THE STORY
I knew someone who lived in Latin America back in the days
when inflation was regularly 2,000 to 3,000% per year. He told me that back then a popular
occupation was to be a profession line-stander.
What these people did was stand in line outside of a store before it
opened. Then, once the store opened,
they quickly bought a bunch of goods for the person who paid them to stand in
line for them.
Why were so many people willing to pay others to shop for
them? The extremely high inflation rates
made it a great economic investment.
When inflation is over 3000%, you want to convert your money into goods
as soon as possible, because every moment you waited made your money far less
valuable. Even waiting a day or two to
shop would significantly diminish how much you could buy with that money.
Therefore, if you were too busy to shop immediately after
getting paid, it was worthwhile to pay someone to shop for you, because the
cost of paying the line-stander was less than the value loss in the currency by
waiting until you could get around to shopping for yourself.
So being at the front of the line was important when paying
cash in that society. However, what if
you were paying credit in a hyper inflation environment? Well, then you’d want to be last in line,
because the longer you waited to pay, the less valuable was the money used to
pay off the earlier debt.
THE ANALOGY
As the story illustrates, sometimes there can be great
benefits to being first in line to get something. Other times the benefits may flow to those at
the back of the line. This same idea
applies to business strategy. Under some
circumstances it makes strategic sense to be a leader in adopting new ideas,
new technologies, and new business models.
Under other circumstances, it makes sense to be closer to the back of
the line. And being in the middle tends
not to get much of any advantage at all.
At first this may seem counter-intuitive. After all, the normal consumer adoption curve
typically looks like a bell-shaped curve.
There are a few early adopters, a few late adopters, and most people
adopt somewhere in-between.
However, when it comes to strategic adoption rates for
businesses, I think the preferred curve may look more like the inverted bell
curve seen in the world of hyperinflation, with most of the advantages coming
at either end, and little to be gained by adopting in the middle.
THE PRINCIPLE
The principle here is that the timing of when you make a
strategic move may be almost as important as what the move is. In most cases, early adoption is best. In many cases later adoption makes
sense. Being in the middle rarely is the
best strategic move.
When Early
Adoption Makes Sense
There are three times when it makes strategic sense to be at
the front of the line. These are each
discussed below.
1) Establishing a Strategic
Position
A strategic position is the benefit where you want to win in
the marketplace. And almost without
exception, there is value to being one of the first to stake out that
position. Why? If you are the first, you are going after
uncontested territory. There is nobody
there who already owns the position, so you can just claim it for yourself...unchallenged. You can defines the rules in that space to be
in your favor. You become the first to
come to mind when the position is thought of.
You are the “expert.”
Consider the opposite, where you try to win at a position
which someone else has already claimed and won. The only way you can win is to
unseat the current winner. That effort can
be extremely difficult, costly and time consuming…and usually still fails. The early leader in grabbing a strategic
position has so many advantages that they can enjoy success for a long time,
even if they do not have the best offering.
That’s why Al Ries and Jack Trout, the experts in
positioning, made their first law of marketing the Law of Leadership, which
says “It’s better to be first than it is to be better.”
2) Gaining a
Temporary Edge
There is a lot of imitation in business. If someone comes up with an idea that gives
them an advantage, others will copy it.
As a result, most advantages are temporary. Therefore, you have two choices: You can be at the front of the line on that
innovation and get the temporary advantage until others catch up; OR you can
wait to do the innovation later.
If you wait, you get no advantage in the marketplace when
you invest in the innovation, since the early adopters already took it. All you are doing is erasing your market
disadvantage so that you can regain parity with the early adopters.
If it costs roughly the same to adopt an innovation early or
late, then all the advantage goes to the early adopter. This is because every firm will eventually
have to make about the same investment in order to stay relevant, so the costs
are the same. But only the early
investor gets the advantage in the marketplace.
The rest have a disadvantage at first and only parity later. So be at the front of the line if it is an
advantage which pretty much everyone will have to adopt eventually.
An example could be something like free on-line
delivery. The first to offer it get the advantage,
become known for it, and build a loyal sales advantage. The latecomers are eventually forced into
offering free on-line delivery to stem their sales losses to the early
movers. But it does not result in huge
market share gains for the latecomers, because those lured by free delivery are
already satisfied by the early adopters of the policy. There is little incentive to switch to the
latecomer’s parity offering. I speak
more about this principle in an earlier blog.
3) The Guinea Pig
Sometimes the inventor of a new process or new technology
has trouble achieving the critical mass of customers needed to make their product
an industry standard. In this B2B world,
it is often to the inventor’s advantage to incent some companies to become
their guinea pig. In other words, if the
inventing company essentially “pays” some potential customers to be test cases
for their product, then they can build the critical mass that gets others to
follow.
This is why brands in the fashion world give free samples to
the tastemakers and celebrities which the masses like to copy. For if the tastemakers and celebrities wear
the fashion, then others will follow, making it worthwhile to give those
leaders the items for free.
This can also happen for businesses which are
opinion-leaders in their industry. If
you are willing to be an early adopter for these businesses desperate to create
a critical mass of demand, you may get the product for free, or get other
incentives to pay for training costs or costs of conversion. Look at the great financial deal Nokia got
from Microsoft to be one of the first to adopt the Microsoft smartphone
software. The latecomers would not get all of those incentives. They would have to pay full price for the
item. Hence,the early guinea pig gains
an advantage over the latecomers.
When Late Adoption
Makes Sense
There are also times when it is better to be nearer the end
of the line.
1) Evolving Industry
Standards
When there are a variety of conflicting technologies
fighting to become the industry standard, it may make sense to wait until one
better understands which technology will become the industry standard. That way, you are less likely to invest in
the wrong technology and then need to make a second investment in whichever
technology ultimately became the standard.
This is especially important if you are a small player who does not have
enough clout to influence which technology wins and not enough money to make
the investment twice.
If the technology impacts your interaction with all the
players in your supply chain, there may be little advantage to being first if
the rest of the people you deal with in the supply chain are waiting until they
see which technology wins. The real
advantage only comes when everyone is on the same page. It may be better to wait to see what your key
partners adopt before making your choice.
2) Price Deflation
Some technologies and business systems are very expensive
when they first come out and have their prices drop dramatically over time. This would be a sort of high price deflation,
the opposite of the high inflation in the Latin America story. In the case of high deflation, there can be
high incentives to wait. If you wait
long enough, you can get the same thing as the early adopters, but much
cheaper. That cost gap may be more than
enough to compensate for entering the business a little later.
Not only might the later product version be cheaper to buy,
but cheaper to operate. The technology
might go from difficult installation to “plug and play.” So purchase cost, installation cost and ongoing
maintenance/operating costs could benefit from waiting.
3) Avoiding
Mistakes
Not all innovations turn out as originally promised. They may bomb in the marketplace or need
significant tweaking. Sometimes, it pays
to let others do all the difficult and expensive work of experimenting and
testing. Then, only once the formula for
success is figured out, pounce on the marketplace with the winning formula.
This type of waiting is especially useful to market leaders
who have significant influence on their supply chain. For example, Coca Cola has rarely ever been
the first with any innovations in their industry. They were not the first to put soda in
cans. They were not the first to create
a diet soda. They were not the first
with energy drinks. What Coke likes to
do is let others waste their time, money and effort on experimenting. Then, once the right answer is known, Coke
jumps in. And because of Coke’s
marketplace clout, they usually overcome the later start and overtake the
innovator…and save all the innovation expense.
SUMMARY
Strategy is more than just knowing what to do…it is knowing
when to do it. Often the best strategic
moves come to early adopters. However,
sometimes it makes more sense to wait.
The proper timing depends on issues like the riskiness of the
innovation, expected price changes over time (up or down) and your relative
market position. There is no obvious
answer for everyone in every situation.
So you have to figure it out, just like most other strategic issues.
FINAL THOUGHTS
Before getting in line, decide where in the line you want to
be.
