126 ENTREPRENEURSHIP
mover advantages. The first mover in a particular technology can, of course, obtain the
initial patents, but these are seldom decisive.^24 More important, the first mover builds up
a research and development base that can lead to further innovations and improvements,
thus keeping the venture ahead of the pack. As production (either through the new tech-
nology or of the new technology) increases, the learning curve is pushed ahead of that
of competitors, often conferring cost advantages and economies of scale that can pre-
empt or delay competition. Being the first mover may mean obtaining valuable and
scarce resources ahead of others. It may mean getting rights to natural resources, secur-
ing the best locations, or crowding distribution channels (distribution space is a valu-
able and rare resource).^25
The final source of first-mover advantage is the imposition of switching costs on buy-
ers.26iSwitching costs can be developed through marketing or contractual obligations.
When a new venture creates brand loyalty through effective advertising, high buyer
learning and evaluation costs, or complementary products, the firm makes it difficult for
others to compete away its profit.
To be first, ventures need to be organized for speed and develop the capability to
innovate and get to market quickly. Street Story 4.2 provides some examples of these
fast-moving companies and some rules for organizing.
First-mover advantages can also be a disadvantage in certain situations. In some cases,
the first mover must reveal the underlying business concept, and others may copy this
by using different resource combinations. The first mover invests in resolving the tech-
nological and production problems that accompany any new venture. Other firms can
then benefit from these investments. Also, being first once does not guarantee that the
firm will always be first. Indeed, inertia can make the successful first mover resist
abandoning a strategy when it is no longer effective. There are no simple prescriptions
about first-mover advantages and disadvantages. The magnitude of the first-mover
effect varies greatly and will dissipate over time. Later entrants sometimes catch up
through advertising and pricing strategies.^27Growth Strategies
So far, we have seen how new ventures enter using their wedges, and how they seek to
collect rents based on their capabilities and resources. We can also use our resource-based
model to account for the rate and direction of a venture’s growth strategies. Firms grow
in the direction of underutilized resources and toward their areas of expertise. The rate
of growth is a step function, not a smooth path, because resources are usually em-
ployable only in bulky, discrete increments.^28 Basically, a firm’s growth is limited to its
resources. Resources determine the industry the firm will enter and the levels of profit
it can attain. For example, labor shortages, insufficient access to capital, and technolog-
ical barriers all limit growth.
In the long run, however, the most important limit of all may be the scarcity of man-
agement capacity. There are two demands on managerial capacity: (1) to run the firm at
its current size, and (2) to expand and grow. Current managers recruit new managers to
increase the growth potential of the venture. However, these new managers need to be
trained and integrated into the firm’s current activities, which takes time away from
existing managers. While incorporating these new managers, the firm’s growth slows.