The Truth About First Mover Advantage

In many ways, the idea that being first into a market is a significant advantage has been ingrained into our very fiber as consumers.  It’s an assumption that is repeated over and over again in business books, business schools, and by successful entrepreneurs.

But many people don’t know where the idea of the first-mover advantage came from or how it evolved into the widely accepted theory we see today. This article will trace the origins of first-mover advantage and help you understand whether it is a natural phenomenon — and why companies like Facebook, for example, would be foolish to rely on their position as a first-mover as a competitive edge.

What Does the First-mover Advantage Mean?

The idea behind first-mover advantage is that being the first company to enter a market provides a benefit over later entrants. This supposed benefit can come in several forms, including gaining access to better information about the market and consumer habits, establishing superior brand equity or customer loyalty, creating a cost advantage via capitalizing on proprietary technology, locking in suppliers and customers before competitors can get them, and preempting any aggressive moves from potential rivals.

Where Did First Mover Advantage Come From?

The origins of first-mover advantage are challenging to pinpoint precisely, and however, the concept of early entrants having some sort of advantage is very old. For example, in 1600 BC, it was written that Chinese leaders believed sailing against the wind was “a secret possessed by none,” so if you got there first with your boat, you had a prominent edge over any opponents who arrived later.

Over time, this idea evolved into a theory known as “first-mover disadvantage,” which held that trying to enter a market early could be more harmful than helpful for companies that were too eager to compete. The term “first mover” didn’t exist until 1942, when it appeared in an article published in Fortune Magazine describing how vital timing was on the battlefield.

From this point forward, first-mover advantage and disadvantage essentially switched meanings. In 1948, a professor at Harvard Business School named George Terry published an article in the school’s alumni magazine titled “First-Mover Disadvantage” that argued companies should avoid acting as first entrants into a market because they were committing commercial suicide.

After that article was published, the idea of first-mover advantage started to spread rapidly across business circles and eventually made its way into everyday language. The concept was popularized by the book Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne, which took the theory of first-mover advantage even further, suggesting companies should attempt to create so-called “blue oceans” of uncontested market space.

However, despite the popularity of first-mover advantage, many business schools and professors don’t subscribe to the theory. For example, one case study in a Harvard MBA class found that 90% of entrepreneurs believed being a first entrant into a market was an asset. However, only 8% of venture capitalists in a survey said they thought in a first-mover advantage since it leaves companies open to the competition, which could quickly overtake their lead.

The First Mover Disadvantage Debate

The argument surrounding whether or not first movers have an advantage is just as evenly divided as opinions on the subject were 60 years ago when George Terry published his article for Fortune Magazine. And this debate has had profound implications on hundreds of millions of consumers worldwide.

Here Is a Brief Timeline of Companies Who Won by Being First and Those Who Lost by Trying To Be the First:

In 1962, Coca-Cola introduced “New Coke” to respond to Pepsi’s growing market share. However, they were forced to revert to their original formula in less than three months after sales plummeted following their failed experiment. On the flip side, Google has built up one of the most profitable businesses in history on the idea that being first matters – especially for search engines. It launched its search engine 15 years before Bing, and Yahoo even existed yet still enjoys a healthy lead over all competitors.

Would Amazon exist if eBay hadn’t pioneered online auctions? Would Uber be as successful if Lyft had beaten them to the punch of on-demand taxi-hailing services? These may sound like silly hypotheticals, but they quickly become serious business questions if you’re an investor or executive at these companies.

Still, first movers aren’t always winners. Companies often win on their second attempt, even though first attempts fail miserably. Take JetBlue Airways, for example. The airline launched in 2000 and filed bankruptcy just four years later after racking up $141 million in losses. However, the company rebounded by introducing new features initially pioneered by other airlines, including free snacks, stylish legroom, and seatback TVs—and their stock price has been up 2,500% since.

What Explains First Movers’ Success?

While some studies have found evidence for first-mover advantage, there are multiple examples of successful companies which launched after their competition. For instance, it took Apple more than five years to turn a profit following the release of the iPhone, while Samsung did it in less than one year with the help of their Galaxy smartphone. Facebook (launched 2004) also grew to surpass News Corp.’s Myspace (established 2003) in 2011 despite launching four years later.

Although many studies argue that having the first-mover advantage is essential, they rarely mention how quickly new market entrants can become dominant players even when they enter long after competitors. A deeper analysis would suggest that while being first may give startups an edge over late entrants early on – this lead becomes increasingly irrelevant as time goes on. No company can maintain a monopoly forever.

While the first-mover advantage is an often discussed topic, there’s no clear consensus on whether it exists. However, the sheer number of examples that contradict this idea suggest that late entrants can easily overcome first movers and overtake their lead if they understand how to differentiate themselves from the market leaders. With that in mind, entrepreneurs should consider timing and a product when deciding whether or not to launch their startup and avoid working on ideas too far ahead of their time.

The success of the first-mover advantage heavily relies on the market in which they compete. For example, being the first to launch an app store would have given Palm a significant edge over Apple in the smartphone market because Apple heavily restricted the iPhone’s app ecosystem. However, this wouldn’t have helped Palm in any other industry such as video game consoles (Playstation), smart TVs (Samsung), or printers (HP).

As time goes on, consumers’ standards for what makes a good product experience inevitably improve. This forces companies to think of new ways to differentiate themselves from the market-leading incumbents. For example, store owners previously could rely on their decor and customer service to set them apart from nearby competitors. Still, now they need something more like exclusive products or discounts. Timing becomes an increasingly important factor as consumers become conditioned to expect that any company can copy their competitors’ features in the blink of an eye.

In Conclusion

In the end, there’s no simple answer as to whether or not first-mover advantage is real. If it does exist, it’s likely much smaller than many people believe due to potential competitors quickly overcoming early market leaders in a short matter of time. The best way for entrepreneurs to take advantage of being the first entrant into a market is by seeking out highly fragmented spaces with no clear winner yet and filling that need before anyone else has thought about doing so.

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