First-Mover Advantage

Rarely has a business strategy gotten such a bad name so fast.

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It seems like only yesterday that first-mover advantage dominated strategy discussions in executive conference halls and plush boardrooms.

And in fact, it was only yesterday. First-mover advantage — the notion that being first in a “space” gives the first-mover an insuperable competitive edge — was a driving concept of the new economy in the late 1990s. According to proponents of the concept, being first on the scene (particularly on the Internet) engendered a fierce loyalty among consumers and cowed potential competitors.

Proof? Look at America On-Line, these first-mover apostles pointed out. Indeed, while few would argue that the ISP offered a superior service in its early days, it had tremendous loyalty among users — many of whom had first logged on to the Internet via AOL.

Compounding the first-mover frenzy: Venture capitalists and Wall Street seemed more than willing to pump billions into the coffers of Silicon Valley’s nimble startups.

Ironic, since the adage in the IT world has always been “Beware first-generation technology.” But this ocean of easy investment capital may have been the downfall of the first-mover concept.

Wall Street and Silicon Valley became so obsessed with first-mover advantage that, in many cases, being the first on the block supplanted more quaint metrics like profit and cash flow. For example, management at Amazon.com, one of first-mover’s brightest stars, held for a long time that it didn’t need to show a profit since it was seizing early control of its market.

In fairness, first mover advantage did lead to market share for companies like Amazon.com. It didn’t always lead to profit, however.

One of the first pure-play E-tailers in the retail toy space, for instance, was eToys. And for a while, the company had the market mostly to itself. But as managers at brick-and-mortar companies like Wal-Mart saw the money being spent on Internet toy purchases, those old-economy giants began mobilizing their vast resources (including their tremendous leverage with vendors). Before long, eToy’s competitive advantage period had expired. In 2001, so did the company.

But competition from old-line companies isn’t the only reason so many first-movers bit the dust. Geri Spieler, a research director with GartnerG2, a business-strategy research service, says a number of first-movers put more effort into marketing their innovations than in making sure their businesses actually worked.

In E-tailing, for instance, where the first-mover idea might have been most popular, prompt and accurate order fulfillment was a huge flaw. Spieler cites the downfall of Value America, the once highly touted online discount superstore. While the company boasted backing by Fedex and Microsoft founders and cozy relations with the IBM, Hewlett-Packard, and Sony, it ran afoul of its customers. Despite its spiffy electronic order-management system, the company lacked warehousing and shipping capabilities. Clients were left to make their own shipping arrangements.

The result: Many customers didn’t get the goods. Holding no inventory, now-defunct Value America also had “no control and no information,” Spieler says. “They were first [to market], but they were vaporware.”

To be fair, a few first-movers have prospered. There’s eBay, a business built on consumers’ need for (a) bargains and (b) a little action. Spieler also mentions outfits like Sephora.com (the online version of a European beauty products retailing giant) and Babystyle.com (connected to a retail clothing chain) as examples of E-tailing first-movers who have survived because of ties to offline businesses.

Mostly, though, Spieler says first-mover advantage was an asset if a company’s business model was traditional. “The ones that could figure that out are the ones still standing.”

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