Protecting Your Turf: First Mover Advantages as a Barrier to Competitor Innovation

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Protecting Your Turf First Mover Advantages as a
Barrier to Competitor Innovation

• Brian C. Briggeman, Michael A. Gunderson, and
  Joshua D. Detre
• Purdue University

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Motivation

• Food and beverage consumer preferences relatively
  well established
• However, unexpected changes do occur
• Low-Carbohydrate diet
• Anheuser-Busch
• Diet BeerMiller Lite
• So, low-carb beerMichelob Ultra
• Lagorce (2003) found a 7.9 increase in 2003 2nd
  quarter earnings

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Objective

• Fresh Juice Inc. (Gray, et al. 2005)
• Leader in the finished juice industry
• Innovative product GMO Juice
• Analysis of GMO Juice
• Calculate the size of first-mover advantages
• Demonstrate that a first-mover strategy deters
  competitors from innovating

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Background

• Product innovation as a business strategy
• Make competitors irrelevant (Kim and Mauborgne
  2004)
• Innovators risk
• Will it work (Technology)
• Will people buy it (Marketplace)
• Conner (1988) Stackleberg-Leader-Follower model
  on the race for a new patent

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Methodology

• Market Size
• Diffusion ModelBass Model (Bass 1969)
• Price
• Market size, demand elasticity, and supply
  elasticity
• Competitive Intensity
• Market share of FJI and competitors (Powell 1997)
• Competitor Entry
• FJI conjectures of competitor entry

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Data

• ENER Juice
• Similar to GMO Juice
• FJI 10 years of historical information
• JAVA Juice
• Competitors innovation in response to ENER Juice

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Estimated/Simulated Bass Model
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Market Share

• FJI conjectures

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Competitors Entry

• FJIs conjectures on competitor entry in year 1

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Competitors Entry

• FJI enters in year 1

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Competitors Entry

• FJI enters in year 2

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Competitors Entry

• FJI enters in year 3

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First Mover Advantages

• If FJI delays entry, gt75 (-) NPV
• First mover advantage 2 million
• Delaying entry causes FJI to compete more
  aggressively for market share

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Conclusions

• Model developed from limited information and
  conjectures to aid in investment decision
• FJI must be the INNOVATOR!
• First mover advantages
• Innovating creates market share for FJI
• Delays competitor entry
• Supports Leiberman and Montgomery (1998) findings
  that pioneering firms gear consumer preferences
  to their product

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Questions
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Pricing Model