Is First Mover a competitive advantage for a firm?
Zerodha was the first mover in the discount broking industry. Unlike the traditional brokers like Sharekhan, ICICI Direct, HDFC sec, etc. who charge large brokerages for their trading services, Zerodha offers a low brokerage charge. And as of 2019, Zerodha has outranked all these big players to become the biggest broking firm in India.
While reading this incredible success of Zerodha, one obvious question among people is whether being the first mover in the discount business model, the biggest reason for the Zerodha’s success? How big is the actual competitive advantage for the first movers? In this post, we are going to discuss the same.
Who are First Movers?
First movers are those companies who are the ‘first’ in line to offer their products or services in the market. They are the ones to innovate and develop a product/service which was not available previously in the market. Further, they do not face similar competition like the ones in the established markets.
In many cases, such companies can build great brand recognition and loyal customers for their products/services during the time gap, i.e. before the competitors enter.
An important point to note is that first-mover advantage is here referred only to those companies who are able to scale and make establish a big market, not the ones who just started the idea but didn’t make it large.
I mean, Amazon might not be the first company in the online bookselling industry. A lot of small businesses might be selling books or their products online before its establishment. However, Amazon was the one who was able to capture a significant market, make an impact and hence, can be considered as an actual first mover in this industry.
A few other examples of the first movers in their respective industry can be Kindle (ebook selling), eBay (online auction), Apple (iPhone & iPads), Uber (taxi booking & ride-sharing), etc.
In India, companies like Flipkart, Oyo, Olx, Ola etc. are the ‘Regional’ first movers. Although they copied the concept from their global rivals, however, being the first mover in the Indian subcontinent region gave them an advantage.
Advantages of First Movers:
Being the first mover, a company can enjoy a lot of benefits compared to the later entrants. Here are a few of the best advantages of first movers:
- Brand recognition: First movers can create a strong impression which can help them build a passionate customer fan-base and create a big brand recognition even before any competitors enter.
- Price & Benchmarking: The first movers enjoy the advantage of setting up their prices for the newly offered products/services and creating their own industry standards/benchmark.
- Technological advantages: Being the first mover and having no competition allows a company to give sufficient time to build a perfect product and get a head start. Further, they can also file proprietary or patent rights to continue enjoying technological advantages.
- Control of resources: First movers can control the resources by doing a strategic partnership (or exclusive agreements) with vendors, supplier; renting the best locations, hiring most talented employees in their industry, etc. The later entrants may face difficulty to find similar resources.
- Switching cost: If the customer has to cost a lot of money, time, efforts, or resources to switch from one product to another, it is considered as the switching cost. First movers can enjoy the benefits of switching cost by launching their products earlier. Here, even if a better product/service is available, the customer may stick with the old company, if the switching cost is high.
Disadvantages of First movers:
Although being a first-mover looks a lot advantageous for a firm, however, it has its downsides too. Here are a few cons of being a first mover.
- In most cases, the later entrants or competitors can reverse-engineer, copy, or even improve upon the product/services offered by the first movers.
- The first movers might take a lot of time to learn and innovate. On the other hand, the following entrants generally have a lower learning curve and can build the product faster.
- The first movers might find it challenging to persuade people to try new product/services. However, later entrants can reduce this education cost.
- The first movers can also face a lot of competition from the free riders. As the Imitation cost < Innovation cost, a lot of copy-cats can join the expanding industry to enjoy the upwards ride and reduce the profitability of the first movers.
- The second movers or the competitors can avoid the failed steps made by the first movers and hence reduce their cost/expenses.
Is First mover a competitive advantage for a firm?
In the investing world, the competitive advantages are the ones which are sustainable for the long term, not for a few years.
Admittedly, being the first mover is advantageous and have a lot of perks. However, over time, the later entrants can destroy this advantage through reverse-engineering, workforce mobility, technical advancement, or even by merely copying the products/service offered by the first mover.
There’s one thing sure in this competitive world. First movers will not always be the only player in any industry. As they grow, a lot of new companies will enter that industry and try to eat their profits.
Further, a lot of big successful global giants were not the first movers. For example, Google was not the first search engine. It followed the model of Yahoo or Infoseek. Similarly, Facebook was a later entrant in the social media world after Friendster and Orkut. Even Starbucks or Cafe Coffee Day (CCD) is a copied business model of the famous local coffee chains. Still, these companies were able to dominate the market and establish a big brand and customer network.
Anyways, in a few cases, if the first movers can dominate a big market and establish a loyal customer base, they may retain a healthy growth level and profitability, despite new entrants.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting