For the last 20 years there has been one big debate around technology innovation. Should you be a first mover or a fast follower? First movers would take on higher risk experiments expecting higher returns, but also tolerating higher rates of failure.
Fast followers, on the other hand, would wait for the kinks to be worked out or the market to be validated before investing. So which strategy is better?
For the last 20 years there has been one big debate around technology innovation. Should you be a first mover or a fast follower? First movers would take on higher risk experiments expecting higher returns, but also tolerating higher rates of failure.
Fast followers, on the other hand, would wait for the kinks to be worked out or the market to be validated before investing. So which strategy is better?
For the last 20 years there has been one big debate around technology innovation. Should you be a first mover or a fast follower?
First movers would take on higher risk experiments expecting higher returns, but also tolerating higher rates of failure.
Fast followers, on the other hand, would wait for the kinks to be worked out or the market to be validated before investing. So which strategy is better?
This debate is far from over. Let’s take a look.
Let’s be honest, whether you move early or late, neither is risk free. Digital transformation in the last 2 years brought it all to the forefront. Innovators claim years of digital advancements while laggards question if being ahead is better than being behind. Who will be right in the end?
First movers or innovators take higher risks and expect higher returns. That’s directionally true. But just like the stock market, higher risk projects have higher level of unknown variables and therefore higher rates of failure. Higher volatility if you will. And that is exactly why you invest in them. You expect higher payoffs from such innovations.
The same way stocks outperform bonds long term, higher risk innovation will outperform the status quo of doing more of the same.
On the flipside, fast following implies that the laggards would overinvest and move faster than the innovators to catch up and gain competitive advantage at a lower cost and risk. Or so the argument goes.
The essence of this dilemma goes back to the good old portfolio theory from business school. When you are faced with projects only take higher risks for higher rewards. If you think the higher risk will not have incremental payoffs you wouldn’t do it.
And that’s the essence of the first mover vs fast follower debate.
First movers perceive the risks in line with returns and fast followers perceive the risk too high.
One of the fallacies of fast followers is to assume they are ready to innovate but choose not to because they weigh these risks.
Followers tend to point to the high failure rate of early experiments, whether those are startups or digital projects. Innovators point out that entering the same space later would require much bigger investments or acquisitions.
One study pointed out that none of the leaders of major sectors are fast followers. Fast following is a defensive strategy at best or an excuse for underperformance at its worst.
Innovators want to take higher risks. They are the venture capitalists of their industries whereas fast followers are the hedge funds focused on maximizing the return from existing assets.
But there is actually more at play here than just risk.
1) There are Growth Expectations
First movers tend to have a growth mindset, expect increasing growth rates above and beyond what the current business provides. To put it simply, their risk tolerance is higher because their growth expectations are higher. In my experience, laggards or followers tend to have lower risk tolerance because of smaller growth expectations. The only way a laggard can be a fast follower is if their growth rate exceeds the leader’s. Otherwise they are slow followers and will lose market share.
Often the argument of fast followers is that their failure rate is lower than those of the innovators.
It’s true but irrelevant. Innovators tend to risk higher failure rate at lower cost. Latecomers tend to invest more to catch up. Overall the calculus may still favor the innovator. Some Fortune 500 companies will not invest in 10 innovation projects at $10 million dollar each but would acquire a business to catch up and spend billions.
The ultimate question about first movers and fast followers is this:
Do you want to bet small amounts at higher risk or large amounts at lower risk. Some choose the former and others the latter. But it gets more complicated than that.
2) Different tolerance per business unit
The same company may be an innovator in one area and a laggard in another. An oil and gas business may tolerate a much higher risk in exploration than in their digital programs. The risk level that is normal for one line of business may not be tolerated in another.
3) And there is the question of Talent
Being a fast follower assumes that you can attract talent to determine what innovations to follow and what not to. Also to have the business acumen to make a case for a much larger bet than an innovator business. To make a catch up plan could cost orders of magnitude more than an early stage innovation. Can a laggard attract and retain such strategic talent? Why would not they go to a business innovator? Hard to see why.
The question of first movers and fast followers is ultimately about the overall risk tolerance of the business. Innovators will make smaller bets at higher risk and laggards will make larger bets at lower risk. Both strategies have winners and losers so it ultimately comes down to business principles. In a world where change is not only constant but accelerating - being always late is a very expensive luxury. And I believe ultimately a fatal one.
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