The competitive Advantage of First mover and Late Mover

The competitive Advantage of First mover and Late Mover

Abstract

Nowadays due to technology advancement, the way of how businesses were conducted has evolved to be more globally attributed and dependable to technological innovation aids. Furthermore, technology could help a firm to be sustained by having competitive advantage, and this especially true in the situation of where firm had the strong dependency towards technology innovation. Technology had becomes more important to specific firm or business when it has the ability to significantly affect their competitive advantage or industry structure.

Thus, it is important for firms to choose and execute their strategy systematically to stay competitive and sustainable in the market. In this report, the strategy of how firms enter a new market will be discussed in term of first-mover and late-mover, taking into account on the creation of how a firm could be either first mover or late-mover, the advantage and disadvantage of being first-mover and late mover, and lastly giving conclusion and insight of what strategy could be better to be implemented in particular situation.

Discussion will begin with explanations and definition of what constitute first mover and their advantage and disadvantages. In this part, researcher Marvin B. Lieberman and David B. Montgomery, 1988 in their article survey about first-mover advantages were referred. They enlighten that there are 3 ways of how first-mover could achieve their advantages. The first sources of how first-mover competitive advantage could be triggered are (i) technological leadership, (ii) preemption of assets, and (iii) buyer switching cost.

Technological leadership will benefit first-mover in term of leadership in innovation, which ensure the sustainability in technology. Being the first in the market, provide sustainable cost advantage could be achieved if learning curve could be maintained exclusively. This due to the unit production of cost will fall with cumulative output as explained in standard learning-curve model. As learning curve could be made exclusively, this could also make advantage to the first-mover by setting up extensive barrier to entry.

Moreover, preemption of assets help first-mover to achieve advantage in term of domination of market shares. As first-mover could controlled the market shares earlier, this provide a barrier for late entrants to seize an amount of market shares which dominated by first-mover.

First-mover also could gain the advantage by preempting the scarce asset. By having the control over existing and available assets, first-mover could deter rival in scarce assets acquisition. Preemption of location in geographic and product characteristics also could lead to advantage for those firm which is first-mover. Being the first-mover, advantage could be achieved through preemption of locations in geographic by entering most viable and profitable market earlier than the rivals. Thus, by implementing strategic action to secure and dominates the market, late-mover will find it is so difficult and viewed it as unprofitable to enter the market. This consequently could deter the subsequent entrants.

Furthermore, Research and Development (R&D) and patents also secure the first-mover advantages. By having extensive and effective R&D, this could lead to discovery of new technology, which could be patented. Thus, as patents exist, this could serve as trade secrets. By doing business as the first-mover, this also provide head start for them to do research and exploit all possible potentially new technology, hence provide numerous patents to protect them from patent-race by future rivals.

Buyer switching cost, affect first-mover firm advantages in term of time and resources which will be spent by late-movers in qualifying as a new supplier. Whenever late-mover settle in within firstly occupied market by those first-mover, late-mover had the obstacle and resistance in order to be familiarized by the customers or buyer. This will drop profit margin hence, increase operating cost. This will bring harm to late-mover as the costs incurred are higher compared to the first-mover. Besides, switching cost could surface due to supplier specific learning by the buyer or customer. In this situation, when customers are familiar enough with one specific supplier, they will embrace the brand, and become loyal. Therefore, it is quit difficult for new entrants or late-entrants to steal that loyal customer or buyer from the first-mover firm.

Moreover, research by Tariq Malik, 2012 which study the advantage of first-mover for a firm when doing strategic alliances with host companies has showed that there is significant advantage for the first mover. (Malik, 2012)

The result of this study has support the hypothesis which are first-mover firm in forming an international alliance in China would perform better than late-mover. This finding seen consistent with literature by Lieberman and Montgomery, 1988, and this is due to first-mover creating an environment which is disfavor by late-entrants. For example, when the first-mover has established relationship between China (Joseph G. Nellis, 1997)firms, through strategic alliances, first-mover has the advantage as they will know on how to do business with China government, organization and media. Moreover, first mover also had the edge over late-move in acquiring strategic location, hired and training the human resources, locked in strategy partner, and has created many consumer loyalties for its technology, products and services.

Another empirical study could be seen in Thomas Cleff et. al research of Are there any first-mover advantages for pioneering firms? Lead market oriented business strategies for environment innovation. In this research, it has been found that a successful innovator is not necessarily become the first but one of the first-movers within the competition of different innovation design. Concluding from this study, there is advantage from being the first-mover, however it is depending on the environmental circumstances. This describe that first-mover has higher risk compared to late-mover. Furthermore, through this research, it also found that first-mover advantages are not available and very risky if in condition where suddenly technology changes abruptly. Moreover, increase in market dynamic increases potential of first-mover, however does not guarantee it. It also could be learned that, in order to achieve first-mover advantage, it has to acquire the ability in developing dominant design, so that can be market leader.

Lead-market approach also crucial for the first-mover to compete with late-mover, as late-mover could diffuse faster than expected if first-mover does not take lead-market approach. Lead-market approach also crucial in faster and widespread diffusion of new technology, so that could not be surpassed by late-mover. (Thomas Cleff, 2012).

In emerging economy, first-mover also has the ability to expand business without attracting much attention from the incumbents from the domestic firm. First-mover also should have the necessary human capital, physical and monetary resources in order to stay in advantages zone, if do not want to be outperformed by the late-mover. To wrap up, in order for first-mover to maintain its profit and advantages, they should be one step ahead of its competitor, however as consequences this will require a high rate of innovation in term of technical and new product development. (Joseph G. Nellis, 1997)

First-mover advantages could be seen in various areas such as technology leadership, the domination of asset, and also the switching cost. However, first-mover also could posses several disadvantages, which indirectly will explain as the late-mover advantages. Disadvantages of being the first-mover in the market includes the (i) free-rider effects, (ii) resolution of technological or market uncertainty (iii) shift in technology or customer needs, and (iv) incumbent inertia.

Late-mover could have advantage in free-rider effect, as late-mover can imitate where first mover innovate. They can imitate in various part involving the Research and Development (R&D), buyer education and infrastructure development. As consequences, they have advantage in cost reduction as imitation is less costly when compared to innovation cost. This ability to imitate then, leads to could reduction of the profitability to first-mover.

Resolution of technological or market uncertainty is also one of the advantage of late mover. How late-mover can benefit from this factor is by being late to enter a certain unknown market. This will reduce the risky selection of market, as being first in the unknown market, will serve many challenges and risk to be overcome. As late-mover could delay their time to enter unknown market, they could avoid any unwelcome problem or issues.

Shifts in technology or changing in customers need also affect the first-mover and this will be taken advantage by late-mover. Marvin B. Lieberman and David B. Montgomery in their journal has review many literature on how shift in technology or changing customer demand can cause advantage to the late-entrants, which relate to creative destruction model introduced by Schumpt (Schumpter, 1961)er (1961). Through creative destruction model, existing product were said to be obsolete by the emergence of innovation of new firms. This late-entrant then will exploit technological discontinuity which by eliminating and replacing existing incumbent. While customers need something new and this will create dynamic condition. This will create loophole where late-mover could take advantage, unless the first-mover are very fast to alert and respond.

While in incumbent inertia, late-mover could be in advantage as late-mover can evade from being locked in specific set of asset. First-mover disadvantage in incumbent inertia also could probably become organizationally inflexible, thus they cannot respond to environmental changes or competitive threats. (Montgomery, 1988)

Reviewing from marketing perspective, late mover could be seen as having the potential to leapfrog those first movers at least in two ways either by beating them in their own game, or secondly by surpassing them using innovation as the tool. In term of beating first movers in their own game, late movers approach could start by providing consumers preferences in the category of product positioned by first mover. This could be the source and anchor for competition to start, hence late movers could take the opportunity to see any gap, overlooked superior product positioned, compete on price, or even could take the action to flood the market hence liquefy first mover’s distribution. Whereas, in term of innovation, late mover could innovated their products or strategy, hence could bring the competition between late entrants and first mover come to intense, providing late entrants to surpass first mover. (Venkatesh Shankar, Gregory S. Carpenter and Lakshman Krishnamurthi, 1998).

Moreover, study conducted by Venkatesh Shankar, Gregory S. Carpenter and Lakshman Krishnamurthi, 1998 shows that innovation lead to the key of late mover advantage when compared to first movers entrants. First mover or also known as pioneer has the advantage in experiencing higher potential market compare to those late mover. Furthermore, the diffusion and marketing mix effectiveness are unaffected by diffusion of non-innovative late entrants. However, when compared with that late mover with innovative, which is stated as innovative late mover, even higher market potential could be achieved with higher repeat purchase rate compared to first mover. Moreover, innovative late mover claimed to create asymmetry in diffusion as it has unequal response to marketing expenditure, market potential and repeat sales. For example, when first mover’s diffusion take place, consumers will shift to the late-mover products does not affected much due to market shares potential and also consumers preferences towards late mover still strong. However, when innovative late-mover diffuse, they will diffuse faster as they had the more superior innovation and lower price compare to the first-mover.

In term of brand growth, pioneer will have to spend a lot of advertising cost, as to create awareness of brand for product and the product category. However, late-mover does not have to prepare such cost, or in other words they could enjoy less expenditure on creating awareness, but only focus on developing brand awareness and could depend on the first-mover to establish the category. They also find the implication of late-mover if, late-mover could not beat first-mover in their own game, which cannot defeat first-mover’s diffusions or marketing strategy, which in turn will cause late-mover will experience low repeats rates and also less effective marketing plan, another way of how late-mover could be in advantage should be discovered.

In this situation, what late-mover could do is to lower the price, and spend more on marketing mix. However, it is effective for late-mover to refine their product in which category in compete with the first-mover in order to beat and compete more intensely. (Venkatesh Shankar, 1998).

Conclusion

In conclusion, being first-mover and late-mover has their own disadvantages and advantages. Thus, in order to implement an entry strategy, the requirement and deep understanding of each firm’s SWOT and the market where they would like to enter is required. To become first-mover in an industry, a firm should possess technological leadership, preemption of asset and also buyer switching cost. In order to maintain first-mover advantage to be sustainable, first-mover should be one step ahead of competitior or late-mover so that learning curve could be made exclusive hence slowing down the innovation process diffusion by the late-mover. In the other side, late-mover could have the advantage in term of free-rider effect, which focuses on imitation or refining of the first-mover product category. However, late mover must be aware that if first-mover is very fast in product innovation and development, hence slowing down product diffusion in the market, focus on quality and pricing could be made. Finally, to choose either first-mover or late-mover is the best strategy is depending on the requirement, circumstances, market condition, assets and also firm’s capacity and capability.

References

Joseph G. Nellis, D. P. (1997). The Essence of Business Economics. New Delhi: Prentice Hall of India Pvt. Ltd.

Malik, T. (2012). First-Mover, Strategic Alliances and performance: Context of turmoil in China. Chinese Management Study, 647-667.

Montgomery, M. B. (1988). First-Mover Advantage. Strategic Management Journal, 41-58.

Schumpter, J. (1961). The Theory of Economic Development. New York: Oxford University Press.

Thomas Cleff, K. R. (2012). Are there any first-mover for pioneering firms? Lead market oriented business strategies for environmental innovation. European Journal of Innovation, 1460-1060.