Law of the handicap of a head start

Last updated

The law of the handicap of a head start (original Dutch: Wet van de remmende voorsprong ), first-mover disadvantage, or dialectics of lead, is a theory that suggests that an initial head start in a given area may result in a handicap in the long term. The term was coined in 1937 by Jan Romein, a Dutch journalist and historian, in his essay "The dialectics of progress" ("De dialectiek van de vooruitgang"), part of the series "The unfinished past" (Het onvoltooid verleden). The mirror image of the law – an initial arrears in a given area may stimulate a development leading to a long-term advantage – is known as the law of the stimulative arrears. This concept contrast with first-mover advantage.

Contents

The phenomenon

The law of the handicap of a head start describes a phenomenon that is applicable in numerous settings. The law suggests that making progress in a particular area often creates circumstances in which stimuli are lacking to strive for further progress. This results in the individual or group that started out ahead eventually being overtaken by others. In the terminology of the law, the head start, initially an advantage, subsequently becomes a handicap.

An explanation for why the phenomenon occurs is that when a society dedicates itself to certain standards, and those standards change, it is harder for them to adapt. Conversely, a society that has not committed itself yet will not have this problem. Thus, a society that at one point has a head start over other societies, may, at a later time, be stuck with obsolete technology or ideas that get in the way of further progress. One consequence of this is that what is considered to be the state of the art in a certain field can be seen as "jumping" from place to place, as each leader soon becomes a victim of the handicap.

In common terms, societies, companies, and individuals are often confronted with the decision to either invest now and get a fast return, or put off the investment until a new technology has emerged and possibly make a bigger profit then. For example, a regular problem for individuals is the decision of when to buy a new computer. Since computer speed develops at a steady pace, delaying the investment for a year may mean having to make do with a slower (or no) computer for the first year, but after that the individual will be able to buy a better computer for the same price. In many cases, however, the technological development is not as predictable as this, so it is harder to make an informed decision.

A related law that can be considered as the contrary of this law is the Law of the stimulative arrears ( Wet van de stimulerende achterstand ) published by Erik van der Hoeven in 1980. [1]

Examples

The author gives an example of the law in his original essay. During a trip to London, he wonders why at that time it was still lit by gas lamps, rather than electric lights as were by then common in other European capitals like Amsterdam. His explanation was that London's head start—their possession of street lights before most other cities—was now holding them back in replacing them with the more modern electric lights. As the streets were already lit there was no pressing need to replace gas lamps, despite the other advantages of electric lighting.

Free-rider effects

Secondary or late-movers to an industry or market have the opportunity to study first-movers and their techniques and strategies. "Late movers may be able to 'free-ride' on a pioneering firms investments in a number of areas including R&D, buyer education, and infrastructure development. [2] The basic principle of this effect is that the competition is allowed to benefit and not incur the costs which the first-mover has to sustain. These "imitation costs" are much lower than the "innovation costs" the first-mover had to incur, and can also cut into the profits the pioneering firm would otherwise enjoy.

Studies of free-rider effects say the biggest benefit is riding the coattails of a company's research and development, [3] and learning-based productivity improvement. [4] Other studies [5] have looked at free rider effects in relation to labor costs, as first-movers may have to hire and train personnel to succeed, only to have the competition hire them away. [2] For example, Craigslist was the first and biggest website to look for short-term rentals. AirBnB came in a few years after and built a massive business at the expense of Craigslist. [6]

Resolution of technological or market uncertainty

First-movers must deal with the entire risk associated with developing a new technology and creating a new market for it. Late-movers have the advantage of not sustaining those risks to the same extent. While first-movers have nothing to draw upon when deciding potential revenues and firm sizes, late-movers are able to follow industry standards and adjust accordingly. [2] The first-mover must take on all the risk as these standards are set, and in some cases they do not last long enough to operate under the new standards.

Shifts in technology or customer needs

"New entrants exploit technological discontinuities to displace existing incumbents." [2] Late entrants are sometimes able to assess a market need that will cause an initial product to be seen as inferior. This can occur when the first-mover does not adapt or see the change in customer needs, or when a competitor develops a better, more efficient, and sometimes less-expensive product. Often this new technology is introduced while the older technology is still growing, and the new technology may not be seen as an immediate threat. [2]

An example of this is the steam locomotive industry not responding to the invention and commercialization of diesel fuel (Cooper and Schendel, 1976). This disadvantage is closely related to incumbent inertia, and occurs if the firm is unable to recognize a change in the market, or if a ground-breaking technology is introduced. In either case, the first-movers are at a disadvantage in that although they created the market, they have to sustain it, and can miss opportunities to advance while trying to preserve what they already have.

Up-front investment costs

New products and services which require significant R&D or development will also require significant investments. Therefore, the firms will need to have the funds available to be able to deal with the up-front investments. If they don't have the cash on hand, this could lead to high loans and debts which puts increased pressure on the products to do well. [6]

Magnitude and duration of first-mover advantages

Though the name "first-mover advantage" hints that pioneering firms will remain more profitable than their competitors, this is not always the case. Certainly a pioneering firm will reap the benefits of early profits, but sometimes profits fall close to zero as a patent expires. This commonly leads to the sale of the patent, or exit from the market, which shows that the first-mover is not guaranteed longevity. This commonly accepted fact has led to the concept known as "second-mover advantage".

Incumbent inertia

While firms enjoy the success of being the first entrant into the market, they can also become complacent and not fully capitalize on their opportunity. According to Lieberman and Montgomery:

Vulnerability of the first-mover is often enhanced by 'incumbent inertia'. Such inertia can have several root causes:

  1. the firm may be locked into a specific set of fixed assets,
  2. the firm may be reluctant to cannibalize existing product lines, or
  3. the firm may become organizationally inflexible. [2]

Firms that have heavily invested in fixed assets cannot readily adjust to the new challenges of the market, as they have less financial ability to change. Firms that simply do not wish to change their strategy or products and incur sunk costs from "cannibalizing" or changing the core of their business, fall victim to this inertia. [2] Such firms are less likely to be able to operate in a changing and competitive environment. They may pour too much of their assets into what works in the beginning, and not project what will be needed long term.

Some studies which investigated why incumbent organizations are unable to be sustained in the face of new challenges and technology, pinpointed other aspects of incumbents' failures. These included: "the development of organizational routines and standards, internal political dynamics, and the development of stable exchange relations with other organizations" (Hannan and Freeman, 1984).

All in all, some firms are too rigid and invested in the "now", and are unable to project the future to continue to maximize their current market stronghold.

See also

Related Research Articles

A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterised by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

<span class="mw-page-title-main">Natural monopoly</span> Concept in economics

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. Specifically, an industry is a natural monopoly if the total cost of one firm, producing the total output, is lower than the total cost of two or more firms producing the entire production. In that case, it is very probable that a company (monopoly) or minimal number of companies (oligopoly) will form, providing all or most relevant products and/or services. This frequently occurs in industries where capital costs predominate, creating large economies of scale about the size of the market; examples include public utilities such as water services, electricity, telecommunications, mail, etc. Natural monopolies were recognized as potential sources of market failure as early as the 19th century; John Stuart Mill advocated government regulation to make them serve the public good.

<span class="mw-page-title-main">Network effect</span> Increasing value with increasing participation

In economics, a network effect is the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. Network effects are typically positive feedback systems, resulting in users deriving more and more value from a product as more users join the same network. The adoption of a product by an additional user can be broken into two effects: an increase in the value to all other users and also the enhancement of other non-users' motivation for using the product.

In economics, internationalization or internationalisation is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization. Internationalization is a crucial strategy not only for companies that seek horizontal integration globally but also for countries that addresses the sustainability of its development in different manufacturing as well as service sectors especially in higher education which is a very important context that needs internationalization to bridge the gap between different cultures and countries. There are several internationalization theories which try to explain why there are international activities.

<span class="mw-page-title-main">Porter's five forces analysis</span> Framework to analyse level of competition within an industry

Porter's Five Forces Framework is a method of analysing the operating environment of a competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.

Porter's generic strategies describe how a company pursues competitive advantage across its chosen market scope. There are three/four generic strategies, either lower cost, differentiated, or focus. A company chooses to pursue one of two types of competitive advantage, either via lower costs than its competition or by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope, either focus or industry-wide, offering its product across many market segments. The generic strategy reflects the choices made regarding both the type of competitive advantage and the scope. The concept was described by Michael Porter in 1980.

Marketing strategy is an organization's promotional efforts to allocate its resources across a wide range of platforms and channels to increase its sales and achieve sustainable competitive advantage within its corresponding market.

Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.

In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty. Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.

In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, held that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibrium because of the existence of potential short-term entrants.

In the theories of competition in economics, strategic entry deterrence is when an existing firm within a market acts in a manner to discourage the entry of new potential firms to the market. These actions create greater barriers to entry for firms seeking entrance to the market and ensure that incumbent firms retain a large portion of market share or market power. Deterring strategies, might include an excess capacity, limit pricing, predatory pricing, predatory acquisition and switching costs. Although in the short run, entry deterring strategies might lead to a firm operating inefficiently, in the long run the firm will have a stronger holder over market conditions.

In marketing strategy, first-mover advantage (FMA) is the competitive advantage gained by the initial ("first-moving") significant occupant of a market segment. First-mover advantage enables a company or firm to establish strong brand recognition, customer loyalty, and early purchase of resources before other competitors enter the market segment.

Product innovation is the creation and subsequent introduction of a goods or service that is either new, or an improved version of previous goods or services. This is broader than the normally accepted definition of innovation that includes the invention of new products which, in this context, are still considered innovative.

International business refers to the trade of goods, services, technology, capital and/or knowledge across national borders and at a global or transnational scale.

<span class="mw-page-title-main">Pricing strategies</span> Approach to selling a product or service

A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.

Market dominance is the control of a economic market by a firm. A dominant firm possesses the power to affect competition and influence market price. A firms' dominance is a measure of the power of a brand, product, service, or firm, relative to competitive offerings, whereby a dominant firm can behave independent of their competitors or consumers, and without concern for resource allocation. Dominant positioning is both a legal concept and an economic concept and the distinction between the two is important when determining whether a firm's market position is dominant.

In economics, barriers to exit are obstacles in the path of a firm that wants to leave a given market or industrial sector. These obstacles often have associated costs, prohibiting the firm from leaving the market. If the barriers of exit are significant, a firm may be forced to continue competing in a market. This forced stay in the market occurs when the costs of leaving a market are higher than costs incurred by continuing in the market. Sometimes, when firms operate at low profit or at loss, they still choose to compete with others. Major factors of this decision making is high barriers to exit.

Hypercompetition, a term first coined in business strategy by Richard D’Aveni, describes a dynamic competitive world in which no action or advantage can be sustained for long. Hypercompetition is a key feature of the new global digital economy. Not only is there more competition, there is also tougher and smarter competition. It is a state in which the rate of change in the competitive rules of the game are in such flux that only the most adaptive, fleet, and nimble organizations will survive. Hypercompetitive markets are also characterized by a “quick-strike mentality” to disrupt, neutralize, or moot the competitive advantage of market leaders and important rivals.

<span class="mw-page-title-main">Profit (economics)</span> Concept in economics

In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as surplus value. It is equal to total revenue minus total cost, including both explicit and implicit costs.

For international trade, Foreign market entry modes are the ways in which a company can expand its services into a non-domestic market.

References

  1. ↑ van der Hoeven, Erik (1980). De wet van de stimulerende achterstand. Amsterdam: Bakker. ISBN   978-90-6019-742-4.
  2. 1 2 3 4 5 6 7 Lieberman, Marvin B.; Montgomery, David B (Summer 1988). "First-Mover Advantages" (PDF). Strategic Management Journal. Strategic Management Society. 9 (S1): 41–58. doi:10.1002/smj.4250090706.
  3. ↑ Spence 1984, Baldwin and Childs, 1969
  4. ↑ Ghemawat and Spence, 1985, Lieberman 1987
  5. ↑ Guasch and Weiss (1980)
  6. 1 2 Rosman, Matthijs (13 August 2020). "First-Mover Disadvantages". Revelx. Retrieved 20 October 2020.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.