Strategic Management Journal, Vol. 9, 41-58 (1988) FIRST-MOVER ADVANTAGES MARVIN B. LIEBERMAN and DAVID B. MONTGOMERY Graduate School of Business, Stanford University, Stanford, California, U.S.A. This article surveys the theoretical and empirical literatuire otn m2echanismZs that confer advantages and disadvantages on first-mover firms. Major conceptlual issutes are addressed, and recommendations are given for futuire research. Maniagerial implications are also discussed. INTRODUCTION What, exactly, are first-mover advantages? Under what conditions do they arise, and by what specific mechanisms? Do first-movers make above-average profits? And when is it in a firms interest to pursue first-mover opportunities, as opposed to allowing rivals to make the pioneering investments? In this paper we examine these and other related questions. We categorize mechanisms that confer advantages and disadvantages on first- mover firms, and critically assess the relevant theoretical and empirical literature. The recent burgeoning of theoretical work in industrial economics provides a rich set of models that help make understanding of first-mover advantages more precise. There is also a growing body of empirical literature on order-of-entry effects. Our aim is to begin to provide a more detailed mapping of mechanisms and outcomes, to serve as a guide for future research. We define first-mover advantages in terms of the ability of pioneering firms to earn positive economic profits (i.e. profits in excess of the cost of capital). First-mover advantages arise endogenously within a multi-stage process, as illustrated in Figure 1. In the first stage some asymmetry is generated, enabling one particular firm to gain a head start over rivals. This first- mover opportunity may occur because the firm 0143-2095/88/050041-18$09.OO ? 1988 by John Wiley these mechanisms enhance the magnitude or durability (or both) of first-mover profits. Our discussion is organized as follows. We first consider theoretical models and empirical evidence on three general categories in which first-mover advantage can be attained: leadership in product and process technology, preemption of assets, and development of buyer switching costs. We then examine potential disadvantages of first-mover firms (or conversely, relative advantages enjoyed by late-mover rivals). These include free-rider problems and a tendency toward inertia or sluggish response by established incumbents. The next section addresses a series of basic conceptual issues. These include the endogenous nature of first-mover opportunities, and various definitional and measurement ques- tions. We conclude with an assessment of opportunities for additional research and a discussion of managerial implications. MECHANISMS LEADING TO FIRST- MOVER ADVANTAGES First-mover advantages arise from three primary sources: (1) technological leadership, (2) preemp- 42 M. B. Lieberman and D. B. Montgomery Environmental Change Firm First-Mover * * Luck Proficiency Opportunity Mechanisms for Enhancing First-Mover Advantage i . Profits Figure 1. Endogenous generation of first-mover advantages. tion of assets, and (3) buyer switching costs. Within each category there are a number of specific mechanisms. In this section we survey existing theoretical and empirical literature on these three general categories of first-mover advantages. The theoretical models surveyed in this section assume the existence of some initial asymmetry among competitors that can be exploited by the first-mover firm. This initial asymmetry is critical; without it, first-mover advantages do not arise. Ways in which this asymmetry may come about are considered later in the paper. Technological leadership First-movers can gain advantage through sustain- X Rumelt (1987) refers to these as isolating mechanisms, since they protect entrepreneurial rents from imitative competition. able leadership in technology. Two basic mechan- isms are considered in the literature: (1) advan- tages derived from the learning or experience curve, where costs fall with cumulative output, and (2) success in patent or R the firms early market entry with superior patented products, coupled with a managerial system promoting continued cost reduction in an evolutionary technological environment, has enabled the company to maintain high profit- ability for decades. Inter-firm diffusion of technology, which dimin- ishes first-mover advantages derived from the learning curve, is emphasized in theoretical papers by Ghemawat and Spence (1985) and Lieberman (1987c). It is now generally recognized that diffusion -occurs rapidly in most industries, and learning-based advantages are less wide- spread than was commonly believed in the 1970s. Mechanisms for diffusion include workforce mobility, research publication, informal technical communication, reverse engineering