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First Mover Theory

First Mover Theory

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  • 1. STRATEGIC FORMULATION 1Elisha SonsonAmerican Intercontinental UniversityStrategic ManagementMGT680 – StrategicNovember 25, 2012
  • 2. STRATEGIC FORMULATION 2Commonly, for many businesses, timing of the marketplace is a critical determination.The focus of such timing to penetrate the market is simply a decision as whether to make anearly or late entry. According to Magnusson and Boggs (2009), there has been increasedawareness over the years regarding the internalization process on businesses. Despite theattention, the uncertainty of whether to enter the marketplace early or late still remains (2009).However, Magnusson and Boggs add that early candidates into the marketplace most likelywould experience more advantages, which includes the knowledge curve effect, the preemptionof scare input factors, choice of promising geographic sites and the expansion of buyer changingcosts. On the other hand, some businesses prefer to respond to the competitive market later whenthe first movers have paved the way, thus creating the advantage edge for the later mover(Magnusson & Boggs, 2009).First Mover TheoryThe theory of the first mover is that they may have the opportunity to experience greaterfinancial performance in the short period because of good character, location or early returns.The first mover can be labeled as the pioneer guru in the marketplace. “The early bird grabs theworm” is a well-known line that conveys the importance of being early. In a marketplace oflimited resources, it is understandable that the first mover enjoys the best possibility of success.The determination to move first and the identification of its value lie behind the economic theoryof the advantage of the first mover (Lieberman & Montgomery, 1987).Advantages of First MoverMurray, Ju, and Gao (2012), outlines the advantages of the first-mover as;• Higher market shares• Technological leadership
  • 3. STRATEGIC FORMULATION 3• Establish brand-recognition• Preemption of scarce assetsDisadvantages of the First MoverDespite the many advantages of the first mover, there are disadvantages to this theory.Dobrev and Gotsopoulos (2010) outline some of the disadvantages to the first mover theory toinclude;• Lesser survival chance on the marketplace• Environmental uncertainty• Uncertainty of long-term investment• Competitors free-riding on first-moverHow Advantages of First Mover Affect the TheoryBoth the advantage and disadvantages of the first mover theory can affect the theory.Beginning with the advantages, higher market shares can affect the first mover theory in thatalthough the first mover may have a higher return, the cost of the first mover can add up quicklythus outweighing the high return on the market. Technological leadership is another advantage tothe first mover but its impact on the first mover is that there may be changes or diffusion oftechnology that may reduce first mover advantage, which means that the first mover may need topurchase the necessary technology needed to sustain formal communication (Lieberman &Montgomery, 1987). One such mechanism that may the cause diffusion includes informaltechnical interaction, which means that the technology may not be practical to support formalcommunication. This impact could affect the first mover in that it comes at a cost to the business.Next, the benefit of having brand recognition can affect the first mover in that latemovers can imitate the brand and produce it at a cheaper cost. Another advantage that can affect
  • 4. STRATEGIC FORMULATION 4the first mover is the preemption of scares assets. This benefit can impact the first mover in thatinformation on available resources may be limited, thus affecting assets that could be purchase atmarket cost. These assets include prime location, which if unknown, the first mover can end upin an unattractive niche, thus affect return on investment (Lieberman & Montgomery, 1987).How Disadvantages of First Mover Affect the TheoryLike the benefits, the downside to the first mover theory can generally affect the mover.First, lesser survival chance on the market is one downside to the first mover theory. This canaffect the first mover in that making an early entry into an unknown market where limitedresearch and development (R&D) exist could potentially affect the first movers’ experience ofsurviving the market. Environmental uncertainty is another disadvantage that could affect thefirst mover. Environmental conditions within the business geographic region can impact the firstmover in that they may not be familiar with the culture, needs, regulatory adjustments andtechnological advances within that specific geographic region. In that case profits could tumblequickly because of the consistent strive to adjust to the environment (Dobrev & Gotsopoulos,2010).The uncertainty of long-term investment can also affect the first mover in that earlymovers may not be able to predict the direction of their investment because competitors have notpaved the way thus facing possibilities of unfavorable conditions that may affect future growth.Free-riding can affect the first mover in that it paves the way for later movers to “piggyback” onfirst movers who enter the market early. There is the opportunity of information spillovers inresearch and development in that research regarding production development, buyer educationand infrastructure development have been conducted by the first movers thus giving late moversthe chance to “free-ride” (Lieberman & Montgomery, 1987).
  • 5. STRATEGIC FORMULATION 5Late Mover TheoryThe pioneers or the first movers are often known in many markets to outsell late moversbut much evidence has shown that in some instances late movers outsell those who enter early(Shankar, Carpenter, & Krishnamurthi, 1998). Like the first mover theory, the late mover theoryshares its own advantages and disadvantaged.Advantages of the Late Mover• Leverage of communication• Lower risks• Certainty of the market• Leverage of innovationDisadvantages of the late mover• Timing of product• Acceptance of the market• Availability of resources• Entry hurdlesHow Advantages of Late Mover Affect the TheoryThe late mover into the market may enjoy some advantages over the early mover butthose benefits can also have an impact on the late mover. Leverage of communication can affectthe late mover in that they may not acquire the skills and experience to communicate theirproducts effectively to buyers. Next, although the late mover may have a lower risk on themarket, the probability of buyers accepting their products puts them at a high risk. Certainty ofthe market can also affect the late mover in that consumers may have already become familiar
  • 6. STRATEGIC FORMULATION 6with earlier product brands and formed a trusted relationship with the first movers, thusgenerating uncertainty for the late movers. Leverage of innovation may seem advantageous tothe late mover but when newer innovation fail to sustain the market or create incompatibilityissues especially in developing countries, it can affect the late mover (Shankar et al., 1998).How disadvantages of Late Mover Affect the TheoryThe disadvantages of penetrating the marketplace late can affect the late mover in manyways. First, timing of the product can affect late movers because launching new products taketime and resources to develop. Next, the acceptance of the market is another disadvantage to thistheory that affects the late mover. Since late movers enter the marketplace later buyers may notaccept their products as they may view them as imitations. Availability of resources can greatlyaffect the late mover in that certain conditions such as environment and geographic location canchange and limit the availability of resources that can be accessible. First movers can createbarriers for late movers thus causing entry hurdles, which can affect the late mover. First moversmay want to control the market by securing patent and product design, thus creating manyhurdles for late movers (Shankar et al., 1998).Successful Firms of the Frist Mover TheoryToday, many firms have successfully emerged as first movers. Kerin, Varadarajan andPeterson, (1992) list Merrill Lynch as a prime example of the first mover theory. The firms’competitive head start over its contenders placed the firm in a leading and long-term position.Lincoln Electric Company is another successful example of the first mover theory. LincolnElectric penetrated the market early with excellent patented products, which has enable Lincolnto sustain higher returns (Lieberman & Montgomery, 1987). Sony is another prime example ofthe first mover theory. The company has developed innovative products by getting them to
  • 7. STRATEGIC FORMULATION 7consumers faster than its competitors, thus continuing fast growth and success. Finally, Coca-Cola the soft drink company, which over the years has distinctly demonstrated appeal andlongevity of the first mover into the marketplace (1987).Unsuccessful Firms of the First Mover TheoryA real example under this theory is Kodak a leading company of photography film.Although Kodak made an early entry into the market, changes in technology forced Kodak tocompete on the market, thus affecting the firms’ bottom line. Another pioneer of this theory isXerox. The firm made an early entry into the market delivering laser printers to consumers butdespite its well-known brand, Xerox failed. Motorola is another first mover to enter the marketbut Apple surpassed Motorola when it entered the market. The MP3 innovator, CreativeTechnology, Ltd. is another example of an unsuccessful first mover. Creative Technology wasquickly overshadowed by Apple who introduced the hard disk MP3 player. IBM a well-knownname in the technology sector was a first mover but like many first movers IBM becameunsuccessful when big names like Apple and HP came on the market (David, 2012).Successful Firms of the Late Mover TheoryAccording to David (2012), it is wise to be a fist mover but that does not mean all firstmovers who enter the market are viable and successful. Many late movers like Apple have beensuccessful in this business. Apple entered the market later than Motorola and has been successfulwith annual sales reaching 24.1 million in the year 2011 alone. Another late mover that has beensuccessful is Nokia who introduced the N8 smartphone and the 12-megapixel camera. Hewlett-Packard (HP) well-known brand entered late and is one of the leading brands in technologytoday. EMI made an early entry introducing the CT scanners but its late rival GE (General
  • 8. STRATEGIC FORMULATION 8Electric) saw much success when it produced similar scanners and took the lead over EMI(David, 2012).Unsuccessful Firms of the Late Mover TheoryThe introduction of the flat screen television rolled out by Mitsubishi is a prime exampleof the late mover theory. Mitsubishi’s unsuccessful endeavor was outranked by leading rivalslike Sony and Samsung. On a smaller scale, the social network iParent.com rolled out into thecyber market but with big names like Facebook, iParent.com made an unsuccessful exit. Withmany investors seeking interest in the company, that was not enough to keep up with its big rivalFacebook (Zimmerman, 2011). A later comer to the auto industry was the Indian line of sedanRenault. Delayed two years later than expected Renault still did not survive the market after its4-year mark (Bhandari & Mukherjee, 2011). Finally, EMC a tech giant entered the market butwhen rivals like IBM and Hitachi entered with high-end products similar to EMC, its stockplunged quickly (Zimmerman, 2011).Recommendation of the TheoryAfter carefully analyzing the benefits and downside to the first mover and late movertheory, it is evident that both theories have interesting elements that make each unique. Despitethe fact that moving first is beneficial I preferably leaned towards the late mover theory.Although many first movers have successfully draped the market, researches have shownexamples of those who have failed to stay afloat. Big names like IBM, Kodak and Xerox areprime examples of this phenomenon. Since developing and launching new products takes timeand resources, it is best to enter the market later than early. This is because much R&D has beendone and inventors can utilize the resources of first movers to analyze the products that havedone well and those that have failed. In addition, being a late move provides a competitive
  • 9. STRATEGIC FORMULATION 9advantage over the first mover in that newer innovative products are being designed and beinglate means inventors have the opportunity to keep up with market trends and consumer buyingbehaviors. Late movers have more resources and the technological advantage is endless. Withthe ever changing demands of consumer, late movers have a better chance of meeting buyers’needs than first movers who focus on being first on the market. According to Lieberman andMontgomery, (1987), being first on the market is wise but late movers have the opportunity toabsorb from the marketing errors of first movers. For example, although Apple was not the firstto introduce a line of technological products, they utilize the experience of earlier movers andlearned from the mistakes of the first movers. In that case being a late mover paid off wellbecause Apple had the opportunity to use the resource of R&D that was done by first movers tobuild a name that continues to be successful on the market.To EndPrior to entering the marketplace, it is critical for firms to make an analysis regardingwhether to enter the market early or late. Although innovative ideas are endless and many firmswant to take the opportunity of introducing their innovation by penetrating the market first,timing is of utmost importance as moving into the market too early or too late can have aneconomic impact on the business. There are many benefits of moving first as there are to movinglater but the importance is introducing innovative product that meet buyers’ needs.
  • 10. STRATEGIC FORMULATION 10ReferencesBhandari, B. & Mukherjee S. (2011). Late Mover Advantage, Business Standard, Retrieved fromhttp://www.business-standard.com/india/news/late-mover-advantage/423445/David, F. R. (2012) Strategic Management Concepts and Cases: A Competitive AdvantageApproach, Fourteenth edition Prentice HallDobrev, S. D., & Gotsopoulos, A. (2010), Legitimacy Vacuum, Structural Imprinting, and TheFirst Mover Disadvantage. Academy Of Management Journal, 53(5), 1153-1174.doi:10.5465/AMJ.2010.54533229Kerin, R. A., Varadarajan, P. R., & Peterson, R. A. (1992), First Mover Advantage: A Synthesis,Conceptual Framework and Research Propositions. Journal of Marketing 56(33-52)Lieberman, M. B. & Montgomery, D. B., (1987), First-Mover Advantages, Stanford BusinessLibrary Research Paper No. 969(2). Retrieved fromhttps://gsbapps.stanford.edu/researchpapers/library/rp969.pdfMagnusson, P., Westjohn, S., & Boggs, D. (2009) Order-of-Entry Effects for Service Firms inDeveloping Markets: An Examination of Multinational Advertising Agencies, Journal ofInternational Marketing, 17(2), 23-41 doi:10.1509/jimk.17.2.23
  • 11. STRATEGIC FORMULATION 11Murray, J., Ju, M., & Gao, G. (2012), Foreign Market Entry Timing Revisited: Trade-Offbetween Market Share Performance and Firm Survival. Journal of InternationalMarketing, 20(3), 50-64. doi:10.1509/jim.12.0083Shankar, V., Carpenter, G. S., & Krishnamurthi, L. (1998) Late Mover Advantage: HowInnovative Late Entrants Outsell Pioneers. Journal of Marketing Research (JMR), 35(1),54-70.Zimmerman, E. (2011). How Six Companies Failed to Survive 2010. New York Times SmallBusiness, Retrieved fromhttp://www.nytimes.com/2011/01/06/business/smallbusiness/06sbiz.html?_r=0