In early days of E-Commerce which approach was more Successful First Mover Advantage or Follower?
During the early days of e-commerce, first mover advantage was known to be one way to achieve success. On the other hand, some suggest that being a market follower can yield rewards as well. Which approach has proven to be more successful first mover or follower? Choose two e-commerce companies that prove your point, and prepare a research report (3 pages) to explain your analysis and position.
First-mover advantage (FMA) is the advantage gained by the initial major occupant of a market segment. This advantage comes from the fact that the first one to get to that market segment can gain control of the resources that the followers may not be able to match. However, the first mover is not able to capitalize on its advantage and leaves the opportunity wide open for another player to gain the second-mover advantage. “Originally made apparent by the ever booming Internet phenomenon, it has recently been on the decline due to the recent economic downturn. It is important to note that the first-mover advantage refers to the first significant company to move into a market, not necessarily the first company. In order for a company to try and become a first-mover that company needs to figure out if the overall rewards outweigh the beginning/underlying risks. Sometimes first-movers are rewarded with huge profit margins and a monopoly-like status. Other times the first-mover is not able to capitalize on its advantage, leaving the opportunity for other firms to compete effectively and efficiently versus their earlier entrants. These individuals then gain a "second-mover advantage". (First Mover Advantage. http://en.wikipedia.org/wiki/First-mover_advantage , retrieved 5 April, 2011.)
First-mover advantage can arise from three primary sources- Technological leadership, Preemption of scarce assets, and Switching costs and buyer choice under uncertainty. A company can gain FMA when it has an upper-handed breakthrough in its research and development (R&D). Though starters in an FMA market have complete control for a period of time, there is competition that competes to reach the originators. First-movers will usually sell their products below cost in an effort to gain better understanding of the market. Then they will turn the market around and control the markets cost. This however reduces the company’s profitability but is quite necessary for breaking into new markets.
A market follower on the other hand is a company which is satisfied to follow the leaders in a market place without challenging them. They usually take advantage of the opportunities created by the leaders without the need for much marketing investments of their own. “Market followers tend to constitute the majority of firms in a market albeit that their collective share may only account for 20-30 per cent of total sales. While no market follower is likely to challenge the leader or its immediate competitors this is not to say that they do not indulge in very active competition between themselves. Denied the ECONOMIES OF SCALE which accrue to the larger firms the followers have to be particularly efficient in their marketing and service policies if they are to survive and many of them choose to develop a concentrated or market niche strategy. (Market Follower Strategy. http://www.westburnpublishers.com/marketing-dictionary/m/market-follower-strategy.aspx , retrieved 5 April, 2011.)”
Amazon.com is an example of an FMA. They went online on the WWW in July 1995. They acquired IPO in May 1997. The company’s stated strategy is “focus on the customer experience by offering (their) customers low prices, convenience, and a wide selection of merchandise”. What began as a purely online book retailer, Amazon.com expanded its product and service offerings. By 1999 new business models were introduced, web hosting and fulfillment service partnerships with the traditional retailer and consumer portals followed in 2000. Despite rapid growth of revenues (up from 15.7M USD in 1996 to 6.9B USD at the end of 2004), Amazon generated operating losses (1.4B USD net in 2000) and only reached profitability in 2003. Since 2000, Amazon is the largest Internet retailer, reporting a customer base of more than 27M active accounts by 2002. (Strategies to Achieve Market Leadership: The example Amazon.com. https://docs.google.com/viewer?url=http%3A%2F%2Fpreibusch.de%2Fdocuments%2FPreibuschS_FleckensteinM_Amazon.pdf , retrieved 5 April, 2011. 10-12.)
“Enter Barnes and Noble. B&N operated its stores as superstores (covering 6000m2 and stocking up to 175.000 titles) and mall-based stores (smaller in size and selection), but also offered mail-ordering through catalogue services. B&N had a centralized logistics and distribution centre and could thus leverage scale economies in procurement by sourcing books directly from publishers, obtaining higher discounts than other book retailers, and avoiding high mark-ups from wholesalers. Due to centralized stock, books could be shipped to the points of sale within a few days, avoiding delivery delays from publishers. B&N installed an electronic store (management) system, enabling real time information exchange among its stores, the distribution centre and wholesalers with access to a 2.5M title database, though not accessible for customers.
Amazon redefined traditional book retailing through a radically different approach: online, over the Internet. Traditional book retailing has several drawbacks. The selection of titles is physically limited by available store space. Traditional retailers must invest in inventory, real estate and qualified personnel for each retail location and it is impossible to provide “a customized store for every customer or to provide customized recommendations without significantly increasing selling costs.” Internet retailers have the advantages of centralized inventory management and low occupancy costs. A large and global group of customers can be reached from a single central location, making the business model very scalable. It is possible to track consumer purchasing patterns in order to better anticipate demand and to provide personalized services such as customized store fronts. (Strategies to Achieve Market Leadership: The example Amazon.com. https://docs.google.com/viewer?url=http%3A%2F%2Fpreibusch.de%2Fdocuments%2FPreibuschS_FleckensteinM_Amazon.pdf , retrieved 5 April, 2011. 11-12.)”
“In this case, FMA Amazon has pioneered proprietary technologies for its web site management, search, customer interaction, recommendation, transaction processing and fulfillment services and systems. Amazon patented its 1-Click technology, as well as its Bid-Click auction bidding process, and in 2000 was also granted a patent on its Amazon Associates Program and on its book recommendation service Book Matcher, which generates automatic recommendations based on customer purchases. Amazon licenses components of its EC platform to third party sellers and hosts third-party sellers’ websites providing its shopping technology. Amazon realized a FMA with the concept of syndicated selling through its Associates and Syndicated Stores programs. The members of the Associates Network, including Internet companies such as AOL.com, Yahoo, Netscape, Excite and the AltaVista Search Service, recommend Amazon products to their own visitors and earn a referral fee and a commission in case of completed purchases. Amazon participates in cooperative advertising arrangements with some of its vendors, and with other third parties. However, Amazon has not yet succeeded in the most difficult matter of course in strategic planning: its Operating Efficiency is still low, overcapacities in operations and fulfillment overshadow its business perspectives, and losses accumulated over years are a burden for the future. ((Strategies to Achieve Market Leadership: The example Amazon.com. https://docs.google.com/viewer?url=http%3A%2F%2Fpreibusch.de%2Fdocuments%2FPreibuschS_FleckensteinM_Amazon.pdf , retrieved 5 April, 2011. 21.)”
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