The early bird catches the worm … ?
What makes more sense:
- To be the first player in a brand new market, able to be the first (or only) company which customers buy from?
- To wait until other companies have proven there is a market for a new offering, and then quickly develop and scale your own?
In innovation circles, the first option is often called the “First-Mover”, whereas the second is called a “Fast Follower”.
The concept of a “First Mover advantage” was published in 1988 by Lieberman & Montgommery, and suggested that companies which successfully bring a new innovation to market which customers want can access that entire market demand for themselves, resulting in much higher market share growth and profitability while other entrants in the market need to catch up.
This idea quickly became popular in technology companies and areas like Silicon Valley where it was used as evidence of a need to launch first (even if you didn’t have a working product), spend big on marketing and get customers at any cost.
The companies which launched later but were able to quickly innovate, based on what they saw working in the new market, were the “Fast Followers”.
However, it was not long before research began to suggest that this First Mover advantage was not always real.
You can identify the pioneers in an industry … They are the ones with arrows in their back.
Probably the most important study of first mover advantage came in 1993, when Golder & Tellis analysed 500 companies across 50 product segments.
They found that of the companies which really were the first to launch in a new category, a full 47% (nearly half), failed to build a successful business.
In comparison, of the companies which were fast followers in those categories (and which entered on average 13 years after the pioneers), only 8% failed.
In fact, after only 10 years, in 1998 Lieberman and Montgomery wrote a follow-up research paper admitting that being a First Mover could be much more dangerous than previously anticipated.
This can partially be due to the fact that:
- Many innovations face a valley of death after they have been developed, but before a viable commercial model is found
- The first iteration of an innovation is unlikely to have reached economies of scale yet, and therefore be rather expensive compared to the current
- It takes a while for new ideas to spread through a society, and the majority of people don’t perceive any value in the new offering at the beginning. This can require significant marketing and sales effort to change
- Customers are happy with their current solution
There are however some other studies which suggest that in markets with very short product life cycles, being in the market earlier can be very beneficial.
So while the pioneers which enter a market have an extremely high failure rate, those which do succeed can benefit from higher profitability and market share for a while. It is a classic example of survivorship bias.
If you are what Professor Steven Spear calls a “high-velocity organization” that is always learning and improving, there are real benefits to moving first. After all, when someone copies what you have in the market, they are copying the artifact of your past effort. As you keep innovating, you create further space between you and the market. And competition has its advantages.
One leader at a consumer company told me that their data suggests that the ideal market share is about 60%. It’s enough to capture more than the fair share of profits in the category, but it also means that other people are spending significant promotional dollars in advertising to boost the overall category.
First-Mover Advantage is an idea that just won’t die. I hear it from every class of students, and each time I try to put a stake through its heart.
This one phrase became the theoretical underpinning of the out-of-control spending of startups during the dot-com bubble. Over time the idea that winners in new markets are the ones who have been the first (not just early) entrants into their categories became unchallenged conventional wisdom in Silicon Valley. The only problem is that it’s simply not true.
What this means is that first mover advantage (in the sense of literally trying to be the first one on a shelf or with a press release) is not real, and the race to be the first company into a new market can be destructive. Therefore, startups whose mantra is “we have to be first to market” usually lose. What startups lose sight of is there are very few cases where a second, third, or even tenth entrant cannot become a profitable or even dominant player.
What soon becomes clear if you look at enough case studies is that both strategies can work for a company, but only if their innovation strategy and risk profile are set up to fully invest in the innovation opportunities when they present themselves.
Some research suggests that for fast followers, it is more important to be very focused on which specific innovations you can develop which add a lot of value to a specific market segment, rather than trying to bring every possible innovation or feature to the market with no particular one being of standout quality.
This selection process to find the “perfect” innovation to focus on cannot take long though. Fast followers also need to be able to move at speed, get market feedback and iterate quickly. Spending too much time and effort in Due Dilligence processes can mean that by the time your company launches its innovation which others have “proven” in the market, it is too late and faster companies are already releasing the next innovation.
So whatever innovation you are trying to launch, assess whether both the innovation and the market are ready for a launch, and then what timeframe and risk investment you are willing to allocate to make the innovation a success.
Sometimes it pays to be first. But this is the exception to the rule.
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