Seize The Second Mover Advantage - And Dominate New Markets

Conventional wisdom holds that it is "better to be first than it is to be better." The desire to pioneer, to "colonize" is intense. But, as Constantinos C. Markides and Paul A. Geroski write in Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets, the companies that "create radical new markets" are not typically the ones that scale them up and dominate them. Often, it is the "second-movers" that are able to leverage new markets into bountiful, and profitable, opportunities. How?

Colonizers vs. Consolidators

Colonizers are the first-movers, the originators. Typically young and agile, they thrive in the risky, "haphazard" world of radical innovation. Consolidators, or second-movers, on the other hand, are the companies that conquer the markets.

Instead of the "it's better to be first than it is to be better" mentality, consolidators embrace a different philosophy: according to Markides and Geroski, "Where colonizers move quickly out of necessity, consolidators move relentlessly but inexorably out of a desire to get it right."

In the early stages of the US auto industry, for example, there were 1000 companies vying for customers to get behind their wheels. Why? "Because the entire concept of what a car would be was up for grabs. The 1000 firms represented not viable carmakers, but rather 1000 ideas about what a car might be." Ford's Model T became the "dominant design." It wasn't first, but it did set the standard.

Innovations and ideas create niche markets; established companies can then enter the fray and scale those markets up. How? Markides and Geroski outline five strategies:

1. Target average customers. Instead of going after early-adopters, consolidators target the average Joe who cares primarily about product features and price.
2. Create a bandwagon effect. How many times have you seen a friend or colleague using a new smartphone or computer and thought, "That's what I need." This is the bandwagon effect; we're more likely to purchase a product if we see others using, enjoying, and deriving value from it.
3. Reduce consumer risk. Through intensive branding and communication efforts, second-movers can diminish concerns and mitigate the risk associated with new products.
4. Build a strong distribution network. While companies can establish new channels, it is often necessary to convince existing distribution channels to accept their new product.
5. Create strategic alliances. Consolidators need to support the growth of "complementary goods." Examples of complementary goods are: flashlights and batteries, printers and ink cartridges, peanut butter and jelly. Alliances facilitate "joint demand" for both products.

Now for the "When"

Those five strategic thrusts are the "how." Equally vital is the "when." When should second-movers enter the market? It depends on their strategy. A slower second enters after a dominant design emerges. For example, Patron created a market for high-end tequila - a drink that was traditionally the province of drunk, cheap spring-breakers. The "super-premium" brand poured millions of marketing dollars into educating consumers, and it worked.

Voodoo Tiki Tequila is a second-mover. Their own brand of high-end tequila leverages all of the hard work (and money) that Patron put into consumer instruction. Founder Donna eCunzo-Taddeo explains the benefit of their later entry: "We'll make a bigger profit because our costs are a lot lower."

That's a slow second. A fast second differs because companies do not wait for a dominant design to emerge. They hop into the market just before - and influence its design. IBM is a classic example. In the 1954, mainframe pioneer UNIVAC enjoyed a market share that was 8 times greater than IBM. Just six years later, that ratio was reversed. As Markides and Geroski write, "Being a fast-second was [IBM's] ticket to market leadership."

When to get that ticket punched is the big question, and companies need to become adept at reading the market. Signs to be on the lookout for:

1. Slowing in the rate of innovation. Products (e.g. smartphones, cameras) have fewer new features.
2. Products gain a sense of legitimacy. Most consumers believe the products will benefit them and add value to their lives.
3. Companies begin producing complementary goods. They're banking on the success of a particular design. (e.g. firms may start producing iPhone protective cases, earbuds, apps, and other goods that complement the phone).

When the timing is right, companies can seek the second-mover advantage, set the dominant design, and take over the market. History is full of these brands and products: Apple, IBM, LinkedIn, Yelp, Google, Prozac, and, of course, Zantac to name but a few.

It's more than good timing (though the importance of good timing - no, impeccable timing - cannot be overstated); brands that hope to capitalize on a fast second entry need to impose their dominant design on the marketplace. How?

• Strategic pricing. And by "strategic," we typically mean "lower." Low prices is one way to establish dominance; companies can do this by achieving economies of scale, shortening the learning curve, or innovating process improvements.
• Target market. Fast Seconds must target the right market, and get them talking. Buzz and good word-of-mouth creates the all-important bandwagon effect mentioned earlier.
• Distribution. To win, companies need to ensure that their products are easily accessible to customers. For example, enlisting trusted retailers to carry products is an integral step in gaining acceptance.
• Alliance Strategy. Reducing competition is critical; remember the 1000 firms that crowded the 19th century auto market. Companies that fail to establish the dominant design have three choices: to exit, to seek out an existence in a niche market, or to join the dominant design and produce variants. Establishing alliances reduces the field further.
• Confidence. Fast Second companies have to convince apprehensive consumers that a dominant design has emerged, that the "competition is over."

As the authors of Fast Second remind businesses, "Victory doesn't always go to the fastest." When brands adopt a fast second or even a robust second-mover strategy, they can outpace - and outlast - pioneers. Established firms may not be agile enough to engage in radical innovation, but they don't need to be. They have the skills, the experience, and the pockets to scale up. And that is how you conquer the market.