First Mover Advantage: Business Framework

First mover advantage has become a kind of gospel in the business world. Companies everywhere are making huge investments on the assumption that being first to market with a new product or service will give them an insurmountable edge over their competitors. But if you’re not well versed in startup-speak, you might find yourself wondering what people mean when they refer to the first mover advantage. And even if you already have some sense of what it refers to, you might be wondering whether it really applies 100% of the time. In this article, we’ll explore the first mover advantage definition, as well as the conditions under which the concept holds true. We will also look at examples of the first mover advantage.

What Is First Mover Advantage?

Put most succinctly, the definition of the first mover advantage refers to the edge a company obtains when it is first to market with a new product or service. Think of it like the business equivalent of getting a head start in a race. Of course, getting a head start doesn’t guarantee you’ll win the race. There are lots of factors in play, and the whole race has to be run.

But what is first mover advantage, really? Why does it really matter? What are the specific advantages conferred to a company by being first to market with a new product or service? The primary advantage then is that the company has the potential to carve out strong brand recognition and customer loyalty. This may mean that customers will continue to stick with the company even as new competitors enter the market with their own versions of the product or service. One reasonable first mover advantage definition is the situation that occurs when a company launches a truly new product or service, immediately capturing 100% share of the market for whatever “new” product or service has been launched. Then, it continues to maintain a large share of the market, even when competitors begin to offer comparable products or services at similar or lower prices.

Other First Mover Advantages

There are other advantages as well. Being first to market gives a company extra time to perfect their product or service—later entrants to the market will be under more pressure to arrive on the scene with a product that has already been perfected if it hopes to be competitive. Further, whoever is first to market has the ability to set the market price to reflect their own production costs, instead of having to respond to the market price that’s been set by other companies. The first mover advantage also gives a company a head start in growing the size of operations and establishing economies of scale.

Further advantages include the ability to control the resources needed to make a product—companies can shift operations to be closer to the necessary resources and markets. They can also inhibit competition by securing copyrights and patents.

How Long Does a First Mover Advantage Last?

Not all first-mover advantages are absolute. Some are more durable than others. Studies have demonstrated that two primary factors dictate the strength of a first mover advantage

1. The pace of change in technology
2. The pace of change in the expansion of the market

A slow pace of change gives the first mover a stronger advantage. More rapid changes to technology and markets give competitors more chances to catch up or benefit from volatility.

Is Being First to Market Always Good?

There are also some disadvantages to being first to market. Trying to be first to market comes with lots of added investment costs, which typically amount to 60-75% more than simply replicating an existing product or service. Later entrants to the market have the ability to learn from and capitalize the first mover’s mistakes. Later entrants have the ability to shape their products and their overall production to expedite operations and improve overall efficiency.

First Mover Advantage Examples

Many of the most successful companies today have benefited from the first-mover advantage. Coca-Cola, for instance, obtained the first-mover advantage when creating its signature product over 100 years ago. Other first mover advantage examples include Netflix, eBay, and Scotch Tape.

Netflix was a first mover in streaming video options. Now, Netflix has many competitors (e.g. Hulu, Quibi, Amazon Prime Video, Disney+, etc.), but Netflix still remains a dominant force in the industry. In the world of online auctions and consumer-to-consumer sales, eBay obtained the first mover advantage and it continues to dominate that market today. One of the great success stories of the first mover advantage is Scotch Tape. By being first to market with a superior product, Scotch tape continues to dominate the market, so much so that the brand name has become synonymous with the market itself.

However, there are just as many examples of companies that have benefited from being later entrants, or companies that have failed despite having first mover advantage. Many highly successful retail chains, such as The Home Depot, were not the first stores of their kind. They simply succeeded in scaling their operations beyond their competitors. One of the great examples of the competition to be first to market is the battle to dominate the home video market that occurred in the 1970s between Betamax and VHS. Most would agree that Betamax offered superior audio/video resolution, and they were also first to market. However, due to many factors including accessibility and user-friendliness, Betamax ultimately lost out to VHS.

If you remember Myspace vs Facebook, you can see how Facebook really took advantage of the mistakes of Myspace to gain market share. This was even though Myspace had the first mover advantage.

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Conclusion

Many companies and venture capitalists have invested massive amounts of capital in efforts to bring their products to market before competitors. This rests on the presumption that the first mover advantage is absolute. However, there are significant costs and even disadvantages associated with being first to market. The first mover advantage may be real, but its ultimate durability comes down to many factors, including the quality of the product, the pace of change, and a company’s overall management. Don’t make the mistake of devoting so many resources to being first to market that you actually leave yourself in a disadvantageous position.

Additional Reading:

• The Pyramid Principle
• US Business Cycle: Expansion & Retraction
• Fishbone Diagram: Business Framework
• McKinsey Frameworks