Wednesday, May 16, 2012

Is First the Worst?

I was taking a Sunday stroll with my family last weekend when, upon leaving our favorite neighborhood coffee shop, my wife asked - "Do you think Starbucks is successful because they were the first or because they make the best coffee?"

Great question.

The concept of first mover advantage is an important one to me as the COO and part-owner of a first mover.  And there is no consensus on whether it's actually an "advantage."

Intuitively, being the first seems like a good thing.  So much emphasis is placed on the "idea" that it makes sense that the first person with that idea will be the one who's successful.  For many years, this is how I viewed the world.

Then I learned that great ideas are in abundance and the keys to success are execution, monetization and timing.  It's not nearly as sexy to be #3 but be the best at providing the right solution at the right time with the right business model, but that's usually how you win the game.

My MBA professors almost universally agreed that being the first mover is a disadvantage.  The first mover spends tremendous resources creating a market and learning how to service it.  Customer acquisition costs are through the roof.  Each iteration drains more time and money.  And, right when you figure it out (if you're still around at that point), second and third movers with clean balance sheets and nimble teams come in and capitalize on the foundation you've built.  First movers put in the labor... second and third movers eat the fruit.

There are many examples of this.  Friendster before Facebook.  AltaVista before Google.  Atari before Nintendo.  And so forth.

But I don't believe this is a universal truth.  The exception is if the first mover can create significant barriers to entry, and fast. 

Starbucks is successful in my opinion for two reasons.  First, they had a great concept - create a "third place" for people to comfortably spend time outside of the home/office.  Second, they were able to scale quickly, opening a new store every work day, by utilizing debt financing to open company-owned stores as opposed to franchising like most QSR's, thus providing this "third place" for people wherever they may be.  Now, whether I'm in NYC or Temecula CA or Lake Geneva WI, I know that I can go to Starbucks to catch up on work and meet with clients/friends because I know exactly what I'm going to get.  And that's why people go there - not for the burnt coffee.

There are other barriers you can create as well - exclusive contracts with key suppliers, strategic partnerships with large industry incumbents, IP, customer loyalty, economies of scale, switching costs and others.

At TGA, I'm confident in our first mover advantage because we've created several of the aforementioned barriers.  But it hasn't stopped others from trying to compete.  And that, to me, is a good thing.  It validates the market, grows it and expands awareness of our concept.  It also makes us appreciative of being five steps ahead and keeps us obsessively focused on getting to six, seven, eight...

If you've come up with a new idea and no one else is doing it, there may be a reason for that.  But if you validate the concept in the marketplace, go for it.  Focus on scale and creating barriers to entry quickly.

If you've come up with an iteration on an old idea, that's great too.  It's how most businesses are started.  I remember hearing a story that Steve Jobs had the idea for the iPad a decade before its release (and versions of the concept can be traced back to the late 60s) but he didn't feel the market was ready for it yet. 

People have built great companies both ways.  Whichever path you go, remember that execution, monetiziation and timing usually win the game.

Good luck and happy entrepreneuring.

1 comment:

  1. Einstein said "genius" is 1% inspiration and 99% perspiration.