Question

a. Describe the advantages and disadvantages of being a “first mover” or a “follower” in a high-tech industry. b. Why does the probability of a “paradigm shift” increase as a technology matures and approaches its natural limit? When that happens, what are the problems and opportunities faced by innovators of “disruptive technology?”

Answer 1

a. 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 allows a company to establish strong brand recognition and product/service loyalty before other entrants.

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.

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.

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 that 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 it.
• Later entrants can reverse-engineer new products and make them better or cheaper.
• Later entrants can identify areas of improvement by the first mover and take advantage of it.

b. A paradigm shift occurs when a new technology or business model comes along that dramatically alters the nature of demand and competition. Faced with paradigm shifts, incumbent enterprises have to adopt new strategies to survive. Paradigm shifts appear to be more likely in an industry when one or more of the following conditions are in place.

First, the established technology in the industry is mature and approaching or at its natural limit. Second, a new disruptive technology has entered the marketplace and is taking root in market niches that are poorly served by incumbent companies that use the established technology. Third, a company develops a new business model that is radically different from that used by competitors, enabling it to capture more demand and put its rivals on the defensive.

c. The theory goes that a smaller company with fewer resources can unseat an established, successful business by targeting segments of the market that have been neglected by the incumbent, typically because it is focusing on more profitable areas.

As the larger business concentrates on improving products and services for its most demanding customers, the small company is gaining a foothold at the bottom end of the market, or tapping a new market the incumbent had failed to notice.

This type of start-up usually enters the market with new or innovative technologies that it uses to deliver products or services better suited to the incumbent’s overlooked customers – at a lower price. Then it moves steadily upmarket until it is delivering the performance that the established business’s mainstream customers expect, while keeping intact the advantages that drove its early success.

Disruption happens when the incumbent’s mainstream customers start taking up the start-up’s products or services in volume. Think Blockbuster and Netflix.

Meanwhile, disruptive companies are exploiting technologies to deliver new or existing products in radically different ways. (Netflix moved away from its old business model of posting rental DVDs to customers to streaming on-demand video.) Their offerings are initially inferior to the incumbents’, and, despite the lower price, customers are usually not prepared to switch until the quality improves. When this happens, lots of people start using the product or service, and market prices are driven down.