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First-mover Advantages and Competition

 

New economy industries face competition based on short cycle times, and competition on
time is highly concerned with first-mover advantages. The first mover must create
demand for a product’s functionality while facing the risk that a nimble second mover can
capture most of the pioneering benefits, while establishing its own brand’s equity and
own technology as the industry standard. Advantage is won when an
early design locks out acceptance of subsequent alternatives (thereby creating switching-
cost barriers). Acceptance comes after (1) customers have gained comfort in using a
particular arrangement, (2) complementary products have been configured to encompass
the unique characteristics of the prototype’s platform, and (3) the cumulative power of
expenditures has elevated the equity of the first version to unassailable heights, among
other conditions. The sunk costs implicit in switching-cost barriers, mobility barriers, and
exit barriers explain an industry’s sudden (albeit temporary) inflexibility in the face of
innovation; value-chain partners around platform standards that serve their
respective economic interests. To reap such benefits, a firm must defend its product
configuration standards against the inexorable onslaught of copycat competitors — even
if such mercenary behavior violates the egalitarian norms of web culture.

What would be the implications of a fragmentation scenario where platform standards did
not coalesce and industry structures evolved slowly? In old economy industries, slow
change rates incubated fragmented industry structures for decades before consolidations
occurred. In new economy industries — where financial pockets are deep enough and
managers’ wills are strong enough to assail extant barriers — hungry competitors will
follow pioneering firms’ successes in serving profitable customers. It should not be
surprising, in that context, that underdog competitors will undermine the status quo bases
for competition by adopting very different strategic postures, just as occurred in the old
economy. Doing so is the only way that late entrants can drive a wedge of entry into
evolving industry structures where standards are solidifying and constellations of
supporting industries are energetically supporting the early entrant’s platform. In most
industry evolutions, detente among converging business models will be difficult to
maintain when growth slows and economic pies become finite because all publicly traded
firms seek to scale the heights of rising stock prices and many private firms willingly
forego profits in their quest for market share advantages. While industry structures are
still malleable and investors seek rapid gains, however, competing coalitions will each try
to shape the industry’s economics to favor their strategic postures by building
bandwagons. Consolidations of built-to-flip firms will ensure that technological novelties
outlive their inventors; the open wallets of venture capital firms will ensure that industry
structures remain mutable for those willing to buy the market.

Chaotic and embryonic industry structures. Until an industry’s structure coalesces around
enduring standards and victorious coalitions, new resources can trump old entry barriers.
The basis for competition can keep on changing until industry evolution finally occurs.
While the industry structure is in chaos, early entrants’ investments risk being
disadvantaged (relative to late entrants) if first movers are unwilling to cannibalize their
toehold investments repeatedly until conditions change (Schumpeter, 1934). Until
providers of capital hold virtual firms to performance standards comparable to other high
technology firms, industries facilitated by internet technologies (and venture capitalists)
will not adopt irreversible standards (nor is technological progress well served by doing
so).
Resource endowments immaterial. One implication of the internet industry’s embryonic
and stunted structure may be that the differing resource endowments of early entrants
(versus later entrants) will not matter because each innovation will be a separate industry
cycle that passes with alarming speed. If that were the case, there would be
no second-round iteration of adaptation and competition between incumbent and de novo
firm. Independent firms — with different resource postures — would clash in each
iteration of innovation and no carryover learning about competing against each other
would occur (since no firms have previous experience in competition against each other).
Alternatively, the internet industry’s structure may not evolve from its embryonic state
because no learning occurs where firms clash repeatedly — each time with different
partners. Competitive learning may not occur where — in a manner similar to “born-
again” firms coming out of bankruptcy protection — consolidation does not occur
because losing coalitions continue to receive tranches of new venture capital funding
from an overheated investor market.

No synergies, no learning. A second implication of the internet industry’s embryonic and
stunted structure may be that synergies become unleveragable in the new organizational
forms that the virtual firm embraces. For example, the benefits of applying a vertical
solution to horizontally related applications require making trade offs between the
increasing returns of standardization versus local responsiveness. Operating synergies
frequently require a centralization of activities that must be coordinated closely to realize
scale, or scope, economies . Facilities must be shared to realize vertical
integration economics from technology transfers, cross-fertilization, and cross-
organizational learning. Partnerships must be enduring to realize experience curve
economies .

Virtual firms thrive on the freedom of decentralization and operating autonomy. Potential
synergies cannot be captured easily in regimes of duplicated facilities, overlapping turf,
and incompatible products, processes, facilities, and so on. Arm’s-length in-house
technology transfers for the sake of easier accountability and entrepreneurial spirit in
buyer-vendor relationships — defeat the camaraderie needed for vertical synergies. Little
organizational learning occurs when outsourcing is substituted for in-house capability
development.

Promiscuity penalties, A third implication of the internet industry’s embryonic and
stunted structure may be that virtual firms will face a backlash tantamount to inflexibility
barriers. Virtual firms need partners that will support the technological platforms used to
reduce customer uncertainty and accelerate the adoptions of new products. If an industry
remains chaotic through wave after wave of new products, however, the identities of a
firm’s dancing partners will very likely change with each round of innovation.

The virtual firm approach is especially tempting in volatile, embryonic industries like e-
commerce where strategic flexibility is desirable but demand- and technological-
uncertainty is high. A network of alternatives is desirable in settings where several
competing technological platforms exist and the winning technology cannot yet be
predicted. The conceptual difference between the old approach to flexibility and the new
approach may be seen in the exit barriers implicit in severing relationships. Old economy
firms may pause before burning bridges when breaking with outsourcing or alliance
partners that could be useful again in the future; new economy virtual firms terminate
their affiliations abruptly and opportunistically.

 

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