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Competitive Advantage - First Mover Advantage

The First-Mover Advantage refers to the advantage gained by the first company that enters a certain market. This advantage is exacerbated (intensified) for digital products and markets. 

There are a number of reasons this advantage exists. A company that is able to increase sales quickly is able to reduce the average cost of the product, over other competitors. This allows the first company to have more flexibility with pricing, either reducing the price to make it less attractive for new entrants (increasing barriers to entry) or increasing the margin and therefore profit while prices remain fixed, this additional profit can then be used for further innovation.

The first-mover can also take advantage of the learning curve effect. First-mover advantage can be further successful if the company is able to achieve lock-in of its installed-base. Thus once lock-in occurs, it is more difficult for other marketers to attract those customers away from the first marketer. Risks of being the first mover include the opportunity for others to imitate and follow best practices (learn from any mistakes). 

The business, IT, and e-commerce worlds all have examples of companies that succeeded with first-mover advantage, companies that failed despite first-mover advantage, and late movers that are now success stories. Generally, the advantages of being first include an opportunity to make a first and lasting impression on customers, to establish strong brand recognition, to iock in strategic partners, and to create switching costs for customers. The risks of being a first-mover include the high cost of developing EC initiatives, making mistakes followers into the market can avoid, the chance that a second wave of competitors will eliminate a first-mover's lead through innovation, and the risk that the move will be too early, before the market is ready (e.g., home banking systems in the early 1990s). Although the importance of a speedy market entry cannot be dismissed, some research suggests that over the long run first movers are substantially less profitable than followers and that switching costs and network effects are not as substantial as claimed. 

So what determines whether a first mover succeeds or fails? In their examination of "the first-mover advantage misconception", Rangan and Adner suggest that the following factors are important determinants of e-commerce(EC) marketplace success:
  1. The size of the opportunity (i.e., the first-mover company must be big enough for the opportunity and the opportunity must be big enough for just one company). 
  2. The nature of the product (i.e., first-mover advantage is easier to maintain in commodity products in which later entrants have a hard time differentiating their product). 
  3. Whether the company can be the best in the market. 
First mover can gain advantages but it is a risky business. New technologies and new ways of using them are expensive to develop and are often not successful. There are advantages to being late mover:
  1. The idea has been tried or tested 
  2. Its effectiveness can be assessed 
  3. Improve version of the new system 
  4. New technology is cheaper and easier to implement

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