When iconic computer manufacturer Apple launched the hand-held Apple Newton in the summer of 1993, it thought it was on to a sure-fire winner.
As the first personal digital assistant (PDA), there was nothing else remotely like it on the market. The Newton had opened up a completely new sector and Apple bosses reckoned that their biggest problem would be making enough of the new wonder-gizmos to meet demand.
Five years later the Newton's share of the now burgeoning PDA market stood at just six per cent. In February 1998, Apple took the humiliating and costly decision to withdraw the Newton from sale.
Apple, it seems, had fallen foul of one of the most widely held and, some say, damaging corporate myths of all time: that of first-mover advantage. The idea is today so deeply ingrained that it is now widely assumed in business that being first into a market allows you to set the frame of consumer reference and gain economies of scale, giving you an unassailable lead over those who follow.
The truth, however, is almost exactly the opposite, says Costas Markides, Professor of Strategic Leadership at the London Business School and author of Fast Second, a book about the dangers of being first into new markets. If you want evidence of how damaging it can be, you need only look at the dotcom bubble and subsequent burst which were fuelled in part by this belief.
"It's just not the case. I can think of very, very few examples where the first into a market managed to dominate." This is because first mover advantage exists only under very particular circumstances, argues Markides.
The first of these is, strangely, a low rate of technological change. "You may have a fantastic new technology but, if rivals are innovating all around you, first-in often ends up bypassed." This is precisely what happened to the Newton, which was rendered almost obsolete by the smaller, cheaper, more user-friendly rival Palm Pilot. Second, the market itself should not be growing too fast. "High growth sucks in competitors and makes it much harder for the first company to dominate," Markides adds.
"It's largely corporate myth-making. The eventual winners in markets persuade themselves and others, for reasons of pride, that they were first-in. Usually they were merely the first to make a success of it, which is a very different thing."
This isn't simply a problem in high tech industries, as Australian alco-pop brand Two Dogs found to its cost. The company launched the first UK alco-pop in 1995. But the opportunity was just too large. The brewing and distilling giants soon followed with the likes of Barcardi Breezer. Two Dogs, which just didn't have the strength in distribution, was crushed.
Lastly, production needs to have significant economies of scale. "Without economies it's harder to have cost advantages which means it's easier for new entrants to come and take your share." You only have to ask any window cleaner whether being first into a new estate means they acquire a monopoly. It doesn't because they acquire no significant cost advantage by being first.
John Allert, COO of brand consultancy Interbrand, adds a fourth condition – that of 'parity'. "When entry products are all much the same, then first-in may have an opportunity to brand their entry in a way that excludes others," he argues. A good example of this was the way that the first banks made capital out of automatic tellers when they were first introduced.
However, most markets support at least three or four players, and often hundreds, sometimes thousands. So, generally, second or later is preferable says Allert. "Be the best rather than the first. You just don't have the same level of risk. You can learn from other people's mistakes. You don't have to pay to educate the consumer, because first-in has already done it. And you can cherry-pick the most profitable segments."
Clearly, however, you don't want to be too far behind the pack. So getting your timing right is vital, says Markides. "The best moment to enter a new market is just when the dominant design is beginning to emerge." You can usually tell which it is by the number of complementary goods, such as add-ons, software, extensions, and associated gadgetry, he says.
But the mystery remains. How could such a plainly wrong argument become accepted as the truth? The culprit, says Markides, is corporate spin by those who eventually dominate markets. "It's largely corporate myth-making. The eventual winners in markets persuade themselves and others, for reasons of pride, that they were first-in. Usually they were merely the first to make a success of it, which is a very different thing."
It's certainly a lesson Apple seems to have learned. MP3 players had been around for years before they launched the Apple iPod. But, rather than lead the market with a product that would appeal only to nerds, the company bided its time, waited to see how people used MP3 and then designed the most user-friendly player on the market. Its reward has been market domination and a doubling of profits in the last year, despite a fall in sales of its core product, the Apple Mac computer.
Apple appears to have learned the very difficult lesson that, when it comes to opening up new markets, sometimes it is better to let others go first.
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