The Myth of Second-Mover Advantage

Back in the 20th century, it became fashionable in business strategy circles to speak of ‘first mover advantage’.  This idea — that if you got there first and staked out a market, it would forever remain yours to dominate — was used to justify funding business plans that would have otherwise seemed, at best, sketchy.

First-movers fall short

Then people began to notice that this is not always how the world really works.  In technology, we could see this evolution in fast-motion.  The ‘first movers’ in online user-to-user communications were MCI Mail and CompuServe.  They were eclipsed (and the latter was bought out) by AOL, which in turn became the vehicle to buy the largest media conglomerate in the world (Time Inc.) — but whose more modest recent successes have come by reinventing itself as a ‘brand company’ (whatever that is).  Google and Microsoft now dominate those categories, which have in effect become loss leaders for their other businesses.

Visicalc was the first dominant electronic spreadsheet — until Lotus 123 arrived, which in turn was hugely successful — until Microsoft Excel came along.  Palm was the early leader in what we now call ‘smart phones’ — and now struggles as a division of HP.  Ashton-Tate was the king of database software — a category that has since effectively disappeared entirely.  Similar happened to just about every early tech mover.

Then, somewhere along the line, true innovation started to develop a bad reputation.

Fast followers follow

Soon the idea of intentionally being a ‘fast follower‘ began to gain adherents — then began to move toward canonization as a smart, modern business strategy.  Articles started being written on it.  ‘Everyone knew’ that Microsoft, poster child for the concept, became what it was largely by copying others and by buying existing innovations that others had created — Windows largely copied the Apple Macintosh, and they bought Word and even the original DOS from others.  Microsoft’s subsequent successes helped legitimize ‘fast follow’ as a strategy to be seriously considered.

The canon goes, “Let them make the investments in R&D. Let them create the markets.  Let them make the mistakes.  Then we’ll just adopt what they do.”  In poker logic, this goes, “We’ll see you and (maybe) raise you one — then we’ll reap most of the return without making much investment.”  Put that way, it seems to make sense.

However, I submit (though few dare say it) that it’s also because it’s easier than determining what the market wants and will want in the future.  It becomes an ‘E-Z Strategy Finder’.  There is even a whole management discipline (competitive intelligence), aspects of which tacitly encourage and thrive on this (often hidden) assumption/myth.

The whole world is watching

Imagine for a moment a world where everyone’s using the ‘fast follower’ strategy. Everybody watches to see what everyone else is doing. If there is no true innovation, everyone holds their steady-state share in a market status quo.  Strategy becomes a zero-sum, red ocean game (wherein I don’t gain share unless I take it from you.)

If someone dares to innovate, everyone else quickly follows him to match it.  This is what happened with Apple and the iPad — after they proved the category’s appeal, everyone else rushed to develop their look-alike entry.

What happened?  Apple retains 40% of the whole category, and makes a higher gross margin in so doing than its rivals.  Only Samsung, with less than half Apple’s share, is a serious contender.  Hewlett-Packard exited the business in August 2011, and more fallout is expected.

Getting back to our example, if everyone followed the ‘fast follower’ strategy, we’d have a situation much like what we actually do have in many markets.  Everyone trains their proverbial radar — not on customer needs and market trends — but on what their rivals are doing.  True innovation seems unjustifiably difficult and risky.

The resulting ‘symmetric mediocrity’ can drive an entire market toward stasis and commoditization (witness the email example above).

We need to snap out of it

This is not sustainable — we need genuine innovation.  Innovation drives industrial progress.  There is no shortcut around it, and to not excel at it could eventually cost the US its lead in the world’s economy. ‘Innovation Nation’ needs to be our drumbeat, and we need to build and innovation initiative on the scale of that man-to-the-moon thing we did so well back in the ’60s.

Corporate leaders need to be rewarded more for being truly innovative and transformative, less for being risk-averse stewards of static business models.

Innovation aWhat would have happened if Thomas Edison had let Nikola Tesla define what the world of commercial electricity would look like?  (We wouldn’t need transformers — but all our motors would run at the same speed.) What would the world would look like today if the Allies had let Hitler invent the atomic bomb first?  (He was working hard on it, and came pretty close.)

A strategy for losers

‘Let them innovate, then we’ll just copy them’ is, to be blunt, a strategy for losers.  Not in the sense that executives will be penalized for proposing or executing it — far from it, regrettably.  But in the sense that industrial progress depends on innovation.

But it goes beyond that.  An orderly, peaceful, laws-based civil society depends on a having a strong, thriving industrial society.  So by extension, business innovation is at the very heart of our entire way of life — it’s no less important than that.

Innovation is hard, disciplined work that can pay huge dividends — ask Apple employees and shareholders — but frequently does not.  Yes, sometimes it is easier and more ‘cost effective’ to leave it to someone else.

But the idea that this is a valid business strategy, and not just garden-variety ‘me-too’ management, strikes me as not only wrong-headed, but also pernicious — bad for those who believe it and use it.  It corrodes the will to innovate that made the American economy what it once was, and what it can be — if we are willing to put ‘following’ as a strategy in the trash bin, where it belongs.

No points for trying

Bear in mind — and this is the hard part — that it can’t just be any random innovation.  It must be an innovation that customers want and value enough to pay for.

Remember 3D TV?  Sony and other TV hardware manufacturers told shareholders that this was going to be their next big innovation.  Problem was, customers didn’t buy it.  The result is that not only is Sony stock near its 15-year low, but also one retailer that depended heavily on TV sales (Circuit City) tanked in 2009, and another (Best Buy) is on the ropes and recently reached a five-year stock low.

One could say, Well at least Sony tried to innovate.  But in real life, there are no points given for a good effort.  The only thing that counts is results.  (Apparently investor Dan Loeb has reached the same conclusion.)

What’s most vexing about this is that the innovation many consumers want with regard to TV — true integration with the Internet — is something that Sony (of all companies, given its mix of businesses) has not yet been able to accomplish, and which even Apple seems to have perennially ‘under development’.

“He not busy being born is busy dying.” (Dylan) You can’t rest on your laurels.  Innovation is a mindset and a process, not a one-time exercise.

One Response to “The Myth of Second-Mover Advantage”

  1. >Visicalc was the first dominant electronic spreadsheet — until Lotus 123 arrived, which in turn was hugely successful — until Microsoft Excel came along.
    Your reasoning is simple but not true. Visicalc did not evolve. Lotus 1-2-3 became standard. Microsoft prevailed by creating MS Office and implemented ruthless marketing tactics. In summary, Microsoft desired to be king.

    > Palm was the early leader in what we now call ’smart phones’ — and now struggles as a division of HP.
    Product development and their marketing were so bad that it was not funny.

    >Ashton-Tate was the king of database software — a category that has since effectively disappeared entirely. Similar happened to just about every early tech mover.

    They also wasted a lot of resources by purchasing one trick ponies like like Multimate and so forth.

    Foxbase/Foxpro was a good database. But Access had a better IDE that attracted more developers..

    The reasoning for most failures usually starts from the top. …An incremental streak of poor decision making from the top regularly lead to crappy strategic intelligence analysis and listless scenario modeling.

    Good blog entry. ..

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