Chapter 5
The Value of Being Second
Before you can be number one, sometimes you have to be number two.
For a while during the 1990s, it felt like you had to be first to get anywhere. The beginning of the Internet age seemed to reward innovation above all else. Men and women who could create totally new technologies to serve markets that no one else thought existed became wealthy and successful virtually overnight.
But what you might call the first mover advantage always has been overrated and never more so than in the early years of the new digital economy. Consider the onetime kings of the 1990s and early 2000s: Netscape, Napster, WebCrawler, and Friendster. Netscape’s browser had consumer goodwill and great market share, but Microsoft’s Internet Explorer beat it by matching its features and being bundled free into new personal computers. Napster sunk under the weight of lawsuits, losing customers to its rivals, legal and illegal. WebCrawler could claim to be the first widely used search engine, but it couldn’t keep up with the likes of Lycos or Infoseek. Friendster’s social network couldn’t match Myspace for customization and music integration. Then, a lot of these second movers were beaten out by still later comers like Google and Facebook. Who knows what may come along next?
Follow the Smart First Movers
My first move in business was a second move: building houses without basements. Other homebuilders elsewhere had done it before Kaufman and Broad, and that gave us several advantages. We didn’t need to conduct consumer research to know that people would buy these houses. That made it easier to ignore the condescension of older Detroit builders: “Young man, I’ve been in this business for 20 years and you just don’t understand the market like I do.” Sure, their disapproval gave me a little pause, but I knew we weren’t attempting something completely untried.
Kaufman and Broad was the second mover again when we expanded to France in 1967. Levitt and Sons, the famed builder of the East Coast’s “Levittowns,” had set up shop in Paris three years before. Bill Levitt was the first to recognize that Europe would take longer to recover from World War II but that when it did, the housing market would boom as America’s had right after the war.
Levitt was right about Europe, and I was smart enough to know it. Following him to France was something like following the first hiker on a trail. The guy in front has to break through the brush, get scratched up, and lose his way a few times before making it to the top. The second guy can just charge along the path the first guy has marked, avoiding the rough patches where he stumbled.
In Paris, our company went head-to-head with Levitt’s and made a solid mark. Eventually, after some troubles with his corporate parent, Levitt had to shut down European operations, leaving us the only game in town. We went on to become Paris’s biggest single-family homebuilder.
Markets Evolve and First Movers Sometimes Can’t, or Won’t, Keep Up
Being the second mover isn’t just a matter of timing. The first mover does have some advantages that may be hard to match: technological know-how, access to resources and talent, early market dominance, and name recognition. Each of these, however, can be acquired by a smart second mover. Technological know-how can be learned or surpassed. Even the company considered the final word in microchips, Intel, has ceded some market share to an up-and-coming rival, Advanced Micro Devices. Talent may go to the first mover, but that same talent won’t be happy suppressing their entrepreneurial instincts just to stay employed at a steady first mover. Think of all the Facebook and Google employees who have gone on to start their own companies or join another start-up. A few of my Kaufman and Broad employees went on to become independent homebuilders.
Market dominance and name recognition can be harder to overcome. Sometimes a first mover defines an entire market so well that its name becomes synonymous with the product—such as Tupperware, Coca-Cola, Post-its, or TiVo. Fortunately for the rest of us, such companies are the exception, not the rule, and nothing lasts forever—not even for them. Xerox is a shadow of what it once was. Kodak, which used to be another way of saying snapshot, is now bankrupt. Polaroid suffered the same fate.
As you can see from these examples, a second mover can beat the first mover on branding and market share by relying on an unalterable commercial fact: markets evolve. Tastes and expectations don’t stay the same. Niches grow more numerous, deeper, and, thanks to the Internet, more accessible. A first mover can sometimes fall in love with its product and fail to realize when technology evolves and consumers want something different. This leaves the field wide open for somebody new. The Big Three automakers were all second movers, improving manufacturing methods and offering a better product. General Electric wouldn’t have become one of this country’s largest companies if it had stuck to only manufacturing light bulbs. And Apple, the world’s most valuable tech firm, has been a second mover several times. The company was not the first to sell mp3 players, smartphones, or even personal computers. Apple just did it better than anybody else.
First Movers Always Leave Some Room—You Just Need to Find It
As I learned with our homes without basements, a low price helps a second mover. Unburdened by the costs of research and testing, the second mover can cut prices, which will always be the best way to enter a marketplace dominated by a first mover. Buyers snapped up our first homes at Kaufman and Broad because they cost less than our competitors’.
Holding down your costs requires planning and discipline, but it lets you increase your margins while giving your customers a better price. In France, Kaufman and Broad was able to make more money on our homes than Levitt despite selling at a lower price. We did this, as we had done in America, by negotiating better contracts with suppliers and labor and by working far faster than our competitors did.
Low prices and attention to your own costs won’t matter much, however, if you can’t make the sale. Finding customers who aren’t being served by the first mover allows second movers to get a foothold in the market. Look for needs your competitors don’t satisfy. Look for disgruntled customers who deal with your competitor not out of loyalty but because there’s no other option. Make yourself an attractive alternative.
Think of Home Depot, which had long been the giant of everything-under-one-roof hardware. Then Lowe’s came along and managed to grab some market share by offering a distinct experience to their customers: smaller scale, better-organized stores, and friendlier customer service.
At SunAmerica we worked hard to offer the best customer service—one of our many ways of finding our niche among big financial services companies and the old-line insurers. Starting in 1983, we did all we could to make it easy for consumers to find SunAmerica through their financial planners, to buy great policies or innovative retirement products, and to get in touch with our customer service representatives. That meant having the best distribution network, the best technology, and, of course, the best products.
We started with distribution. We wanted the biggest sales force this side of Merrill Lynch’s—the top retailer of financial services—and we got very close. We accomplished that ambitious expansion by buying up brokerages, so we had thousands of independent brokers across the country. That meant SunAmerica’s customers had easy access to brokers in their own neighborhoods, who could guide them through investment decisions and explain our new products.
Beginning in 1990, after moving operations to Los Angeles and streamlining our back office to make it nearly paperless, we installed 24-hour toll-free information lines, a telephone line for the hearing impaired, and software that let our brokers more clearly demonstrate how our products worked. By 1995 our website was up and running, and soon after, customers could log in to look at their policy online—well before many of our rivals even had a Web address.
All of this made buying a SunAmerica policy a friendlier, more modern experience than buying from our competitors, enhancing our customers’ sense of security in what was a major financial decision.
Study a First Mover’s Failure for Clues to Success
One of the biggest second moves of my career was taking over the fund-raising for the construction of the Walt Disney Concert Hall, a new home for the Los Angeles Philharmonic. It turned out to be a forceful reminder that in every aspect of life you can build on the experience of others, add your own innovations, and achieve success.
The effort to construct Disney Hall began in 1987, with a very generous $50 million donation from Lillian Disney, Walt’s widow. A committee was formed to oversee additional fund-raising, design, and building. Architect Frank Gehry designed a strikingly beautiful building. But nine years later, when I stepped in, construction hadn’t even started. The fund-raising committee had wasted a lot of time raising only a couple of million dollars from donors other than the Disney family, even though the project’s cost looked like it would top $200 million.
If you’re the second mover and the first mover has failed—whether you’re starting a company, taking over a project, or pursuing a social or civic reform—you’re in something of a dangerous position. People tend to think one failure follows another, or that it’s contagious. They might assume that the first mover struck out because there was no way to succeed. That’s what many people whispered about Disney Hall—that L.A. didn’t care enough about its symphony, that none of the city’s rich were willing to open their wallets for the project.
I didn’t believe that. Failure is never preordained. Along with my friend Dick Riordan, then L.A.’s mayor, and our fellow fund-raiser, Andrea Van de Kamp, wife of the former California attorney general and head of the Music Center board, we found a smarter way to sell Disney Hall. We saw clearly that sniffing around all the philharmonic’s old sources of funding just wasn’t working.
Instead, we proclaimed that Disney Hall, when built, would be “the heart of the city,” a defining landmark like the Eiffel Tower in Paris, Big Ben in London, the Statue of Liberty in New York, and the opera house in Sydney. I also argued that it would reinvigorate L.A.’s center, a place whose world-class potential was going almost wholly unrealized. Suddenly, Disney Hall was no longer about a symphony orchestra, the arts, or even philanthropic generosity. It was about Los Angeles’s right to call itself a world-class city. We raised that $200 million and then some, and Disney Hall has become exactly what we promised.
Often, when a problem seems insoluble, it’s because somebody needs to come along and reframe it. The second mover has the best perspective to do it.
Whether You’re the First Mover, the Second, or the Last—Just Keep Moving
This chapter may have given you the impression that it’s too risky to be the first mover. Actually, it doesn’t matter whether you move first or last as long as you keep innovating.
Innovation is especially important in today’s most dynamic economic sectors. Barriers to entry are low. Initial costs might be nothing more than registering a domain name and getting a decent server. It took decades for Johnson & Johnson to gain its nationwide prominence in the consumer goods market. It took Google only a few years to completely marginalize every other search engine. The point is to keep moving, especially now, when everything moves faster.
At SunAmerica, for example, we updated our signature annuity product, the Polaris fund, almost every year subsequent to its introduction. When we launched the fund, we were first movers: The fund was the first to offer middle-class customers the ability to switch their money from fixed to variable annuities and back again without paying a fee each time. That meant when interest rates were high and the market was down, a customer could easily switch over to fixed annuities, which yield a higher return in that climate. If the opposite happened, the customer could move to variable annuities. The fund was also managed by a group of talented investment professionals—something no other annuity company offered at the time. We had to play a careful game of timing to keep ahead of second movers. We didn’t want to cannibalize our own products, but we also didn’t want to wait for our competitors to beat us.
Not everyone can be an original thinker, but everyone can be a rational one. Innovation doesn’t always mean creating something from thin air that needs a patent or a copyright. It just means always looking for ways to improve, sharpen, and evolve what you do—whether it’s refining a product, keeping up with new technologies in your line of work, or reaching new customers in new ways, all based on the lessons of the first mover. As I often say, let someone else go first and get the arrows in their back.