First mover, last mover

6 June 2016

The first mover theory refers to the competitive advantage a company earns by being the first to enter a specific market or industry. With this movement comes advantages and disadvantages. An advantage of being a first mover is the technological advantage through sustainable leadership in technology. If the firm is the first one to introduce the technology, it reaps the benefits of selling those products to consumers. It also leads the way with research and development and obtaining patents for its products. This advantage can also create barriers to entry, as few firms can compete profitably.

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A first mover may also be able to obtain scarce assets. The first mover gains control of the assets that already exist. If the firm has superior information, it may be able to purchase assets at market prices below those that come later in the evolution of the market. Again, the acquisition of scarce resources may limit the number of firms that can compete in the market.

Being a first mover means paying less buyer switching costs that may arise from new suppliers, new software or computers, and training employees for new protocol or software. Late entrants have to pay more for these switching costs. Switching costs typically enhance the value of market share obtained early in the evolution of a new market.

With being a first mover, a company does not have to compete with as many established products as a last mover. Being early into a market means that competition is not as fierce and the company can set industry standards and gain market share easier than if it was competing with firms already established in the industry. No brand reputation has been formed yet as well.

With being a first mover come disadvantages as well. One of these disadvantages is late movers being ‘free-riders’ on the first movers investments in areas such as research and development and other areas. Late movers can also exploit employee screening and tap into skilled labor at a lower cost because the first movers have given the employees experience and training.

In a market with considerable uncertainty, being a late mover means some of the uncertainty is relinquished before the firm enters the market. The automobile and aircraft markets are examples of this. Late movers can jump into the market once it has been established and know that there is little uncertainty that it is going to be a profitable industry. Once uncertainty is resolved, competition shifts to price, so those with low manufacturing costs have a competitive advantage.

Being a first mover means new technology is brought to consumers earlier, but late movers can exploit technological discontinuities to displace incumbents. It may be difficult for first movers to see that last movers are displacing their technology as the new technology appears while the old technology is still growing. The late movers can basically take advantage of the early technology and make improvements on it.

Finally, a disadvantage of being a first mover is incumbent inertia. This means that the first mover firms may be locked in to fixed assets, may be reluctant to get rid of existing product lines, or be organizationally inflexible. Firms may want to ‘harvest’ sunk costs such as buildings or marketing channels, instead of drastically changing itself to adapt to the market.

Being a last mover means entering a market after it has been established by the first movers. There are advantages and disadvantages to being a last mover that are directly related to the advantages and disadvantages of a first mover. Firstly, being a last mover means the company knows how the product has been perceived and knows that the uncertainty of the market has been eliminated.

Research and development costs will be less because the first movers have done extensive research to produce products. The last movers can piggy-back off this R&D make improvements to the products already established.

Last movers can take advantage of trained personnel from first movers. The first movers can train employees and give them experience, and then the last movers can come in and take them away, utilizing their skills. They may have to pay a higher salary to pull them away from the first mover, but they will save money on training.

Finally, being a last mover means switching costs are lower. This is related to the idea that the market is already established. Since last movers can see where the market is headed, it can invest in these assets instead of switching old assets over to the new assets. This will ultimately save the company extensively.

There are disadvantages to being a last mover as well. One of these disadvantages is possibly missing a opportunity to enter a market altogether. The market may disappear altogether before the firm can really establish itself. Assets that were used to enter the market will be obsolete.

Another disadvantage is less potential customers because the market is flooded with first and last movers. Other companies may have the same idea to enter the market late, and with all the different companies competing in the same market, this may cause too many similar products to be on the market. This can lead to companies not being able to differentiate themselves.

Last movers may not be able to keep up with technological advancements because they have not been established very long. Their R&D departments need time to make technological improvements and since they are not in the market for long, may fall behind the first movers in this area.

A final disadvantage of last movers is being labeled a “copycat” or “imitator.” When a late mover enters the market, since they are competing with established products, consumers may think they are just copying their ideas and turn away from their products. It is imperative that the new products established differences so that consumers see that there is a benefit to choosing the new product.

There are several examples of firms that are first movers that have been successful and unsuccessful. The obvious first mover example is Apple, which introduced products such as the iPad and iPhone. Other examples are IBM, which introduced the first 16 bit personal computer, GM in the car industry, and Yahoo, the first online search site.

There are also examples of unsuccessful late movers. An example is AOL, which led the way with dial-up internet but later was replaced with DSL and cable internet. Other examples are Napster, which ran into legal issues, Motorola, and Wal-Mart as a low cost products provider.

Some examples are last mover firms that have been successful are Facebook as a social media site, Home Depot for home improvement products, Netflix for online movies, and Samsung in the phone industry. All these firms entered their respective industries late but have established a competitive advantage that makes them viable in each industry.

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