Do the early birds get the Worms? First or Late Mover

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Do the early birds get the Worms? First or Late
Mover Advantage in e-Business

• Jamie Hays Khaled Sadeddin

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Agenda

• Definitions
• Sources of first mover advantages disadvantages
• Sustainability in the old economy
• The coke wars, a success story
• Characteristics of the E-market place
• First mover characteristics and advantages
• Late mover advantages
• Sustainability
• Challenges to sustainability in the E-market
  place
• Success and failures in the E-market place
• Strategic and marketing implications
• Food for thought
• References

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Definition

• The generation of first mover advantage is an
  endogenous process arising from environmental
  change. This change situation sets up an initial
  asymmetry that presents a pioneering firm with
  the opportunity to become a first mover to the
  market, and in doing so, it enables that firm to
  reap abnormal profits derived from the firm's
  competitive head start over rivals. Lieberman and
  Montgomery (1988)
• The consensus in academia and in the business
  world is that such a move should result in a
  competitive gain in terms of market share or
  profitability
• However this very gain is the subject of intense
  academic and business debate with each side
  supporting their claim with various empirical
  studies (Robinson and Fornell, 1985), (Golder and
  Tellis 1993).

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Sources of First Mover Advantages

• Opportunity to exploit network effects and
  positive feedback loops, locking consumers into
  its technology
• Establish significant brand loyalty which is
  expensive for later entrants to break down
• Ability to ramp up sales volume ahead of rivals
  and thus reap cost advantages associated with the
  realization of economies of scale and learning
  curve
• Ability to create switching costs for its
  customers
• Ability to accumulate valuable knowledge
  advantage

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Sources of First Mover Disadvantages

• Significant pioneering costs ( Developing the
  technology, the distribution channels, and
  educate consumers about the product benefits)
• First movers are prone to making mistakes due to
  uncertainties in new markets
• Building the wrong resources and capabilities due
  to errors in identifying characteristics of the
  mass market
• First mover may invest in inferior or obsolete
  technology

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First Mover vs. Late Movers
Hill, C, Jones, G. Strategic Management An
Integrated Approach
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Sustainability

• Traditionally it was theorized that first mover
  competitive advantage can be sustained (Ghemawat,
  1986 Porter, 1985)
• Todays Hypercompetitive and global market
  present a challenge to such theory in that
  competitive advantage today is less about scale
  and physical assets and more about invisible
  assets (Itami, 1987)
• Those invisible assets are
• More mobile
• More easily imitated
• More easily circumvented by substitution
• Ecommerce is the most accurate representation of
  such market conditions and thus becomes the
  testing ground for the new theory of first mover
  advantage and its sustainability

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The Coke Wars

• Coca cola was founded in 1886, today it operates
  in over 200 countries and has 400 brands
• In 1898 Pepsi received its first logo and started
  producing Brads Drink
• Coca cola enjoyed a leading position in the soft
  drink market
• The competition between the two was limited to
  marketing and advertising
• Product attributes related to life style and
  brand ID were the main dimensions of competition
• In the late 70s Pepsi challenged the product
  difference myth and proved in a national campaign
  that 55 of consumers when blinded folded
  preferred the taste of Pepsi
• This percentage was not reflective of the lower
  market share that Pepsi had in the soft drink
  market
• Coke responded with volume discounting in its
  dominated markets
• The price war reduced the profitability for the
  whole industry
• Now both companies are refocusing on product
  differentiation but the price discounting
  continues

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Characteristics of the E-Commerce Market Place

• Global market place whereby consumers have many
  options - Highly competitive
• E-commerce market has raised the level of market
  dynamics firms face constant challenge, change,
  disequilibrium
• Major sustainable competitive advantage is
  non-existent (low imitation barriers, innovation
  is not enough must be continuous)
• Weak intellectual property rights, technical
  interdependence, technical uncertainties, rapid
  technical innovation
• Allows marketer to cut through traditional
  constraints geographical, timeliness, cost of
  creating branding messages, reach
• Firms need to adopt to gain and regain market
  advantage (offer superior customer service)

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First Mover

• Euphoric DotCom boom Build brand in new
  category (Amazon), invent a new business model
  (eBay), achieve critical mass (webvan hoped to
  do) ? lead to long term success
• In fact for most dot.coms being first meant
  losing more faster
• Businesses built on ideas rather than products
  and services
• Stock prices went up based on the strength of
  these ideas (venture capital available
  companies overspent)
• IT professionals not necessarily business
  professionals
• 62 DotComs had no financial experience, 50 had
  little marketing experience
• Learning WEB sites are not businesses
• E-commerce shift after DotCom bust Pure play ?
  Brick mortar to click and mortar. Legacy firms
  represent the future of e-business
• Effective integration of existing business
  processes with technology

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First Mover Advantages

• Get a head start over the competition (force
  competition to be reactionary and have to play
  catch up)
• Develop your brand first
• Establish key partnerships (customers, suppliers,
  distribution channels, advertising partners)
• Lock in market share by creating switching costs
  (financial, psychological)
• Stay ahead on the learning curve (must be a fast
  learner) challenge is to keep learnings
  proprietary (difficult in the e-commerce
  environment)
• Experience and knowledge can generate entry
  barriers, though knowledge diffusion does occur

12
Late Mover Advantages (Imitation Strategy)

• Volatile dynamic market characteristics
  imitation surpasses innovation as business
  strategy
• Innovation can be risky, costly (develop
  technology, channels)
• If the market develops contrary to first movers
  forecast it stands to lose significantly
• Late mover can wait until the uncertainty
  resolves and capitalize on the opportunity. More
  knowledge about how the market will evolve leads
  to more confidence in achieving desired outcomes
  (ROI)
• Followers can learn from pioneers mistakes and
  position their products as superior
• Pioneers are discouraged from adopting followers
  positions

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Factors that determine success in the
e-Marketplace (Sustainability)

• Building brand recognition key
• Strong brand creates product demand and
  solidifies customer loyalty
• Justifies higher margins, builds influence over
  distribution channels
• Consumers are willing to pay US 2.49 premium
  from merchants they have previous experience
  (trust)
• The only resource that cannot be imitated
• No organization can build a competitive advantage
  that is sustainable (must continually innovate to
  create and recreate advantage)
• Organizations must continuously work to create
  competitive advantage through
• Continuous innovation
• Urgency to implement status quo not good enough
• Patenting

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Factors that determine success in the
e-Marketplace (Sustainability)

• Understand the market and your customers
• Have a sound business model coupled with sound
  business strategy
• Simplicity of the business model
• Understand the technology and how to successfully
  integrate it (boo.com)
• Focus on superior customer service

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Challenges

• Low entry barriers
• Low imitation barriers legal, financial
  (Patents out of date by the time they are issued
  Amazon.com one click feature)
• Ideas, web pages, technology, marketing
  strategies
• Low switching costs
• Knowledge diffusion (HR mobility, availability of
  talent, publications)
• Dell (recruited Mort Topfer (Motorola), James
  Vanderslice (IBM),
• Global competition

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Pit falls

• Wrong timing (which race are you running?)
• Overpaying for market share
• (1999) furniture.com earned 10.9 M, they spent
  33.9 M on sales and advertising. Conventional
  wisdom suggests 20.
• Being first with a model that is DOA
• Misreading the customer (pets.com who really
  wants to order pet food online)
• Unsound economics no advantage being first in
  the destination that is not worth the trip (a WEB
  site is NOT a business)

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First Mover Success Amazon.com

• First to move booking retailing online (1994
  Jeff Bezos)
• Brand recognized worldwide, most visited site in
  USA (2000)
• Simple model Expensive inventory and brick and
  mortar warehousing not required Require WEB to
  interface with customers and take their orders
• Continuous Rapid innovation
• one-click, search facilities, collaborative
  filtering, affiliate programs (250,000 partners
  in 2000), order tracking mechanisms
• Established strong brand presence created
  psychological switching costs in consumers
  (collaborate filtering, privacy policies, builds
  trust)
• Pillars (quality of service, value for money,
  trust worthiness)
• WEB site easy to use, easy to find, and fast

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First Mover Failure Webvan

• Founded under the name of Intelligent Systems
  to be a full service online retailer, offering
  customers a convenient and affordable way to shop
  for groceries
• In April 1999 the company changed its name to
  Webvan and launched its operations in June 1999
  in the San Francisco Bay Area
• It was the first online full service grocery
  store that delivered to time starved, and
  price insensitive customers who raved about
  the service
• They utilized a Hub and Spoke delivery system
  with customers choosing a 30 minute window for
  delivery and made their choice from 20,000 items
  of groceries and prepared meals
• On July 9th, 2001 and just 16 months after their
  successful IPO the company ceased operations and
  filed for chapter 11 protection
• The company burned through 1.2 Billion Dollars
  in investor capital, making it on of the most
  spectacular failures of the dot.com era
• Reasons for failure
• Grew too fast, too big 20 years a head of their
  time
• Chicago Los Angeles Orange County, California
  Portland, Oregon San Diego San Francisco and
  Seattle.

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Late Mover Success Dell

• Founded in 1984 Michael Dell
• Key focus Improve delivery time, cut costs,
  maintain quality customer service
• Model sell direct to consumer, eliminate the
  intermediary
• Strategy
• Rely on standardized components (867 patents in
  19 years) RD not necessary spending
• Easy to use interfaces
• Superior customer service
• HR recruitment, promotion strategy

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Late Mover Failure Barnes Noble

• Went online 1997 (barnesandnoble.com)
• Suffered from customer affinity (traditional
  retail outlet cozy ambience)
• WEB site was difficult to find
• Traditional brand did not translate well online
  (lesson)
• New strategy separate brands, best of both
  worlds
• Bn.com pursued the hybrid customer
• Nielson ratings (1999) 47 bn.com customers
  shopped at Amazon .com
• Amazon.com dropped AOL 3 yr contract (17 M)
  bn.com jumped at it sales increased 25
• Amazon pursued affiliate program commission
  based model

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Strategic and Marketing Implications

• Traditionally, the role of strategy was to create
  and defend large sustainable competitive
  advantages
• In light of the new market dynamics of
  hypercompetition and globalization the modern
  role of strategy is to create a constantly
  changing series of small, temporary competitive
  advantages, thereby keeping competitors off
  balance by forcing them to respond

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Food for Thought

• Learn from the mistakes of other players
• Information is power
• Be creative and think outside the box
• Deploy All resources effectively and wisely
• Be a market driver not market driven

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Food for Thought (contd)

• Always ask What If?
• Your most critical assets are people and
  knowledge, effective management of both is
  critical to the success of any organization
• Be constantly vigilant

Complacency is not an option
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References

• Anonymous (2005). DotCom boom and bust.
  Strategic Direction, 21, 2, 30-31.
•  
• Biehn, G. (2001). Yes, you can profit from
  e-commerce. Financial executive, 17, 3, 26-27.
•  
• Boulding, W. (2004). Sustainable pioneering
  advantage? Profit implications of market entry
  order. Marketing Science, 22, 3, 371-392.
•  
• Chennai (2002). Challenges of online branding.
  Businessline, July 4, 2004, pg. 1.
• Ghemawat, P. (1986). Sustainable advantage.
  Harvard Business Review, 64(5), pp.53-58.  
• Hamel, G. (2001). Smart mover, dumb mover.
  Fortune, 144, 4, 191-193.
•  
• Higham, N. (1999). Amazon success story built
  on traditional marketing expertise. Marketing
  Week, 22, 37, 17.
• Hill, C and Jones, G. (2004). Strategic
  Management An Integrated Approach, Houghton
  Mifflin Company, Boston, MA.
• Itami, H. (1987). Mobilizing Invisible Assets.
  Harvard University Press, Cambridge, MA.

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References (contd)

• Itami, H. (1987). Mobilizing Invisible Assets.
  Harvard University Press, Cambridge, MA.
•  
• Kanellos, M. (2004). Dells success in the
  details. CNET News.com. Retrieved March 15,
  2006, from http//news.com.com/Dellssuccessinth
  edetails/2100-1014_3-5170114.html
•  
• Mellahi, K. (2000). Does it pay to be a first
  mover in e-commerce? The case of Amazon.com.
  Management Decision, 38, 7, 445-452.
• Lieberman, M.B. and Montgomery, D.B. (1988),
  "First mover advantages", Strategic Management
  Journal, Vol. 9, pp. 41-58.
•  
• Pinker J., Seidman A., Foster R. (2002).
  Strategies for Transitioning Old Economy Firms to
  E-Business. Communications of the ACM, 45, 5,
  77-83.
• Porter, M. (1985). Competitive Advantage
  Creating and Sustaining Superior Performance.
  Free Press, New York.
• Robinson, W.T. and Fornell, C. (1985), "Sources
  of market pioneer advantages in consumer goods
  industry", Journal of Marketing Research, 25
  February, pp. 87-94.
• www.wired.com/news/business/0,1367,45098,00.html