First-Mover Advantages versus Pioneering Costs

How to Tell the Difference – In Advance

I received an initial question and then lots of reinforcement of it from some of my most avid readers, so I decided to write a piece on the requested topic: first-mover advantages. My thoughts are summarized in this Playing to Win/Practitioner Insights (PTW/PI) piece called First-Mover Advantages versus Pioneering Costs: How to Tell the Difference – In Advance. As always, you can find all the previous PTW/PI here.

The Question

First-mover advantage is a big deal in the modern economy, especially in the technology sector where network effects are famously powerful. However, there remains an important question: by going first, will you reap competitive advantages stemming from the fact that you went first – like FedEx, Google, Facebook, Amazon or Netflix – or will you experience damaging pioneering costs, wasting capital and operating costs on an initiative that fails or that doesn’t prevent others from catching up and surpassing you – like General Motors in electric vehicles?

The fundamental question is how to assess in advance whether you will benefit from powerful first-mover advantages or suffer from wasted and/or excessive pioneering costs?

The short answer is that you will never be able to know in advance with 100% accuracy which will be the case. But as with the purpose of all strategy, with thorough thinking, you can improve your odds of success dramatically and, I believe, lop off a chunk of the left tail of the distribution. That is, you can figure out in advance which initiatives are highly likely to be dead-on-arrival. And lopping off the bottom of the left tail always raises the mean of the resulting distribution.

An Approach to Thinking about First-Mover Advantages versus Pioneering Costs

The first important point to understand in contemplating this issue is that it isn’t a question of either first-mover advantages (FMA) or pioneering costs (PC). If FMA is possible, it is only so to the extent that there are PC. That is, the only way to secure FMA is to attempt something new and untested. If it was old and tried-and-true, there would be no FMA possible because, by definition, you wouldn’t be a first mover. For FMA to be possible, the company must be trying something new – the definition of a first mover. There are always costs to trying anything new – costs of experimentation, costs of customer persuasion, costs of infrastructure-building, etc.

The pursuit of FMA invites and incurs PC. So, the truly critical question is whether the risk-adjusted value of the targeted FMA is greater than the inevitable PC? It is analogous to how I think about corporate strategy (see here and here in this series or in my book A New Way to Think – Chapter One). A corporate level automatically imposes costs on the businesses below, so it needs to have an approach to generate enough countervailing benefits to the businesses below for ownership of the businesses to make economic sense. The analogous implication here is that you need to have a realistic assessment of the PC and a theory of advantage driving the desired FMA to decide whether the theory of advantage is powerful enough to overcome the inevitable PC.

That means really understanding the PCs – and having a strong enough FMA strategy argument to overcome them. To make that assessment, I pay attention to four categories. The first two help me estimate PC, the third the strength of the potential FMA and the fourth is an important contextual factor:

1) Technical Risk

If your FMA is based on bringing a new technology to market, it is obligatory make a realistic assessment of the technical risk – which is a key PC. This is the case whether the technology is a high-tech digital technology – like Cloud Computing – or a more traditional industrial technology – like Tide Pods.

My rule of thumb is to treat this as if you were remodeling your kitchen. Whatever the designer and/or contractor says, assume it will cost twice as much and take twice as long. In this case, ask the in-charge technologist for the time and cost estimate and just double both. Usually, you can make the technology work. But most times, it just takes longer and costs more. So, it is prudent to be conservative.

Tide Pods is a great example. Then CEO Bob McDonald had to preside over an embarrassing and costly delay in the launch of Tide Pods in 2011-2012 because of problems in getting the tricky pod-making technology to work at scale. Tide was the biggest and most important profit contributor in the whole company – and the launch of Tide Pods was delayed eight months. It was not only a big short-term hit to profitability but was also a major embarrassment for the company because the retail trade had been primed for it and were waiting eagerly and planning for the launch, which didn’t happen until much later, as described in articles like the following in Forbes and Reuters.

Tide Pods has turned out to be a great initiative and created a sustained FMA in what is now called ‘uni-dose’ laundry detergent. But it had a far bigger technical risk that was modeled and baked into plans.

2) Customer Risk

If it is a truly new innovation, there is automatically a customer risk. Customers have to adopt something new – otherwise there would be no possibility of FMA because there is no first-moving involved.

However, customer risk varies greatly. How much change is required for them adopt the new product/service? To what extent does it integrate seamlessly into their workflow (whether personal or business)? Does it maintain the ease of the workflow or make it easier still?

To use another P&G example, Dryel was its innovative home dry cleaning product. It made the workflow simpler in one helpful respect – you didn’t need to go to the dry cleaner. But consumers needed to learn and adopt a new workflow – put the garment in a Dryel bag, place the bag in the dryer, take it out and dispose of the used bag. That wasn’t an easy or natural workflow to adopt. But the biggest challenge was that it created an entirely new step to the workflow. The garment came out of the bag wrinkled. Hence it needed to be ironed or steamed – a step previously integrated into the dry cleaner’s workflow. So, it was a handy but entirely new workflow that provided only part of the output of the old workflow.

Unsurprisingly, Dryel achieved only modest success as a home dry cleaner and eventually pivoted to positioning as a clothes freshener.

BlackBerry had the opposite situation in terms of customer risk. It made the existing workflow easier. Rather than having to wait to get back to your desktop to receive and send emails, you could do both from anywhere you wanted – using the same protocols, and even a similar keyboard. The only challenge was learning to type with your thumbs – which was a snap, so adoption was swift. (However, while the customer risk element of PC was favorable, the FMA part of the story turned out very unfavorably).

Netflix was arguably a middling story of customer risk. On the negative side, customers had to learn a new workflow – compared with renting DVDs at Blockbuster. However, that workflow was so much simpler and more elegant that customers not only adopted but told all their friends that they would be nuts not to jump on the bandwagon.

Mentally add up the two elements of pioneering costs – technical risk and customer risk – to be able to compare it to your targeted FMA. Be realistic. And remember PC are inevitable and if you don’t see meaningful PC, you aren’t trying something new enough to have the possibility for FMA.

3) Strength of First-Mover Advantage Theory

Because those two PC are real and can be substantial, there needs to be a bigger countervailing FMA. That means articulating a theory of why being first will provide you with a long-term competitive advantage. There are many theories and real examples of FMA that produce long-term competitive advantage.

For example, moving first can provide scale advantages, and nobody will ever catch up. That is the case for Vanguard in index mutual funds. Its scale advantage has lasted 50 years – and hasn’t been eroded.

Moving first can provide network effects, and nobody will ever catch up. That has been the case for Bloomberg in trading terminals – every trader wants to be on one because all the other traders are on one too.

Moving first can cause customers to build you as a habit, and nobody can break it – as with Uber. Moving first can provide a learning advantage – we will find out important things sooner and be able to innovate better/faster and nobody can catch up. Moving first can enable the tying up of critical assets – such as the best real estate sites or mineral reserves or forests – and competitors can never get equally good access.

This is not an exhaustive list. Rather it is a starter and an explanation of what a theory of advantage looks like. The key, as with all How-to-Wins, is that there is a theory of how advantage will be achieved. Then the question is what would have to be true (WWHTBT) for the advantage to last? As always, the most important question in strategy is WWHTBT. And part of asking WWHTBT is what would we have to do to keep the lead. Nothing guarantees competitive advantage forever. Network effects should have protected Facebook’s FMA in social media. But, as I have discussed earlier in this series,TikTok has eliminated that lead. But Vanguard has maintained FMA in index mutual funds and Lego in construction toys. So, it can be done.

4) Capital Provider Support

The final consideration of the four in determining whether FMA justifies the investment is capital provider support. Yours need to be supportive of investing in FMA. Some are and some most certainly are not. I have characterized the former as ‘west-coast capital’ and the latter as ‘east-coast capital’ in an earlier article in this series – even though the geography doesn’t line up 100%. The former embraces risk in return for the potential of outsized returns while the latter tries to avoid risks of all kinds.

Sometimes capital is supportive of investments to create FMA – as with Fred Smith and his FedEx project in the 1970s. But it was the opposite for General Motors with its pioneering EV-1 project in the 1990s – which was shuttered in part because of aggressive sniping by unhappy investors, leaving the field wide open for Telsa decades later.

Practitioner Insights

It is not a question of PC or FMA. The former costs of technical risk and customer risk are automatic. They must be countervailed by a strong theory of FMA. If you see an FMA, work through the WWHTBT for it to produce an advantage that is sustainable. Then ask whether those either are true today or you can make them true going forward.

If you can’t make the case for FMA value exceeding PC, then let someone else incur the PC and fast follow. If you have done the analysis well, you will know when and how to fast-follow.

If you can make the case for FMA value exceeding PC, then go for it – before someone else does. But make sure to plan for and invest in what is necessary for you to maintain that FMA. Every highly successful strategy draws in replicators and they succeed when the initiator doesn’t invest in protecting its FMA. They can be held off if there is a strong theory of FMA and investment in maintaining it. And as with Bloomberg, Lego, Vanguard and others, FMA can be extended valuably for a very long time.