First Mover Theory versus Last Mover Theory
Increased competition within and without national borders has made companies adopt different strategies in gaining a competitive advantage. When companies want to diversify into a new product market, there are two strategies that they can adopt. They can either be the first movers or late movers. The former entails being the initial company in the provision of a new product or service while the latter connotes adopting a wait and see perspective (Grant, 2003). Both these strategies have advantages and disadvantages that are discussed in detail in this paper.
First Mover Theory
The first mover theory argues that the first entrant into a market is able to garner an insurmountable advantage by capitalizing on being the first at satisfying consumer needs. Consumers identify with first mover brands and develop loyalty to them to the disadvantage of late entrants.
Advantages of First Mover Theory
First movers usually have the opportunity to exploit initial networks and feedback channels that ensure consumers identify with their brands making it difficult for competitors entering the market at a later date. Sony would have made a fortune in the video cassette business through licensing had the company taken advantage of its first mover opportunity which it abandoned eventually favoring Matsushita which was the second mover.
In capitalizing markets at the earliest opportunity, first movers get the opportunity to develop brand loyalty which is difficult to breakdown for late entry competitors (Moreau et al, 2001). In most cases, first entrant products are associated with a complete product class. Xerox took advantage of first entry to the effect that photocopying was usually referred to as Xeroxing. Additionally, FedEx was associated with courier services such that the service was referred to as FedExing.
First movers usually develop switching costs for use of certain technologies and products that make it costly for consumers to move to competitors. AT&T developed a wireless phone that consumers pay for once they terminate the service. The cost of switching to competitors was high meaning that consumers preferred to stay with the company.
A first mover is in a position to understand what consumers want and use this knowledge to develop better technologies for processes and distribution which become difficult for late entrants to acquire. For example, Volvo entered into the luxury bus market in India by producing buses that are five times more costly than those of competitors like Tata. However, the company has been successful since it understands the market better than its competitors.
Disadvantages of first mover theory
First movers are solutions to market search rather than benefactors of the market. The entry of a company as the first helps competitors identify a market and seek to perform better since there is an already defined market (Urban et al, 1986). Chux Diapers were surpassed by Proctor and Gamble’s Pampers since the latter had a better understanding of the market than the former. P&G had the luxury of studying the market when Chux was venturing into it thereby making more superior products that eventually outdid the competition.
First movers incur a lot of costs since they must make consumers aware of their new products and gain acceptability. Development of regulations with relevant authorities is also expensive in terms of cost and time.
It is argued that the first version of a product is rarely right and has to be improved over time. Late movers usually have the advantage as first movers develop iteratively while they get the advantage of observing them. America Online is an example of a company that took a different approach to internet browsing making room for competitors to capitalize. The company could not develop its products better and hence fell by the wayside to the advantage of others like Google.
First movers get locked in by the desire to market version 1 of their product and this single-mindedness works to the advantage of competitors who develop newer models of products that perform better in different markets. Sony developed PlayStation 1 and was so immersed in attempting to recover the cost of developing the product such that it was overtaken by the Xbox and Nintendo in some markets.
Last mover theory
Last mover theory asserts that a company will gain competitive advantage by venturing into a market that is already defined. While initial entrants will expend numerous resources in the introduction of new products into the market, late entrants will incur lesser costs and will take fewer risks in developing similar products (Campbell & Goodstein, 2001). Additionally, the improvements to an already established product might be a better strategy than the introduction of an entirely new one.
Last mover advantages
Last movers usually take fewer risks as they enter into an already defined market and improve upon it. Facebook is the most popular social media site in the world. However, the company was not the first mover and in fact only capitalized on the market that had been identified by first movers like Friendster.
Last movers do not have to search as hard as first movers to get funded. When an initial venture has become successful, investors are usually willing to support a similar one that will replicate that success. This is why after the initial success of MySpace, funding for a company like Facebook was forthcoming.
Late entrants into markets usually have a benchmark to compare to. The success of last movers can be guaranteed by extensive research and development done by looking into the factors that led to the success of initial movers (Bainbridge, 2013). Microsoft is an example of a late entrant that was aided by the introduction of operating systems that were better than those of the initial entrants or their followers. The company developed products that were driven by extensive research into existing markets.
Last movers have the advantage of tweaking markets to fit their situations. For example, the introduction of Carling Cider into the British market was due to the success of Stella Artois Cider albeit at a lower price due to a favorable tax regime. Conditions change to the advantage of late entrants like the reduction of taxes which translate to reduction of prices. The late entrants in the vodka market also have advantages in that they charge their products double the current market prices due to the improved vodka quality as compared to competitors’.
Last mover disadvantages
Last movers may find it difficult to gain market acceptance due to brand loyalty cultivated by first movers. Last mover products are weighed against established quality first mover products and sometimes fall ominously short (Zheng, 2002). Pepsi was unable to capture the global soft drink market due to the hold of Coca-Cola. Pepsi products were regarded as inferior to those of Coca-Cola and thus could not upstage this competition.
Last movers have the disadvantage of having limited access to resources. First movers usually position themselves in those positions that are advantageous to their businesses to the peril of late movers. For example, first movers will have the best placed office spaces or manufacturing plant. They will also have access to the best human resources. Microsoft is an example of a company that employed the best minds in the industry. The company tapped its human resources from the best academic institutions and ensured that its products were driven by extensive research which competitors could not match.
The disadvantage of being a last mover to adopt a strategy that has worked for other companies is that it erodes the advantage already possessed. American Airlines filed for bankruptcy as it was the last company to seek court protection from creditors (Brady, 2011). Other competitors like Delta Airlines and United Continental had filed for this protection in the midst of the financial crisis. After markets began to recover, the latter airlines made profits as compared to the former that made huge losses. The advantages that it had accrued over its competitors were eroded as consumer confidence waned.
Last movers also have the disadvantage of producing goods and services that may be going out of favor with the consumers. Lack of a comprehensive understanding of the market due to poor research into market trends lead to losses for late movers. Hummer is an example of a last mover that thought it was capitalizing on lucrative vehicles but later found that suburban utility vehicles were a dying trend.
Bainbridge, J. (2013). Last-mover advantage: when brands should avoid taking the lead. Marketing Magazine. Accessed 17 Feb, 2014 from http://www.marketingmagazine.co.uk/article/1167648/last-mover-advantage-when-brands-avoid-taking-lead
Brady, D. (2011). American Airlines’ Last-Mover Disadvantage. Bloomberg Business Week magazine. Accessed 17 Feb, 2014 from http://www.businessweek.com/magazine/american-airlines-lastmover-disadvantage-11302011.html
Campbell, M.C. & Goodstein, R.C, (2001). The Moderating Effect of Perceived Risk on Consumers’ Evaluations of Product Incongruity: Preference for the Norm. Journal of Consumer Research, 28 (12), 439-49.
Grant, R.M. (2003). Cases in Contemporary strategy analysis. New York: Blackwell publishing
Moreau, C.P. et al (2001). Entrenched Knowledge Structures and Consumer Response to New Product. Journal of Marketing Research, 38 (2), 14-29.
Urban, G.L. et al (1986). Market share rewards to pioneering brands: an empirical analysis and strategic implications. Management Science, 645-659.
Zheng, Z. (2002). Achieving Late-Mover Advantage: The Effects of Enhancing and Distinctive Strategies. Blacksburg, Virginia: State University
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