What is the First-Mover Advantage?

First-mover advantage, or FMA, is the advantage that is gained from being the first company in a brand new market segment. Sometimes the first-mover advantage provides a company with an advantage that can be difficult or even impossible for other market entrants to overcome. The first company in a given market segment can often take control of resources that subsequent entrants may not be able to duplicate. The first mover in a market can sometimes set up barriers to entry that make it difficult for new competitors to enter the market.

First-mover advantage is most apparent when a large company is first to market, as a small company may not be able to expand quickly enough to capitalize on the advantage. If a small company is unable to exploit the first-mover advantage, a larger company may come along and compete where the small company could not, thereby enjoying what is known as second-mover advantage. The first significant entrant into a market typically enjoys large profit margins and the advantages of a monopoly until subsequent companies enter the market and create a competitive atmosphere. Depending upon the product and the industry, it may be some time before competitors can enter the marketplace, making the first-mover advantage a significant one.

Because the costs to become the first company to enter a given market can be significant, a company needs to carefully weigh the costs and benefits of the first mover advantage. A company will benefit from a careful analysis of its strategic management to determine if the benefits associated with first-mover advantage outweigh the costs. The company will have to consider the costs to create the new market segment and the potential size of the market, as well as the prospects for competition.

A first mover needs to be able to generate or capitalize on the network effect to help the product category, and, by extension, its own product, gain acceptance in the market place. The network effect refers to the concept that the more users there are of a new product or service, the more valuable it is to all of those users. The classic example of the network effect is the telephone. The more people who have telephones, the more valuable they are to everyone who has one. Creating value for users of a product by expanding the market through the network effect enhances the first-mover advantage.