First mover advantage theory of entrepreneurship

Should entrepreneurs strive to be first? This is an important question that is relevant to myriads of decisions that entrepreneurs make involving commitments of resources and attention. For instance, given the option to implement two ideas, one with early entry potential and the other with late entry potential, which should an entrepreneur run with?

According to Kerin et al. (1992), “studies purport to demonstrate the presence of a systematic direct relationship between order of entry for products, brands, or businesses and market share.”

First mover advantage theory posits that new entrants that are earliest to a new market niche get several advantages, such a brand awareness and a reputation for innovativeness. Followers can built great brands too, though at a greater cost.

Another first movers advantage is the ability to tie up factor markets by engaging in long term contracts with key suppliers, which makes it harder for followers to acquire the necessary complementary assets to compete. Tying up suppliers only works if there are few quality suppliers available.

First movers may also ride down the experience curve ahead of rivals creating barriers to entry. In general, this advantage is only sustainable if followers have fewer resources to be able to speed down the experience curve even faster, then catch up and surpass the leader.

There are some reasons to question the notion of first mover advantage. Startups usually occur in clusters where more than one entrepreneur independently pushes a business model, product, or technology. After a technological discontinuity, many individuals independently pursue the next logical business innovation, forming a cohort of competing new ventures known as the fermentation stage (Tushman and Anderson, 1986).

Interestingly, evolutionary theories of technological innovation tend to discount the first mover, arguing instead that the first mover takes on extra costs (e.g., training customers and basic research) that the second mover does not need to bear. Followers can benefit from the leader’s wake of supplier training and research and development spillovers and use reverse engineering to save on development time. This cost advantage me be enough in the early stages of an industry to make the difference between winning and losing.

Teece (1986) suggests that first movers usually win only if followers don’t have access to the intellectual property needed to imitate, or when the followers lack the complementary assets (manufacturing, distribution, and marketing) needed to compete effectively. Entrepreneurs need to compare themselves with the incumbent firms and size up their ability to compete.

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2 comments for this post
  1. Animesh Roy

    The specific nature of new innovations play a key role in deciding whether to be a first-mover or not. Factors to consider, apart from the ones listed in the blog entry, include levels of complexity and uncertainty in the industry, as well as whether initial preference formation is expected to be strong. Tesla, as an example, may be building strong customer preference by being a first-mover in the electric vehicle industry.
    Regardless of the industry being assessed, a key ability that first movers need to possess, in order to reduce threats from later entrants, is being able to rapidly transition from a niche market to a mass market when the situation is right. Failure to do so can often result in losing market share to second movers. A practical example can be drawn from the competition between Uber and Lyft. While Uber gained first mover advantage, Lyft was able to successfully enter the market as well, and now enjoys a healthier financial position than Uber.

    Concepts taken from:
    Przychodzen, W., Leyva‐de la Hiz, D.I., and Przychodzen, J., 2020. First-mover advantages in green innovation- Opportunities and threats for financial performance: A longitudinal analysis. Corporate Social Responsibility and Environmental Management. Pp.339-357.

  2. Ray H

    Haili Zhang and Michael Song’s research further develops on this theory with their paper “Do First-Movers in Marketing Sustainable Products Enjoy Sustainable Advantages? A Seven-Country Comparative Study”. Ultimately they find that there are competitive advantages but some disadvantages, identifying seven different types which can vary depending on the country. For example, the theory that sustainability first-mover firms outperform later entrants is significant in the United States and the United Kingdom, however the effect in china is significantly lower. The first mover gains a favourable quality image perception In Japan, China, South Korea and Singapore, meanwhile the effect is not as pronounced as in the United States, United Kingdom and Germany. Advantages of economies of scale were noticeable within all countries with no major differences. Uncertainty disadvantages of sustainability first-mover are lower in Asian countries than Western countries. This research is helpful given the increasing importance of considering a global perspective.

    Zhang, H., Song, M. (2020). Do First-Movers in Marketing Sustainable Products Enjoy Sustainable Advantages? A Seven-Country Comparative Study. MDPI. Retrieved from https://www.mdpi.com/2071-1050/12/2/450/htm

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