Being first to market isn't the only thing, and maybe not even the most important thing

A week or so ago someone said to me, "We have to be first to market, because others are already working on this idea." That was a flashback to the late 1990s, during the hay day of the technology bubble, when you couldn't have a conversation without someone breathlessly saying they would make a gazillion dollars because they had a first mover advantage.

NetBank in Atlanta was one of the first online banking companies. They were first to market. Recently they were closed after intervention from the US Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

Being first to market is important. But it's not the only thing. And it may not be the most important thing.

I had a client at KPMG back in the 1980s, TelMan, that was one of the first companies to begin selling long distance services after AT&T was deregulated. (That's where Leighton Cubbage cut his teeth, for those of you who know Leighton.) But TelMan leadership knew that their first mover advantage wasn't a sustainable advantage, so they designed the company from the beginning to sell. They started in 1984, went public in 1986, and sold to SouthernNet in 1986 for a couple of hundred million dollars. There you go.

To have a sustainable advantage, like a Swamp Fox you need to be creating an entirely new value chain targeted at customers not well served by the market leaders. The are several signs to look for that you are hiking on the right trail.

The target customers probably are on the low end of an existing market, so it looks too small and unprofitable for the market leader to bother with. Think about how Bentonville looked from the top of the Sears Tower in Chicago in the late 1960s, when Sears was focused on affluent, suburban markets where the end of growth couldn't be seen. Do it right like Sam Walton did, and when you finally hit the radar screen of the market leader you have a lean, mean channel developed serving what now everyone understands is a large market. The market leader goes from looking potent and agile to slow and lumbering. Happens all the time. Ask Sears and Lord Cornwallis.

Another sign that you are creating distinctive value is that your competition is an indirect alternative. We've discussed here before about how Henry Ford competed with faster horses, not other manufacturers of expensive luxury cars, and Southwest Airlines competed with people driving their cars, not other airlines with expensive hub systems.

The final sign that you're creating a sustainable advantage is that you are empowering people in your value chain to generate revenue that weren't before. Angioplasty wasn't commercialized by heart surgeons. They saw it as an inferior clinical (and oh by the way less profitable) alternative to open heart surgery. Cardiologists enthusiastically commercialized angioplasty because it was an entirely new revenue stream to them (and of course in their professional opinion it was a superior solution in most cases to heart surgery.)

NetBank was a first mover in the world of online banking a decade ago. They didn't create distinctive value that market leaders couldn't ultimately co-opt. And they didn't have the insight to sell out when they were hot and could.

So now they have the ignominious fate of TechCrunch formally announcing them part of their Deadpool.