RACY CASES 45 He, who moves first, moves fastest.


 

A V Vedpuriswar and V Pattabhi Ram

The legendary professor Service Sam was teaching Strategy.  “The early bird catches the worm”, he said in his trademark style that peppered lectures with quotes, jokes and examples. He was explaining “First mover advantage.”

Battery (he wore powerful (!) glasses) yawned. “Sir, these proverbs are meaningless.”  The class was shocked. Gosh! That sort of lingo was taboo. But Battery was on a roll.  “You see, an English proverb says, ‘Look, before you leap.’  And another crows, ‘He who hesitates falls.’”  As the class roared in approval Sam smiled.

“If you want jargon, you shall get jargon” said Debbie.  She spotted a new hairdo. Someone hissed, “Wow”.  Debbie ignored the jibe and said  “First mover advantage (FMA) is a firm’s ability to get ahead of its competitors by being the first to market a new product category”. Phew. Flowers liked Debbie but he didn’t buy this idea of FMA. He said, “Today anyone can copy your product in six months flat.  That’s all the head start you can have”. And asked rhetorically, “Then, where is the first mover advantage?”

Complimenting Flowers for his very original thinking, Sam said, “There are three reasons as to why you can create FMA. One, if you start early you will have that much more time to accumulate technical knowledge.  You can then use that knowledge to beat the competition.  Two, you can preempt the competition’s access to scarce assets.  For example in the software industry by offering attractive pay packs and ESOPs you can stop the competition from poaching your most important asset, manpower.  And finally by building an early base of customers and offering classy service you can create high switching costs”.

Debbie decided to borrow a leaf from Battery’s book. “So, it is no longer ‘he who laughs last, laughs longest’.  It is he who moves first, moves fastest’? Huh”. It was all that Battery could do to keep his cool. His first mover advantage had gone! He said, “I agree with both Flowers and Sam.!” Debbie blinked.  Somewhere she had read that to hold two diametrically opposite views in one’s mind and yet retain one’s sanity was the hallmark of a genius. And she knew that Battery was no genius.  Mr. Power Glasses was saying, “Whether you can enjoy first mover advantage would depend on two things.  The first is the pace at which the technology is evolving.  And the second is the pace at which the market is expanding”.

A backbencher screamed, “Explain please.”  Battery was only too happy to do that. “Technological advancements can take place at different rates. For instance, in the glass industry (which dates back to 3500 BC) the technology hasn’t changed much.  In contrast, the change has been dramatic in the computer industry”. Debbie jutted in, “The faster the change the lesser is the first mover advantage”.

Battery hated interruptions.  Even as he stared at her, Debbie was busy elaborating on the second point namely market: “The pace of market evolution varies from industry to industry. For instance, the market for fixed telephones developed more slowly than the market for mobiles. Landlines needed 50 years to reach a household penetration of 70%. Cell phones have cracked it within one decade. There was first mover advantage in the former (Slow market) and none in the latter (Fast market).

The professor summarized. “Gradual evolution in both technology and markets create the best conditions for generating first mover advantage. If the technology changes slowly new entrants aren’t able to differentiate their products from that of the first mover. But if the technology changes rapidly, the product itself becomes obsolete quickly. Often such products are overtaken by versions from new entrants, who are not burdened with the innovator’s dilemma, i.e., fear of cannibalizing prior investments”.  As Sam paused for a sip of water, Battery whispered a translation of a local quote.  “No mom likes to kill her kid!”

Sam continued.  “Similarly if the market grows slowly, the first mover gets time to cultivate new market segments. The Great Depression was kind to 3M’s Scotch Tape on both fronts, namely market and technology. At first, 3M thought the product would be used in factories to seal cellophane wrapped around baked goods. Instead, it was purchased by the middle class for repairing items that in more affluent times they might have discarded! The gradual growth of Scotch Tape’s appeal gave 3M the time to organize production and distribution. Technological change was also modest, enabling 3M to prevent later entrants from introducing superior versions. Scotch Tape so dominated its category that it became a generic name”.

The class heard in pin drop silence. “Sometimes, the market leads and technology follows. The Walkman, pioneered by Sony in 1979, used prevailing technologies.  The basic design remained unchanged for a decade. But its market simply exploded. Yet Sony’s market share was 48% even ten years after the Walkman’s launch.  Perhaps Sony’s superior design skills, marketing muscle and strong brand helped. Contrast this with the sewing machines industry. Elias Howe introduced the first commercial sewing machine in the late 1840s, but the machines made by Isaac Singer, a later entrant with greater resources, found more customers”.

When the technology leads and the market follows, early entrants face many years of flat sales. The furious pace of technological revolution attracts new competitors, who think their improvements will draw customers away from the incumbent. Only a company with very deep pockets can survive such a market.

Sam then asked the class, “What happens when both technology and markets change rapidly”. Battery responded, “Then first movers become vulnerable. Netscape, despite its early start, was overtaken by Microsoft”.  Flowers remarked, “Hey, but look at a different example.  Intel.  By putting all its technical and marketing muscle behind its product development and being “paranoid” about competition, Intel dominated in its product category.”  Debbie thought, “Intel inside, idiot outside.”

Service Sam was suitably impressed. He summed up: “Ultimately, let’s remember that firms should not make the first move simply for the sake of doing so. After all, first-mover advantage occurs not when a company enters a market, but when it starts making real money in it.”

Advertisements

About Pattabhi Ram

A chartered accountant by profession, a writer by passion and a teacher by accidental choice.
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s