Plugdin Insights: Is it better to be a first mover or a fast follower?

Read time: 10 minutes

In tech, pure disruption and ‘first mover advantage’ are often presented as the Holy Grail of business success. Like all of us, investors are often attracted to the new, but is it sometimes better to be a fast follower rather than a total pioneer? Is there sometimes a benefit in letting another player go first, and then launching with an evolution that learns from their mistakes? 

The idea of ‘first mover advantage’ came to prominence in a 1988 paper by David Montgomery, a Stanford Business School professor, which he co-authored with Marvin Lieberman. The phrase was soon being used by Silicon Valley start-ups to justify a rather macho approach to business growth that was common during the dotcom bubble. It continued to be trumpeted long after the authors had published a follow-up paper, in 1998, which rowed back on the idea that being the first entity to launch a service or hit the shops necessarily entails commercial glory.  

And with good reason, perhaps. In 1993, research by Peter N Golder and Gerard J Tellis pointed at the much higher survival rate of followers over first entrants. In the authors’ study of 500 brands in 50 product categories, the authors found that 47% of start-ups that were first to sell a product failed, whereas the failure rate among businesses that entered a market early but weren’t first was just 8%. 

Yet in tech, the prospect of genuine innovation or ground-breaking disruption is inevitably an enduring attraction to investors. So the debate goes on: is it better to break first ground or build on another’s breakthrough?  

Maximising innovation 

Innovation comes in many forms. A product may be so original as to make a previous technology redundant. It may deliver a new product from an original bundling of existing products or technologies, or it may apply an emerging technology (such as automation or AI) to a category or market for the first time. One such first-mover example is HeadBox, which has developed tech to disintermediate the b2b event booking space.  

‘We unlock events for bookers, companies and venues through a combination of our platform, smart software and outstanding customer service,’ says CEO Andrew Needham. HeadBox directly connects corporate bookers looking for great event spaces with the owners of those spaces, so removing a lot of the friction, third-party management and manual legwork from the process of searching, booking and paying for a space. The company was a first mover in this sense, but it was only after developing this idea into a viable service that it hit on a bigger opportunity.   

‘Before we started, there was very little tech or IP in the events industry,’ says Needham. ‘I knew the problem first hand from my previous company, where we had to get senior stakeholders together with consumers to address tough brand and innovation challenges, and we had to find amazing spaces to host these interactions. But booking a venue was such a hassle – you had to pick up a phone, send emails, you had all this paperwork going backwards and forwards, trips to the scanner and photocopier. You had to deal with an intermediary. If you wanted to talk directly to the venues you'd have to ring round every single venue to go through this process.

‘I felt there had to be a simpler, easier, faster way of doing this. We all have an expectation now that technology should be taking the pain and hassle out of basic business processes, and we were the first to apply that to the events space by bringing together supply and demand through a platform. The essence existed in other areas, but this was new to the events industry.’

First-mover success

‘The innovation has helped to educate venues about how to market themselves more powerfully, experiment with dynamic pricing and maximise the value from their properties. But it also led to a more powerful idea: assisting corporates in their digital transformation by giving them a holistic view of their event management and spend across the entire organisation.

‘We learned quite quickly that our platform was only really addressing the needs of an EA or a PA who was booking simple, lower-level events. But beyond that, we realised that there were a whole range of needs that existed at an organisation-wide level that were not being addressed within the marketplace, and that if we addressed those needs we could sign up entire companies with HeadBox.’ So the company introduced HeadBox Business, which sits behind the main interface and gives corporates their own dashboard, where they can see who is booking what space, where, for how much, across their entire organisation.

‘It’s analogous to a travel-management company. It’s giving businesses visibility and control over an area of spend that they just had no idea existed, because as you can imagine, with big organisations everyone's a booker. Everyone wants to book a little team away-day, or a sales kick-off, or a little get-together in a restaurant, and they’re all putting it on their credit cards, or expensing it. HeadBox can spot trends, drive efficiencies, and act as the single point of payment for these big companies, rather than having to set each one up as a separate supplier, with a different contract, every time an individual event is booked. Now the company can just contract with HeadBox, and we have brought some uniformity to contracts and payments in an industry where there was no standardisation.’ 
 

The benefits of being a fast follower

The rewards for successful first movers may be substantial, but it’s also obvious to see why fast followers often have the edge over first movers. The latter are inevitably working with only a limited understanding of their market, of the full potential of their tech, or their optimum business model. Their potential customers are on a steep learning curve. Fast followers, on the other hand, can learn from their mistakes and from the reaction of early adopters. They can enter into a market where the product is already known and evolve its functionality.

Nigel Filer is CEO of Rimo3, who help businesses adopt new technology faster through their automated application testing solution, and offer a new approach to managing their IT and application estate. ‘The transition to Evergreen IT is the utopia of every business. Complex legacy systems and manual processes replaced with automated, frequent IT updates and adoption that take less time, budget and resource. But this journey is a challenge for many organisations, especially when faced with industry deadlines such as Windows 10.

At Rimo3, we have developed solutions that focus on helping businesses automate, accelerate and adopt Evergreen IT.  We are fast followers, rather than pioneers, as we take the automation technology that already exsits, but use it in a different way, offering both an experienced approach and smarter way of doing things’.

It is this advantage of following rather than leading – at a very early stage – that Nigel believes is critical.

He illustrates his point by reference to the Gartner hype cycle, a regularly updated, graphic representation tracking the maturity and adoption of emerging technologies over time. 

‘The art of entering a market is making sure that you jump onto that hype cycle at the right point,’ he says. ‘If you’re too early – if you’re really a first mover – you can end up investing a hell of a lot of money before the market's ready and before you start to monetise whatever it is that you’re producing. If you define a first mover as someone who really creates the idea when it’s embryonic and takes it through, then I would say I probably wouldn't want to be a first mover in a market, but I'd want to be a very fast follower.’ 

Too late is almost as problematic as too early, he says. ‘If you jump on too late and the tech or the idea is on a downward curve, you have no competitive advantage, you've got no differentiation in the marketplace, and you're not going to monetise what you're doing very well at all. But if you jump on when the curve is on its way up, you can take someone else's idea, tweak it, make it better, deliver more value to your customers and actually then monetise that in a much more effective way.

‘For example, our own ACTIV platform solves an age old problem of managing change in a new and unique way. We are able to deliver huge business improvements, not as a first mover as some coud argue, but as a fast follower to our own original AppDNA product.’

A great idea, then, is nothing without timing. ‘It doesn't matter how great an idea is if the timing is wrong,’ says Filer. ‘There have been so many brilliant ideas that have failed because either the market wasn’t ready, or the infrastructure wasn’t there to deliver against it. Take boo.com, at the end of the dotcom bubble. They had the idea of 3D clothes. It was an amazing idea and all the fashion retailers do such things now, but at the time the bandwidth and the compression technologies just weren’t there.’

Market education and defensibility

Educating the market is another area where the fast follower has the advantage. ‘The big issue with disrupting markets, when you’re introducing a completely new product or service, is educating the market that it needs it at all, or that this is a new way of doing something,’ say Peter Cowley, serial entrepreneur, seasoned angel investor, and author of The Invested Investor. ‘Education of markets takes time and therefore money, because you’re burning money while you’re not actually selling anything. The cost of being in the blue ocean – where it’s just you swimming out there and you’ve got the whole ocean to yourself (as opposed to a red ocean which has aggressive competitors) – is high.

‘What I look for in businesses that pitch to me is technology that works, first of all,’ he says. ‘If it doesn't work, they’re never going to disrupt anything. Then you need something with a good level of defensibility, something that has got a barrier to entry of some form. It doesn't need a patent, but it must have something that's fairly difficult to replicate. But in the end, it's not that that builds the business, it’s creating or getting into a market.’

‘There are certain factors that have to be in place for a good idea to become something that makes it in a market,’ says Nigel Filer. ‘Above all, you have to have an idea that translates into a solution that people are prepared to pay for, one that delivers value. There’s got to be an ease of delivery for the idea, it’s got to be easy to consume, there’s got to be the right infrastructure and environment, and a price point that isn’t prohibitive.’ 

Peter Cowley would agree. ‘I’ve seen lots of examples of start-ups that offered a very neat technological solution, which they’d got to the point of working well, but because they didn’t find a market for it or any technology that they were able to commercialise, they died a death. It’s a big issue – people having a great tech idea, believing there will be a market there and then being proved wrong. And that’s why most small companies fail. They don’t get to the point where there’s enough gross margin from customers to actually break even, and the equity dries up.’

Says Andrew Needham: ‘The reason why fast followers succeed at a higher rate is that they’ve got that proven product-customer and product-market fit to build on. They learn from the first movers, they listen to their customers, they understand a bit more about the market, and what the customer needs are.’ 

First-mover disadvantage

Nigel Morris, Director of Technology Advisory Services at BDO, relates a cautionary tale of a first mover being overtaken by a fast follower, from an earlier phase in his career. ‘After working for a multinational freight company, I joined a start-up which was looking to disrupt that industry by matching capacity with consignments in road haulage, using automation and connecting systems rather than relying on manual input. 

‘I see a disruptor as someone who creates a market which is then in competition with an existing market and that’s what we were doing – there were numerous organisations offering load matching, but largely driven by manual input into a web interface rather than automated out of the back office systems. So we were looking to create a new market with the automation of the exchange of information from the back-office systems through to our load-matching platform. The goal being that this would then take over and replace not just the existing manual systems, but actually change the way that the whole load haulage industry might work, including both the utilisation of the vehicles and the back office admin behind that utilisation. 

‘When we spoke to large organisations, larger shippers and carriers, they all thought what we were doing was a great idea and they liked the theory. But, when push came to shove and they actually had to pay to use the service, we found they were extremely risk averse. Even though they were operating on small margins, and we could offer them potentially much larger margins, it was very difficult to find organisations who were prepared to take that first step. 

‘A disruptor is somebody who creates a market, but of course in doing so you also create the conditions for competition. In my example, we were introducing a service from scratch as a first mover. But some of our competitors who had a manual service already in place realised that the industry was moving towards back-end automation, and were able to upsell an automated offering to an existing customer base. So as a fast follower they benefited from our innovation.

‘So there’s a great deal of risk to being a disruptive company. You have to gain investment. You then have to sell the concept to customers. Often it's a new concept with an unproven business model, and you shoulder the burden and risk of the research and development. Often I think disruptors haven't got a clear business model, and maybe haven't got a clear picture of the market that they're attacking, and when the reality comes about where they're actually trying to get customers on board, they find that the research they've done or the information they've been given is either incorrect or is not exactly as they expected and therefore it's quite tough for them to actually establish the service or product.’  

Guarding against disruption?

How then does a business with a marketable disruptive idea guard against being disrupted itself?

‘There are certain factors that have to be in place for a good idea to become something that makes it in a market,’ says Nigel Filer. ‘Above all, you have to have an idea that translates into a solution that people are prepared to pay for, one that delivers value. There’s got to be an ease of delivery for the idea, it’s got to be easy to consume, there’s got to be the right infrastructure and environment, and a price point that isn’t prohibitive.’ 

‘I think that the way you avoid being disrupted is to never think that you are doing things the best way,’ says Nigel Filer. ‘You absolutely have to always be open to the idea that there is always going to be a different way. You may have just launched the latest and greatest disruptive technology, but do not think for a minute that there isn't something that could then become the next latest and greatest, and could disrupt you. Businesses that stay at the top of their game and continue to be disruptors are the ones that have a very open mind to their way of doing things. They’re always looking at new ways of doing things, listening to the market, reacting to the market and always trying to drive innovation. At Rimo3 we are constantly talking to the market, understanding needs and looking for new ways to meet them.’

For Andrew Needham, similarly, it all comes back to obsessing about the customer. ‘Listening to our customers and speed of execution are key,’ he says. ‘We keep listening and learning, and feeding that back into our agile approach to software development, so that we’re always coming back with solutions quickly and always improving the product. If another player came along and copied us, by the time they came out we’d be another six months on, because we’re just a little bit ahead of that curve. That may mean relatively subtle iterations sometimes, but it may also mean having the courage to make a step-change where you see that that's necessary.  

‘Jeff Bezos talks about waking up and being really scared – not of your competitors, but of our customers. They’re the ones you’ve never quite done enough for, they're the ones you have to innovate against. I think if you keep your focus on that, if you really listen and you build a great product, then you will succeed.’