First Mover Theory and Late Mover Theory

First Mover Theory and Late Mover Theory

 

             Generally, for most firms, timing of market entry is an important decision. The subject of timing of market entry can be put simply as whether to enter early or late. According to (1985), “market entry timing decisions are the link between new product development at an operational level and overall corporate level business strategy.” .(1993) further argue that timing and scope decision combined is a source of superior market performance and firm survival.

First movers may be able to enjoy above normal economic performance, at least in short term, due to good reputation, positioning or early profits. However, initial position as a market leader does not guarantee long term success and competitive advantage. According to   (1996), “market pioneering is neither necessary nor sufficient for long term success and leadership.”  On the other hand, second moving or late coming can sometimes be a better option since being a first mover includes risks of demand uncertainty and low cost imitation, and significant costs of product development.

Many studies have examined multidimensional entry strategies and argue that firm resources and organizational attributes influence entry timing (1995). Superior resources give a firm a good point of departure to either sustain or overcome competitive advantage current.  (1996) argue that entry order itself does not guarantee long lasting competitive advantage but an opportunity for that. Sustainable competitive advantage has to be created by other means.

 

First Mover Theory

“Early bird gets the worm.” A prominent line which bring about the value of being first. In an environment of scarce resources and competition, it is likely to be comprehended that whoever is first enjoys the greatest chance of success. The drive to be the first and the understanding of its importance underlies the economic concept known as first-mover advantage.

Numerous theoretical studies in the industrial organization literature advance the notion that the first firm to enter the market for a specific product or service achieves permanent competitive advantages that include technological leadership, preemption of assets, and buyer switching costs (1988). In a comprehensive literature review,  (1992) conclude that prior studies often find that first-movers enjoy larger market shares than late-entrants, which may be considered a support to the notion of first-mover advantages.

The theory of first-mover advantage predicts that a firm who is first to move into a new market, particularly in industries that are subject to network effects, will accrue advantages such that barriers for new entrants become very high, and perhaps even insurmountable. In general, these advantages stem from early adoption by users which allows a firm to capture a large percentage of market share early on. Thus, by the time competitors are able to enter the market, the first mover will, ideally, have already established advantages in brand-loyalty or recognition as well as cost advantages of existing infrastructure and distribution systems.

In  (1988) seminal paper on first-mover advantage, they attributed some elements of fist mover advantage. These are: network effects, consumer switching costs, acquisition of resources and technological preemption.

Ø  Network Effects

Network effects apply to industries where the value of a good or service increases with the number of users. Direct network effects occur when goods are physically linked such that another consumer’s adoption of a good provides a direct benefit to existing users. A first mover’s advantage can increase exponentially if he is able to effectively dominate a network early on. In addition, indirect network effects which occurs as a result of compatibility issues and the existence of the complementary goods market also benefits the first mover. In this case, users’ valuation of a good does not depend explicitly upon other users owning the same good, but rather on the presence of other necessary and compatible goods which enhance the value of the network overall.

Ø  Consumer Switching Cost

Consumer switching cost is beneficial if first mover effectively captures the consumers early on. Consumers may develop loyalty to a particular brand that provides quality goods and services and proves to be reliable and trustworthy. In this situation it would be hard and riskier for them to switch to a late mover offer which they haven’t tried yet.

 

Ø  Acquisition of resources

In the competitive market where there are scarce resources, a first mover can benefit from acquiring the resources and assets first before their competitors. Such resources may include physical assets, positioning in geographic space, and brand presence in the minds of consumers. Gaining first access to physical assets is particularly important in industries where resources are scarce, such as the natural resources of gas or mineral deposits. Acquiring capital and equipment early on could translate to a cost advantage to the first-mover as these resources may become more expensive as the industry grows. Although labor is mobile, first mover can capture and train human resources early on who would likely make them stay in their work. In addition, first mover also can benefit from the geographic area which can be accessible to transportation and visible to the target customers.

Ø  Preemption of Technology

Naturally, gaining a head start of developing product and process technology gives the first mover an advantage over the competitors. As the pioneer firm advances down the learning curve, and the longer that pioneer is alone in the market, the harder it will be for potential competitors to catch up. This is due not only to the fact that the pioneer amasses a greater volume of knowledge sooner than his competitors, but also because innovations in either product development or organizational management can translate into cost advantages for the pioneer. (1984). Early knowledge can only work to the firm’s benefit if the knowledge remains exclusive to the firm.

 

In summary, there are various advantages of first movers. They may able to preempt resources of various types. These include superior positions in geographic space, technology space (e.g., patents), or customer perceptual space. Pioneers may be able to expand and defend their position by blocking product space with a broadening product line. Preemption of superior human resources is also possible, but employee mobility makes such an advantage difficult to sustain.

In addition, early entrants may be able to mold the cost structure of customers. Customers’ perceptual space may evolve in a manner that favors the initial position of the pioneer (1989). Second, customers may develop switching costs as they accumulate experience with the pioneer’s product. Third, network externalities may establish the pioneer’s product as the industry standard.

Moreover, early entrants may also gain a head start in developing a set of organizational capabilities that are essential to the product or service offered in a new industry.

However, there is no guarantee that these advantages will be sufficient to ensure a sustainable competitive advantage. It is also important to note that pioneers high market share may only due to fewer competitors in the same early years and having more time than their competitors to grow but according to  (1997), it does not necessarily be an indication of high performance in the broader sense. Globalization and consequently increased networking and greater pace of market evolution have created conditions where catch up strategies are favored more than ever before (1992). In addition, market potential for innovative late movers may be at least as high as that for the pioneers.

 

Late Movers Theory

             (1992) suggest that strong marketing and manufacturing skills and resources increase the likelihood of later entry.   (1988) identified three factors of first mover disadvantages which are eventually translate directly into late mover advantages. These include: free-rider effects, resolution of uncertainty, and first mover inertia. ( 1988).

Ø  Free-rider Effects

In the absence of patent protection or barriers to knowledge diffusion, knowledge can leak between firms by way of a highly mobile labor force, reverse engineering of products, or a general transparency about the industry which would be a disadvantage to first mover and an advantage to late movers. Late movers can free-ride on the technologies, processes, or organizational practices already developed by pioneer firms, as imitation is often easier and cheaper than innovation. Therefore, a late-mover may benefit from a wait-and-learn approach and by letting a first-mover explore the new market first.

Ø  Resolution of Uncertainty

When a product or service is brand new, preferences for attributes are “weakly formed.” Producers and users alike are not yet fully sure how the product will be best used and what attributes will be the most useful. As pioneer firms is going on an uncertain position in the market, late movers can benefit from learning in their mistakes and failure which is more valuable advantage to late-movers if the mistakes and failures of the first-mover cause the firm to become unviable.

Ø  First Mover Inertia

A change in customer needs and preferences does occur. When a first mover can not accommodate these changes due to organizational or operational inertia, late moving firms would have the advantage. Usually firms are hesitant to abandon its products due to substantial financial investment.

 

Although pioneers outsell late movers in many Markets (1992; 1985), a growing body of evidence suggests that in some cases late movers outsell pioneers (1993;  1988, 1990). The personal computer, wine cooler and video game markets are examples in which pioneers were eclipsed by late movers.

Late pioneers can outsell pioneers in at least two ways. First, a late mover can beat pioneers at the pioneer’s own game. The pioneer plays a central role in defining the category concept and buyer preferences for the category concept ( 1989). These preferences are the foundation for competition between the pioneer and the later entrants in the category ( 1990). By understanding these preferences, a late mover can identify a superior but overlooked product positioning, undercut the pioneers on prices or out advertise or out distribute the pioneer, therby beating the pioneer at its own game. The freeze dried coffee market offers one such example. Maxwell House’s Maxim pioneered the category but Nestle’s Taster’s Choice identified superior position and overtook Maxim (1986). Second, a late mover can overtake a pioneer through innovation. Innovation can either be product or strategy.

 

Conclusion

Faced with a decision about when to enter a new market, the optimal timing often depends upon the strengths and weaknesses of the firm’s existing resource base. Pioneering is likely to be a desirable strategy for firms whose relative skills are in new product development, whereas firms with relative strengths in marketing and manufacturing may prefer to enter later, after the initial market and technological uncertainties have been resolved. In many cases, the timing of entry may not be subject to managerial choice, as firms with weaker innovative capabilities may be forced to positions of late entry. Such entrants can prevail if they hold valuable resources or capabilities lacked by the pioneer. Moreover, later entrants may be able to acquire pioneers, thereby linking their own resource base with the pioneer’s market position, resources and skills. The ultimate decision depends on the organizational objectives.

 

 

 

Credit:ivythesis.typepad.com

http://researcharticlebase.blogspot.com/2011/09/first-mover-theory-and-late-mover-theory.html