lesson to learn from Google & Amazon

If you need to buy a book online, which website do  you visit first? If you want to research the author of the book, which search engine do you use? The answers, most probably, are Amazon and Google, respectively. Such is the dominance of these two Internet giants that their names define their respective markets. Both organizations have a significant edge in the markets they lead, but they achieved that dominance by different means. Amazon, launched in 1995, gained its advantage by being the first business to enter the online retail market, establishing its brand name, and building a loyal customer base. Google, by contrast, was by no means first. When Google launched in 1998, the market was already dominated by several large players; Google’s edge came from offering a superior product—not only was it faster, but it produced more accurate search results than any of its competitors. Getting into a market first has significant advantages, but there are also benefits to being second. The key is that in order to gain a competitive edge in the market, a business needs either to be first, or it needs to be better.

 

Market pioneers

The benefits of being first into a market are known as “first-mover advantage,” a term popularized in 1988 by Stanford Business School professor David Montgomery and his co-author, Marvin Lieberman. Although introduced a decade previously, Montgomery and Lieberman’s idea took particular hold during the dot-com bubble between 1997 and 2000. Spurred on by the example of Amazon, businesses spent millions pitching themselves headlong into new online markets. Conventional wisdom was that being first ensured that the company’s brand name became synonymous with that segment, and that early market dominance would create barriers to entry for subsequent competition. In the end, however, overspending, over hype, and overreaching into markets where little demand existed was the downfall of many fledgling dot-coms. With notable exceptions, businesses found that promised returns were not being realized and funds quickly ran short—and for many of these first-movers, failure followed.

Be First-mover advantage

Being first out of the block undoubtedly has its advantages, and in the case of the dot-coms, those advantages were exaggerated to the extreme. First-movers often enjoy premium prices, capture significant market share, and have a brand name strongly linked to  the market itself. First-movers also have more time than later entrants to perfect processes and systems, and to accumulate market knowledge. They can also secure advantageous physical locations  (a prime location on a main street  of a city, for example), secure the employment of talented staff, or access beneficial terms with key suppliers (who may also be eager to enter the new market). Additionally, first-movers may be able to build switching costs into their product, making it expensive or inconvenient for customers to switch to a rival offering once an initial purchase has been made. Gillette, for example, having invented the safety razor in 1901, has consistently leveraged its first-mover advantage to create new products, such as a “shaving system” that combines cheap handles with expensive razor blades.

Market strategies In the case of Amazon.com, first mover advantage consisted of a combination of factors. In the newly emerging e-commerce market, customers were eager to try online purchasing, and Amazon was well placed to exploit this growing curiosity. Books represented a small and safe initial purchase, and Amazon’s simple web design made buying easy and enjoyable. Early sales enabled the organization to adapt and perfect its systems,  and to adjust its website to match customer needs—adding, for example, its One Click ordering system to enable purchases without entering payment details. Amazon was also able to build distribution systems that ensured quick and reliable delivery of its products. Although competitors could replicate these systems, customers already trusted  Amazon, and the brand loyalty the organization enjoyed created significant emotional switching costs; even today, Amazon enjoys the benefits of this trust and loyalty, and almost a third of all US book sales are made via Amazon.com.

A recent example of how important first-mover advantage remains are the “patent wars” contested between most of the leading smartphone makers (including Apple, Samsung, and HTC). Patents help a company to defend technological advantage. In the hyper competitive smartphone industry, being first to market with a new technological feature offers critical, albeit short-term, advantage. In an industry in which consumers’ switching costs are high, even short-term advantages can have  a significant impact on revenue.

Since the publication of Montgomery and Lieberman’s original paper in 1988, academic research has indicated that significant advantages accrue  to market pioneers, which can be directly attributable to the timing of entry. The irony is that in a retrospective paper that appeared in 1998, “First-Mover (Dis) Advantages,” Montgomery and Lieberman themselves backed off their original claims concerning  the benefits of being the first to enter a market. Building on the work of, among others, US academics Peter Golder and Gerard Tellis in 1993, Montgomery and Lieberman’s 1998 paper questioned the entire notion of first-mover advantage. In their research, Golder and Tellis had found that almost half the firstmovers in their sample of 500 brands, in 50 product categories, failed. Moreover, they found that there were few cases where later entrants had not become profitable or even dominant players—in fact, their research identified that the failure rate for first-movers was  47 percent, compared to only  8 percent for fast followers.

learning from mistakes – Be Better

The challenge for first-movers is that the market is often unproven; industry pioneers leap into the dark without fully understanding customer needs or market dynamics. First-movers often launch untried products onto unsuspecting customers; and it is rare that they get it right first time. Large companies may be able to take the losses of such early-market entry mistakes; small companies, on the other hand, may soon find that their cash is running out and their tenuous business models are collapsing. Later entrants have the advantage of learning from the mistakes of the first-movers, and GAINING rom entering a proven market. They are also able to avoid costly investment in risky and potentially flawed processes or technologies; first-movers, by contrast, may have accrued significant “sunk costs” (past investment) in old, lessefficient technologies, and may be less able to adapt as the industry matures. Followers can enter at  the point at which technology  and processes are relatively well established, with both cost and risks being lower.

Followers may have to fight  to overcome the first-movers’  brand loyalty, but simply offering  a superior product that better addresses customer needs is  often sufficient to secure a market. Brand recognition is one thing,  but technical and product superiority can give that all-important competitive edge. Moreover, with investment costs being much lower, followers often have surplus cash to use on marketing, thereby offsetting the branding advantages of the first-mover. When Google, for example, entered the Internet search business in 1998, the market was dominated by the likes of Yahoo, Lycos, and AltaVista, all of whom had established customer bases and brand recognition. However, Google was able to learn from the mistakes of these earlier entrants and, quite simply, build a better product. The organization realized that with so much information on the Internet people wanted search results that were comprehensive and relevant; the various market incumbents offered a variety of systems for filtering search results, but Google was able to take the best of these systems and build its own unique algorithm that led to market dominance.

Lets Learn from the world class companies if you want to take advantage build the company with innovation or lead the market with superior USP (Unique selling point)

 

 



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