The Imitation Game: Why First-Mover Advantage Could Lose its Allure in Tech Strategy
‘Originality is nothing but judicious imitation’ - Voltaire
‘Good artists copy; great artists steal’ – Steve Jobs
Being the first is overrated when it means you can instantly be copied.
The ‘time profit’ strategy is one of the most widely utilised models in tech-centric business. In essence, the model is as follows:
- Take advantage of innovation, newness and/or uniqueness to gain time-limited competitive advantage
- Invest in robust early sales efforts to maximise high-margin revenue
- Attempt to sustain momentum for as long as possible before profit margins inevitably erode as competition catches up
When a product is by consensus the hot new thing, it earns premium profits. Then, when a competitor copies the innovation, price competition drives profits to zero. Companies relying on this model make continuous innovation their raison d’être (see Apple’s efforts over the past two decades as a perfect example of the strategy in motion), where the game is to do one thing: invent. The company must then capture as much value and sustain its advantage for as long as possible before the imitation starts.
And yet while innovation is exalted, does it hold the same advantage as it once did? For an example of how a particular industry has been impacted by the advent of digital, let’s look at the retail industry, where one of the best metrics in gauging how well a retail outlet manages its inventory is the cash conversion cycle (CCC), a liquidity metric that balances how fast a company can overturn its inventory into cash.
CCC = Days in Inventory + Days in Receivables - Days Payable Outstanding
This involves expediting accounts receivables, delaying accounts payables, and minimising costs around inventory. An assessment of CCC in the late 1980s/early 1990s, where GAP, Levi’s and other brands could leverage the power of television to invigorate sales annually to the tune of over 30%, suggests that the median CCC for these companies within the S&P 500 has significantly decreased. This piece from Utah State University suggests that the mean average CCC in retail fell from 77.38 days between 1974 and 1993, to 56.29 days between 1994-2017, a 27% drop.
Although an expedited CCC may seem great news for an individual company, if your competitors are doing the same thing, you being first to introduce a new idea to market no longer holds the same cache if it works, as you can be instantly copied and drowned out before your claims to originality are acknowledged by your audience.
For example, if a clothing company in the 90s launched a seasonal campaign on television for months ahead, as Gap and Levi’s did to enormous success, it could be months before competitors had an opportunity to respond. Social media now means companies can retort to a shift in the advertising force within weeks, if not days. In fact, due to the CNN effect of Twitter, much as Ted Turner’s invention of the 24-hour news cycle meant politicians had to have instant responses, so now do brands have to be permanently vigilant to their competitors’ advertising manoeuvres. This can result in hasty and often ill-conceived ideas that can truly damage a brand’s reputation (you needn’t look far for examples of this in the modern retail industry).
This point was touched upon by PayPal founder-turned-VC Peter Thiel, where he discussed the competitive advantage of the tech industries and in the West and East. While Thiel contends that he believes much of tech innovation still comes from Silicon Valley, the competitive advantage has been eroded from years to months to the point where the incentive to innovate from a financial perspective no longer holds as true. This may be disheartening to modern retailers, but they should take solace in the quote:
“It’s not where you take things from – it’s where you take them to’’.