FIRST‐MOVER (DIS) ADVANTAGE AND REAL OPTIONS

Abstract

Fear of losing first‐mover advantages has caused many corporate strategists to ignore real options analysis and simply go ahead with any project that they think is expected to have a positive net present value. But first‐mover advantages are not nearly as valuable as most strategists tend to assume. This article weighs the expected value of first‐mover advantages against the benefits of the real option arising from delay and flexibility. The real options model recognizes the value of delaying projects until important sources of uncertainty and risk can be resolved. After reviewing two well‐known cases of successful second movers—the triumph of VHS over Betamax in VCRs and Microsoft's remarkable late software entries—the authors go on to present more broadly based historical evidence for their view that first‐mover advantages often fail to confer lasting value. The article closes with an assessment of first‐mover advantages in the new economy, including a brief look at recent developments in the Internet and telecom sectors.