Strategy and the Second Mover Advantage

There is a myth in some corporate circles surrounding the “First-Mover Advantage” — that is, the idea that the first entrant in a given market will gain significant competitive advantage by staking their claim and building significant market share. Seen from that perspective, it’s a race to be first to market and a zero sum game.

This mentality was particularly prevalent during the rise of the internet and tech bubble of the late 1990s, and continues to persist during this new tech renaissance led by the rise of such new sharing economy darlings as Uber and AirBnB.

In his article Getting Ahead by Betting Wrong in this month’s Harvard Business Review, however, Prof. J.P. Eggers of NYU’s Stern School of Business succinctly lays out the advantages accorded to firms that “bet wrong” on technology but ended up competitive with (or eventually out-performing) the initial first-movers.

Eggers’ basic point: the data show firms can benefit from experimenting with and investing in new technology or initiatives even if it does not ultimately pan out because the experience accelerates their learning curve.

For example, Eggers cites the development of flat-panel computer designs. Firms had to choose early whether to pursue either plasma screens or liquid crystal displays (LCDs). While LCDs ultimately became the dominant technology, “several firms with an early focus on plasma, including IBM, ended up as the top LCD performers.”

Why? Eggers posits that the prior experience prior to switching to the new technology accelerates companies up the learning curve, better enabling them to use the knowledge gained to beat competitors whose “learning progressed more slowly.”

While it is still essential to recognize the need to pivot if a particular technology isn’t working, often first-movers in the successful technology platform suffer from confirmation bias that blinds them to the need rethink some details of the technology to improve it.

Further, the very act of pursuing the losing technology can lead to important insights and perspectives missed by the initial market leaders (such as the importance of color displays that many LCD-first companies missed).

The scope of Eggers’ article ends there, but it inspired the following lessons for our own companies:

Always be learning

Whether it is investing in R+D side projects outside of your core business or simply investing in personal development such as taking an evening class in an unfamiliar subject, the process itself can spur relevant connections and discoveries that can positively impact your business (or career) even if the project itself fails or is shelved.

Don’t quit too early

Simply because a competitor may have “gotten there first” does not necessarily mean one should quit. Examples of seemingly risky but ultimately successful second movers include:

Facebook (vs. Friendster and Myspace)

Google (vs. Yahoo! and Altavista)

DVDs (vs. Laser discs)

Nintendo (vs. Atari)

Advancements often come from outside perspectives

I studied for a year in Tokyo as an undergraduate, having long been fascinated by Japan’s language and culture. Faced with scant natural resources and little arable land, much of Japan’s economy has depended on quickly adopting – then improving upon– technology first developed in the West.

They did this twice in the last 150 years, each time leap-frogging up the technological learning curve by adopting best practices from around the world.

First, when they moved from an agrarian and feudal society to an industrialized nation in less than 40 years following Commodore Perry’s landing in 1856, and again in the 40 years following their defeat in World War II.

In each case, the government invested heavily in technology and infrastructure borrowed directly from the West – from railroads, schools and government structure in the late 19th century, to automotive assembly lines, audio and semiconductor technology in the late 20th century.

The lesson? Companies can benefit from continued investment in R+D or non-core business lines, even if they are not the first-to-market or initially choose the “wrong” (non-dominant) technology.

The very act of developing a failed technology can enable cheaper switching costs and accelerate improvements that enable leap-frogging over an incumbent first-mover.

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