First mover advantage

The first company to launch a new type of product should have a competitive advantage over those that start later. Before competitors get started it should have been able to:

• build a customer base
• build a strong brand
• develop economies of scale
• develop distribution channels.

This should mean that a first mover should have a very good chance of remaining the market leader, however it is not uncommon for a first mover (or other market leader) to be overtaken. An new entrant may have:

• a better product, especially if they learn from the mistakes the first mover made
• better distribution you are probably reading this using Internet Explorer. How did a late entrant with a mediocre product become the market leader?
• a strong existing brand, especially if it already sells related products.

If the first mover is comparatively small its may well find that larger late entrants already have strong brands (developed for other products), better distribution channels (also developed for other products) and the resources to start on a large scale, or to absorb losses while building market share.

The usefulness of first mover advantage needs to be judged in the context of the product, the industry concerned and the actual and potential competition are. Points to consider include:

• whether there are network effects
• how much of an advantage is conferred by having an established customer base
• whether there are any advantages in distribution or economies of scale that competitors will find hard to replicate.