First to Fail? Why You Want To Gain The Second-Mover Advantage

You have a little case of heartburn. Maybe those spicy tacos weren't such a good idea. You reach for your Zantac - and prove that companies that enter the race first do not always win it. During the 1970s, Tagamet was the leading treatment for ulcers and heartburn. When Zantac came on the scene a few years later (lightning fast in pharmaceutical time), it quickly came to dominate the market. While there is a persistent myth surrounding radical innovation and being first, oftentimes coming in a "Fast Second" proves the smarter move.

Fast Second: The Way to Win the Market?

Coming in second - and winning? It's just not the way business is done. GlaxoSmithKline's Zantac must be an anomaly. Take Coca-Cola, for instance. Developed in the 1880s, Coke was the first soft drink of its kind; it became synonymous with refreshment.

Over a century later, Coca-Cola is still the reigning soda: over 1.7 billion servings are sold each day; the brand is worth more than Budweiser, Pepsi, and Red Bull combined, and as an economy, Coke ranks 85th in the world (one spot up from Costa Rica).

But as Constantinos C. Markides and Paul A. Geroski argue in Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets, it's first-movers like Coca-Cola, not second-movers like GSK, that are the anomalies. They write, "It turns out, when it comes to radical, new-to-the-world markets, the pioneers almost always lose out to latecomers."

But why?

"Radical Innovation"

Let's back up a moment. To understand why, we need to determine exactly what Markides and Geroski mean by "radical, new-to-the-world markets." Radical innovations must meet the following criteria:

• Introduce major new value propositions that disrupt existing consumer behaviors (e.g. Coca-Cola).
• Create markets that undermine traditional competencies and complementary assets on which existing competitors have built their success (e.g. cars, VCRs, computers).

This contrasts with other types of innovation, such as incremental. Google is a prime example. It did not create an entirely new value proposition with its search engine; it improved on an existing one. Highly-disruptive, supply-pushed to market, and rarely driven by customer need or demand, radical innovations, on the other hand, create an entirely new landscape rather than building on the existing one.

The Cost of Being First

Markides and Geroski call firms that engage in radical innovation "colonizers" (as opposed to "consolidators," who scale those markets up) - and most businesses are enamoured by the idea of settling new ground and creating an empire. In Al Ries and Jack Trout's The 22 Immutable Laws of Marketing, for example, rule #1 is: "It's better to be first than it is to be better."

But, contrary to conventional wisdom, there's a steep cost to being first. For one: the "radical innovation process is very difficult to replicate inside a big corporation. That's because dramatic innovations tend to be haphazard, unsystematic, and rare."

Typically, established businesses (and their hierarchical structures) operate most effectively in "maturing markets that reward building rather than creating." Further, first-movers incur the heavy costs of building infrastructure, time, and most of all, risk.

Researchers Peter N. Golder and Gerald J. Tellis analyzed 500 first-movers across 50 product categories. Nearly half of failed. Adding insult to injury, those that survived achieved a mean market share that was lower than comparable companies. They also found that "Fast Followers" enjoyed greater long-term success. Another study, cited by the Kellogg School of Management, Northwestern University, discovered that second-movers beat out first-movers in 35 of 50 product categories.

The bottom line: for every Coca-Cola, there's 10 Tagamets. For every Sony, there's a Xerox, Atari, Newton, and Digital Research.

There is good news; Markides and Geroski write, "They may not be good at creating radically new markets, but they don't need to be. After all, the money is not in creating a new market, but in consolidating it." Established firms have the clear advantage here; seize it, and conquer new markets. Next, we'll see how companies can leverage the second-mover advantage to do just that.