would be wise, forexample, to wait until the companiesin the first wave have been weakenedby competition and seen their techno-logical edge duIled. But by that point,there might not be enough time leftto master the technology in question.Still,in somesituations,it may not makea lot of senseto try to be the firstmover.In environments where a first mover'sadvantage is likely to occur only afteryears of losses, and then to be short-lived,discretion would probably be thebetter part of valor.After all,first-moveradvantage ocq.lrs not when you entera market, but when you start makingreal money in it.

To make real money in an evolvingmarket, you need to analyze the kindof environment that surrounds thenew category; to assess the characterand depth of your resources, compar-atively speaking; and then to decideon the type of first-mover advantage-short-term or durable, immediate ordelayed - that is most achievable, ifindeed any is. Remember, once you'vegone into the water,you have no choicebut to swim. CJ

~---Reprint R0504JTo order, see page 135.

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