The Value of Being Second
Oded Shenkar, author of Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge, introduces an excerpt on the wisdom of entering markets after first movers from The Art of Being Unreasonable: Lessons in Unconventional Thinking, by Eli Broad.
Innovation does not need another advocate. It has acquired divine status, with even politicians promoting its virtues, promising that “we will innovate our way” out of any mess in which we find ourselves.
There is, however, one little problem: evidence. A close scrutiny of the empirical work suggests that the market supremacy of innovators is questionable, often distorted by biased assumptions and inadequate design. Many of the more rigorous studies show that innovators produce lackluster returns. Even those studies that identify a modest first-mover edge find that it has been receding over time.
Who does capture the benefits of new ideas, products, and models? Imitators. They get a free ride, avoid dead ends, capitalize on the shortcomings of early offerings or tweak the originals to better fit shifting consumer tastes. And yet, imitators rarely get the recognition they deserve: When was the last time someone received an Imitator of the Year Award?
Eli Broad, who built not one but two Fortune 500 companies — KB Home and SunAmerica — would be a good nominee for a lifetime achievement award for successful imitation. This excerpt from Broad’s recent book, which collects the insights and lessons he learned during his career, explains why.
— Oded Shenkar
An excerpt from Chapter 5 of The Art of Being Unreasonable: Lessons in Unconventional Thinking
Before you can be number one, sometimes you have to be number two.
For a while during the 1990s, it felt like you had to be first to get anywhere. The beginning of the Internet age seemed to reward innovation above all else. Men and women who could create totally new technologies to serve markets that no one else thought existed became wealthy and successful virtually overnight.
But what you might call the first mover advantage always has been overrated and never more so than in the early years of the new digital economy. Consider the onetime kings of the 1990s and early 2000s: Netscape, Napster, WebCrawler, and Friendster. Netscape’s browser had consumer goodwill and great market share, but Microsoft’s Internet Explorer beat it by matching its features and being bundled free into new personal computers. Napster sunk under the weight of lawsuits, losing customers to its rivals, legal and illegal. WebCrawler could claim to be the first widely used search engine, but it couldn’t keep up with the likes of Lycos or Infoseek. Friendster’s social network couldn’t match Myspace for customization and music integration. Then, a lot of these second movers were beaten out by still later comers like Google and Facebook. Who knows what may come along next?
My first move in business was a second move: building houses without basements. Other homebuilders elsewhere had done it before Kaufman and Broad, and that gave us several advantages. We didn’t need to conduct consumer research to know that people would buy these houses. That made it easier to ignore the condescension of older Detroit builders: “Young man, I’ve been in this business for 20 years and you just don’t understand the market like I do.” Sure, their disapproval gave me a little pause, but I knew we weren’t attempting something completely untried.
Kaufman and Broad was the second mover again when we expanded to France in 1967. Levitt and Sons, the famed builder of the East Coast’s “Levittowns,” had set up shop in Paris three years before. Bill Levitt was the first to recognize that Europe would take longer to recover from World War II but that when it did, the housing market would boom as America’s had right after the war.
Levitt was right about Europe, and I was smart enough to know it. Following him to France was something like following the first hiker on a trail. The guy in front has to break through the brush, get scratched up, and lose his way a few times before making it to the top. The second guy can just charge along the path the first guy has marked, avoiding the rough patches where he stumbled.
In Paris, our company went head-to-head with Levitt’s and made a solid mark. Eventually, after some troubles with his corporate parent, Levitt had to shut down European operations, leaving us the only game in town. We went on to become Paris’s biggest single-family homebuilder.
Being the second mover isn’t just a matter of timing. The first mover does have some advantages that may be hard to match: technological know-how, access to resources and talent, early market dominance, and name recognition. Each of these, however, can be acquired by a smart second mover. Technological know-how can be learned or surpassed. Even the company considered the final word in microchips, Intel, has ceded some market share to an up-and-coming rival, Advanced Micro Devices. Talent may go to the first mover, but that same talent won’t be happy suppressing their entrepreneurial instincts just to stay employed at a steady first mover. Think of all the Facebook and Google employees who have gone on to start their own companies or join another start-up. A few of my Kaufman and Broad employees went on to become independent homebuilders.
Market dominance and name recognition can be harder to overcome. Sometimes a first mover defines an entire market so well that its name becomes synonymous with the product—such as Tupperware, Coca-Cola, Post-its, or TiVo. Fortunately for the rest of us, such companies are the exception, not the rule, and nothing lasts forever—not even for them. Xerox is a shadow of what it once was. Kodak, which used to be another way of saying snapshot, is now bankrupt. Polaroid suffered the same fate.
As you can see from these examples, a second mover can beat the first mover on branding and market share by relying on an unalterable commercial fact: markets evolve. Tastes and expectations don’t stay the same. Niches grow more numerous, deeper, and, thanks to the Internet, more accessible. A first mover can sometimes fall in love with its product and fail to realize when technology evolves and consumers want something different. This leaves the field wide open for somebody new. The Big Three automakers were all second movers, improving manufacturing methods and offering a better product. General Electric wouldn’t have become one of this country’s largest companies if it had stuck to only manufacturing light bulbs. And Apple, the world’s most valuable tech firm, has been a second mover several times. The company was not the first to sell mp3 players, smartphones, or even personal computers. Apple just did it better than anybody else.
— Eli Broad
Excerpted with permission of the publisher, John Wiley & Sons Inc. Copyright © 2012 by Eli Broad.