Why You Should Invest in Late Comers Rather than First Movers

Any business school graduate will tell you first mover advantage is huge.

A company is considered a first mover when they bring their product to market first. And because they were first, they get to enjoy super-normal profits.

But being first doesn’t just lead to temporary success. If a business can build a loyal following before competitors jump in, they can continue their profit run for years to come. So it’s best to be that first mover, right?

Well, not in my opinion.

Sure, being first has its upsides, but there are so many more benefits as a late comer.

Let me explain…


Where are the first movers now?

Have you heard of WordPerfect? Or what about VisiCalc? No? Neither ring a bell?

I don’t blame you. There’s good reason you might not have heard of either. They both bombed way back in 1989. Or maybe you do have a vague recollection of them? After all, they were powerful brands before then.

So what happened?

Microsoft happened, that’s what. Or more accurately, Windows happened. Yes, 1989 was the year Microsoft launched today’s most dominant operating system.

Windows quickly spread throughout the world. And it conveniently had applications for writing and data manipulation. These apps were Word and Excel.

Word…WordPerfect…are you starting to connect the dots?

Yes, WordPerfect and VisiCalc were early versions of a Word document and Excel spreadsheet. Or rather, they were the first versions.

So in 1989, instead of starting from scratch, Microsoft Corporation [NASDAQ:MSFT] just slightly improved what was already on the market.

They were the latecomers. But they still won the market race.

There are many other similar stories. Take Yahoo, the first really dominant search engine. But who today jumps onto Yahoo to search for anything?

Google tends to be the search engine of choice. In fact, it’s so commonly used that the word Google has grown to become a verb — if you don’t believe me, just Google it.

Anyway, Google founders Larry Page and Sergey Brin realised people don’t just want to search terms. They wanted relevant results from those search terms.

So instead of showing you a bunch of links littered with your search terms, Google ranks each link by how many times it has been referenced, which increases its relevance to your query.

This wasn’t anything completely new. It was just an adaption on what Yahoo was already doing — another latecomer who ended up in front.

And who could forget Motorola? They were the ones that kicked off this whole mobile phone industry. In 1973, the company created the first handheld mobile phone.

But where is the company today? The only smartphones anyone cares about are from Apple, Samsung, Sony and Google.

There are plenty more examples of late comers dominating innovators and pioneers. But why is that? Why is it that some first movers don’t pan out over the long-haul?



Late comer advantage

One reason that comes to mind is the advantage of improving what’s already on offer. Take Myspace for instance. I had an account. You and your kids probably had an account too.

So why aren’t we all logging onto Myspace still? Well, because now we have Facebook, Inc. [NASDAQ:FB].

Facebook wasn’t drastically different from Myspace. The idea was still the same — chat with your friends, like their pictures and create a wall.

But Facebook did a few things better than Myspace, which allowed them to scale up and cause Myspace to spiral down. Facebook allows you to build a personal social network. Myspace, on the other hand, tried to monetise users early, turning itself into a platform of social entertainment.

It’s a subtle difference. But it’s one that makes Facebook a US$550 billion company and Myspace a cautionary tale.

So the late comer learns from the first mover’s mistakes.

Being second isn’t just an advantage when it comes to business. It can also help emerging countries leap frog their stronger, bigger trade partners.


China and India are making their move

For as long as anyone can remember, the US has been on top. The country is a birthplace for innovation, productivity and aspiration for bigger things.

And seeing how well certain innovations worked out for America, countries like India and China could create massive growth with little improvements on these new concepts.

I wouldn’t expect China and India to rise to stardom on the back of rail roads, steel and oil. Technology is the answer.

By trading with advanced nations, China and India can adopt new processes and new technology. And by making just slight improvements, their economies can continue rocketing upwards.

It’s really only a matter of time before the US is no longer number one. It’s going to be China or India. And it will probably happen a lot sooner than you think. All they have to do is take what’s worked and improve it slightly.

History has shown that buyers tend to go for the newest and best product on offer, not necessarily the first.

This is just one reason why I think you should have exposure to businesses in emerging markets. These places pump out growing businesses constantly. Most are just improving on what’s already worked in the West.

Even the start-up scene in most of these places is blowing up. According to South China Morning Post, venture capitalists are now finding more opportunities in China than the US:

China surpassed North America in attracting venture capital for the first time in the second quarter, helped by a record US$14 billion fundraising round by Alibaba Group Holding affiliate Ant Financial Services.

Start-ups in China accounted for 47 per cent of the world’s VC funding in the three months ended June, compared with a combined 35 per cent for the US and Canada, according to a report by Crunchbase, which tracks and compiles fundraising data.

While you can’t jump into start-ups, you can invest in plenty of small listed growing stocks with exposure to these regions.

You probably don’t want to bet the farm on these stocks. But if you can grab a winner or two, it would drastically affect the returns of your whole portfolio.

Something to think about.


Your friend,

Harje Ronngard,
Editor, Money Morning




Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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