BE FIRST OR BE BETTER GAINING AN EDGE

IN CONTEXT FOCUS

Competitive advantage KEY DATES1988 US scholars David Montgomery and Marvin Lieberman write “First-Mover Advantage,” outlining the competitive advantages of being first to market. 1995 Amazon.com launches, the first of a new breed of online retailers. 1997–2000 Adopting the “be first” mantra, dot-com companies race to market; many fail when the promised advantages do not materialize. 1998 Montgomery and Lieberman question their original findings in their paper, “First-Mover (Dis)Advantages.” 2001 Amazon.com returns its first profit. The company’s first-mover advantages were significant, but a good business model mattered more.

business to enter the online retail market, establishing its brand name, and building a loyal customer base. Google, by contrast, was by no means first. When Google launched in 1998, the market was already dominated by several large players; Google’s edge came from offering a superior product—not only was it faster, but it produced more accurate search results than any of its competitors. Getting into a market first has significant advantages, but there are also benefits to being second. The key is that in order to gain a If you need to buy a book online, which website do you visit first? If you want to research the author of the book, which search engine do you use? The answers, most probably, are Amazon and Google, respectively. Such is the dominance of these two Internet giants that their names define their respective markets. Both organizations have a significant edge in the markets they lead, but they achieved that dominance by different means. Amazon, launched in 1995, gained its advantage by being the first competitive edge in the market, a business needs either to be first, or it needs to be better. Market pioneers The benefits of being first into a market are known as “first-mover advantage,” a term popularized in 1988 by Stanford Business School professor David Montgomery and his co-author, Marvin Lieberman. Although introduced a decade previously, Montgomery and Lieberman’s idea took particular hold during the dot-com bubble between 1997 and 2000. Spurred on by the example of Amazon, businesses spent millions pitching themselves headlong into new online markets. Conventional wisdom was that being first ensured that the company’s brand name became synonymous with that segment, and that early market dominance would create barriers to entry for subsequent competition. In the end, however, overspending, overhype, and overreaching into markets where little demand existed was the downfall of many fledgling dot-coms. With notable exceptions, businesses found that promised returns were not being realized and funds quickly ran short—and for many of these first-movers, failure followed. First-mover advantage Being first out of the block undoubtedly has its advantages, and in the case of the dot-coms, those advantages were exaggerated to the extreme. First-movers often enjoy premium prices, capture significant market share, and have a brand name strongly linked to the market itself. First-movers also have more time than later entrants to perfect processes and systems, and to accumulate market knowledge. They can also secure advantageous physical locations (a prime location on a main street of a city, for example), secure the employment of talented staff, or Amazon.com was a first-mover in the online retail market. It has dominated the industry since its launch in 1995, creating strong brand recognition and a loyal customer base. access beneficial terms with key suppliers (who may also be eager to enter the new market). Additionally, first-movers may be able to build switching costs into their product, making it expensive or inconvenient for customers to switch to a rival offering once an initial purchase has been made. Gillette, for example, having invented the safety razor in 1901, has consistently leveraged its first-mover advantage to create new products, such as a “shaving system” that combines cheap handles with expensive razor blades. Market strategies In the case of Amazon.com, firstmover advantage consisted of a combination of factors. In the newly emerging e-commerce market, customers were eager to try online purchasing, and Amazon was well placed to exploit this growing curiosity. Books represented a small and safe initial purchase, and Amazon’s simple web design made buying easy and enjoyable. Early sales enabled the organization to adapt and perfect its systems, and to adjust its website to match customer needs—adding, for example, its OneClick ordering system to enable purchases without entering payment details. Amazon was also able to build distribution systems that ensured quick and reliable delivery of its products. Although competitors could replicate these systems, customers already trusted Amazon, and the brand loyalty ❯❯