Summary:

  • We like to think we can compete effectively by waiting on others to show us the market direction
  • You cannot make high rates of return with a “fast follower” strategy
  • Companies that constantly take innovations to market grow longer, and make higher rates of return
  • White Space allows you to learn, grow and be smart about when to get out while costs are low

“I want to be a fast follower.  Let somebody else carry the cost of learning what the market wants and what solutions work.  I plan to come in fast behind the leader and make more money by avoiding the investment.”  Have you ever heard someone talk this way?  It sounds so appealing.  Only problem is – it very rarely works!  Fast followers might gain share sometimes, but universally they have terrible margins.  Their sales come at an enormous investment cost.

Those who enter new markets early actually gain a lot, for little cost.  Take for example Amazon.com’s early entry into electronic publishing with Kindle.  Entering early gave Amazon a huge advantage.  Amazon may have appeared to be floundering, potentially “wasting” resources, but it was learning how the technology of e-Ink worked, how costs could be driven down and what users demanded in a solution.  Every quarter Amazon was learning how to find new uses for the Kindle, making it more viable, finding new customers, encouraging repeat purchases and growing.  Now Mediapost.com headlines “Review: New Kindle Kicks (Even Apple’s) B*tt.”

Now there are a raft of “fast followers” trying to catch the Kindle in the eReader market.  But the Kindle is far lighter, easier to use, with greater functionality and available at one of the market’s lowest prices.  While the cost of entry was low, Amazon learned immensely.  That knowledge is not repeatable by companies trying to now play “catch up” without spending multiples of what Amazon spent.  Amazon is so far in front of other eReaders that it’s competition is the vastly more sophisticated (and expensive) mobile devices from Apple (iPhone and iPad).  By entering early, Amazon has lower cost, and considerably more/better market knowledge, than later entrants.

We see this very clearly in Microsoft’s smart phone approach.  Microsoft got far behind in smart phones, losing over 2/3 its market share, as it focused on Windows 7 and Office 2010 the last 3 years while Resarch in Motion (RIM) Apple and Google pioneered the market.  Now the 3 leaders have millions of units in the market, low price point establishment, and between them somewhere between 400,000 and 500,000 mobile apps available. 

As reported in Mediapost.comMicrosoft Gets Serious with Windows 7 Phone” entering now is VERY expensive for Microsoft.  Microsoft spent almost $1billion on Kin, which it dropped after only a few months because the product was seriously unable to compete.  So now Microsoft is expecting to spend $500million on launch costs for a Windows 7 mobile operating system.  But it faces a daunting challenge, what with 350,000 or so iPhone apps in existence, and Google giving Android away for free (as well as sporting some 100,000 apps itself). 

The cost of entry, ignoring Microsoft’s technology development cost, to get the mindshare of developers for app development (so Windows 7 mobile doesn’t slip into the Palm or Blackberry problem of too few apps to be interesting) as well as minds of potential buyers will more likely cost well over $1B – just for communications!!  Microsoft now has to take share away from the market leaders – a very expensive proposition!  Like XBox marketing, these exorbitant marketing costs could well go on for several years.  XBox has had only 1 quarter near break-even, all others showing massive losses.  The same is almost guaranteed for the Windows 7 phone.  And it’s entering so late that it may never, even with all that money being spent, catch the two leaders!  Who are the new users that will come along, and what is Microsoft uniquely offering?  It’s expensive to buy mind and market share.

Clearly Apple and Android entered the smart phone market at vastly lower cost, and have developed what are already profitable businesses.  Microsoft will lose money, possibly for years, and may still fail – largely because it focused on its core products and chose to undertake a “fast follower” strategy in the high growth smart phone business.

We like to believe things that reinforce our behaviors.  We like to think that tortoises can outrun hares.  But that only happens when hares make foolish decisions.  Rarely in business are the early entrants foolish.  Most learn – a lot – at low cost.  They figure out where the early customers are with unmet needs, and how to fulfill those needs.  They learn how to identify ways to grow the business, manage costs and earn a profit.  And they learn at a much lower cost than late followers.  They capture mind and market share, and work hard to grow the business with new customers keeping them profitable and maintaining share.

We want to think that innovators bear a high risk.  But it’s simply not true.  Innovators take advantage of market learning to create revenues and profits at lower cost.  Companies that keep White Space projects flourishing, entering new markets generating growth, earn higher rates of return longer than any other strategy.  Just look at Cisco, Nike, Virgin, J&J and GE (until very recently).  The smart money gets into the game early, developing a winning approach — or getting out before the costs get too high!