This is my first time on this part of SO. Go easy on me :)
Say for example you know a company building a tool or app, but you discover that their way of doing it is flawed or in a more kinder way of saying it - you find loopholes in their product that you can improve upon. Now in a world where the client-base is big, competing products can survive, but say this is a niche market. What I would like to know is:
Will a similar but better product have a chance at competing or is the first-to-market principle enough to capture the entire niche market initially and then choke out competitors? In order to define a niche, say for example I am addressing the fitness or taxi-hailing market. These are just examples, so don't use them explicitly when answering.
This question above may have an obvious answer, but I was just thinking that if I was the first to market, I could probably capture 70-80% of the market and then when competitors come out with better products, I could just copy those features to my product to prevent competitors with a better product from stealing market-share. Companies are obviously doing this, which is part of competition.
I look forward to the answers. If any of you are aware (off-hand) about empirical evidence that shows that even when the first-to-market product copied the competitors better products, the competitors still took away market share, please share. Otherwise your answers without empirical evidence would be fine :)
It depends on the specifics of a particular niche market. In particular, the switching costs and network effects will affect the first mover advantage. If the network effect and switching costs are low the first to market doesn't give a sustainable advantage. In fact it may help competitors to validate the market and the product/problem fit and learn from the first mover mistakes without bearing the costs. There many examples of quick/resourceful imitators beating the company who was first to market with an innovative product.
For starters, I would suggest familiarizing yourself with Michael Porter's Five Forces analysis and augmented models (e.g. 5F + complementors)
http://www.quickmba.com/strategy/porter.shtml Teece wrote extensively on rent extraction from innovation and different industry's appropriation regimes which to a large degree determine who will profit from innovation. Have a look at Teece, D. J. (1986). Profiting from technological innovation.
There is also a great book by Robert Grant on contemporary strategy analysis: http://www.contemporarystrategyanalysis.com
If you're first to market and capture a large percentage, you still have to retain customers. There are a couple of drivers that could influence how many you keep:
A competitor may find an overlapping market. Maybe you managed to corner the market on high-performance snow mobile ski wax until the worlds largest manufacturer of snow ski wax came to the conclusion they could come after this niche market as well.
It depends on the market, but you can enter a niche market even if its crowded as long as you have a marketing angle you can play with, e.g. positioning your company within the niche market differently than your competitors.
You can have all features of your competitors (or better), but get a different positioning. Also look if you can segment your customers, start with one segment and then grow gradually from there.
You can choke your competitors by delivering the better product (or similar in features) at a cheaper price with a stronger brand.
If a product/service is marketed very well it can steal the leadership. Example with the iTunes Music Store and the iPhone.
In some cases the product doesn't even need to be better, the marketing is sufficient. Example with Domino's pizzas, great service and marketing but bad product (that improved later).
When it comes to internet based businesses however, the chances for competitors are lower as there are usually no second runner in the prospect's mind.