First-Mover Advantage: A Synthesis, Conceptual Framework

First-Mover Advantage: A Synthesis, Conceptual Framework, and Research Propositions

Author(s): Roger A. Kerin, P. Rajan Varadarajan and Robert A. Peterson

Source: Journal of Marketing , Oct., 1992, Vol. 56, No. 4 (Oct., 1992), pp. 33-52

Published by: Sage Publications, Inc. on behalf of American Marketing Association

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Roger A. Kerin, P. Rajan Varadarajan, & Robert A. Peterson

First-Mover Advantage: A Synthesis, Conceptual Framework, and Research

Propositions Numerous conceptual and empirical studies advance the notion that first movers achieve long-term competitive advantages. These studies purport to demonstrate the presence of a systematic direct relationship between order of entry for products, brands, or businesses and market share. However, an objective assessment of the literature suggests that this view must be qualified. A broadened perspective is presented that highlights the complexity of this phenomenon and suggests that first-mover status may or may not produce sustainable advantages because of a multiplicity of controllable and uncontrollable forces. A conceptual framework identifying factors that underlie first-mover advantage and product-market contingencies that moderate the order of entry-competitive advantage relationship is proffered. Several research propositions relevant for marketing theory and practice are presented.

N 1977, Merrill Lynch introduced the Cash Man-

agement Account (CMA), an all-purpose brokerage account that included a credit card, a money market fund, a checkbook, a margin account, and other financial instruments. This action prompted lawsuits by banks and states alike. Merrill Lynch persevered while other brokerage firms did nothing for five years. By the time other brokerage firms entered the market in 1982, Merrill Lynch had sold 533,000 CMAs repre- senting assets of $32 billion. By 1989, it had 1.3 mil- lion CMAs with $155 billion in assets-eight times the number of its nearest rival (Wall Street Journal 1989).

Roger A. Kerin is the Harold C. Simmons Distinguished Professor of Marketing, Edwin L. Cox School of Business, Southern Methodist Uni- versity. P. Rajan Varadarajan is Foley's Professor of Retailing and Mar- keting, College of Business Administration and Graduate School of Business, Texas A&M University. Robert A. Peterson holds the John T. Stuart III Centennial Chair in Business Administration, Graduate School of Business, University of Texas at Austin. The authors thank the editor

and anonymous JM reviewers for constructive comments on a previous version of the article.

Firms such as Merrill Lynch, the first to enter the market for a specific product or service, are commonly believed to accrue long-term competitive advantages. These advantages are thought to derive directly from the firm's competitive head start over rivals and to result in dominant and enduring market positions. Specifically, order of entry into a market and market share are believed to be causally related (Ur- ban and Star 1991). That is, on average, first movers have higher market shares than early followers, who in turn have higher market shares than later entrants. Accordingly, companies are often encouraged to pursue preemptive strategies to achieve first-mover status (e.g., Miller, Gartner, and Wilson 1989).

A firm can achieve first-mover status in numerous

ways. For example, the first firm to (1) produce a new product, (2) use a new process, or (3) enter a new market can claim this distinction (Lieberman and Montgomery 1990). Though being the first firm to pursue an opportunity is a necessary condition for ex- ploiting entry-related advantages, the factors involved in achieving and sustaining first-mover advantage are

Journal of Marketing Vol. 56 (October 1992), 33-52 First-Mover Advantage / 33



considerably more complex than a simple order of entry effect. As we demonstrate on the basis of theoretical and empirical evidence, a head start alone is not sufficient to achieve cost and differentiation ad-

vantages over rivals that result in dominant and enduring market shares and abnormal financial returns. The fourfold purpose of this article is to (1) synthesize and critically assess the literature on first-mover advantage, (2) provide a conceptual framework identifying the sources of first-mover advantage and product-market contingencies that moderate the order of entry-competitive advantage relationship, (3) advance a propositional inventory delineating the moderating effects of various product-market contingencies, and (4) suggest implications for marketing practice and future research directions relating to first-mover advantage.

Perspectives on First-Mover Advantage

For expository purposes, we distinguish between two primary literatures on first-mover advantage: theoretical-analytical explanations and empirical documentation.

Theoretical-Analytical Explanations

Two categories of theoretical-analytical support have been offered to explain first-mover advantage: (1) economic theory and associated analyses that have used the barriers-to-entry concept and a firm's utility function to explain first-mover advantage and (2) an amal- gamation of behavioral theories describing likely consumer responses to pioneering brands and later entrant brands.

The economic-analytical perspective. Consider- able theoretical and analytical literature in industrial organization economics pertains to first-mover advantage. Economists generally approach this phenomenon from the perspective of sequential market entry by firms or business units (e.g., Lane 1980; Nti and Shubik 1981) and offer several reasons why a first mover might obtain competitive advantages due to entry barriers.

According to Von Weizsacker (1980, p. 400), a barrier to entry is "a cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry." In ref- erence to market pioneering, an entry barrier implies that additional resources must be expended by a nonpioneering firm (beyond those required under conditions of simultaneous entry) to compete effectively in the marketplace relative to the first mover. Here, entry barriers faced by nonpioneering firms within an industry can be different from those encountered by

nonpioneering firms outside the industry (see Mitchell 1991). More generally and in relation to all nonpi- oneers, numerous entry barriers are presumed to contribute to first-mover advantage. They include scale effects (Rao and Rutenberg 1979), experience effects (Smiley and Ravid 1983), asymmetric information about product quality and risk-averse buyers (Conrad 1983), differences in marginal effects of advertising between first and later entrants (Comanor and Wilson 1979), reputational effects (Bain 1956; Krouse 1984), "uncertain imitability" reflected in ambiguity sur- rounding the reasons for the success of a first mover (Lippman and Rumelt 1982), and communication good effects (Teece 1987). Other barriers include technological leadership, preemption of scarce resources, and buyer switching costs (Lieberman and Montgomery 1988; Porter 1985; Rumelt 1987).'

Entry barriers in turn lengthen the lead time between a firm's head start and the response by followers. This lead time allegedly enables the first mover to benefit in two ways (von Hippel 1984):

1. During the time when there is no competition, the [first- mover] is, by definition, a monopolist, and may use this position to gain higher profits than would be possible in a competitive marketplace and/or increase the size of the total market.

2. After the entry of the competitors, the [first-mover] has established market position and learning curve economies, which may allow it to retain a dominant market share and higher margins than imitators.

Economic arguments supportive of first-mover advantage are impressive if only because of the number of factors contributing to entry barriers that may be erected by being first. However, for the most part, these arguments have been oblivious to product-market contingencies that moderate these sources of first- mover advantage, as we detail subsequently.

Game theorists have also challenged the notion that competitive advantages automatically accrue to the first mover. Gal-Or (1985, 1987) has shown analytically the conditions (e.g., demand uncertainty) under which a firm may purposefully decide to be a first mover or later entrant. She notes that, depending on whether a firm's reaction curve is downward or upward sloping, it will choose a leader or follower strategy. Her work has been independently corroborated by others (Chat- terjee and Sugita 1990; Ghosh and Buchanan 1988).

The behavioral perspective. Behavioral theories have been offered to explain first-mover advantage at the product or brand level. For example, Peterson (1982) posited that a first mover will find less resis- tance among potential customers, especially those considered early adopters and innovators of a product

'For a review of entry barriers, see Demsetz (1982), and for an extensive listing of entry barriers, see Karakaya and Stahl (1989).

34 / Journal of Marketing, October 1992



or brand, than will later entrants. Because a first mover

would be able to "skim off" early adopters, later entrants would be left with only potential customers less predisposed to purchasing new brands.

Other authors explain first-mover advantage in terms of the role of learning in consumer preference formation (Carpenter and Nakamoto 1989, 1990). This view holds that the process by which consumers learn about brands and form preferences plays an important role in creating a first-mover advantage even in situations in which brands can be repositioned and buyer switching costs are minimal. When consumers know little about the importance of product attributes or their ideal combination, a first mover may be able to influence how attributes are valued, define the ideal attribute combination, and ultimately influence consumers' preferences to its benefit over later entrants.

In effect, through its marketing efforts, the first mover may be able to establish the perceptual structure of the market to its advantage. Also, the first mover can define a product category as a whole and thus become the "prototype" against which all later entrants are judged (Alpert 1987; Howard 1989). Because consumption is a learning experience, follow-on brands may be compared with the pioneer brand to their dis- advantage if the latter is perceived as "ideal." As a result, the pioneer brand may be viewed as competi- tively distinct, and making competitive inroads would become difficult for later entrants. Support for this viewpoint is found in the literature on consumer judg- ment and decision making (e.g., Houston, Sherman, and Baker 1989; Tversky 1977). Recent evidence that labels this phenomenon as a "head start effect" provides insights into how the response time of later entrants affects first-mover advantage, at least in the short run (Brown and Lattin 1992).

Other behavioral advantages are also believed to accrue to the first mover. For example, being first in the marketplace suggests a high degree of consumer awareness, in turn leading to product trial which, given favorable use or consumption experience, results in ongoing repurchase behavior to minimize consumer perceived risk and information costs (Schmalensee 1982). Once this pattern is established, consumers may be reluctant to switch brands upon later entry of other brands (Hoch and Deighton 1989). Similarly, Hauser and Wernerfelt (1990) propose an analytical model that shows why follower brands might find it difficult to penetrate the consumers' set of acceptable brands because of buyer decision and search costs.

Though the behavioral perspective on first-mover advantage provides valuable insights, in certain respects it fails to represent reality adequately. For example, implicitly or explicitly, the first mover is assumed to (1) offer a high quality product, (2) choose the correct positioning, and (3) pursue the right com-

petitive strategy. Follower brands are assumed to at- tempt to be me-too brands. Such assumptions not only greatly restrict the generality of these insights, but also limit their applicability to the marketplace. As a case in point, the behavioral view ignores the possibility that a later entrant has the organizational skills and capability to attract the first mover's customers and those newly entering the market by offering a product of superior value. Hauser and Shugan (1983) show that if the first mover does not choose the "correct"

market position, it will be at a competitive disadvan- tage in relation to later entrants. Later entrants will be able to better position their brands because of what they have learned about consumer preferences from the first mover's incorrect positioning.

Furthermore, Urban et al. (1986) point out that though entry order is a determinant of market share, followers have strategic options in the form of product positioning and heavy promotion that are even stronger determinants of market share. Carpenter and Naka- moto (1990) provide a game-theoretic model showing that if a first mover does not have an asymmetric competitive advantage, later entrants may effectively challenge the dominant brand with heavy advertising and a high price.

Even if the first mover's positioning is sound, there is no basis for implicitly assuming that later entrants will follow a me-too strategy. For instance, firms can achieve a competitive advantage by influencing consumers' preferences rather than responding to them. A later entrant can diminish the impact of the first mover's distinctiveness and increase its own by mov- ing away from the first mover and developing and establishing a more desirable position (Carpenter and Nakamoto 1989). In fact, entry strategies employed by later entrants may go well beyond differentiated positioning, as the literature on technology life cycles (e.g., Foster 1982) and new-game strategies (e.g., Buaron 1981) suggests.

In summary, the conceptual and analytical arguments supportive of first-mover advantage have equally attractive counterarguments. However, one might as- sert that first-mover advantage is an empirical question and that the phenomenon has been demonstrated at the business-unit, product, and brand levels of analysis. We now turn to the empirical literature.

Empirical Documentation

The findings of 13 studies on the first-mover phenomenon are illustrative of empirical work on this topic (see Table 1). Six studies were performed at the business-unit level with the PIMS (Profit Impact of Mar- ket Strategy) database; seven studies focused on products or brands, employing sample surveys or archival records. Though these studies often show an entry order-market share relationship, closer inspection re-

First-Mover Advantage / 35



TABLE 1

An Overview of Empirical Studies on Order of Entry and First Mover Advantage

PIMS Database Studies Sample Survey and Archival Studies

Principal Finding(s)/ Principal Finding(s)/ Study Conclusion(s) Study Conclusion(s)

Robinson and Fornell (1985)

Analyzed 371 mature consumer goods businesses

Robinson (1988)

Studied 1209 mature

industrial goods businesses

Lambkin (1988)

Examined 129 start-up and 187 adolescent businesses

First-movers were found to

have higher market shares than later entrants. On

average, first-movers had a market share of 20%, versus 17% for early followers and 13% for late entrants.

Significant degrees of lateness effects were

found. Early followers had significantly higher market shares than late followers; however, the difference was much smaller than the difference between first-

movers and early followers.

First-movers were found to

have higher market shares than later entrants. On

average, first-movers had a market share of 29%, versus 21% for early followers and 15% for late

entrants. Order of entry alone explained 8.9% of the variation in market share. First-movers also

tended to have higher product quality, broader product lines, and broader served markets.

Order of market entry was found to have a significant effect on market share for

both startup businesses and adolescent businesses.

Among startup businesses, on average, market pioneers had a market share of 24%, versus 10% for early followers as well as late entrants. Among adolescent businesses, on average, first-movers had a market share of 33%, versus 19% for early followers and 25% for late entrants.

Bond and Lean (1977)

Examined introduction dates

and subsequent market shares of 11 innovations in

two categories of prescription drugs (oral diuretics and antianginals).

Whitten (1979)

Examined the introduction of

7 cigarette types.

Spital (1983)

Tracked 22 product innovations in the metal oxide semiconductor

(MOS) industry.

Flaherty (1983)

Studied 10 types of semiconductor

components, equipment, and materials.

Urban et al. (1986)

Analyzed 129 consumer brands across 34 product categories.

The first firm to offer and

promote a new type of product was found to receive a substantial and

enduring sales advantage. Later entrants were in a

position to overtake the pioneers by offering new benefits.

For six of the seven cigarette types studied, the first firm to offer, promote, and widely distribute a brand for which there was a favorable market trend was found to receive a substantial and often

enduring sales advantage.

in 17 of 22 innovations

studied, the first manufacturer to produce a design was found to hold the largest market share in that design from the date of first production until the time of the study. This result was explained by the lengthy period required to qualify vendors and the practice of "designing-in" technology. No lateness effect was observed.

A small negative simple correlation was found between order of market

entry and market share of lead technology, but product quality and skills in application engineering moderated the relationship.

Of the four independent variables investigated (market positioning, advertising expenditures, order of entry, and time lag between entries into the market), the first two variables were found to be

more important explanators of market share than order of entry. No lateness effect was observed.




TABLE 1 Continued

PIMS Database Studies Sample Survey and Archival Studies

Principal Finding(s)/ Principal Finding(s)/ Study Conclusion(s) Study Conclusion(s)

Srinivasan (1988) Early followers have lower Lilian and Yoon (1990)

Analyzed order of entry effects, marketing and R&D expenses, product quality, market share, and return on investment.

Miller, Gartner, and Wilson (1989)

Studied 119 new corporate ventures in the consumer and industrial sectors

marketing and R&D expenses than first-movers.

Early followers have marginally lower product quality and market shares than first-movers, but followers in product- markets in the initial stage of their life cycle have higher product quality and larger market shares.

Early followers in the initial phase of a product-market life cycle are more profitable than first-movers because of higher market shares and lower

marketing and R&D expenses.

Analyzed 112 industrial products in 7 French industry sectors

Mitchell (1991)

Studied 314 entrants into five technical subfields of the

diagnostic imaging industry.

A significant inverse relationship was found between order of entry and market share.

First-movers had higher quality, better service, and more differentiated

products than later entrants. No lateness effect on share was observed.

The third through fifth entrants were more

successful than first and

second entrants; successful products, irrespective of timing, benefited from entry early in the product life cycle; delay of entry accompanied production and marketing expertise of followers.

Entry order effects on market share and survival depend on whether the first-mover

is an industry incumbent or newcomer. Newcomers

benefit from early entry and incumbents perform better with later entry.

A significant "survivor bias" observed in relationship between entry order and market share.

Parry and Bass (1990)

Studied 593 consumer goods businesses and 1287

industrial goods businesses

Pioneers were observed to

have higher market shares than followers. The extent

to which pioneers have a share advantage depends on industry type (concentrated, nonconcentrated) and end- user purchase amounts.

Considerations in Interpreting and Generalizing Results

PIMS-Based Studies All Empirical Studies Sample Survey Studies 1. Operational definition of 1. Censored sample bias 1. Idiosyncratic samples a pioneer or first-mover 2. Focus on averages 2. Timing of market share

2. Unit of analysis measurement 3. Sample heterogeneity

and representativeness




veals that they do not provide unequivocal evidence supportive of first-mover advantage arising from entry order alone.

PIMS-data-based studies. The PIMS studies em-

pirically demonstrate an entry order-market share relationship. Nevertheless, these studies also show that a first mover's market share is related to higher product quality, better differentiated products, and broader product lines.2 The entry order-market share relationship is shown to be moderated somewhat by industry type, purchase transaction size, and breath of served markets. Additionally, researchers acknowledge that first-mover advantage may not apply when a pioneer is challenged by established firms in related markets (Mitchell 1991; Robinson 1988) and that organizational structure and strategy may equal or sur- pass order of entry in terms of their influence on market share (Lambkin 1988). Indeed, research using the PIMS database and employing different analytical procedures shows that the order of entry-market share relationship all but disappears in the presence of superior managerial skills and resources (Moore, Bould- ing, and Goodstein 1991; Van Honacker and Day 1987).

Though in many respects the PIMS database (with cross-sectional and longitudinal data on more than 3000 SBUs in a broad range of industries, products, services, and markets) is clearly superior to small-sample surveys, it has certain limitations. Researchers using PIMS data to study entry-order-related issues generally acknowledge some of its limitations, but three issues warrant further discussion. First, the PIMS definition of a first mover is very broad "one of the pioneers in first developing such products or services." This means that a first mover may or may not have been the first to enter a market, but only per- ceives itself to be one of the first few firms. Indeed, more than half of the business units in the PIMS data-

base are classified as "pioneers," including several competitors within the same market (Buzzell and Gale 1987). The matter of definition is further illustrated by Srinivasan (1988), who reports that 60 to 72% of PIMS businesses competing in various four-digit SIC categories are self-classified as pioneers. These ob- servations call into question the meaningfulness of the PIMS designations as well as the validity of the underlying PIMS sample for studying first-mover advantage.

Second, the leeway that PIMS member companies have in defining their business units can lead to con-

2As one reviewer suggested, it is plausible that being a first mover might provide an opportunity to offer broader product lines, better differentiated products, and enhanced product quality. Consequently, the presence of each might reflect an indirect influence of being a first mover.

siderable variance in the level of aggregation at which they provide information on industry structure, business strategy, and performance variables. For example, a business unit in the PIMS database can be a division encompassing either several product lines, a single product line, a brand within a product line, or other profit center.

Finally, because the PIMS database pools cross- sectional data from a sample of businesses across different products and markets, the resulting sample heterogeneity calls into question the validity of the reported entry order-market share relationship. For example, a seemingly homogeneous sample such as mature consumer goods businesses includes both consumer durable and consumer nondurable goods businesses. Nondurable goods businesses could involve personal care products, frozen foods, beverages, breakfast cereals, cigarettes, and laundry detergents. Sample heterogeneity also challenges the generaliza- bility of market share differentials observed between first movers and later entrants (Table 1). Because sub- sets of PIMS businesses in the consumer (industrial) goods samples could conceivably be drawn from industries having different levels of concentration, entry and exit barriers, and other structural characteristics, systematic market share differentials, if any, between first movers and followers could very well be different across these industries (see Parry and Bass 1990).

Sample survey and archival studies. As summa- rized in Table 1, several sample survey and archival studies support the order of entry-market share relationships. On balance, however, the empirical studies suggest that the observed market share pattern is explained as much by other factors as by entry order. For instance, empirical studies in the semiconductor industry (Flaherty 1983; Spital 1983) and related research (Maidique and Zeiger 1984) point toward the important links between vendors and buyers, technology applications engineering, and buying practices that often limit qualifying sources, increase switching costs, and preclude later entrants. Research in the cigarette (Whitten 1979) and pharmaceutical (Bond and Lean 1977) industries illustrates the role of government regulation as an entry barrier. Though Urban et al. (1986) reported an order of entry-market share relationship, they also observed that effective marketing positioning and advertising expenditures were more influential than order of entry in explaining market share differentials.

Inferences from these studies must be tempered for other reasons as well. For example, all but the studies by Urban et al. (1986) and Lilien and Yoon (1990), are based on idiosyncratic industry samples. In the semiconductor industry-where innovations often involve close linkages between vendors and cus-




tomers-applications and design engineering, post-sale services, and quality of manufacturing combine to limit generalizations beyond this unique product-market setting (see Flaherty 1984). Similarly, the cigarette industry presents atypical entry barriers because information vehicles fostering product/brand search and trial are eliminated and purchase inertia prevails (Ho- lak and Reddy 1986). Likewise, the pharmaceutical industry, with unique business practices often involv- ing prescription sales and marketing directly to the medical profession, is not easily generalizable to consumer goods product-market situations (McRae and Tapon 1985).

The timing of market share measurement is another matter of concern. Under conditions of products and brands continually entering and exiting the marketplace, market shares of individual brands are likely to undergo varying degrees of fluctuation. Therefore, depending on the point in time when market share is measured, conclusions can be very misleading.

Common-method issues. Two additional method-

ological issues affect studies on first-mover advantage. First, with the exception of Mitchell's (1991) research, all empirical studies of first-mover advantage have a common deficiency: they address only surviving entrants. By definition, only businesses, products, and brands that survived in the marketplace over the periods studied were available for investi- gation. Because a substantial proportion of new entrants fail, this limitation creates a "survivor bias" that raises concerns about the validity of the empirical findings on the order of entry-market share relationship (Glazer 1985; Mitchell 1991).3 Second, studies on first-mover advantage seem to have a pervasive tendency to examine market share averages. This focus leads to overlooking information on the range of performance of (individual) first movers and later entrants apart from their survival or failure (Lambkin and Day 1989).

In summary, an objective examination of empirical studies on first-mover advantage suggests that the generality of the observed relationships must be in- terpreted with care. Indeed, the findings must be considered in a broader conceptual context.

A Conceptual Framework of First-Mover Advantage

Efforts to explain and demonstrate the presence of first- mover advantage, though subject to conditions and

3The possibility of successful pioneers exiting a market as competition increases, profit margins erode, and potentially more attractive opportunities arise creates an overlooked form of survivor bias. Though the pervasiveness of this practice is unknown, firms such as 3M, which gain an initially dominant market share only to withdraw as a product-market matures, will affect an observed order of entry- market share relationship in studies based only on firms, businesses, or brands in mature markets (see Boyd and Walker 1990).

caveats, nevertheless provide valuable insights into the mechanisms that operate beyond a simple market entry order effect. It is noteworthy that the literature on first-mover advantage has developed in the absence of a unified conceptual framework. The purpose of this section is to propose a framework that identifies the principal factors that constitute potential sources of competitive advantage and product-market contingencies that moderate this advantage.

The proposed framework (Figure 1) simulta- neously encompasses the elements of competitive advantage advanced by Day and Wensley (1988) and focuses attention on factors likely to affect first-mover advantage-a special case of competitive advantage resulting from market entry timing. The framework extends current thinking on first-mover advantage in three ways. First, it explicitly includes the fit between environmental opportunity and organizational skills and resources that affords a feasible market opportunity from the firm's standpoint. Second, because the purpose of strategy is to achieve sustainable competitive advantage, the competitive strategies of the first mover and later entrant are explicitly addressed. Order of entry is treated as one of the multiplicity of factors contributing to overall competitive advantage. Finally, the

FIGURE 1 First Mover Advantage: A Conceptual

Framework

Environmental Opportunity Attractiveness

I I First-Mover Later Entrant

CStrtetgy - Distinctive Competencies a Distinctive Competences - ompettive Strategy 0 Resources a Resources

First-Mover Positional Advantages Later Entrant Cost <--------------------------.-------..--. > Differentiation Advantages

Economic | Preemption | Technological Behavioral Imitation Factors Factors Factors Factors Costs

|~ |~ ?~LF~ L * mFree - Rider !|_____~~~~ |I~ ~~ L __ Ij____ ,,.-,Effects

Moderators Moderators Moderators Moderators Eonics EcOnomics

Demand Preemptive L Technological Nature L P Leers ncertainty N Investment nnovation of Good iers Characteristics

I Entry L I Scale

Efficient

Sclae-to- Market Size

AdvertisingL I Intensity

| Response

I Time F

I scopeL I Economies

+)

Product Technological Market Character- Change & I Type

istics Discontinuity

Market L Evolution

Buyers' Investment ., in Cospecial- ized Assets

- f+ f+) f+) I-I

1 Overall Magnitude of First-Mover Advantage

Vby Market Share Performance Profitability Performance

Absolute j Return on Assets Relative Return on Sales


T I

ll*



notion that first-mover advantages are fundamentally positional advantages (cost and differentiation) is elaborated upon and contingencies that enhance or mitigate these advantages are delineated.

Environmental Opportunity and Organizational Skills and Resources: Fit Considerations

Changes in the environment (such as changes in technology and/or customer needs) often give firms an opportunity to be a first mover (Lieberman and Mont- gomery 1988, 1990).4 Indeed, the attractiveness of the market opportunity resulting from environmental change is a necessary condition for profitable entry into a product-market. Favorable environmental trends that encourage product or process innovation or spur market demand create windows of opportunity for firms that have "marketing prescience" (Melville 1987). However, the results of efforts to convert favorable

trends into commercially successful ventures depend on a host of external and internal variables, some of which are controllable and others uncontrollable by the firm, as well as the timing of such efforts. Abell (1978), for example, proposed the term "strategic windows" to focus attention on the limited period of time during which the "fit" between key market re- quirements and the particular competencies of a firm competing in the market is optimal.

Though environmental change provides an opportunity for a firm to be a first mover, the likelihood of a firm benefiting from being a first mover depends on several organizational factors, including the degree of fit between the (1) skills and resources necessary to capitalize on an environmental opportunity and the skills and resources possessed by the firm and (2) skills and resources necessary to capitalize on mechanisms for enhancing first-mover advantage and skills and resources possessed by the firm to convert these mechanisms into a first-mover advantage. In other words, the opportunity to be a first mover arising from environmental change and the ability to profit from being first to market are two very different, though related, issues. As Lieberman and Montgomery (1990, p. 21- 21) note, "the ultimate net impact of pioneering generally depends on the firm's skills and positions, competitors, and changes in the environment." Game theorists also point toward various "types" of competitors that pursue a first-mover status while others adopt a "wait-and-see" stance depending on how environmental forces and prospects for profitability are assessed (Chatterjee and Sugita 1990; Corstjens, Ma- tutes, and Neven 1990).

The marketing literature on first-mover advantage

4This view is consistent with conceptual and empirical literature suggesting that first-movership and related advantages are an endogenous phenomenon (see Lieberman and Montgomery 1988; Moore, Boulding, and Goodstein 1991; Van Honacker and Day 1987).

has been largely silent on environmental and organizational considerations, whereas business strategy theorists emphasize these considerations. Organiza- tional theorists note that firms align with their environments through the process of strategic choice and that different organizational competencies can produce identical outcomes (e.g., market share and profitability) by different methods or means (Hrebaniak and Joyce 1985). For example, Miles and Snow (1978) proposed a typology of strategic types-prospectors, analyzers, and defenders-interrelating organizational strategy, structure, and process variables within a theoretical framework of coalignment. A key dimension underlying their typology is the rate of an organization's product-market innovation. Prospector organizations excel in new product and market development. Defender organizations engage in little or no new product and market development. Analyzer organizations are an intermediate type that make fewer and slower product and market changes than do prospectors but are less committed to stability and effi- ciency than defenders. As these strategic types develop relatively stable and enduring patterns of coalignment with their markets and environments, they develop distinctive competencies or capabilities that are different from those of competitors.

It is significant that the Miles and Snow strategy typology does not explicitly advocate market pioneering as the normative strategic behavior conducive to superior performance for all organizations, nor does it impute insurmountable competitive advantages to the first mover. It suggests that though some organizations might be inclined to enter a market first (prospector firms) because of a distinct set of organizational competencies, others influenced by a different set of distinct organizational competencies may be more inclined to enter a market after its viability has been proven, and yet achieve performance levels comparable or superior to those of the pioneer (Conant, Mokwa, and Varadarajan 1990). Interestingly, a recent PIMS-data-based study showed that market pioneers, early followers, and late entrants tend to ex- hibit different skill and resource patterns (Robinson, Fornell, and Sullivan 1991). The notion that individual firms have different strategic postures in terms of innovation, risk-taking, and entry order has been doc- umented also in the industrial organization literature (Wilson, Ashton, and Egan 1980).

Resource availability is also overlooked in the marketing literature on first-mover advantage. Con- ceptual, empirical, and case study literature on first- mover advantage strongly suggests that the financial and nonfinancial (e.g., marketing acumen, distribution clout, superior product/process innovation skills) resources at a firm's disposal play an instrumental role in achieving positional advantages (Chandler 1990;




Cooper 1979; Day 1990; Green and Ryans 1990; Schnaars 1986). This work suggests that unless the first mover has substantial resources (or can gain access to resources), it is unlikely to convert environmental opportunities into long-term positional advantages. Such was the case with Minnetonka, Inc., a small entrepreneurial firm that was the first to intro- duce bathroom soap in pump dispensers (Softsoap) and an antiplaque toothpaste (Check-up). Both products achieved dominant initial market shares, only to lose them when larger competitors such as Procter & Gam- ble entered the market (Business Week 1986). This example illustrates possible mechanisms available to diversified multibusiness followers that enable them

to outmaneuver a single-business first mover. Through cross-subsidization and/or predatory pricing, these followers can exercise market power not available to smaller pioneers. The fit between environmental attractiveness and organizational skills and resource conditions suggests two important implications for achieving competitive advantage. First, the greater the degree of fit between the organizational skills and resources necessary to capitalize on an environmental opportunity and the skills and resources possessed by a firm (first mover or later entrant), the greater the firm's sustainable competitive advantage. Second, the greater the degree of fit between organizational skills and resources necessary to achieve sustainable competitive advantages through market pioneering and the skills and resources possessed by a firm that chooses to be a market pioneer, the greater the order of entry- related competitive advantage of the first mover.

Positional Advantages: Cost and Differentiation

Sustaining positional advantages through market pioneering depends on three conditions being met (cf. Coyne 1986; Kerin, Mahajan, and Varadarajan 1990):

1. Subsequent to the entry of other firms into the market, customers must continue to perceive a consistent difference in important attributes (key buying criteria) between the pioneer's offerings and those of later entrants. The overall magnitude of competitive advantage held by the pioneer relative to later entrants results from the net effect of both positive and negative differentiation in terms of key buying criteria. To contribute to a sustainable competitive advantage, the pioneer's positive differentiation in terms of important attributes must command the attention and loyalty of a substantial customer base.

2. The pioneer's positive differentiation in terms of key buying criteria should be the direct consequence of a capability gap (entry barriers) that separates the pioneer from later entrants. Only if later entrants are un- able to imitate the attributes in the pioneer's offering that are perceived as desirable by consumers (or are in a position to imitate, but only at significant costs) would the pioneer's sources of competitive advantage remain enduring.

3. The durability of competitive advantage is contingent upon the positive attributes of the first mover's offerings retaining their importance over time and the durability of the first mover's capability gap that initially created the positive attributes. In other words, the pioneer's advantage from positive differentiation in terms of important attributes will dissipate if these attributes are no longer viewed as key buying criteria by consumers (or will gradually diminish if, over time, these attributes lose their importance as key buying criteria), or if later entrants are successful at bridging the capability gap (surmounting the entry barrier) that provided a competitive advantage to the market pioneer.

The factors underlying cost and differentiation advantages likely to accrue to or be endowed by the marketplace on a first mover can be broadly divided into four categories: (1) economic factors, (2) preemption factors, (3) technological factors, and (4) behavioral factors. A synopsis of each follows.

Economic factors. For the most part, economic factors relate to cost advantages in the form of scale and experience economies and marketing cost asymmetries.

Scale and experience economies. Through preemptive capacity investments, a first mover may achieve scale- dependent cost advantages over later entrants. Later, when follower firms are engaged in building facilities of comparable capacity to achieve comparable costs, a first mover might be engaged in streamlining its production process to achieve even lower costs. If late entrants perceive large- scale entry as unprofitable, they may choose to enter on a small scale in market niches where consumer needs are

not effectively met by the first mover (Robinson and For- nell 1985). Such actions will be reflected in later entrants having a lower market share than the first mover. To the extent the relative cost position of competing firms is a function of cumulative experience, the first mover will have the greatest cumulative experience and an experience-based cost advantage over later entrants if it is successful in maintaining market share leadership.

Marketing cost asymmetries. Comanor and Wilson (1974) note substantial differences in the marginal effects of advertising between the first mover and later entrants due to consumers' different degrees of consumption experience with competing brands and their inclination to respond differently to the advertising messages of these firms. During the period in which a first mover has a monopoly, its promotional messages are heard in an uncluttered environment. As competitors enter the market, the multiple messages targeted at consumers of a particular product will diminish the effectiveness of all competitors' messages. Under such conditions, later entrants will have to advertise more frequently and more creatively to attract customers away from the first mover. In effect, the first mover must direct its marketing effort on holding its customer base, whereas later entrants must devote marketing effort to creating brand awareness as well as altering established consumer buying patterns (i.e., stimulate brand switching by offering economic inducements and/or more extensive advertising). Such differences may enable the first mover to build and maintain customer awareness and brand preference less expensively than later entrants.

Empirical support for marketing cost asymmetries be-




tween first movers and later entrants has been found in

the PIMS database. Buzzell and Farris (1977) reported that, on average, advertising and sales promotion expenditures as a percentage of sales were 1.45% higher for early followers than for pioneers and 2.12% higher for later entrants than for early followers. Similarly, Fomell, Robinson, and Wernerfelt (1985) observed that advertising and sales promotion expenditures as a percentage of sales were lower for pioneers than for later entrants. Also, in comparison with later entrants, pioneers were found to allocate a significantly greater proportion of promotional resources to advertising than to sales promotion.

Preemption factors. In contrast to economic factors, preemption factors can provide a basis for a first mover to achieve absolute cost advantages (e.g., pro- curement contracts that ensure supply of raw materials at prices lower than those incurred by later entrants) or differentiation advantages (e.g., preemption of perceptual space, geographic space, and marketing channels).

Cost asymmetries in factor inputs. If the first mover has superior information, it can acquire plant and equipment and/or contract with suppliers of factor inputs for supplies at prices below those that will prevail later in the evolution of the market. Through such preemptive actions, the first mover may achieve an absolute cost advantage over later entrants (Lieberman and Montgomery 1988).

Spatial preemption. The first mover may gain a differentiation advantage through spatial preemption by select- ing the most attractive niches in terms of geographic space (locations), perceptual space (product characteristics space), distribution space (marketing intermediaries and shelf fac- ings), and market segments (the largest and/or the most profitable). Through spatial preemption, a first mover may be in a position to limit the amount of space available as well as reduce the spatial options available to later entrants. In either case, later entrants will have a relatively less attractive position and are likely to record lower market shares (Hauser and Shugan 1983; Lieberman and Montgomery 1988).

Technological factors. Technological factors that may benefit a first mover relate to product, process, and organizational innovations that produce a cost and/ or differentiation advantage.

Product and process innovations. For the first mover, product and process technologies that enhance product performance or create switching costs are a source of differentiation advantage. Those that lower the cost of a product are a source of competitive cost advantage. Porter (1983) characterizes as first-mover advantages factors that enable a firm to translate a technology gap into other competitive advantages that persist even after the gap is closed. In this context, two types of first-mover advantage are (1) intertemporal dependence of demand (a manifestation of differentiation advantage) and (2) intertemporal dependence of costs. Intertemporal dependence of demand could be due to switching costs, the pioneering firm acquiring a reputation as a premier producer, or the pioneering brand establishing a distinct identity. Intertemporal dependence of demand is greatest when switching costs are high, there is moderately frequent repeat buying, and information gathering for making purchase decisions is expensive.

Intertemporal dependence of costs results from learning curve effects that remain proprietary to the first mover. Under conditions of technological change characterized by continuity and relatively stable process technology and customer needs, first-mover advantages are greatest. Technological change characterized by continuity enables the first mover to remain on the same scale or learning curve and maintain its cost advantage (Porter 1983). In general, this perspective suggests that the slower the rate of product and process innovation, the greater will be the first-mover's cost and/or differentiation advantage.

Organizational innovations. Innovations in areas such as organizational systems and structures can also be a source of sustainable competitive advantage. For instance, attention paid to human capital can create cost advantages through productivity improvements and differentiation advantages through creative execution of marketing pro- grams. Such organizational innovations can produce im- perfectly imitable competitive advantages for the first mover (Lippman and Rumelt 1982). Indeed, such organizational innovations are believed to convey more durable cost and differentiation advantages than product or process innovations (see Lieberman and Montgomery 1990).

Behavioral factors. Variables defined as behavioral factors constitute opportunities for the first mover to achieve a differentiation advantage (e.g., contractual switching costs) or for a differentiation advantage to be endowed on the first mover by the marketplace (e.g., communication good effects).

Switching costs. Switching costs provide incentives for established buyer-seller relationships to continue (Porter 1985). A buyer contemplating switching from the first mover's offering to a later entrant's offering generally faces two types of switching costs. Contractual switching costs are those imposed on buyers by the first mover through long-term buyer-supplier agreements. Noncontractual switching costs include investments in cospecialized assets that the buyer must make in adapting to the late entrant's offering and the time and effort the buyer must expend in learning to use the late entrant's product. The existence of contractual and noncontractual switching costs not only differentiates the first mover's offerings, but also emphasizes the need for later entrants to invest additional resources to attract customers from the first mover (i.e., marketing cost asymmetries).

Prototypicality and product-specific reputational advantages. In the early stages of market evolution, consumers are likely to know little about the importance of product attributes or their ideal combination. Under such circum-

stances, the first mover has an opportunity to influence consumers' perceptions of the relative importance of attributes as well as the ideal combination. Through its marketing efforts, the first mover may be able to establish the perceptual structure of the market to its advantage and become the standard (prototypical brand) against which all late entrants' offerings are compared (Carpenter and Nakamoto 1989; Howard 1989). Also, to the extent that buyers' product-specific beliefs about reputation are based on the length of time competing brands have operated re- putably, the first mover may have a differentiation advantage.

Communication good effects. Certain goods increase in value as the number of adopters or users increases. By developing a large user base prior to the entry of other




firms, the first mover may be in a position to establish its offering as the industry standard (Teece 1987). To the extent the first mover's offering serves as a means of social coordination (standardization) and the benchmark for complementary goods, a differentiation advantage will result.

Information and consumption experience asymmetries. Having been exposed to the first mover's messages for a longer time period, consumers are likely to know more about the first mover's offerings than later entrants' offerings (information asymmetry). Greater familiarity with the brand name of the first mover is presumed to afford information advantages to the first mover. For example, the economics of information literature (Nelson 1980) suggests that additional information search will be under- taken only if the expected gain associated with more information exceeds the costs of search. It is also conceiv- able that consumers have more consumption experience with the first mover's offerings than with late entrants' offerings (consumption experience asymmetry). When buyers have imperfect information about the quality of competing offerings, they may be inclined to remain loyal to the first brand they encounter that performs satisfac- torily. If the quality of the pioneer's offering is viewed as satisfactory, a consumer may be inclined to remain loyal to the pioneer's brand even after the entry of others (Schmalensee 1982). This situation is likely when buyers perceive the cost of making a purchase mistake to be high.

Even buyers entering the market for the first time and confronted with the task of evaluating competing offerings may seek ways of economizing on evaluation costs. An approach to economizing on evaluation costs for first- time buyers is to resort to a "free-ride" on the presumed analysis of the well-informed (i.e., buying the leading brand, which could conceivably be the pioneering brand or the brand that has been in the market longest; Rumelt 1987).

Product-Market Contingencies and Positional Advantages: A Propositional Inventory

The discussion to this point has focused on the potential opportunities available to the first mover to achieve cost and differentiation advantages. The extent to which the first mover realizes these advantages depends on certain product-market contingencies and the actions of the first mover and later entrants. For

instance, experienced-based and scale-dependent cost advantages depend on the ability of the first mover to invest in capacity expansion and learning-based technologies and on the inability of followers to neutralize such advantages by capitalizing on cost advantages independent of experience and scale (Porter 1980). Dif- ferentiation advantages are contingent on effective market positioning by a first mover and its ability to create positive consumer attitudes through awareness and successful trial (Brown and Lattin 1992; Hauser and Shugan 1983). A detailed discussion on various moderator effects and research propositions follows.

Moderators of Economic Factors

Figure 1 shows that numerous moderating influences affect whether frequently mentioned economic mechanisms produce a first-mover advantage generally and cost advantages specifically.

Demand uncertainty and entry scale. Often the first mover is required to make investment decisions such as plant capacity in the face of uncertainty about future demand (Porter 1985; Wernerfelt and Kanani 1987). The greater the uncertainty level, the lower the likelihood that a first-mover will make sizable in-

vestments in capacity to achieve scale-dependent cost advantages. If the first mover is unwilling to commit substantial resources in the face of demand uncer-

tainty, or simply enters on a small scale, its scale- dependent cost advantage will be correspondingly lower. Under these conditions, the firm most likely to achieve a competitive cost advantage when demand uncertainty is resolved will be the firm (first mover, early follower, or late entrant) that has superior skills in low-cost production. This reasoning suggests that:

PI: All else equal, there is an indirect inverse relationship between demand uncertainty and the scale-dependent cost advantage of the first mover.

Ratio of minimum efficient scale to size of market. Minimum efficient scale (MES) is the smallest volume for which unit costs are at a minimum. If MES

is comparable to the size of the market, the first mover, by investing in capacity (- MES), can achieve a competitive cost advantage. In effect, MES would pose an entry barrier to later entrants. However, if the ratio of MES to size of the market is small, MES will not pose an entry barrier to later entrants. For instance, under conditions of a broad served market (e.g., the relevant market for competing firms being the global market rather than domestic markets, and firms being able to achieve overall scale economies by serving many different markets), the ratio of MES to size of the market will be low (see Oster 1990). Hence:

P2: All else equal, the lower the ratio of MES to the size of the market, the smaller the first mover's scale-dependent cost advantage.

Advertising intensity. Though consumers are exposed to the first mover's advertising message for a period of time in an environment of no competing messages, later entrants' messages will be heard under conditions of a larger aggregate volume of competing messages. Hence, the marketing cost asymmetries faced by later entrants in industries with high advertising-to-sales ratios are likely to be more severe than those faced by later entrants in industries characterized by low advertising-to-sales ratios (see Com- anor and Wilson 1974, 1979; Robinson and Fornell 1985). Therefore, we propose that:




P3: All else equal, the first mover's ability to achieve a cost advantage due to marketing cost asymmetries is less in advertising-nonintensive than advertising-inten- sive industries.

Response time. The longer the elapsed time between entry of the first mover and that of later entrants, the more opportunities becomes available to the first mover to achieve cost and differentiation advan-

tages. A longer response time provides the first mover more time to promote awareness and trial that contribute to category learning and for consumers to in- tegrate into their memory additional information about the pioneer from media exposure and word-of-mouth communications. As perceived switching costs and choice inertia become more firmly entrenched, a pioneering brand may achieve a dominant share (Brown and Lattin 1992). Also, the longer the elapsed time between the entry of the first mover and that of later entrants, the greater will be the gap in cumulative experience (von Hippel 1984) and the greater will be the investment in marketing resources a later entrant must make to attract customers from the first mover. These

considerations suggest that:

P4: All else equal, the shorter the response time needed by later entrants to enter a market, the lesser the first mover's

(a) experience-based and scale-dependent cost advantage,

(b) cost advantage due to marketing cost asymmetries, and/or

(c) differentiation advantage due to information and consumption experience asymmetries.

Scope economies. The economics literature on first- mover advantage typically focuses on opportunities to achieve absolute and dynamic cost advantages through preemption, scale, and experience. Though economies of scope is not a relevant issue for single-business firms, the extent to which multibusiness firms (the first mover and/or later entrants) may be in a position to achieve cost advantages due to scope economies (marketing, manufacturing, and technological synergies) depends on their respective business portfolios. All else equal, whereas a related diversified firm has the benefit of scope economies, an unrelated diversified firm has no such cost advantage. For instance, pooled purchase of media time and media space for all products in its portfolio would enable the first mover to achieve a marketing cost advantage over a later entrant, provided the later entrant is a single- business firm or a multibusiness firm whose potential to benefit from scope economies is less than that of the first mover. Note, however, that whether the first mover or a later entrant benefits more from scope economies depends on their respective portfolios (see Mitchell 1991). In propositional form:

P5: All else equal, the greater the degree of interrelationship (marketing, manufacturing, and technological in-

terconnectedness) between the first mover's new business venture and the other businesses in its portfolio, the greater its scope-dependent cost advantage.

Moderators of Preemption Factors Though certain cost and differentiation advantages accrue to the first mover as a result of its investments

in spatial preemption, demand uncertainty and product characteristics moderate their effect.

Demand uncertainty and preemptive investment. A first mover's propensity to secure long-term contracts with suppliers of factor inputs and commit resources to plant and equipment is attenuated under conditions of high demand uncertainty (Gal-Or 1985, 1987). If the first mover elects not to make sufficient preemptive investments to achieve scale-dependent and absolute cost advantages, these advantages will be less or nonexistent. Hence:

P6: All else equal, there is an indirect inverse relationship- between demand uncertainty and the first mover's preemptive-investment cost advantage (both absolute and dynamic).

Product characteristics. Several product characteristics have been identified as possibly amplifying the preemptive spatial advantages of first movers. For example, when a product is technically complex, or bulky, or a distributor must stock large product in- ventories and complementary items or spare parts, channel members might be reluctant to carry second or third brands (Boyd and Walker 1990; Lieberman and Montgomery 1990). Preemptive advantages also are likely to be magnified when a first mover pioneers a product category rather than a product form, thus creating opportunities for line extensions (Alpert 1987). For example, Frito-Lay pioneered and now dominates the shelf-stable chip dip category using multiple fla- vors (bean, cheese, sour cream), thus minimizing shelf space availability for later entrants (Kerin and Peter- son 1990). Inherent product characteristics coupled with the manner of introduction (breadth and depth of assortment) suggest that:

P7: All else equal, differentiation advantage accruing to the first mover is greater when (a) products are technically complex, bulky, or re-

quire complementary products and/or spare parts. (b) a product category is created than when a product

form is introduced, and/or (c) the depth and breadth of a product line are large.

Moderators of Technological Factors

Three aspects of technological innovation moderate potential cost and differentiation advantages accruing to the first mover: (1) the characteristics of the innovation itself, (2) the rate of technological change, and (3) technological discontinuities.

Characteristics of technological innovation. Two




factors govern a firm's ability to benefit from its technological innovation: (1) the efficacy of legal instruments of protection (patents and copyrights) and (2) the nature of technology underlying the innovation (product vs. process innovation; tacit vs. codified knowledge). First movers with tight patent protection might hold a monopoly position for the life of the patent. However, evidence suggests that about 60% of successful innovations are imitated within four years (Mansfield, Schwartz, and Wagner 1981). Moreover, as technology advances, the first mover might find it increasingly difficult to protect its rights as later entrants "invent around" the patent (von Hippel 1988).

Patents typically offer greater protection for product innovations than for process innovations. How- ever, where the innovation is embedded in the process, trade secrets are a feasible alternative to patents, provided the secrecy of the underlying technology is not compromised by the introduction of the product (Teece 1987). Moreover, technology embedded in the product is susceptible to reverse engineering, and process technology is likely to leak to competitors more slowly than product technology (Lieberman and Montgomery 1990).

Technological innovations proprietary to the first mover can provide an enduring competitive advantage. However, innovations that are (1) attributable to external sources such as suppliers of machinery and components, (2) available to present and potential competitors, and (3) do not create a unique product benefit may not constitute a source of cost and/or differentiation advantage (Porter 1983; Robinson 1990).

Tacit knowledge pertaining to innovation, by definition, is difficult to articulate. Unless persons who possess the knowledge can demonstrate it to others, knowledge transfer (i.e., imitation) is difficult. By comparison, codified knowledge underlying the innovation is easier to communicate (i.e., imitate) and is more exposed to industrial espionage (Teece 1987).

The distinctions between product and process innovation, tacit and codified knowledge, and the efficacy of legal instruments suggest that:

P8: All else equal, the greater the rate of technological change, the lower the efficacy of legal instruments as a source of a first mover's cost and differentiation advantages.

P9: All else equal, technology-based competitive advantages (cost and/or differentiation) of the first mover are

(a) higher when the technology underlying the innovation is embedded in the process than when it is embedded in the product and

(b) higher when the source of knowledge underlying the innovation is tacit rather than codified.

Technological change and discontinuities. A factor that often enables later entrants to neutralize (or partially offset) the experience-based cost advantage

of the first mover is the advent of superior technology. Replacement technology commonly emerges while the old technology is still growing (Lieberman and Montgomery 1988). To the extent that later entrants' access to relatively newer cost-efficient technologies enables them to offset or neutralize the first mover's

experience-based cost advantages, experience effects as a source of first-mover advantage diminish. A high rate of technological change and/or technological discontinuity as technology changes paths (e.g., electro- mechanical to electronic cash registers) may offer later entrants a larger number of gateways to entry in the form of product and process innovations.

Major shifts in technology for which a first mover is ill-prepared because of its investment in old technology may favor the fast follower that is not bur- dened with such investments. In situations in which a

first mover's specialized assets in one product generation lose their value in the next, the first mover's advantage dissipates as past learning is invalidated, new learning curves emerge, and present production facilities are made obsolete (Porter 1983). Two effects of technological change and discontinuity are proposed:

P,0: All else equal, there is an inverse relationship between the rate of technological change and the first mover's experience-based cost advantage.

P11: All else equal, a first mover's cost and differentiation advantages are greater under conditions of technological continuity (when technological change occurs along a fundamentally consistent path) than under conditions of technological discontinuity.

Moderators of Behavioral Factors

Numerous differentiation advantages arising from behavioral factors accrue to the first mover. However, these advantages are likely to be moderated by the nature of the good sold, market type, cospecialized assets owned or operated by intermediaries and/or end- users, and market evolution.

Nature of the good. Most notably, buyer uncertainty (Schmalensee 1982), information search and evaluation costs (Hauser and Wernerfelt 1990), and consumer learning (Carpenter and Nakamoto 1989) combine to influence consumers' trial and repurchase behavior toward products and brands. The literature in this area, combined with the work on search and experience goods (Nelson 1980; Wilde 1980), suggests that buyer uncertainty is higher for experience goods whose benefits can be determined by the buyer only after purchasing and using the good. By comparison, buyer uncertainty for search goods is lower because benefits can be assessed prior to acquisition and use. Also, noncontractual switching costs are perceived to be higher when product search and evaluation costs are high and the potential cost to buyers




of making a purchase mistake is large (Oster 1990). This reasoning suggests that:

P,2: All else equal, the more predominant the search characteristics of a good, the less important is product consumption experience asymmetry as a source of first- mover differentiation advantage.

P13: All else equal, the lower the buyer's search and evaluation costs and/or the costs of making a purchase mistake, the smaller the first-mover differentiation advantage due to noncontractual switching costs.

Another characteristic of the good that has a bear- ing on first-mover advantage is purchase frequency. Empirical research on purchase frequency has pro- duced equivocal results (Robinson 1988; Robinson and Fornell 1985). Porter (1983) suggests that first-mover advantages are greater for products characterized by moderate repeat buying than for those characterized by frequent or infrequent repeat buying. With frequent repeat buying, the perceived risk of product trial is likely to be low. Infrequent repeat buying mini- mizes consumption experience asymmetries that give first movers an advantage with repeat buyers. There- fore, it is expected that:

Pi4: All else equal, the first mover's differentiation advantage attributable to buyer risk aversion (consumption experience asymmetries) is greater for products characterized by moderate purchase frequency than for products characterized by either low or high purchase frequency.

Market type. Empirical research demonstrates that the market share differential among pioneers, early followers, and later entrants is slightly more pro- nounced in consumer markets than industrial markets (Parry and Bass 1990; Robinson 1988; Robinson and Fornell 1985). In industrial markets, noncontractual switching cost as a source of differentiation advantage tends to dissipate over time as buyers become more knowledgeable about competing products and processes (Lieberman and Montgomery 1988). In consumer markets, particularly when the dollar value of purchase amounts per transaction is high, buyer-perceived risk may lead to greater reliance on known brands or suppliers. This research suggests that:

P15: All else equal, first-mover differentiation advantage arising from noncontractual switching costs and/or information asymmetry is greater in consumer markets than industrial markets.

Buyer's investment in cospecialized assets. Though the presence of buyer switching costs benefits the first mover, the type and magnitude of those costs are likely to vary by industry or product-market setting. In particular, in product-market settings in which products or services supplied by a first mover entail sizable investments in cospecialized assets by marketing intermediaries and/or end users, noncontractual switching costs are high because cospecialized assets are char-

acterized by bilateral dependence (Teece 1987). Al- ternatively, if the investment in cospecialized assets is easily reversible, noncontractual switching costs as a source of first-mover differentiation advantage are lessened. In more formal terms:

P,6: All else equal, there is a positive relationship between the differentiation advantage of the first mover due to noncontractual switching costs and the extent of investment in cospecialized assets made by buyers.

Market evolution. When a market for certain goods and services remains stable for an extended period, positional advantages once gained may be enduring. However, changes in consumer preferences, the advent of competing technologies, a redefinition of what constitutes a product-market, and changes in marketing channels can dilute information and consumption experience asymmetries, alter consumers' perceptions of ideal product attribute combinations (i.e., prototypicality), and cause buyers and intermediaries to reevaluate switching costs and benefits. As a case in point, the pattern of market evolution in the ATM industry in the 1970s all but eliminated the positional advantages of Docutel, the first mover. Over a period of a few years, Docutel's market share declined from 100% to less than 10% (Abell 1978, 1980). The presence of market evolution suggests that:

Pl7: All else equal, the greater the pace of market evolution, the less enduring the first mover's cost and differentiation advantages.

Overall Magnitude of First-Mover Advantage and Performance

Outcomes

As shown in Figure 1 and described previously, the overall magnitude of first-mover advantage is the composite effect of a multiplicity of factors. The degree of fit between the environmental opportunity and the first mover's skills and resources, the firm's ability to capitalize on potential sources of first-mover advantage (economic, preemptive, technological, and behavioral), the moderating effects of product-market contingencies on the factors underlying the positional advantages of the first mover, competitive strategies of the first mover and later entrants, and later entrant advantages combine to determine the overall magnitude of a first-mover advantage.

Role of Competitive Strategy

First-mover advantage denotes competitive advantages arising from market entry timing. The overall magnitude of positional advantages accruing to the first mover depends on the comprehensive competitive strategies employed by the pioneer and followers, in concert with entry timing. Breadth of served markets,




product line width, pricing policies, R&D focus, capacity utilization, and resource commitments that reflect a firm's strategic posture are likely to attenuate or amplify the overall magnitude of the first mover's competitive advantage.

Apart from the potential to achieve positional advantage by being the first mover, Figure 1 highlights the role of competitive strategy by showing a direct relationship between the competitive strategies of pioneers and later entrants that emerge from the distinctive competencies and resources of each.

Later Entrant Advantages

A later entrant can affect the magnitude of first-mover advantage in several ways. A later entrant may achieve cost and differentiation advantages arising from lower imitation costs, free-rider effects, scope economies, and learning from the pioneer's mistakes (Lieberman and Montgomery 1988).

A first mover often incurs substantial pioneering costs such as the expense of gaining regulatory ap- provals, educating potential buyers, nurturing suppliers of factor inputs (raw materials and machinery), and developing infrastructure facilities for training and servicing intermediaries and buyers (Porter 1980). In situations in which potential buyers have specific assets invested in an earlier generation product or process, a pioneer may incur expenses related to over- coming or offsetting the initial switching costs of innovators and early adopters. In effect, the switching costs incurred by the pioneer constitute a particular type of pioneering cost. Later entrants may be in a position to free-ride on the first mover's entry costs if they can avoid all or some of the costs of product and/or market development incurred by the first mover. Indeed, research suggests that the cost of imitation is about 65% of the cost of innovation (Mansfield, Schwartz, and Wagner 1981). As is the case with the first mover, the degree of interrelationship (marketing, manufacturing, and technological interconnect- edness) between the late entrant's new business venture and other businesses in its portfolio determines the extent to which it can exploit scope economies to achieve cost advantages.

Even if a first mover preserves its cost advantage, a later entrant skillful at influencing and shaping consumer preferences can gain a differentiation advantage (Carpenter and Nakamoto 1990). A later entrant also can achieve a differentiation advantage by learning from the pioneer's mistakes in such areas as positioning (Hauser and Shugan 1983) and product design and characteristics (Varadarajan 1986), or by simply doing things differently-for example, altering the configuration of value chain activities involved in designing, producing, marketing, deliver- ing, and supporting a product (Buaron 1981). The

irreversibility of investments in any of these areas might preclude the first mover from adopting the strategy and tactics of later entrants that have the benefit of

hindsight (Porter 1980). A later entrant's skills and resources can nullify or offset some of the cost and differentiation advantages of the first mover. Indeed, Japanese manufacturers supplanted Xerox, the fac- simile machine pioneer, by adept positioning, adding new features, and aggressively promoting their models (Katayama 1989). In summary, the overall magnitude of competitive advantage arising from a first mover status depends on the extent to which later entrants (1) benefit from the difference between innovation and imitation costs, (2) free-ride on the first mover's pioneering costs, (3) capitalize on a pioneer's mistakes, (4) benefit from scope economies, and (5) are able to influence and shape consumer preferences.

Performance Outcomes

Rewards for positional advantages arising from first- mover status are ultimately scored in terms of market share and profitability. Figure 1 displays these variables as separate and distinct performance outcomes because evidence for a direct relationship between market share and profitability is by no means clear (Kerin, Mahajan, and Varadarajan 1990; Kohli, Ven- katraman, and Grant 1990).

The conceptual framework and supporting literature indicate that being first to market can produce dominant and enduring market share provided a firm or business unit (1) identifies a favorable environmental trend, (2) capitalizes on its distinctive competencies and resources to achieve positional advantages that are not easily imitated or surpassed by later entrants, and (3) leverages product-market contingencies to its benefit. They also suggest that a first mover should be in a position to achieve higher profits than later entrants. As described previously, a first mover has the opportunity to achieve a competitive cost advantage by leveraging certain economic, preemptive, and technological factors in its favor. In addition, a pioneer can be expected to command a higher price than later entrants because of differentiation advan-

tages such as imperfect information about product quality. Because a product of unknown quality (a later entrant's offering) might be perceived by consumers as riskier than a product of known quality (the pioneer's offering), consumers may be willing to pay a higher price for the latter (see Conrad 1983; Schma- lensee 1982).5 This reasoning suggests an inverse re-

5This argument, though conceptually appealing, does not consider the distinction between quality reputational effects of a firm and those of a product. For example, the favorable reputation of a firm in the context of a broad product category (e.g., IBM, a late entrant for personal computers but reputed in the broader computer industry) might enable it to overcome the product-specific reputation of a first mover (e.g., Apple Computer in personal computers) and possibly command a higher price for its product(s).




lationship between order of entry and profitability, but empirical evidence reported to date does not confirm such a relationship. For instance, Boulding and Moore (1987) have observed that, on average, first-mover firms are marginally unprofitable. Srinivasan (1988) reports that early followers show higher profitability than first movers because of lower absolute marketing expenses and R&D expenses. Furthermore, as described previously, pioneering costs incurred by the first mover and free-riding by later entrants could nullify some of the pioneer's cost advantages. In summary, market pioneering is a necessary condition for attaining first-mover advantage and is conducive to achieving a dominant market share and abnormal returns. However, as suggested by the proposed conceptual framework and accompanying literature, the relationships between entry order and market share and between entry order and profitability are more complex than a simple order of entry effect.

Conclusions

The foregoing discussion indicates that the notion of first-mover advantage is a more complex phenomenon than the current literature suggests. Indeed, the belief that entry order automatically endows first movers with immutable competitive advantages and later entrants with overwhelming disadvantages is naive in light of conceptual and empirical evidence. The literature, in fact, affirms and emphasizes the significance of fundamental marketing and competitive strategy concepts and practices employed by resourceful market pioneers and followers. This literature, when assessed in the broader context of planning market entry strategy, has important implications for marketing practice and research.

Implications for Marketing Practice

Three major implications for marketing practice emerge from this synthesis of the literature on first-mover advantage.

Market pioneering is not a normative strategic behavior conducive to superior performance for all firms. Environmental change presents opportunities to all firms, but a particular firm must have certain competencies and capabilities, such as technological fore- sight, perceptive market research, skillful product and process development capabilities, marketing acumen, and possibly luck to be a successful market pioneer. Indeed, depending on their unique strategic posture, some firms might benefit from early entry and others might benefit from following. Moore, Boulding, and Goodstein (1991) point out that because some firms excel at leading whereas others excel at following, unless the effects of managerial skills are taken into account in estimating the impact of pioneering on per-

formance, one might mistakenly conclude that, for all firms, the act of pioneering itself will lead to an un- ambiguous advantage. As noted by Lieberman and Montgomery (1988, p. 52):

... for any given firm, the question of whether early or late entry is more advantageous depends on the firm's particular characteristics. If one firm has unique R&D capabilities while the other has strong marketing skills, it is in the interest of the first firm to pioneer and the second firm to enter at a later date.

Both may earn significant profits entering in this se- quence, but neither would gain if the (attempted) order of entry were reversed.

The relationship between Sony and Matsushita is a case in point (Abegglen and Stalk 1985). Matsushita generally allows Sony and other firms to experiment with new product concepts. When the potential is demonstrated, Matsushita relies on its manufacturing and marketing expertise backed by large investments to become the volume leader in two or three years.

Market pioneering can only provide opportunities for gaining positional advantages. Actual competitive advantages depend on product-market contingencies and the actions of the first mover and later entrants. There is a lack of strong evidence that a first-mover advantage unequivocally exists and results solely from order of entry. Though certain positional advantages might accrue to or be endowed on the first mover, being a market pioneer per se does not directly produce enduring competitive advantages, dominant market shares, and abnormal returns. Market pioneering only provides opportunities for achieving positional advantages, market share dominance, and abnormal returns. Unless a firm has the expertise, resources, and creativity necessary to exploit these opportunities, and forestalls or neutralizes the efforts of later en-

trants, being first to market will produce neither sustainable competitive advantages nor desired performance outcomes.

Organizational reality: every firm is more often a later entrant than a pioneer. For every genuinely new product or process there can only be one pioneer, but there are bound to be many later entrants. Also, no single firm can either afford or expect to be a first mover all of the time; it often will be compelled to be a later entrant. Hence, firms need to formulate strategies for achieving sustainable competitive advantages and desired performance outcomes when they are later entrants. In addition to encouraging innovation and market pioneering, firms should have af- firmative policies by which to support imitative strategies and later entry in an organized way. These policies could (1) legitimize systematic imitative thinking as much as innovative thinking, (2) ensure that necessary imitative activities are initiated early, and (3) serve to communicate to the company personnel that both in-




novation and creative imitation are valued (Levitt 1986). Firms should not only provide organizational legiti- macy to the pursuit of me-too/imitative late entrant strategies, but also recognize the range of possibilities for later entrants to be innovative within the competitive context.

Directions for Future Research

Five directions for future research emerge from our assessment of the literature on first-mover advantage. First, consideration must be given to assessing the profitability of market pioneering. If it pays to be a pioneer, it is reasonable to expect a first mover to record higher rates of return than later entrants. Though limited empirical evidence suggests otherwise, this subtle but significant issue remains unresolved.

Second, insights are needed into how a firm's competencies and resources are converted into sustainable positional advantages in the context of environmental opportunities. Recent empirical research (Boulding and Staelin 1990; Capon, Farley, and Hoenig 1990) and industry case studies (e.g., Rosenbloom and Cusumano 1987) reaffirm the fundamental linkage of environments, organization, and strategy variables to market share and financial performance. Research related to these linkages would require databases that include not only survivors, but also business units, products, and brands that did not survive the shake- out phase in a product-market or industry life cycle. Therefore, longitudinal research is needed.

Third, the discussion of moderator variables that enhance or mitigate a first-mover's positional advantages suggests that the empirical literature has lagged behind conceptual developments. Product-market contingencies that moderate cost and differentiation advantages are a fruitful area for inquiry that could contribute to both marketing theory and practice. The research propositions advanced here are a first step in such inquiry.

Fourth, there is a need to consider the interactive effects among two or more factors underlying cost and differentiation advantages and the interactive effects of product-market contingency variables. For example, the interactive effects of the nature of the good (search vs. experience), purchase frequency (frequent vs. infrequent), and market type (consumer vs. industrial) on differentiation advantages and the interactive effects of scale and experience on cost advantages warrant attention. Such inquiries will shed further light into relationships that could attenuate or amplify a first-mover advantage.

Finally, research is needed on later entrant advantages and strategies. Because more firms in any product-market setting happen to be later entrants than pioneers, research on the options and opportunities available to followers would be welcomed by a larger population of firms. Such research would also provide a clearer picture of the competitive dynamics present in the context of sequential entry and the perils and payoffs of market pioneering.

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