2021
Under what conditions would you suggest that a first or a second mover are more likely to achieve a
competitive advantage? Discuss and illustrate with examples.
Intro: Factors that affect whether first or a second mover are more likely to achieve a
competitive advantage
o Factors raising SMA free-riding benefits
(1) Favor SMA: High appropriability of innovation/ ease of tech diffusion (ease of
free-riding)
(2) Favor SMA: product is novel and complex (extent of free-ride benefits)
(3) Favor SMA: high upfront costs and tech uncertainty (reduce uncertainty)
o Factors raising first-mover advantage
(4) Favor FMA: when demand-side advantages of being first mover is strong
(high buyer switching costs, brand loyalty, strong status quo bias, network
effects)
(5) Favor FMA: when supply-side advantages of being first mover is strong (Pre-
emption of scarce resources, lowered costs from learning/EoS)
Can break into 2 paragraphs
o Firm's pre-existing market position
(6) Favor FMA: as a new small firm, great benefits of disruptive competence-
destroying innovation
(7) Favor SMA: if you are a large firm, SMA better for disruptive innovation
*Note: can't talk about large firm good for sustaining innovation as that is not
considered creative destruction which FMA/SMA implies...
Favor SMA: High appropriability of innovation (ease of tech diffusion) (free-ride benefits)
o If innovation is easy to imitate/ little legal protections against imitation...
o SMA free-riding benefits high avoid R&D costs, FMA tech leadership quickly eroded
(Liebermann & Montgomery 1988)
o Appropriability, affected by factors like patents, affects profitability of innovation
(Teece, 1986)
o LINK: this depends on the strength of the IP protection- the legal systems and regulatory
environment in which firm operates. External institutional differences affect firm
decisions (Hall & Soskice 2001), non-market environment matters (Baron, 2013)
o Examples:
Polaroid's large number of patents in instant photography enabled it to keep
competitors like Kodak out. Kodak was excluded from the US markets in 1976
after a lawsuit on patent infringement (Lieberman & Montgomery, 1988)
Pharma: strong patent protection laws encourage many pharmaceutical
companies to invest heavily in R&D. Novo Nordisk Ozempic and Wegovy- high
profits from FMA in innovation.
, Low appropriability: ASML photolithography machines hard to reverse engineer.
train suppliers on cybersecurity risks and keeps tabs on any potential reverse
engineering of its machines.
Favor SMA: product is novel and complex (free-ride benefits)
o Novel (high customer/ stakeholder education needed) and complex (high R&D needed)
o With imitation costs being significantly lower than innovation costs, it is better to be a
fast follower for novel complex products.
o Greater free-riding benefits (Lieberman & Montgomery, 1988).
o Examples:
Free-ride consumer education: Texas Instruments overtook Bowmar in
electronic calculators, by leveraging Bowmar's investment in teaching
consumers to use them.
Fast follower Samsung benefited from Apple educating consumers on how to
use this novel product and developers on the possibilities of mobile apps. It also
benefitted from Apple's significant R&D costs as it imitated the iPhone's
touchscreen design and technology.
IBM PC dominated the market as the first mover, but eventually had to exit as
fast followers caught on
Favor SMA: high upfront costs and tech uncertainty (free-ride benefits)
o Benefit of having tech uncertainty resolved as second mover (Liebermann &
Montgomery 1988)
o There is a pre-paradigmatic phase of innovation (Teece 1986)
o Example:
First mover De Havilland produced Comet I, the first commercial airline jet two
years before Boeing's 707. After large investments into Comet I-specific
production facilities, its failure due to technical and commercial design flaws
significantly affected De Havilland's financial position (Teece 1986).
Favor FMA: high buyer switching costs, brand can be cemented effectively, strong status quo
bias, network effects (strong demand-side FMA)
o Tendency for customers to stick with the satisfactory brand of the first mover, especially
if it is a convenience good where savings or additional utility derived from switching may
not compensate for the switching costs (Lieberman & Montgomery, 1988).
o Higher persistence of performance in industries with high switching costs (Waring, 1996)
o If switching costs are high due to discoverability or complexity of products, imperfect
information, and pricing structure, or if switching costs are not worth it compared to the
value of the product, being a first-mover is preferable.
o Partial convergence of returns due to isolating mechanisms like early mover advantages:
learning curve, brand, switching costs, network effects (Besanko et al 2007)
o Examples:
Under what conditions would you suggest that a first or a second mover are more likely to achieve a
competitive advantage? Discuss and illustrate with examples.
Intro: Factors that affect whether first or a second mover are more likely to achieve a
competitive advantage
o Factors raising SMA free-riding benefits
(1) Favor SMA: High appropriability of innovation/ ease of tech diffusion (ease of
free-riding)
(2) Favor SMA: product is novel and complex (extent of free-ride benefits)
(3) Favor SMA: high upfront costs and tech uncertainty (reduce uncertainty)
o Factors raising first-mover advantage
(4) Favor FMA: when demand-side advantages of being first mover is strong
(high buyer switching costs, brand loyalty, strong status quo bias, network
effects)
(5) Favor FMA: when supply-side advantages of being first mover is strong (Pre-
emption of scarce resources, lowered costs from learning/EoS)
Can break into 2 paragraphs
o Firm's pre-existing market position
(6) Favor FMA: as a new small firm, great benefits of disruptive competence-
destroying innovation
(7) Favor SMA: if you are a large firm, SMA better for disruptive innovation
*Note: can't talk about large firm good for sustaining innovation as that is not
considered creative destruction which FMA/SMA implies...
Favor SMA: High appropriability of innovation (ease of tech diffusion) (free-ride benefits)
o If innovation is easy to imitate/ little legal protections against imitation...
o SMA free-riding benefits high avoid R&D costs, FMA tech leadership quickly eroded
(Liebermann & Montgomery 1988)
o Appropriability, affected by factors like patents, affects profitability of innovation
(Teece, 1986)
o LINK: this depends on the strength of the IP protection- the legal systems and regulatory
environment in which firm operates. External institutional differences affect firm
decisions (Hall & Soskice 2001), non-market environment matters (Baron, 2013)
o Examples:
Polaroid's large number of patents in instant photography enabled it to keep
competitors like Kodak out. Kodak was excluded from the US markets in 1976
after a lawsuit on patent infringement (Lieberman & Montgomery, 1988)
Pharma: strong patent protection laws encourage many pharmaceutical
companies to invest heavily in R&D. Novo Nordisk Ozempic and Wegovy- high
profits from FMA in innovation.
, Low appropriability: ASML photolithography machines hard to reverse engineer.
train suppliers on cybersecurity risks and keeps tabs on any potential reverse
engineering of its machines.
Favor SMA: product is novel and complex (free-ride benefits)
o Novel (high customer/ stakeholder education needed) and complex (high R&D needed)
o With imitation costs being significantly lower than innovation costs, it is better to be a
fast follower for novel complex products.
o Greater free-riding benefits (Lieberman & Montgomery, 1988).
o Examples:
Free-ride consumer education: Texas Instruments overtook Bowmar in
electronic calculators, by leveraging Bowmar's investment in teaching
consumers to use them.
Fast follower Samsung benefited from Apple educating consumers on how to
use this novel product and developers on the possibilities of mobile apps. It also
benefitted from Apple's significant R&D costs as it imitated the iPhone's
touchscreen design and technology.
IBM PC dominated the market as the first mover, but eventually had to exit as
fast followers caught on
Favor SMA: high upfront costs and tech uncertainty (free-ride benefits)
o Benefit of having tech uncertainty resolved as second mover (Liebermann &
Montgomery 1988)
o There is a pre-paradigmatic phase of innovation (Teece 1986)
o Example:
First mover De Havilland produced Comet I, the first commercial airline jet two
years before Boeing's 707. After large investments into Comet I-specific
production facilities, its failure due to technical and commercial design flaws
significantly affected De Havilland's financial position (Teece 1986).
Favor FMA: high buyer switching costs, brand can be cemented effectively, strong status quo
bias, network effects (strong demand-side FMA)
o Tendency for customers to stick with the satisfactory brand of the first mover, especially
if it is a convenience good where savings or additional utility derived from switching may
not compensate for the switching costs (Lieberman & Montgomery, 1988).
o Higher persistence of performance in industries with high switching costs (Waring, 1996)
o If switching costs are high due to discoverability or complexity of products, imperfect
information, and pricing structure, or if switching costs are not worth it compared to the
value of the product, being a first-mover is preferable.
o Partial convergence of returns due to isolating mechanisms like early mover advantages:
learning curve, brand, switching costs, network effects (Besanko et al 2007)
o Examples:
