First Mover Advantage - Benefits and Drawbacks of Being First

The first mover advantage refers to an advantage gained by a company that first introduces a product or service to the market. The first mover advantage. FirstMoverAdvantageTheadvantagegainedbyacompanythatfirstintroducesaproductorservicetothemarketHome›Resources›Knowledge›Strategy›FirstMoverAdvantageWhatistheFirstMoverAdvantage?Thefirst-moveradvantagereferstoanadvantagegainedbyacompanythatfirstintroducesaproductAccountingOurAccountingguidesandresourcesareself-studyguidestolearnaccountingandfinanceatyourownpace.Browsehundredsofguidesandresources.orservicetothemarketMarketEconomyMarketeconomyisdefinedasasystemwheretheproductionofgoodsandservicesaresetaccordingtothechangingdesiresandabilitiesof.Thefirst-moveradvantageenablesacompanytoestablishstrongbrandrecognitionandproduct/serviceloyaltybeforeotherentrantstothemarket.Itisimportanttonotethatthefirst-moveradvantageonlyreferstoalargecompanythatmovesintoamarket.Forexample,Amazonwasnotthefirstcompanytosellbooksonline.However,itwasthefirstcompanytoachievesignificantscaleinthatlineofbusiness. LearnmoreinCFI’sBusinessStrategyClass. AdvantagesofBeingaFirstMoverThereareseveraladvantagestobeingthefirstbusinesstoexecuteastrategy.Companiesthatarefirstmoverscanoften:EstablishtheirproductastheindustrystandardBeabletotapintoconsumersfirstandmakeastrongimpression,whichcanleadtobrandrecognitionandbrandloyaltyMaybeabletocontrolresources,suchasbasingthemselvesinastrategiclocation,establishingapremiumcontractwithkeysuppliers,orhiringtalentedemployeesCangainanadvantagewhenthereisahighswitchingcostforconsumerstoswitchtolaterentrants BenefitsofBeingaFirstMoverProfessorsMarvinLiebermanandDavidMontgomery,intheir1988award-winningpaper,First-Mover(Dis)Advantages:RetrospectiveandLinkwithResource-BasedView,listthreemainbenefitsofbeingafirstmover: 1.TechnologyleadershipFirstmoverscanmaketheirtechnology/product/servicesharderforlaterentrantstoreplicate.Forexample,ifthefirstmovercanreducethecostsofproducingaproductCostofGoodsManufactured(COGM)CostofGoodsManufactured(COGM)isatermusedinmanagerialaccountingthatreferstoascheduleorstatementthatshowsthetotal(an“experience”curveeffect),thefirstmovercanestablishanabsolutecostadvantage.Inaddition,applyingforpatentscanprotectandestablishafirst-moveradvantage. 2.ControlofresourcesThesecondbenefitistheabilitytocontrolstrategicand/orscarceresources.Forexample,Wal-Martwasabletolocateitsstoresinsmalltownsandpreventothersfromenteringthemarket. 3.BuyerswitchingcostsThethirdbenefitthatfirstmoversmayenjoyisbuyerswitchingcosts.Ifthefirstbusinessisabletoestablishitselffirmly,itmaybeinconvenientforconsumerstoswitchtoanewbrandlater. DisadvantagesofBeingaFirstMoverBeingthefirstbusinessinanindustrymaynotalwaysguaranteeanadvantage.Thefirstmovermayinvestheavilyinpersuadingconsumerstotryanewproduct.Laterentrantswouldbenefitfromtheseinformedbuyersandwouldnotneedtospendasmuchoneducatingconsumers.Laterentrantscanavoidmistakesmadebythefirstmover.Ifthefirstmoverisunabletocaptureconsumerswiththeirproducts,laterentrantscantakeadvantageofthis.Laterentrantscanreverse-engineernewproductsandmakethembetterorcheaper.Laterentrantscanidentifyareasofimprovementleftbythefirstmoverandtakeadvantageofthem. LearnmoreinCFI’sCorporateStrategyCourse. ExamplesofSuccessfulCompaniesThatWereNotFirstMoversListedbelowarethreecompaniesthatwerenotfirstmoversintheirrespectivemarkets,buthavenowgrowntobecomesomeofthebiggestcompaniesintheworld: 1.GoogleBeforeGoogle,thereweresearchenginessuchasYahooandInfoseek.However,Googlewasabletocustomizeitssearchenginetoperformmoreeffectivelyandefficiently.Theynowcontrolover65%ofsearchactivity. 2.SouthwestAirlinesSouthwestAirlinesenteredtheairlineindustryasalateentrantbutwasabletoexpandandbecomethesecond-largestairlineintheworldintermsofthetotalnumberofpassengers.Thecompanyfocusedonanareathatotherairlineswerenotlookingat–short-haulflights. 3.StarbucksTherewerealotofplacestobuycoffeebeforetheestablishmentofStarbucks.However,StarbuckswasabletoestablishastrongbrandequitybyplacinganemphasisonmakingStarbucksthego-toplacewhenyou’renothomeorattheoffice. RelatedReadingThanksforcheckingoutCFI’sguidetothefirst-moveradvantagestrategy.CheckouttheseadditionalCFIresourcestohelpyoukeeplearningandadvancingyourcareer:AbsoluteAdvantageAbsoluteAdvantageIneconomics,absoluteadvantagereferstothecapacityofanyeconomicagent,eitheranindividualoragroup,toproducealargerquantityNaturalMonopolyNaturalMonopolyAnaturalmonopolyisamarketwhereasinglesellercanprovidetheoutputbecauseofitssize.Anaturalmonopolistcanproducetheentireoutputforthemarketatacostlowerthanwhatitwouldbeifthereweremultiplefirmsoperatinginthemarket.Anaturalmonopolyoccurswhenafirmenjoysextensiveeconomiesofscaleinitsproductionprocess.EconomiesofScopeEconomiesofScopeEconomiesofscopeisaneconomicconceptthatreferstothedecreaseinthetotalcostofproductionwhenarangeofproductsareproducedtogetherratherthanseparately.TransferPricingTransferPricingTransferpricingreferstothepricesofgoodsandservicesthatareexchangedbetweencompaniesundercommoncontrol.GetCertifiedfor
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