Business managers find themselves in a dilemma on the best market entry strategy to adopt among the first and late mover strategies when making an entry into a new market. Theoretical and practical investigations and evaluations into the merits and demerits associated with these approaches could help them make informed decisions on the most appropriate market entry strategy for their firms.
Among the advantages a business organization is likely to gain with the first mover strategy is a significant occupation of the target market. This can be in terms of resource capitalization and buyer switching costs. Schnaars (1961) argues that switching costs stem from the financial burden of initial transaction costs, employee training costs, customer learning costs, and the cost of qualifying a new supplier.
Theoretically, switching costs facilitate the creation of value and share of the market although it may not translate to higher profits. Another advantage argued on a theoretical framework is buyer choice uncertainty. Uninformed buyers tend to stick to initial products irrespective of the fact that newly launched products may be of a superior quality to their preferred choice. This perception revolves around brand royalty (Schnaars, 1961).
Reinganum (1983) asserts that sustained leadership in technology is an advantage gained through mechanisms based on the learning curve and product patents. The learning curve theory demonstrates the advantage of falling unit costs with an increase in output volumes. In view of this, fierce rivalry may result from competing firms adjusting product prices downwards to bar new entrants.
This rivalry often causes other firms to under price their products to gain an upper hand in the share of the market. This was the case with the mining of uranium at Proctor. Gamble endeavored to gain a sustained advantage by integrating this strategy in its pursuits to gain an upper hand in uranium mining. This was also the case with Lincoln Electric Company.
The firm entered the market with patented products that were superior coupled with a distinct technological dynamism that lead the company to operate on distinctly high profits. First mover advantages can also be sustained by patenting products, a case with Xerox.
Patents played a key role in barring competitors from entering the target market until forced entry was achieved through anti-trust actions. Wernerfelt and Karnani (1987) product detailed descriptions of managerial innovations that led first movers into greater profitability in product manufacturing and distribution.
Another advantage is that firms may preempt the scarcity of resources in the form of machinery and related equipments. Weiss (1976) argues that first movers can gain an advantage in controlling already existing assets which may not have been necessarily created by the firm. These assets span the geographic space, product positioning, and input and output processes.
The preemption of input factors may be in terms of a firm’s current and superior knowledge about market conditions. The knowledge includes prime market geographic locations.
Geographic locations can enable the first mover to establish appropriate product space as the case with Wal-Mart. Wal-Mart targeted several geographic locations making its supply chain extremely efficient. That led the firm to realize huge and sustained profits.
The above commitment leads a firm to maintain greater outputs making it extremely difficulty for new entrants to penetrate that market. These commitments can be partially achieved through price cuts and other strategies.
Smaller firms cannot risk entering such markets since they may ruin their chances of making sustained profits. The case with Dow chemical industry illustrates this scenario. This firm gained a near market monopoly by manipulating prices in view of the large investments it had made.
On the hand, the first mover strategy suffers from various disadvantages while on the other hand the late mover benefits from these disadvantages. Spence (1977) affirms that first movers may enjoy first mover monopoly. The magnitude of profits enjoyed by first mover firms diminish as late movers switch to the newly created market enjoying the infrastructure and other innovations specific to the new market made by first movers.
Late movers are adept at product and technology innovations. In addition to that, late movers may benefit from employee screening done by early movers. Late movers may find readily skilled labor in the new market. Spence (1977) cite the case of EMI that developed the first scanner. The company could not aggressively penetrate the market since it lacked skilled personnel and infrastructure to reach the target market.
That shortcoming was exploited by the Pilkington firm which put to advantage its ability to create a market infrastructure. That led it to gain enormously by drawing upon its experience and asset utilization. Other companies on record to have gained from the disadvantages of early movers were IBM and Matsushita.
Risk and uncertainties coupled with different technologies is another disadvantage spanning the first mover approach and advantage of the late mover approach. The effects of this approach revolve around the size of the market, the ability of rival firms to resolve market uncertainties, and the availability of skilled labor. Well illustrated cases were Model T ford and D-C 3 companies. Another firm was Toyota.
Toyota endeavored to exploit the first mover mistakes of Volkswagen in entering the US market. When Toyota planned to enter the US market, it incorporated the weak aspects of Volkswagen, a company that dominated US market for long. This saw the market share for Volkswagen dwindle as that of Toyota rose.
The third disadvantage of first mover that is also an advantage of late mover approach is a shift in technology. New entrants may evaluate technological discontinuity of rival firms and come up with new innovations that are better tailored to meet customer needs. That becomes a striking gateway for late movers.
Reinganum (1983) argues that incumbent firms may take longer to perceive threats from aggressive followers and late movers in terms of technological innovations.
Such examples include the failure of steam engine manufacturers to respond to newly invented diesel engines, the American Viscose’s inability to recognize the threat by rayon as a substitute for Viscose, and the industry transition from germanium to silicon. Another example includes IBM and Burroughs’ constant onslaught on Docutel’s automatic teller machine.
The fourth disadvantage of the first mover and fourth advantage of the last mover approach is the inertia inherent in asset optimization. This approach is characterized by failure of a firm to optimize its fixed assets, product lines, and organizational inflexibility.
These elements hamper organizational ability to adapt to environmental changes that gradually may lead an organization to decline despite short term profit optimization. Specific examples include steel production methods in the US in the 1950’s and 1960’s. These firms continued to invest in obsolete technologies irrespective of the cost and inefficiencies inherent with these furnaces.
Other examples include Xerox’s failure to innovate its products on time, an opportunity IBM seized upon. Ford’s decision to continue manufacturing the T Model despite challenging environmental competitions and the introduction of chips into the market for women and children which prior to that introduction had been a reserve for men in pubs and bars (Spence, 1977).
On the other hand, late movers are disadvantages by their failure to acquire a profitable chunk of the market. Once the new entrant has gained a share of the current market, it could be difficult for the late mover to penetrate an already occupied market. This disadvantage may be facilitated by technological leadership of the first mover compared to the new entrant’s inferior technology (Reinganum, 1983).
In addition to that, consumer behavior may determine the success or failure of the new entrant. It has been shown that consumers show prevalence and loyalty to products they are conversant with compared to new products. In addition to that, the perceived value of a product influences consumer loyalty (Schnaars, 1961).
Late mover approach suffers from the disadvantage of patents. First mover products may be patented and late movers may have no economic advantage through innovations of such products (Shaw & Shaw, 1984).
That has been the case with new entrants into the already capitalized market for soft drinks dominated by the giant coca-cola firm. Other examples are companies that endeavor to make entries into the automobile industry dominated by Toyota and other automobile industry leaders.
Unilever is another example of a firm that has dominated the market for household products for many years. Late entrants find it difficult to access the market and make economic value out of them (Schnaars, 1961).
First mover advantage constitutes the economic benefits a firm gains in consequence of its early entry into the market. These benefits are facilitated by patents, learning experience, transaction volumes, product image, buyer’s behavior, and technological leadership.
In view of the advantages associated with first mover and late mover approaches, it is strongly recommended that the first mover strategy be adopted for the firm. This is in view of the technological advantages that may be gained by the first mover and the large number of opportunities presented for the first mover.
In addition to that, the first mover may invest in a learning strategy to keep track of the ever changing environment and remain dynamic to the changing business and consumer behavior, an element that the late mover may not optimize on.
The first mover strategy may compel organizational inertia to drive a firm into profitability, an aspect which may be combined with luck and better mechanisms of accessing and manipulating the market coupled with foresight and tact. In addition to that, if successful research has been conducted on a new product, the chances of failure are a bare minimum. However, research reveals that failure can occur in practice.
However, skill and luck can be combined to provide above normal profits if a first entry mover sustainably pursues its goals and objectives. It is therefore strongly recommended that the firm adopt the first mover strategy in exploiting the widely available opportunities given current technological capabilities. Certainly this strategy could propel any firm that adopts to it for economic prosperity.
References
Reinganum, J. F. (1983). Uncertain Innovation and the Persistence of Monopoly. American Economic Review, 73(1). 741-748.
Schnaars, S. P. (1961). When Entering Growth Markets: Are Pioneers Better than Poachers?. Business Horizons, 29 (1), 27-36.
Shaw, R. W. & Shaw, S. A. (1984). Late Entry, Market Shares and Competitive Survival: The Case of Synthetic Fibers. Managerial and Decision Economics, 5 (2), 72-79.
Spence, A.M..(1977). Entry, Capacity: Investment and Oligopolistic Pricing. Bell Journal of Economics, 8 (1), 534-44.
Weiss, L. W. (1976). Optimal Plant Size and the Extent of Sub-Optimal Capacity. In R.T Masson and P. D. Qualls, eds. Essays in Industrial Organization in Honor of Joe S. Bain. Cambridge, Ballinger Press.
Wernerfelt, B. & Karnani, A. (1987, March-April), Competitive Strategy Under Uncertainty: Strategic Management Journal, 8 (2), 187-194.