International Business & Multinational Operations
The following essay aims to analyse whether competitive advantage is rooted in the new trade theory of first-mover advantages and evaluating whether it is a myth. We have used case from the MP3 and Video Player industries to further explore the issue with relation to relevant theoretical frameworks – New Trade theory, first mover, late mover, international product life cycle and national competitive advantage theories. We conclude that first mover may possess attractive competitive advantage; however it is not crucial to be the first but to satisfy the market needs. The enduring outcome largely depends on firms abilities to continuously pursue improvements and innovations in order to sustain the competitive advantage in the market.
New trade theory deals with the returns on specialization where substantial economies of scale are present. It suggests that the world market is only able to support a limited number of firms in certain industry sectors (Paul Krugman, 1979). In other words, trade will eventually skew towards countries with firms that managed to acquire inherent advantages in specialisation through the ‘First mover’ (Charles W.L.Hill, 2009).
Being the First mover is attractive for several reasons. Firstly, being first entrant to the market gains the advantage of having the “head
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While the first movers gets a “head start” and gains by being first in the industry, at the same time, competitors may be working on their own learning curves, thus being late movers. There are benefits of being late movers (Hill, 2011), such as the existing supply of suppliers, employees and customers driven by the first movers. Furthermore, they are able to free-ride on first-mover efforts and experience in developing the particular demand factor. Lastly, the late movers also are able to learn through the incumbent mistakes that have been made by the first movers.
Given both the attractive advantages and its disadvantages, it led us to the larger question of whether there are larger pay-offs in being the first mover. Global information and technological advancement know-how travels rapidly across the globe which in turn pressures firms to capture a ‘unique’ competitive advantage in order to continue to benefit from the first mover advantage. In here, we define ‘unique’ as the ability to innovate and substantially improve to create a specific strong niche for the market and better cater its customer needs.
1. Essay Focus Therefore, this essay aims to address the issue concerning whether competitive advantage is rooted in the first mover advantage and whether it is a myth. This is done by analyzing two key industry sectors which are MP3 and video player industries. 1. Relevant Definitions & Conceptual points 1. New Trade Theory The New Trade theory proposes that being a first mover gains a competitive advantage by positioning products in the most desirable market segment. The new trade theory (1970s) also suggests that trade increases the variety of goods in the market thereby decreasing its average cost because of presence of economies of scale (Hill,2011)
“Be the first to market” – principle that many firms adhere to acquire the competitive advantages in consumer impact, name recognition and having little or no competitors. First movers have the privilege of occupying the consumers’ mind and being able to set a form of standard in the market. In addition, being first to introduce a product gave the advantage of recognition. Obviously, being first also grants exclusive market rights. However, given the competitive advantage of being first mover in pre-empting the market, it does not guarantee firms to prolong success.
One prescribed formula for company success is: be a pioneer and an innovator; beat the competition to the market with new and innovative products and you will gain a dominant position (Robinson and Fornell, 1985). This poses the question, does being first mover guarantee market dominance? This is not necessarily the case, it may only end up paving the way for competitors (Gaebler, 2011). Eventually, many major markets are dominated by firms that are late movers (NickSaint,2011).
Late movers can outsell first movers in at least two ways (V. Shankar; Gregory S. Carpenter and L. Krishnamurthi, 1998) First, late movers are known to gain advantages through the free riding the first movers. First movers create the new market and produce the new product. This eventually provides late movers the time to develop their learning curves. Late movers are able to tap into the readily pool of resources, suppliers and customers. In other words, less effort and time is required for research and development. Therefore, through these, late movers are able to beat the first movers in product position, prices, advertisement and even distribution.
An example can be seen from the freeze dried coffee market where Nestle’s Taster’s Choice, a late mover overtook Maxwell House’s Maxim, a first mover (Urban et al., 1986). Secondly, late movers can further enhance their advantage through unique product innovation. Innovation creates competitiveness which allows them to overtake the first movers rapidly (Berndt et al, 1995; Carpenter et al, 1997; Carpenter and Sawhney, 1996; Yip 1982) An example can be seen from Gillette where it pursued continuous innovations and overtook first movers, including Star and many others (Golder and Tellis, 1993).
1. International Product Life-Cycle The International Product Life-Cycle theory aims to address the international trade pattern of technological innovation, new products that first occur in major industrialised economy and relocating to countries with lower production cost (Vernon, 1966). There are 3 stages to the product development – new, maturing and standardised product (Hill, 2011).
In the MP3 industry, the first movers (E.g. Sahean, Pontis Electronics and Diamond-Rio) lasted on an average of between 2 to 5 years. Later, closer to the end of the new product stage, Apple entered the market as a late mover and it rapidly dominated the market with its market (23%) in 5 years (Abel, 2008). Upon the standardised product stage, which is of today, Apple has its production chain spread out throughout the world. Apple then has its main product assembly point located in China where there is cheaper labour thereby lowering the production cost. However, their product innovations; designers; engineers still situated in the US. This highlights that although a late-mover in the MP3 player industry, Apple can also take advantage of economies of scale and become a market leader through its global production web.
1. National Competitive Advantages Porter suggests that in order to sustain industrial growth, it cannot rely mainly on the five factors – land; location; resources; labour and population. In relation to competitive advantage, Porter then introduced a concept called “clusters” of interconnected firms, suppliers, related industries, and institutions that arise in certain locations. Clusters provide late movers with a way of capitalising on first-mover advantages, providing them with the opportunity to become market leaders by benefiting from using existing industry ‘know-how’, as can be seen by the example of Apple and the ipod MP3.
1. Applications to the Real World Although certain players of the first movers in many markets outsell the late movers, research studies and evidence suggests that late movers can outsell the first movers (Golder and Tellis, 1993; Lieberman and Montgomery, 1988; Lilien and Yoon, 1990). The personal stereo and video players are examples in which industry first movers were clearly shadowed by the late movers.
1. MP3 Industry Sector 1. Apple iPod In 2008, Apple dominated the MP3 market and had 73.4% market share compared to competitor such as Microsoft which only had approximately 2% of the MP3 player market share. It was stated by Rick Le Page that the reason Apple was more powerful than Microsoft in the MP3 market is because of the tight control Apple has over the hardware and software of the ipod. According to Rick Le Page, former president of MacWorld magazine, there are crucial factors attributed to the success of the ipod.
Firstly, Competitors that were first movers in the MP3 market such as Rio and Creative failed to invent an effective and efficient way to integrate the player, computer and software connecting the two into one product. Apple’s innovative capacity and rigid research and development resulted in the creation of a product, the ipod, which could efficiently and effectively perform the function its competitor MP3 players were unable to do.
The ipod was not only at the fore-front of innovation but it was also a product that was easy to use. This ‘user-friendly’ feature made it a stand out product to customers and contributed to its success against already established competitors. Secondly, Le Page states that Apple focused on constantly improving and re-inventing their product on a regular basis to keep the technology up to date for consumers. By focusing strongly on the ipod product development, it was difficult for competitors to develop a superior product as the ipod was constantly evolving at a rapid rate.
The technical ability of apple to make their product available to PC users instead of restricting their MP3 product to only Mac users allowed them to market the ipod to the mass market and make it accessible to a large customer base. Targeting the mass market has allowed the ipod to achieve a large market share, which suggests that the function of marketing couples with product development has allowed apple to dominate the MP3 market, and these advantages are not dependant on being a ‘first-mover’ in the marketplace.