Why Being The “Second Mover” Is Sometimes Better

Gaining the fabled “first mover advantage” is a good thing. Especially if the company seizing that mantle has the ability to execute well and build a defendable “competitive moat” around itself.

But in many other cases, being the “second mover” may be equally good, if not actually better – especially if you can learn from the mistakes of the first-to-market company, execute better and/or out-innovate the first mover. Toyota, for example, in cars. 

A Professor at Kellogg, Gregory Carpenter and a Professor at Texas A&M University, Venkatesh Shankar, make this point in a recent Kellogg Insight magazine article:

So why are late entrants often more successful than their pioneering competitors?

One key factor is that creating a product is costly, both in terms of the money invested and the mistakes made on the path to success. While the pioneer pays a steep price in creating the product category, the later entrant can learn from the experience of the pioneer, enjoying lower costs and making fewer mistakes as a result.

Such a fast follower strategy is especially appealing to agile firms with deep pockets. “A lot of times pioneers are not very well funded,” says Carpenter. “They create a competitive game, and then they’re unable to dominate it. Their resources are just too limited. So competitors enter quickly and, with more resources, are able to win the game that the pioneer has created.”

A riskier but more rewarding strategy is innovative late entry. Entering late without any sort of meaningful innovation can be tough. Compared with noninnovative late entrants, pioneers have an advantage on a number of important fronts: they have higher rates of repeat purchase, their investment in marketing is more effective, and their sales rates tend to grow faster.

Innovative late movers, on the other hand, are able to redefine the category, reshaping the category ideal and enjoying many of the same benefits as pioneers. Think of the way that Apple has come to redefine and dominate the market for mobile devices—a category pioneered by Motorola.

Intel To Give Up On Pay-TV Disruption

That’s the latest, via Amol Sharma, on The WSJ:

Intel Corp. is in talks to sell all or part of its yet-to-be-launched TV venture to Verizon Communications Inc., reflecting the difficulty the company has had in building an online version of pay television, according to a person familiar with the situation.

For the past couple of years Intel has been planning a service that would stream TV channels over the Internet, and has made a significant investment in the operation, which now involves more than 350 people. The company has developed an advanced set-top box that was widely praised by media executives as significantly easier to use than boxes offered by traditional cable operators.

But, alas, it couldn’t overcome make-or-break issues.

Some TV programmers will offer their content only if several peers of similar size jump in, creating a chicken-and-egg problem for Intel, media executives have said. Price has also been a big barrier: programmers are insisting on a premium because they don’t want to disadvantage the cable and satellite companies that are their biggest customers.

Some smaller TV-content owners, meanwhile, have contractual obligations with their pay-TV partners that limit their ability to sell content to a company like Intel, media executives say. It isn’t clear whether those restrictions would become moot in the event that Verizon the venture.

That Intel is giving up on this, really shouldn’t be that surprising. The TV-content owner ecosystem has tens of billions of dollars at stake and it was always going to be exceedingly difficult to dilute its power. [Look at what happened to TWC as a result of its fight with CBS over fees last quarter: 306,000 subscribers left.] 

No, instead, what stands out for me is how mighty companies such as Intel, despite having top management talent, sophisticated models and strategies, willpower, power, money and the brand can stumble against deeply entrenched interests and some variation on Prisoner’s Dilemma. 

So what’s the answer? Not sure there is one, for this market, yet. 

Why Some Things Catch On & Others Don’t

Most product categories these days overflow with choices…and there is little, if any, real differentiationBut some choices “catch on” and the lucky company is able to plow through the competition. Others either stagnate and drop off the radar or just die off quickly.

So what makes something catch on?

Jonah Berger, a Professor of Marketing at Wharton has this to say in an interview with Strategy+Business magazine:

For the past decade, I’ve studied word of mouth—why people talk about certain brands more than others. It’s not random; there’s a structure behind it, a formula. And if we understand that formula, we can be much more effective. Again and again, I found the same six key drivers: social currency, triggers, emotions, public, practical value, and stories.

Social currency is the idea that people are more likely to talk about something the better and smarter it makes them look, and the more special it makes them feel. Triggers are why peanut butter makes us think of jelly—linking products and ideas to cues in the environment increases word of mouth. The more you can get people fired up, excited, or even feeling negative about something, the more likely they’ll be to pass it on: That’semotionPublic refers to the idea that by making behavior more observable, so that it can be imitated, you make it more likely that your idea will catch on. When something haspractical value—when it is useful—people share it with others to help them. And finally,stories enable you to wrap your product or idea in a narrative that carries your brand along for the ride.

The full interview, where he expands on lessons marketers can/should learn, based on these drivers of “viral-ness” (virality?), is worth a read (though I don’t really agree with the article’s title). 

Undifferentiated Product or Service? No Problem.

Differentiation as a source of competitive advantage is over-rated, argues Freek Vermeulen, a Professor at the London Business School, and uses McKinsey vs Bain vs BCG as an example to talk about how companies use other “things” to get a leg up in the race to revenues and profits:

The trick is that when there is uncertainty about the quality of a product or service, firms do not have to rely on differentiation in order to obtain a competitive advantage. Whether you’re a law firm or a hairdresser, people will find it difficult – at least beforehand – to assess how good you really are. But customers, nonetheless, have to pick one.  McKinsey, of course, offers the most uncertain product of all: Strategy advice. When you hire them – or any other consulting firm – you cannot foretell the quality of what they are going to do and deliver. In fact, even when you have the advice in your hands (in the form of a report or, more likely, a powerpoint “deck”), you can still not quite assess its quality. Worse, even years after you might have implemented it, you cannot really say if it was any good, because lots of factors influence firm performance, and whether the advice helped or hampered will forever remain opaque.

Research in Organizational Sociology shows that when there is such uncertainty, buyers rely on other signals to decide whether to purchase, such as the seller’s status, its social network ties, and prior relationships. And that is what McKinsey does so well. They carefully foster their status by claiming to always hire the brightest people and work for the best companies. They also actively nurture their immense network by making sure former employees become “alumni” who then not infrequently end up hiring McKinsey. And they make sure to carefully manage their existing client relationships, so that no less than 85 percent of their business now comes from existing customers.

I think the three things he highlights, “status, social ties and relationships” are important but apply a lot more to consulting and accounting firms than to, say, soap and toothpaste sellers. 

And for the latter category, which consists almost wholly of undifferentiated commodity products, marketing (which raises the “B” in “B minus C”) becomes the route to revenues and profits. Which is why Coke, P&G, Unilever et al are fundamentally fearsome marketing juggernauts. 

External Financing – Boon or Curse?

Chobani’s founder Hamdi Ulukaya thinks that it’s certainly not a boon. 

He is quoted in an interesting article on HBR as saying:

But as it turned out, I was able to borrow the money to buy the factory—and after Chobani hit the market, I financed our growth through further bank loans and reinvested profits. This is a crucial piece of the Chobani story. Our ability to grow without reliance on external investors—the venture capitalists, private equity types, strategic partners, and potential acquirers who’ve offered us money since we launched—was vital to our success. Today Chobani is a $1 billion business, and I remain the sole owner. That means I can run the company the way I choose—and plan for its future without pressure from outsiders.

Typically when startups and small companies receive external financing, they also receive advice, wisdom and in that process, become more disciplined than they would be if they were to go it alone. At which point, it comes a trade-off: Capital for growth or “freedom”? 

Good for Mr Ulukaya that he had the money, the business acumen and freedom to do what he wanted, but I am not sure this is always a good idea or a model. 

The Role of “Trust” in Management And Corporate Governance

In business settings, the temptation to monitor and control human behavior via contracts, rules, handbooks, guidelines, audits, etc., is quite high. In fact it’s the standard way in which most companies are managed. 

But what if companies emphasized trust over regulations and rules?

Everyone would be better off, assert a Stanford Professor and a researcher at Stanford, who together wrote a book called “A Real Look At Real World Corporate Governance“.

How would this work? 

For starters, trust replaces the need for written contracts because the two parties commit in advance to abide by a set of actions and behaviors that are mutually beneficial. Both parties in a trusting relationship generally understand the limits of acceptable behavior even when these are not fully specified. And when trust is introduced into the environment, the motivations of each party are known and their behaviors are predictable. That means managers can spend less time monitoring employee actions, and employees can focus on their jobs rather than exerting additional effort simply to demonstrate they are compliant with the firm’s standards.

And they go on to list four specific ways in which this mindset and philosophy could have real world benefits before talking about a couple of companies that already treat their employees (and execs) as trust-worthy grown-ups:

Real estate company Keller Williams Realty Inc. maintains a strict “open books” policy. All agents within the company’s market centers have access to detailed information about the office’s revenues, commissions, and costs. This reduces the opportunity for theft, waste, or special dealings, and also the need for a robust internal-audit department.

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Netflix Inc. is known for maintaining a high-performance culture rooted in the concept of “freedom and responsibility.” Employees are expected to work hard, take ownership, and put the company’s interests ahead of their own. In return, the company offers top-of-market salaries equivalent to the combined value of the salary and bonus offered by other firms. Netflix does not offer incentive bonuses, and equity compensation is granted only to employees who voluntarily request it as a portion of their compensation mix.

Of course, this approach comes with its own risks that companies should be mindful of…Further, like with anything, trust by itself, in isolation, is not a silver bullet. Wise companies must make other strategic HR and management decisions that can build a culture in which trust can flourish and yield benefits for all. 

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