This content relates to : NEW PRODUCT & SERVICE DEVELOPMENT
Recognize the 3 major sources of first-mover advantage:
-Shaping expected innovation benefits
-Creating customer lock-in
-Expanding the initial customer base via network effects
Using these advantages, encourage your organization to innovate into new markets.
Failing to do so increases a firm’s risk of losing its first-mover advantage.
NC State University
Established firms often have trouble maintaining an innovation streak they may have enjoyed in their earlier years. Tesla seems to be outrunning the legacy car companies, and even Apple gets accused of not being innovative enough anymore in its new products. Incumbent companies spend years establishing skills, knowledge, routines, and assets that help serve their current markets, but this experience base can be ill-suited for anything other than incremental innovation.
This “supply-side” view to the curse of incumbent inertia and lack of innovation is well known, but there’s another side to the story. Our research shows that the incumbent firm has potential “demand-side” advantages that can help it compete and innovate. The customer base can exhibit demand tendencies that may benefit the incumbent over newer competitors in three ways.
First, early in any product market, customers need to learn what a product is supposed to do and resolve uncertainties about what benefits the product may hold. Incumbents that are early can basically teach customer what they should like, which of course reflects what the firm’s own products deliver. Amazon established one-click shopping early on, and customers quickly came to expect easy internet shopping. Customers form their preferences around such product benefits that the firm then leverages into greater demand.
Second, the early incumbent can create customer lock-in as it sells to a growing customer base. Generating customer loyalty and other brand-based advantages takes time, so newer firms or products may face a disadvantage to the incumbent. Customers would incur switching costs if they wanted to flip from the incumbent to another product (think of airline mileage programs, or the costs of learning new software), and brand loyalty may cause customers to simply reject outright a new product from another firm. Consider how a new sports drink would try to compete against Gatorade today versus 35 years ago.
Third, an incumbent’s customer base can have enormous network benefits – the product becomes beneficial as more people buy into it. Incumbents can try to quickly build their installed base to their growing advantage against newer rivals. PayPal, for example, used discounts and referral rewards to more quickly grow its initial customer base. Our research shows that network effects can be the biggest contributor to an incumbent’s ability and incentive to be more innovative – customers don’t want to feel being left out of what the firm is doing next.
How do these demand-side factors contribute to an incumbent’s ability to innovate as it simultaneously battles the supply-side issues holding it back? Avoiding the incumbent’s curse first requires the firm to recognize that any demand-side advantages may only be short-lived if it becomes too complacent. In other words, the supply-side problems don’t simply go away just because you currently have a strong customer base. Indeed, having a profitable installed base can make supply-side inertia worse over time since the incentive to stay incremental becomes even stronger. The good news is that a loyal customer base is often more willing to try and accept innovative new products from the firm, while also being more skeptical of innovations offered by other companies. Any brand-based advantages can also give the incumbent a boost when expanding their product line into other markets. The key is that the incumbent has to strategically engage in these innovations – either technologically or into new markets – or otherwise risk the decay of demand-based advantages they worked so hard to create.
Professor of Marketing, Poole College of Management, NC State University
To learn more, read:
Stanko, Michael, Jonathan Bohlmann, and Francisco-Jose Molina-Castillo (2013), “Demand-side inertia factors and their benefits for innovativeness,” Journal of the Academy of Marketing Science, 41 (6), 649-668.
Bohlmann, Jonathan, Michael Stanko, and Jelena Spanjol (2020), “A Demand-Side View of Incumbent Inertia and Performance,” Proceedings of the European Marketing Academy, 49th Annual Conference