The Second-Mover Advantage

Pioneering and late-moving companies both have distinct advantages. Making smart decisions means knowing why many pioneers fail, why many late-movers succeed, and whether your situation favors pioneering or entering the market late.

“A lot of times people are looking for simple solutions,” says Gregory Carpenter, a professor of marketing and faculty director for the Kellogg Markets and Customers Initiative at the Kellogg School who, along with Venkatesh Shankar, a professor at Texas A&M University, recently wrote a book chapter about the topic. “What we’ve tried to show is that there are enormous advantages to being first. But in many cases, that doesn’t preclude later firms from being successful. In fact, the same mechanisms that create success for pioneers also create success for later entrants. In some industries, under some circumstances, it’s much better to enter late.”

Zantac or Coca-Cola?

The ulcer-relief drug Zantac is a classic case study of a successful, late-entering product. Zantac was superior to the pioneer ulcer drug in important ways—it had fewer side effects, for example—when the company Glaxo began selling it in the early 1980s. A few years later, it was the best-selling prescription drug in the world. Other well-known brands have followed a similar path. Boeing did not pioneer modern jet travel, nor Google the Internet search engine. Yet both companies are now industry leaders.

On the other hand, consider Coca-Cola. An entire section of the company’s website is devoted to telling the story of Coke’s evolution from drugstore curiosity in the 1880s to one of the most famous brands in the world today. Though many soda companies have emerged since Coke began selling its product, none of them have its story, its mystique, or its success.

Coke’s example highlights one of the great advantages of being a pioneer: you can become the psychological standard—the brand that consumers recall first and most frequently. And being the standard by which other brands are judged, pioneers are in a position to shape consumer tastes and preferences. They shape the product ideal and thus can be hard to beat. Pioneers also benefit from people’s basic risk-aversion. Once consumers have come to trust a brand, they prefer it to untried, unknown alternatives—even when the pioneer costs more.

Fast Followers and Late Movers

So why are late entrants often more successful than their pioneering competitors?

One key factor is that creating a product is costly, both in terms of the money invested and the mistakes made on the path to success. While the pioneer pays a steep price in creating the product category, the later entrant can learn from the experience of the pioneer, enjoying lower costs and making fewer mistakes as a result.

Such a fast follower strategy is especially appealing to agile firms with deep pockets. “A lot of times pioneers are not very well funded,” says Carpenter. “They create a competitive game, and then they’re unable to dominate it. Their resources are just too limited. So competitors enter quickly and, with more resources, are able to win the game that the pioneer has created.”

A riskier but more rewarding strategy is innovative late entry. Entering late without any sort of meaningful innovation can be tough. Compared with noninnovative late entrants, pioneers have an advantage on a number of important fronts: they have higher rates of repeat purchase, their investment in marketing is more effective, and their sales rates tend to grow faster.

Innovative late movers, on the other hand, are able to redefine the category, reshaping the category ideal and enjoying many of the same benefits as pioneers. Think of the way that Apple has come to redefine and dominate the market for mobile devices—a category pioneered by Motorola.

To Pioneer or Not to Pioneer?

If innovation is a key common bond between pioneering and successful late-entering companies, and there are advantages inherent in each role, what are the other factors to consider?

When a company can choose whether to be a pioneer or a late mover, the expected life of the product category is important. When that period is likely to be short, the advantage goes to the pioneer, because the product’s life cycle probably will not extend much beyond the early period, when competition is weak and most of the profit is made. (An example is the market for Y2K solutions software in the late 1990s.) When switching from one brand to another would be expensive, the advantage also goes to pioneers, since they can create a kind of monopoly among established customers, while late movers are left competing for just the new customers.

It is also best to pioneer when the value of the product is highly subjective: think of the benefits that Dom Perignon reaps by being known as the pioneer of champagne. That fact lends a prestige that consumers want to be associated with and creates a level of brand equity for Dom Perignon that is difficult for late entrants to compete with, since the quality of champagne is usually a highly subjective judgment.

When there are more objective standards by which to judge a product, late movers have a greater chance of success. Consider the market for cars. Although emotion and other subjective factors play important roles in car choice, many elements of car ownership are entirely objective: price, gas mileage, safety features, the cost of service, and a car’s dependability, among many others. So a late entrant like Toyota’s Lexus can create remarkable success over 100 years after Karl Benz developed the first car.

Late movers have a competitive advantage, too, when the cost of imitating a product is low. For example, “imitation costs” in the chemical, ethical drug, electronics and machinery industries are about two-thirds the product development costs that pioneers incur, according to one study. (This advantage can be neutralized when a product is protected by patents, making the cost of imitation higher.)

The result is that, in many cases, it makes sense for companies with substantial resources to let others assume the risk of pioneering. “By waiting and entering later,” Carpenter writes, “they can cash in on the pioneer’s efforts in creating the market, and outmuscle them”—a strategy that Microsoft, for example, has used to great success in the computer software market.

Creating Lasting Advantage

Buyer learning is an important source of lasting competitive advantage. Many times, later entrants find the cost of educating buyers daunting. Coca-Cola’s competitors have been unable to redefine the market, leaving Coca-Cola on top for over 100 years. In other cases, later entrants can exploit what buyers have learned through their experience with the pioneer. Glaxo, for example, could focus its marketing on Zantac’s superiority, becasue the pioneer had already educated consumers about the benefits of ulcer-relief drugs.

Despite appearing so different, successful pioneers and innovative late entrants share a great deal. They define or redefine the markets in which they compete. They set the standard, defining the ideal, and shaping how buyers think. They become better known than their competitors. Rather than leaving the future purely to chance, they help create it, and in the process create remarkably enduring advantages.