First-Mover Advantage is an idea that just won’t die. I hear it from every class of students, and each time I try to put a stake through its heart.
Here’s one more attempt in trying to explain why confusing testosterone with strategy is a bad idea.
First mover advantage – great bad idea
The phrase “first mover advantage” was first popularized in a 1988 paper by a Stanford Business School professor, David Montgomery, and his co-author, Marvin Lieberman.[1]
This one phrase became the theoretical underpinning of the out-of-control spending of startups during the dot-com bubble. Over time the idea that winners in new markets are the ones who have been the first (not just early) entrants into their categories became unchallenged conventional wisdom in Silicon Valley. The only problem is that it’s simply not true.
The irony is that in a retrospective paper ten years later (1998), [2] the authors backed off from their claims. By then it was too late. Using this idea to differentiate themselves as the hot new Silicon Valley VCs, some of his former business school students made this phrase their rallying cry. Soon every other VC was using the phrase to justify the reckless “get big fast” strategies of dot-com startups during the Internet Bubble.
Fast Followers – a better idea
In fact, a 1993 paper by Peter N. Golder and Gerard J. Tellis had a much more accurate description of what happens to startup companies entering new markets.[3] In their analysis Golder and Tellis found almost half of the market pioneers (First Movers) in their sample of 500 brands in 50 product categories failed. Even worse, the survivors’ mean market share was lower than found in other studies. Further, their study shows early market leaders (Fast Followers) have much greater long-term success; those in their sample entered the market an average of thirteen years later than the pioneers. What’s directly relevant from their work is a hierarchy showing what being first actually means for startups entering new or resegmented markets:
| Innovator | First to develop or patent an idea | |
| Product Pioneer | First to have a working model | |
| First Mover | First to sell the product | 47% failure rate |
| Fast Follower | Entered early but not first | 8% failure rate |
The Race to Fail First
What this means is that first mover advantage (in the sense of literally trying to be the first one on a shelf or with a press release) is not real, and the race to be the first company into a new market can be destructive. Therefore, startups whose mantra is “we have to be first to market” usually lose. What startups lose sight of is there are very few cases where a second, third, or even tenth entrant cannot become a profitable or even dominant player. (The rules are different in the life-sciences arena.)
Ford vs. GM, Overture vs. Google
For example, Ford was the first successfully mass produced car in the United States. In 1921, Ford sold 900,000 Model Ts for 60 percent market share compared to General Motors 61,000 Chevys, a 6 percent market share. Over the next ten years, while Ford focused on cost reductions, General Motors built a diverse and differentiated product line. By 1931 GM had 31% of the market to Ford’s 28%, a lead it has never relinquished. Just to make the point that markets are never static, Toyota, a company that sold its first car designed for the US market in 1964, is poised to surpass GM as the leader in the US market. The issue is not being first to market, but understanding the type of market your company is going to enter.
If the car business is too removed from high tech as an example, how about the story of Overture. In 1998 Goto.com, a small startup (later Overture, now part of Yahoo!), created the pay per click search engine and advertising system and demo’d it at the TED conference.
It was not until October 2000 that Google offered its version of a pay per click advertising system -AdWords -allowing advertisers to create text ads for placement on the Google search engine.
Google is a $25 billion dollar company with most of its revenue from AdWords.
Overture was acquired by Yahoo for $1.6 billion.
Implicit Customer Discovery and Validation in Fast Followers
Why do fast followers win more often? It’s pretty simple. First Movers tend to launch without really fully understanding customer problems or the product features that solve those problems. They guess at their business model and then do premature, loud and aggressive Public Relations hype and early company launches and quickly burn through their cash.. This is a great strategy if there’s a bubble occuring in your market or you are going to bet it all on flipping your company for a sale. Otherwise the jury is in. There’s no advantage. [4]
Astute fast-followers recognize that part of Customer Discovery is learning from the first-mover by looking at the arrows in their backs. Then avoiding them.
Lessons Learned
- Believing in First Mover Advantage implies you understand your business model, customers problems and the features needed to solve those problems.
- That’s unlikely.
- Therefore you’re either going to burn through your cash or pray that the hype can help you can flip your company.
- None of the market leaders in technology were the first movers
[1] Montgomery, M. Lieberman.1988 “First Mover Advantage.” Strategic Management Journal, Volume 9, Issue S1, pages 41–58, Summer 1988.
[2] Montgomery, M. Lieberman “First-mover (dis)advantages: retrospective and link with the resource-based view.” Strategic Management Journal Volume 19, Issue 12, pages 1111–1125, December 1998
[3] P. N. Golder and G. J. Tellis. 1993. “Pioneer Advantage: Marketing Logic or Marketing Legend?” Journal of Marketing Research, 30(2):158–170.
[4] Did First-Mover Advantage Survive the Dot-Com Crash? . M. Lieberman 2007
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Great topic, Steve.
If we posit that all businesses get it wrong when they start, then First Mover is just another way of saying First to Fail.
But, the Fast Followers are also likely to get it wrong when they start, too. They have the learnings of the First Failer to build upon, but something is still going to go wrong, and some sort of pivot or course correction undertaken.
So, if both the First Failer and the Fast Follower are bound to make mistakes, why is the success rate of the Fast Follower so much higher?
Is it psychology of the management? Psychology of the customers? Are the mistakes of the First Failer more egregious?
FWIW I’ll offer my own take: the learning curve is not linear. You have the most to learn in the beginning, with the corollary that the mistakes you make early-on are the biggest. As learning accrues and the market becomes better defined, each subsequent mistake has less marginal impact. Add a bit of learning-lag and company inertia once a direction is set, and you have a reasonable explanation of why aggressive first-movers are often killed by fast-followers — they make smaller mistakes.
I’d wager that the fundamental metric for success is “learning per dollar spent”. If you’re there early, you can pick up more learning. But if you start spending money then you have implicitly said, “Ok, learning’s done — time to scale.” Interestingly, you can keep the metric high simply by not spending money. Is this the hidden secret of bootstrapped, Y-Combinator, and other low-burn startups?
I tend to think there is a statistics error in here:
* There is only one “First Mover”
* There might be many “Fast Followers”
As for the failure rate it may be explained by the Survivorship bias.
Overall, I do not deny the important insight that being first is not an advantage. Probably other factors (e.g. organization’s abilities) are more of a factor.
Thanks for the great post!
Really very interesting. The facts around the Overture case are both at the surface correct and somewhat more murky: at Yahoo acquisition time, Overture was competitive, or even slightly larger, than adwords.
The reasons that Google beat out Yahoo in search advertising included:
1. Google realized the size and scale of the eventual market, and built for that, while Overture’s initial architecture didn’t scale far enough (consistent with the author’s theme)
2. Yahoo is particularly bad at doing acquisitions; most have failed (exception — mail )
3. Yahoo’s search engine (a combination of Inktomi and Alta Vista) was actually introduced AFTER Google’s, and so was a market follower. It was widely perceived as inferior to Googles for the crucial phase of rapid market expansion (which is somewhat contrary to the author’s assertion).
4. Putting (1) and (2) together, Yahoo realized the size and scale of investment necessary to make up for (1) about 2 years late, and failed three times before rebuilding the search advertising systems to an architecture robust enough to handle the traffic volume.
There’s one additional theme that is implicit, but never called out, in the author’s premise — the experience and skill of the management team. First movers have difficulty attracting the best management talent, as the risk of jumping in a virgin market is higher than a defined market. Here, risk is mainly “does the startup fail without a payoff”. Without the vision of the slightly-less-risk-tolerant ‘A’-list players, first movers have real challenges in scaling organizations.
Yahoo Search came both before and after Google search.
Yahoo Search existed in 1995. Google incorporated a few years later (1998), and became the default search engine for Yahoo in 2000. In 2004, Yahoo dropped Google search and went back to their own technologies (based on Inktomi and Alta Vista, as you mentioned).
I’m very curious about your comment:
“(The rules are different in the life-sciences arena.)”
Are you saying there *is* an important first-mover advantage in life sciences? If so, can you say why this is? The first thing that comes to my mind is drug/device patents, which seem to be much more powerful in biotech than in software.
“Google is a $25 billion dollar company”
$167 billion. http://www.google.com/finance?client=ob&q=NASDAQ:GOOG
Look at the annual revenue, not the market cap. It’s generating about $25 billion in annual revenue.
So true of Google vs Overture example ( I was a Goto/Overture/YSM engineer). Overture pioneered straight keyword auction. Google introduced revenue reordering. The latter automatically optimized CTR and revenue at such an efficient and rapid rate that even when YSM tried to play catchup with Panama, it was too late.
YSM never caught up because Panama and all YSM tools were an order of magnitude to complex compared to AdWords. Back in 2005-06 (I think – can’t remember exactly) we had tons of Adwords customers that would have loved to spend more with Y but they literally couldn’t figure out how to do it!
Steve, thanks for this! I wish more people were familiar with the Golder and Tellis study. In addition to all the points you make in your post I would add that the first mover advantage myth often weakens a company in the long run by promoting strategic laziness and keeping it from developing effective barriers to entry beyond first mover or largest share. This locks the company into a Red Queen’s Race where it is forced to run ever faster just to stay in place. In my travels, I’ve run across several different non-strategic reasons driving a first mover approach http://bit.ly/9f4LSe
I’m proud to say that I contributed to Professor Lieberman’s 2007 paper along with a fellow student (we collected the raw data that was used in the analysis.) We were all surprised to find that first-mover “advantage” was generally contra-indicative. There was a narrow-range exception for network-effect markets, but they were few and far between.
I think this is an important distinction. I feel that the reason for this is because you’re generating a substantial advantage too difficult to overcome. That said, it’s just a hypothesis.
I also want to believe that you can be successful if you’re first to market. But, I have no proof of this. Maybe that Apple lost the PC market to Microsoft, but now is the largest tech company in the world??
Could you give an example of a company that launched first with the network effect that was didn’t succumb to being overwhelmed? The company that licensed patents for the fax machine and the Bells?
Are there ever cases where 1st mover does have an advantage? What about online marketplaces that have high switching costs and network effects? Switching from a Ford to a GM might be easier than a seller at Ebay switching over to a new marketplace, because the seller can’t port over their buyer feedback from Ebay to the new one. Could these kinds of marketplaces be a case where the first mover may have an advantage?
Lieberman’s study specifically notes that first-mover advantage does seem to play in network-effect markets (which he calls “brokers” or “market makers”) and specifically cites EBay as an example (along with Monster.com and a few others.)
Very clear message but raises an interesting conundrum: If being the first mover is an unsound strategy, how can you be a fast follower if no one is the first mover? Why should anyone be the first one in the pool?
Is there a more sound way of being the first mover?
Read a bit more closely. Steve writes, “[First Mover] in the sense of literally trying to be the first one on a shelf or with a press release”, and “First Movers tend to launch without really fully understanding customer problems or the product features that solve those problems. They guess at their business model and then do premature, loud and aggressive Public Relations hype and early company launches and quickly burn through their cash.”
So, instead, be a First Follower. Find customers, talk to them, learn, iterate, find more customers… etc. Getting learning first can be an advantage. Spending money first is generally not.
There will always be a fool in the game
I hate to disagree, but:
Successful first movers:
Ebay
Amazon
SAP
Oracle
and many more.
Chris,
Ebay, no not really. Comp-U-Card Online/Comp-U-Store held weekly auctions for consumer goods like the brand-new Sony Walkman in 1983, and CompuServe’s first eBay-style automated online auctions were held in 1982.
SAP, nope. ASK Software, had a manufacturing software package before SAP.
Amazon. Lots of other first movers selling books before Jeff Bezos. Charles Stack, Computer Literacy, etc.
Oracle. No again. Berkeley Ingres, IBM BS12
It’s easy to confuse the fast followers with first movers because the survivors write the history. The dead never speak.
steve
I’m afraid you’re falling victim to survivor bias.
— I personally bought and sold many computers on UCE – the United Computer Exchange – well before EBay started. UCE started in 1993.
— Intershop was selling services to online retailers in 1994, indicating a vibrant merchant market before Amazon was founded.
— SAP’s original software came from IBM – it wasn’t even its own creation.
— RDBMS was described by Codd in 1970 – Oracle wasn’t founded until 1977, and wasn’t a database company until 1979. Multics was selling an RDBMS out of Honeywell as early as 1976.
Apple is a typical 1st mover, and isn’t their success phenomenal?
Microsoft has always been considered a follower, and where are they now?
Apple was a pioneer in personal computing – but still has only a small share of it. On the other hand it was among the last to enter Smartfone race long after Microsoft, Palm and Nokia, but it makes a big chunk of money there.
I think the authors left out the biggest example – Microsoft. DOS and Office were not the first Operating System and office package respectively. But, they are the most successful software products ever in terms of profits.
Another example is Facebook. There were a few social networking sites before 2004 including MySpace, but nothing ever came close to Facebook.
Looks like we concur–I wrote a very similar post examining the myth of the FMA for Venture Populist…
[…] Why Pioneers Have Arrows In Their Backs First-Mover Advantage is an idea that just won’t die. I hear it from every class of students, and each time I try to […] […]
An old story for idea development in most industries.
Check out “Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets” http://www.amazon.com/Fast-Second-Innovation-non-Franchise-Leadership/dp/0787971545/ref=sr_1_1?s=books&ie=UTF8&qid=1286294495&sr=1-1
[…] a quick note to point out Steve Blank’s latest, Why Pioneers Have Arrows in Their Backs. Awesome. Read it if you’re thinking of starting a company. Especially if you think […]
This is true, but it is because we have weakened our patent system and it is not good for our economy. I created a model of the costs of being the inventor who introduces a new invention – see http://hallingblog.com/2010/08/13/invention-%E2%80%93-a-financial-analysis/ . It is amazing how much of a first mover advantage you have to have in order to make up for the cost of creating an invention and marketing a product based on that invention. This is why large companies focus on incremental inventions that are line extensions.
Since increases in our technology (inventions and dissemination of inventions) are the only way to increase real per capita income, it is not good for our economy that it makes business sense to be a copycat.
Great post, Steve. I think that the First-Mover Advantage has worked well for some and not-so-well for others. In my market (politics) technology was the prohibiting factor for my competitor’s being so successful that the barrier to entry was too great to overcome. My business VoterMind.com is definitely not a pioneer, but we firmly believe we’re on our way to meeting the needs of our customers better than anyone else in our market (politics). Sometimes, I’ve wondered whether or not we were too late in the game. Your story has confirmed that we are in this at the right time. Keep the insight coming.
I think it has less to do with the order, and more to do with the team that is driving the company forward. Admittedly from all measures first movers are blind, while fast followers have a clearer understanding.
Fast followers don’t have all the internal marketing information and lessons learned of a first mover. They see only external evidence. Consider any copy cats you’ve bumped into along the way.
One of your posts stands out Steve about a copy cat business that used your business plan. But your company had moved on in both marketing knowledge and in planning by then so they were always chasing you.
This article is consistent with Dominic Orr’s message – Second but Better. He raised Aruba Networks to be the number 2 in their line of business.
This coupled with “thoughtful speed of execution” makes for a higher success rate the second time around.
I really appreciate the insight you presented here.
Thank you.
[…] This week’s recommended reading is an article he wrote regarding the negatives of the ‘First Mover Advantage’. It is an absolute must read for any aspiring entrepreneur, so be sure to check it out by clicking here. […]
question: how many first mover we have? and how many second followers we have? and how many second followers have fail?
Steve, how is the life science sector different than tech? Is it more advantageous to be a ‘first mover’ or ‘fast follower’ in life sciences?
Mike,
I have no expertise in life sciences. As an outsider it appears this may be the one place I’d want to be the “first mover.”
My thoughts here: http://steveblank.com/2009/05/28/vertical-markets-2-customermarket-risk-versus-invention-risk/
steve
If first mover advantage is important, which should a startup do with resources first: expand internationally or perfect and grow current market?…
A start up needs to first uncover a viable business model before expanding that model into extended markets. However, if it assumed that the target market is international in scale, it is sensible to architect the product offering in such a way that it…
[…] Why Pioneers Have Arrows in Their Backs by Steve Blank “Over time the idea that winners in new markets are the ones who have been the first (not just early) entrants into their categories became unchallenged conventional wisdom in Silicon Valley. The only problem is that it’s simply not true.” […]
This phenomenon (arrows in the back of pioneers) seems to occur at very micro levels even within workplace reform at an office level, which lends credit to its general validity.
Does being first to market help or hurt businesses?…
Steve Blank has a great article on the subject: “Why Pioneers Have Arrows In Their Backs” [1] where he says that being a fast follower is usually a better idea the article also quotes the paper from Golder and Tellis who analysed 500 brands in the ea…
Nowadays first mover and *early* mover are almost one and the same. And also I have to agree that normally the guy who comes second always takes the cake. Case in point. Pizza hut vs Pizza Corner in Chennai.
[…] by Steve Blank. This entry was posted in quotes by Angelo. Bookmark the […]
[…] In my case, I knew there was a void in the online wine market, but I didn’t exactly know what the product should look like, nor did I know exactly what my customers wanted. This non-stop uncertainly consumed all of my shower thinking time. I wrestled with every strategic move, product feature, and marketing approach. It would have been nice to save myself the hassle and simply not be the first-mover, opting instead to quickly follow a pioneer, a wise strategy espoused by Steve Blank. […]
[…] if it’s good or bad, some people seem to think it is bad like Steve Blank who discusses it in this article. Peter Thiel seems to think it is good. It is possible to be in a situation where you can choose […]
[…] Sometimes there really is an opportunity where you need to “use it or lose it”. Ifyou have a head start, but the time window is closing, you may need to executesuper fast. Venture capital makes it possible to do that. BUT: the vast majority of startup businesses are not really like that. Manycompanies who went for the so-called “First Mover” advantage ended up as “FirstLosers” instead. In most cases the real competition you face is non-adoption by customers – notother startups. Check out this blog post by Steve Blank on “first movers” before you decide youneed venture capital to become one. http://steveblank.com/2010/10/04/why-pioneers-are-the-ones-with-the-arrows-in-their-backs/ […]
[…] http://steveblank.com/2010/10/04/why-pioneers-are-the-ones-with-the-arrows-in-their-backs/ […]
[…] For an interesting take on pioneers by entrepreneur and educator Steve Blank, click here […]
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