First-mover advantage

In marketing strategy, first-mover advantage, or FMA, is the advantage gained by the initial ("first-moving") significant occupant of a market segment. It may be also referred to as Technological Leadership.

A market participant has first-mover advantage if it is the first entrant and gains a competitive advantage through control of resources. With this advantage, first-movers can be rewarded with huge profit margins and a monopoly-like status.

Not all first-movers are rewarded. If the first-mover does not capitalize on its advantage, its "first-mover disadvantages" leave opportunity for new entrants to enter the market and compete more effectively and efficiently than the first-movers; such firms have "second-mover advantage."

The three primary sources of first-mover advantages are technological leadership, preemption of scarce assets, and switching costs / buyer choice under uncertainty.

The first of the three is technological leadership. A firm can gain FMA when it has had a unique breakthrough in its research and development (R&D). A new, innovative technology can provide sustainable cost advantage for the early entrant; if the technology, and the learning curve to acquire it, can be kept proprietary, and the firm can maintain leadership in market share. The diffusion of innovation can diminish the first-mover advantages over time, through workforce mobility, publication of research, informal technical communication, reverse engineering, and plant tours. Technological pioneers can protect their R&D through patents. However, in most industries, patents confer only weak protection, are easy to invent around, or have transitory value given the pace of technological change. With their short life-cycles, patent-races can actually prove to be the downfall of a slower moving first-mover firm.

If the first-mover firm has superior information, it may be able to purchase assets at market prices below those that will prevail later in the evolution of the market. In many markets there is room for only a limited number of profitable firms; the first-mover can often select the most attractive niches and may be able to take strategic actions that limit the amount of space available for subsequent entrants. First-movers can establish positions in geographic or product space such that latecomers find it unprofitable to occupy the interstices. Entry is repelled through the threat of price warfare, which is more intense when firms are positioned more closely. Incumbent commitment is provided through sunk investment cost. When economies of scale are large, first-mover advantages are typically enhanced. The enlarged capacity of the incumbent serves as a commitment to maintain greater output following entry, with the threat of price cuts against late entrants.

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