First Mover Advantage

How Does the First Mover Advantage Work?

The first mover advantage (FMA) is a strategic business concept that conveys the notion that the earliest entrant in a market can attain a competitive advantage.

In short, the first mover introduces a new product category or service offering to customers in a particular market segment.

Therefore, the branding of the “first to market” early entrant is inherently attached to the product or service, creating an opportunity for the company to establish strong brand recognition and quickly obtain market share.

The overarching strategy undertaken by companies to achieve a first-mover advantage is oriented around value creation in an entirely new market segment.

The first mover advantage is contingent on recognizing an untapped market opportunity, developing a product (or service) with a differentiated value proposition, and effective communication to create market demand.

On the other hand, the sustainability of market leadership (i.e. positioning as the incumbent holding the highest market share) requires continuous improvement to the product offering, including closely monitoring the competitive landscape to mitigate risks and fend off new entrants in the market that pose threats.

Since there is no (or limited) industry data sets to reference, the first mover must conduct market research via its initiatives to accumulate knowledge on the target end market and extract insights on the customer base, including consumer preferences and recent spending trends.

Hence, the first mover must allocate significant resources and capital toward research and development (R&D) for the company to gain an in-depth understanding of the target market and customer profile, which is often segmented into cohorts.

Why Pursue the First Mover Advantage Strategy?

The risk-return trade-off attributable to the strategic initiatives of a first-mover is far riskier, yet the potential reward (or “upside”) is compelling enough for certain companies to bear the incremental risk.

The conventional, widely accepted theory on the relationship between value and cost is that a business must pick between offering high value at high costs or reasonable value at low costs (i.e. a mutually exclusive decision).

• High Value ➝ High Cost
• Low Value ➝ Low Cost

The concept of the blue ocean strategy is closely interconnected to the first mover advantage because the former refers to a company’s product roadmap and go-to-market (GTM) strategy, while the latter represents the intended outcome.

The first-mover encounters no competition at initial entry into the untapped new market—which is formally termed the “blue ocean strategy”—wherein the first company can create a new market (or submarket) and rapidly gain market share.

• Blue Ocean Strategy ➝ The business crafts a strategy to create a new market by offering a new product or service (thus, facing no competition in the earlier phases).
• Red Ocean Strategy ➝ The business competes in a crowded market to capture market share from the market leader(s), an incumbent that likely has an established track record, strong branding, and a loyal customer base.

The first mover can create an entirely new industry or expand the constraints set within an existing industry. The latter option of establishing a sub-industry is far easier in comparison, of course, and thereby more common.

The head start in front of the competition set forth by the early entry of the first-mover is a favorable situation that presents valuable time to refine the product and service offerings and streamline operations to improve their overall efficiency.

However, it is only a matter of time before competing firms start to enter the market, so the period in which competition is absent is a critical inflection point to capitalize on the opportunity to capture a sizeable piece of market share.

What are the Benefits of the First Mover Advantage?

The first mover advantage offers the potential to reap several distinct benefits, such as the following:

• Industry Standard ➝ The first mover sets the industry standard (or benchmark) for the product category in the market, at least in the initial stages. The quality of the initial product, including features, establishes the industry norm among consumers. Still, competitors must meet (and exceed) the “hurdle rate” set by the first mover to obtain market share.
• Supplier Relationships ➝ If a company introduces a new product to the market, there is more choice in suppliers with whom to initiate long-term relationships, which grants them more access and room to negotiate favorable terms (and establish reliable distribution channels).
• Favorable Unit Economics ➝ The first mover can purchase raw materials at reduced prices, control resources, and set the market price at which the products are sold to customers.
• Economic Moat ➝ The early mover can reap a higher profit per sale considering the favorable cost structure and limited competition, contributing toward an economic moat (i.e. the long-term protection of profits and market share).
• Strong Brand Recognition ➝ The branding of the first mover will inherently be tied to the product, even after competing product offerings start to emerge in the market.
• Brand Loyalty ➝ The first mover advantage enables the early occupant’s brand to become attached to the product offering, facilitating long-term recurring revenue from multi-year contracts or repeat purchases from customer loyalty.
• Switching Costs ➝ The buyer switching costs are the monetary and intangible factors that serve as barriers to entry in an industry. The company is given the opportunity to establish trust and build brand loyalty within its existing customer base. Therefore, for a competitor to convince an existing customer to switch providers, the value offered by the product or service must exceed the incumbent’s competing offering (and offset the buyer switching costs).
• Customer-Centric Model ➝ The centerpiece of a business should be understanding the needs of its customer base, which is integral to achieving sustainable, long-term success. Market research must be performed to identify specific customer needs (“pain points”) and preferences, which inform the direction of a company’s product development strategies. The active, “hands-on” initiatives early on to build strong customer relationships are critical to collecting valuable feedback and implementing tangible changes to build trust.

What are the Drawbacks to the First Mover Advantage?

On the other hand, there are numerous pitfalls to being the first mover in a market that present material risks to the long-term viability of a company, such as the following:

• Threat of New Entrants ➝ If the market opportunity is deemed attractive, new entrants will emerge, which is an inevitable outcome. Hence, the first mover must prepare for a shift in the competitive landscape by implementing measures to mitigate the risks (and market uncertainty), using diversification strategies, and expanding their product categories.
• Business Model Replication ➝ The business model of a company cannot be patented (or trademarked), so competitors can replicate the revenue model, customer acquisition strategies, and growth tactics adopted by the first mover (“copycat business model”).
• Outsized R&D Spending ➝ The first mover must allocate significant funds toward market research and invest heavily into product development (i.e. high upfront R&D costs) for the sake of accumulating market knowledge and honing a particular product to cater to the customer needs and preferences.
• Demand Generation ➝ The novelty of the new product or service offering creates the necessity to incur substantial sales and marketing (S&M) expenses to draw attention to the product launch and convert potential customers into paying customers.
• Public Transparency ➝ The first mover in a market, assuming the total addressable market (TAM) is deemed worthwhile, will soon be closely monitored by nearby competitors. The strategic initiatives that falter present opportunities for competitors to exploit, which is a material risk to publicly traded companies in particular. By recognizing the mistakes of early entrants, competitors can steer clear of making the same costly errors (and thereby, operate more efficiently).
• Temporary Buffer ➝ The timing advantage afforded to the first mover is temporary, and certain late entrants can catch up rather quickly with the market leader and outpace them in terms of innovation and the strategic execution of a well-crafted business plan. In particular, market entrants with technology leadership present the most industry risk, as the rapid pace of innovation and disruption to traditional business methods tends to create the most challenging environment to compete in (i.e. tech-oriented startup vs. established incumbent).

Absolute Cost Advantage: How to Optimize Cost-Efficiency

The absolute cost advantage refers to the optionality of a company to produce a good or service at a lower cost on a per-unit basis relative to its competitors in the same (or an adjacent) market.

The quantity of resources required by the company as part of the production process (or the “inputs”) are similar, if not the same, yet the costs incurred by the company are lower.

The cost efficiency is attributable to factors such as access to cheaper raw materials, proprietary knowledge, optimized manufacturing processes, and a more robust distribution network (i.e., transportation).

The first mover in a market often benefits from an absolute cost advantage, wherein the profit earned per dollar of revenue generated is higher.

Given the higher margin on product sales, the early entrant can price its goods and services at a lower price than competitors if deemed necessary.

In comparison, a new market entrant cannot sell their products or services at low prices (i.e. underpriced relative to the standard market rates), or the unsustainable burn rate will cause their cash reserves to run out.

First Mover Advantage: Amazon (AMZN) Example

One real-world example of a company that benefited from the first-mover advantage and maintained its position as the market leader is Amazon (AMZN).

Founded by Jeff Bezos, Amazon originally started out as an online bookstore, which was a major contributing factor that helped establish strong brand recognition and customer loyalty early on.

^{Amazon Bookstore First-Mover Advantage Example (Source: LA Times)}

Amazon was one of the first pure-play eCommerce retailers and, therefore, had the opportunity to shape consumer preferences around online shopping and build trust with its customer base.

For instance, Amazon set the standard for shipping speed by normalizing two-day shipping, which consumers nowadays expect from all online retailers.

^{Amazon Prime — Industry-Standard 2-Day Shipping Model (Source: Amazon Prime Shipping)}

Brand equity was one of the determinants that led to customers continuing to purchase products from Amazon, as the business model soon expanded into new product categories like electronics, toys, and apparel. In particular, Amazon achieved economies of scale from the widespread usage of the e-commerce platform before competitors like Walmart (WMT) entered the online retail space.

The efficiency at which Amazon operates—which stems from economies of scale, its long-term relationships with suppliers, and its ability to negotiate favorable terms (e.g., extend payables)—is a factor that is near impossible for later entrants to replicate or even come close to catching up to.

Under the management of Bezos, Amazon made several crucial investments into the logistics and fulfillment capabilities (and distribution network), which would later on prove itself as a profitable strategic decision that contributed toward its outsized scale and positive growth trajectory.

^{Amazon Fulfillment Center Network (Source: Amazon Supply Chain)}

Amazon managed to reduce shipping distances to customers by building out a network of strategically located fulfillment centers, which enabled the eCommerce platform to incur fewer shipping costs as the network expanded.

The early utilization of advanced robotics, automation, and AI technologies in its warehouses to further streamline operations and optimize inventory management reduced order processing times and total costs.

Therefore, Amazon strategically leveraged its status as a first-mover in the online bookstore vertical to solidify its strong branding and market position as a leading eCommerce platform, which later on facilitated the expansion of its product selections and transition into other segments such as cloud computing (AWS).

The outcome? Amazon developed into one of the most valuable, publicly traded companies at present, and is widely recognized as a pioneer in the eCommerce market.