Geoffrey
Phillips / Business Advisory Services
Being
first into new market spaces has widely been shown to be one of the most
powerful drivers of business value. Working with our clients, we have developed
a powerful, quantifiable model that evaluates the specific impact of first
mover actions. The model is dynamic and evaluates the complex interactions
among timing, offer quality, customer satisfaction, and competitive action.
Some
of the subtle interactions that we find involve complexities around user
preference; the impact of a disappointing experience; the willingness to use a
second choice when the first choice is not available; and the “stickiness” that
results once a choice is made. Another
powerful influencer on ultimate value is entry timing relating to the readiness
of the market for the new product or service.
There is low value for being first into a market that no one sees! In many markets there is also structural
pre-emption. This is when the first
to market can legally tie up a key distribution channel or a key supply
resource in a way that severely retards the ability of second-movers to attain
effective market position.
By
quantifying the various factors, we are now able to examine the economic
trade-offs of different first-mover strategies. For example: what is the value of over-selling in order to
establish a strong first position? Or does the customer dissatisfaction totally
destroy this position? At the other
extreme, we can examine quantitatively what a second-mover must do in order to
overtake the first mover in market share or economic value. Factors that play here are reducing
stickiness; the value of learning from the first mover; the real options
value of waiting; and the strategy of how to deploy competitively against a
growing incumbent.
The
consumer broadband access markets (DSL and cable) have had to deal with – and
therefore illustrate – many of these factors.
Early first movers had to face the cost of a market that didn’t have a
need for high-speed access. This
resulted in thin deployments, which then drove overheated marketing efforts to
produce economic scale. These marketing
efforts often over-sold the availability of services which in fact weren’t
ready. At the same time, the
first-movers often failed to complete an effective operating and support model,
so that users experienced long delays on installation, and poor service
support. Pricing differentials between
cable and DSL and the uneven availability of services enabled first movers to
often attain customers who would have preferred the alternate offer. Stickiness factors – which in this case are
not insignificant – can hold these customers in place.
Historically,
there are numerous examples of effective and ineffective first-mover
strategies. Banks who lead the way into
ATM machines realized both near and long term benefits from the early
leadership. Betamax is the classic
example of an early-mover position that – despite significant stickiness – was
ultimately defeated by VHS. It’s early
position was on too small a scale to overcome the higher preference for, and
broader engagement with, the later, VHS standard.
By
quantifying the interplay of all of these factors, companies at multiple levels
in the value chain can gain a useable perspective on their choices. For example, manufacturers can evaluate the
impact of securing pre-emptive distribution positions, and balance that against
the “cost” of an offer which may be not-quite complete; and distribution
channels can evaluate the real-options value of waiting for alternatives
against the benefits (negotiating strength, competitive advantage) of moving
earlier.
In
summary, we have found that first-mover factors turn out to be extremely
powerful determinants of future value.
Effective quantification of their interplay is therefore an activity of
immense value.
Geoffrey Phillips / Business Advisory Services has provided significant guidance to its clients and to their clients regarding first mover actions and the maximization of shareholder value.