First Movers Don't Always Have the Advantage

Many entrepreneurs fall into the trap of believing that being the first mover always conveys a formidable advantage.  The first mover myth trips up many business people. Who was the first player in social media?  Not Facebook.  It was Friendster.  Who was the first mover in the browser market?  Netscape.  Who was first in search?  Not Google.   According to Kellogg Insights, “One study showed, in fact, that pioneers were more successful than late movers in just 15 of 50 product categories.”  

What are the key sources of first mover advantage?  If substantial economies of scale, network effects, and a powerful learning curve exist, then first movers have an advantage.  However, there's downside to being the first mover.   Being the pioneer in a new market can be expensive and challenging.  You make all the mistakes that a pioneer is likely to make.  Others watch and learn from your errors, and then they leapfrog past you.  At the same time, entrepreneurs who move first can then get stuck in the sunk cost trap.  They can become resistant to adapting their strategy that enabled them to gain some initial traction.  Fast followers then pass them by.   Entrepreneurs need to look carefully at a particular market and understand that simply being the first mover may not convey substantial advantage and protect them from competitive threats.

Groupon's IPO

Groupon announced yesterday that it would be issuing an initial public offering soon.   Many analysts expressed concern about the high valuation coupled with the significant losses that have mounted as the company grows rapidly.  Some analysts have talked of this IPO as further evidence of a bubble in new tech firm valuations.

How do we make sense of these concerns?   We have to ask ourselves:  Has Groupon built a significant sustainable competitive advantage?   Are they a successful first mover, or will they be like many early movers in technological industries who actually end up being overrun by later entrants?   To answer these questions, we have to look at several factors.  First, does the company's business model have significant scale economies?   If so, then they can amortize fixed costs as they grow, and therefore, they will become quite profitable.  Second, does the business model have substantial network effects?   Amazon's model has both scale economies and network effects.  Thus, Amazon turned early losses into sizeable profits as it grew, and it built a quite formidable competitive advantage.   At first glance, it does not appear that Groupon has the type of economies of scale and network effects enjoyed by Amazon.   The model seems to very labor intensive, with new staff required to drive new growth.  The jury, of course, is still out though.  As the company goes public and we learn much more about its finances and strategy, we will be able to discern this more accurately. 

Competitive advantage may derive from other sources as well. Groupon itself focuses on its relationships with local merchants.  Undoubtedly, they do have ties at the local level that are quite impressive. Yet, questions remain to be answered.   Have they built relationships that will be hard to duplicate or break?  Are there significant switching costs for these merchants?  The barriers to entry do not look huge at this point, as we have seen a flood of entrants into this space.  Of course, some big existing players also want a piece of this pie, and so we will have to watch the likes of Google, Amazon, and Facebook to see if Groupon can sustain its early lead.