The type of the industry where first and second movers are engaged in influences greatly the risks and rewards that they are faced with. The potential rewards that motivate the companies to take the second-mover approach do not always turn it to be successful. Below are some possible risks and rewards for a second mover strategy:
Capturing Market Share:
The lack of competition enables first movers to gain substantial market share. It is the result of the huge demand for the new product that enters the market. When, on the contrary, the competitors who follow the imitation strategy start to play an active role in the market system, the market share considerably reduces.
In this case second movers benefit from the mistakes that the first movers have made, thus capturing the market fast. Second mover also gets the advantage in cutting costs down in training, research and development. Second mover companies become more efficient in utilizing the resources in this manner and get a cost advantage over the first mover. Many industries like Fast moving consumer goods have experienced the imitator effect in capturing the market share. In the process of capturing the market share, the follower attracts the existing customers of the first mover. There are a lot of risks involved in capturing the market share from the market leader.
Competing with its rival Microsoft, Sun Microsystems Inc licensed its Java software for all consumer-electronic products. It resulted in Java’s appearing in a wide range of devices. If we consider, for example, Motorola, it uses Java everywhere: starting from pagers and cell phones and going up to fax machines and smart cards. In such a way the company captured market share from the market leader. The risk involved in the business is obvious, but higher the risk, higher the return.
Research and Development Costs:
The second mover does not face the problems of high research, development costs and marketing costs that are so essential for informing the public about the new product. The second movers can just benefit from the experience of the first movers and implement the techniques adapted by them to their similar products. The marketing task of educating the public about the new products is also done by the first mover. Consequently, the second mover can concentrate its efforts on producing something new and superior in comparison with the first mover’s production.
But second mover cannot completely ignore the law of constant research. As the environment changes dynamically research holds the key to competitive advantage. If there is no adequate research, the company risks to have incurring loses. This risk that a company faces without a research is as good as exiting the market.
A good example of using the research done by the first mover is Charles Stack Online Bookstore. Though the company has conducted a profound research, it failed to maintain its position in the market. Amazon.com learned from the mistakes of this company and became the market leader without much costs spent on research and development.
Customer Needs and Role of Technology:
As customer needs are constantly changing, this creates opportunities for further development. The customer requirements are strictly followed due to the technology that is rapidly developing. The second mover strategy is rather appropriate in this changing context. The failures of the first mover are closely examined by the second mover; the new technology is developed on the basis of the existing one, but with regards to the changing customer needs.
The Delaware corporation Home Depo, Inc. dealing with building materials, invented the home-improvement superstore. Another world retailer, Lowe’s, though being a second mover “is exploiting a calculated bet that Home Depot CEO Robert Nardelli made after taking the reins in 2000”. This is an example of the second mover advantage when the second mover companies benefit from what they have observed done by the first movers. The advantages that Lowe’s gained turned to be profitable. According to Lowe’s report “in the fourth quarter of 2005 its earnings surged 37%–compared with 23% at Home Depot. The stock market has taken notice: Shares of Lowe’s returned 18% over the past year, to Home Depot’s 7%”.
One should also take into account the following risks which may be involved in being a second mover:
- Insufficient resources can be usurped;
- Because of the changing the economics of the market, second entrants may fail to get an economic justification to enter it.
- The reputation will depend much on the way the company’s products are accepted by suppliers, distributors and customers.