2 of 11

The first-mover advantage refers to an advantage gained by a company that first introduces a product or service to the market. The first-mover advantage enables a company to establish strong brand recognition and product/service loyalty before other entrants to the market.

It is important to note that the first-mover advantage only refers to a large company that moves into a market. For example, Amazon was not the first company to sell books online. However, it was the first company to achieve significant scale in that line of business.

The first-mover advantage

3 of 11

Advantages of Being a First Mover

There are several advantages to being the first business to execute a strategy.

Companies that are first movers can often:

Establish their product as the industry standard

Be able to tap into consumers first and make a strong impression, which can lead to brand recognition and brand loyalty

May be able to control resources, such as basing themselves in a strategic location, establishing a premium contract with key suppliers, or hiring talented employees

Can gain an advantage when there is a high switching cost for consumers to switch to later entrants

4 of 11

Benefits of Being a First Mover

List three main benefits of being a first mover:

Technology leadership

First movers can make their technology/product/services harder for later entrants to replicate. For example, if the first mover can reduce the costs of producing a product (an “experience” curve effect), the first mover can establish an absolute cost advantage. In addition, applying for patents can protect and establish a first-mover advantage.

2. Control of resource

The second benefit is the ability to control strategic and/or scarce resources. For example, Wal-Mart was able to locate its stores in small towns and prevent others from entering the market.

3. Buyer switching costs

The third benefit that first movers may enjoy is buyer switching costs. If the first business is able to establish itself firmly, it may be inconvenient for consumers to switch to a new brand later.

5 of 11

Disadvantages of Being a First Mover

Being the first business in an industry may not always guarantee an advantage.

The first mover may invest heavily in persuading consumers to try a new product. Later entrants would benefit from these informed buyers and would not need to spend as much on educating consumers.

Later entrants can avoid mistakes made by the first mover.

If the first mover is unable to capture consumers with their products, later entrants can take advantage of this.

Later entrants can reverse-engineer new products and make them better or cheaper.

Later entrants can identify areas of improvement left by the first mover and take advantage of them.

6 of 11

Examples of Successful Companies That Were Not First Movers

Listed below are three companies that were not first movers in their respective markets, but have now grown to become some of the biggest companies in the world:

1. Google

Before Google, there were search engines such as Yahoo and Infoseek. However, Google was able to customize its search engine to perform more effectively and efficiently. They now control over 65% of search activity.

2. Southwest Airlines

Southwest Airlines entered the airline industry as a late entrant but was able to expand and become the second-largest airline in the world in terms of the total number of passengers. The company focused on an area that other airlines were not looking at – short-haul flights.

3. Starbucks

There were a lot of places to buy coffee before the establishment of Starbucks. However, Starbucks was able to establish a strong brand equity by placing an emphasis on making Starbucks the go-to place when you’re not home or at the office.

7 of 11

Sustainable Competitive Advantage

Sustainable competitive advantages are required for a company to thrive in todays global environment. Value investors search for companies that are bargains. In order to avoid purchasing a value trap one of the factors we search for is sustainable competitive advantages.

Without one or more sustainable competitive advantages a company may not be able to recover from whatever caused the stock to become a bargain. We only want to buy the stocks of companies that are real value investments, not value traps. In other words, we want to buy stocks trading below their intrinsic value and will grow cash flow for shareholders.

Definition: Sustainable Competitive Advantages

Sustainable competitive advantages are company assets, attributes, or abilities that are difficult to duplicate or exceed; and provide a superior or favorable long term position over competitors.

8 of 11

Types and Examples of Sustainable Competitive Advantages

Low Cost Provider/ Low pricing

Economies of scale and efficient operations can help a company keep competition out by being the low cost provider. Being the low cost provider can be a significant barrier to entry. In addition, low pricing done consistently can build brand loyalty be a huge competitive advantage (i.e. Wal-Mart).

Market or Pricing Power

A company that has the ability to increase prices without losing market share is said to have pricing power. Companies that have pricing power are usually taking advantage of high barriers to entry or have earned the dominant position in their market.

Powerful Brands

It takes a large investment in time and money to build a brand. It takes very little to destroy it. A good brand is invaluable because it causes customers to prefer the brand over competitors. Being the market leader and having a great corporate reputation can be part of a powerful brand and a competitive advantage (i.e. Coca-Cola (KO).

9 of 11

Types and Examples of Sustainable Competitive Advantages (Continue…..)

Strategic assets

Patents, trademarks, copy rights, domain names, and long term contracts would be examples of strategic assets that provide sustainable competitive advantages. Companies with excellent research and development might have valuable strategic assets (i.e. International Business Machines (IBM).

Barriers To Entry

Cost advantages of an existing company over a new company is the most common barrier to entry. High investment costs (i.e. AT&T (T)) and government regulations are common impediments to companies trying to enter new markets. High barriers to entry sometimes create monopolies or near monopolies (i.e. utility companies).

Adapting Product Line

A product that never changes is ripe for competition. A product line that can evolve allows for improved or complementary follow up products that keeps customers coming back for the “new” and improved version (i.e. Apple iPhone) and possibly some accessories to go with it.

10 of 11

Strong Balance Sheet / Cash

Companies with low debt and/or lots of cash have the flexibility to make opportune investments and never have a problem with access to working capital, liquidity, or solvency (i.e Nike (NKE). The balance sheet is the foundation of the company.

Outstanding Management / People

There is always the intangible of outstanding management. This is hard to quantify, but there are winners and losers. Winners seem to make the right decisions at the right time. Winners somehow motivate and get the most out of their employees, particularly when facing challenges. Management that has been successful for a number of years is a competitive advantage.