#012 - PM Lessons by Meituan Co-Founder - Pt 11: Strategy: First Mover vs Last Mover Advantage
10mins read - Needs less convincing, it can be done, "normal" & Elon Musk didn't found Tesla?
Wow, crazy week! First of all, thanks to @ruima ‘s share on Twitter and @garrytan and @balajis ‘s retweets that I had a huge burst in new subscribers. Thanks to those that shared with their friends & colleagues and those that sent me encouraging messages as well!
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Let’s get you up to speed:
Wang Huiwen is the co-founder of Meituan, who recently retired at age 42 with an estimated net worth of >US$2B. He opened a Product Management course at Tsinghua University in September 2020. This article and others in this PM series are my translation and edits based on a compilation of the content of his course shared online. You can see other articles in this series here.
First-Mover Advantage vs. Last-Mover Advantage
The first-mover advantage is well understood. It works similarly to the Matthew Effect. Because you were the first one to do it, you earn the label of being an innovator and thus are able to attract entrepreneurial talents and so on. You would also be the first to know what the pitfalls are and you may even accumulate unfair strategic resources. (e.g. data, network). As such, the first-mover advantage is very important to have and it's a dominant theme in business.
Today, we focus on the last-mover advantage as it is no less important than the first-mover advantage but far less well-understood.
In our first lesson (#002 - Products, Product Managers), we mentioned that none of the 5 products were the first in their category. Despite not being the first-movers, they are the products that matter and last. Behind each one of these successful products is a product manager that made it so.
People who understand the first-mover advantage know how powerful and intimidating it can be. What frequently happens is that people give up entering due to this fear. (the familiar “800-pound gorilla” in this space). That's why we should expound on being the last mover as it can also be very advantageous.
Advantage I: Needs Less Convincing
When there is already a first-mover in the industry, how difficult it is for followers to enter? For Meituan, other than group buy, none of our businesses were the first in China.
The first advantage of being the last-mover is that you don't have to convince as many people. The pain that a first-mover goes through to explain and convince people of the idea is unfathomable for most people.
Wang Xing and I started on our first social network site DuoDuoYou (Note: "Many Friends") in 2003, and Xiaonei (Note: "On-campus Network") in 2005. At that time, in the United States, social networks like Friendster and Myspace were already very popular, but our biggest challenge was to convince people to use them. We spent two years trying to think of one simple/elegant sentence to describe the product, but we didn't get anywhere.
In the late 1980s, the one-sentence description that Steve Jobs had for the PC is, "A bicycle for the mind."
I think one of the things that really separates us from the high primates is that we’re tool builders. I read a study that measured the efficiency of locomotion for various species on the planet. The condor used the least energy to move a kilometer. And, humans came in with a rather unimpressive showing, about a third of the way down the list. It was not too proud a showing for the crown of creation. So, that didn’t look so good. But, then somebody at Scientific American had the insight to test the efficiency of locomotion for a man on a bicycle. And, a man on a bicycle, a human on a bicycle, blew the condor away, completely off the top of the charts.
And that’s what a computer is to me. What a computer is to me is it’s the most remarkable tool that we’ve ever come up with, and it’s the equivalent of a bicycle for our minds.” - Steve Jobs
It's a rather convoluted product description, which demonstrates the challenge of being an innovator. The followers would not face such a problem.
To illustrate - why are you making electric cars? where do you go charge? don't I look stupid driving an (impractical) electric car when everybody else drives petrol cars? Telsa might have had to answer these questions all the time. None of the following electric car makers needs to worry about these questions. At the abstract level, humans love innovation, but at the concrete level, humans fear innovation.
Advantage II: It Can Be Done
The second advantage of being a last-mover is that you know it can be done. The first country to make nuclear bombs faces a different reality than the countries that follow. You still have to work independently and from scratch, but the levels of uncertainty are completely different.
Advantage III: Being “Normal”
The Visionary Innovators
The third advantage is that the last-movers are more normal. Being innovators, the first-movers have unique minds. The downside of that is you may not see beyond yourself. Woz made the PC based on his (or an engineer's) needs but Steve Jobs was more business-minded and his vision for the PC was bigger than just the hobbyists. (Note: e.g. expansion slots for extra memory. It proved to be prescient as only the Apple II had enough memory, 32K RAM, to run the spreadsheet killer app, VisiCalc, in 1978-79. )
When the Wright Brothers were experimenting with airplanes, they didn’t really think about their applications or a business model. Their primary goal for inventing the airplane might not be a business one. As such, the Wright Brothers didn’t achieve much with airplanes commercially.
(Note: Their business model was 10% royalty for every plane sold. As such, the Wright Company concentrated its efforts on protecting the company’s patent rights rather than on developing new aircraft or aircraft components, believing that innovations would hurt the company’s efforts to obtain royalties from competing manufacturers or patent infringers. As put by historian, Edward Roach, the Wright Brothers were excellent self-taught engineers who could run a small company, but they didn’t have the business skills or temperament to dominate the growing aviation industry. - Wikipedia)
Frequently, the discovery and innovation processes are unpredictable. In the 19th century, bicycles have a much steeper learning curve (and more dangerous) than the conventional three-wheelers at the time. It’s a tool for young rebellious Europeans to signal coolness and identity, much like skateboarding today. The inventors of these innovations didn’t really think about their business model.
(Note: Bicycle is a recurring theme today. The Wright Brothers’ work with bicycles gave them the conviction that an unstable vehicle such as a flying machine could be controlled and balanced with practice. It led them to their breakthrough, the three-axis control system, which remains the standard today.)
The Minds of Innovators vs. Followers (Ele.me vs. Meituan)
We are so frequently blinded by the halo effect of the innovators (first-movers) that we neglect the last-mover advantage. Let’s talk about an example related to Meituan.
Nobody invented food delivery. There’s food delivery before the Internet. Ele.me wasn’t the first Internet company to do food delivery either. However, they were the first to achieve breakthroughs. How they did it was rather unique and clever.
How Ele.me Started
First, they’d choose which schools to open. The founders would go to each school and count how many food delivery riders enter and leave the school. If there were a lot of riders in and out, it means the school has a solid base for food deliveries. The restaurants would have their people giving out flyers. The students would stick them on their walls - whenever they need to get food, they could just call the number. The canteens at different faculties may have vastly different standards, so some schools would have a greater need for food delivery than others.
The restaurants that offer food delivery would face a big problem. Come lunchtime, there would be dozens of students calling, and the restaurants would handwrite down the orders and addresses. When the orders pile up, the restaurants would have a hard time remembering which orders are sent and which are not, which results in high manpower and time costs for the restaurants.
With this context, Ele.me created a software for the restaurants. The customers can order on the website. That way, the restaurants don’t have to handwrite down so many details. The restaurants can also check off sent orders. The site also shows the waiting time, so that the delivery riders can manage their deliveries, reducing their need to constantly check with the restaurants, which are already stretched for manpower.
In short, Ele.me created an order management system for the restaurants. It improved efficiency tremendously. And therefore, it’s very welcomed by the restaurants, so much so that the restaurants would set their voice notification to “Order food delivery, use Ele.me!”. Furthermore, the restaurants also sent their order ledgers to Ele.me. The ledgers would have customers’ numbers. Ele.me would send an SMS to each of the customers and ask them to use Ele.me.
It’s very clever. Ele.me didn’t have to subsidize consumers, didn’t have to convince consumers and restaurants to use their app, and didn’t have to build their own fleet. This methodology allowed this small startup to operate at positive margins from one to dozen-plus cities while having a 200% annual growth rate.
How Meituan Came In (The Advantage of Being “Normal”)
Ele.me’s clever tactic has one problem. What they did was so capital-efficient that they replicated the same methodology throughout their business expansion. If they went to a school and it didn’t have a strong demand for food delivery, they wouldn’t operate in the city. This methodology allows you to discover the early adopters (both consumers and restaurants), but it doesn’t reveal the full future potential market. Ele.me operated in dozen-plus cities but they didn’t operate in the city with most college students in China, Wuhan. (Side Note: Wuhan is just another city guys, don’t be traumatized by it.)
Meituan’s mindset is different. We used the total student population to estimate the market size. We did research on the total number of college students that have transacted on Ele.me and its total order quantity. From there, we calculated the average monthly orders per person and we estimated that Wuhan would have 2M orders/month. (Note: Wuhan has 1M+ college students out of an 11M population.)
Based on this, Wuhan is a very reasonable market, but Ele.me didn’t do it. This is the difference in thinking between innovators and followers. Innovators face tremendous difficulties. They are either fundamentally different in how they think, and they don’t innovate for commercial gains. Or they have to (over-)optimize their investments because of the resource constraints. This results in some blind spots in thinking.
When Meituan entered the food delivery market, we think in standard business logic, so we entered in the Incremental Markets that Ele.me didn’t operate in. They did a good job in the markets that they operated in - they have high recognition from both the consumers and the restaurants, and their operational personnel are well-versed. As such, we had to go to cities that they weren’t in.
We initially opened in 20 cities. Why 20?
We have estimated the market size so we know it’s a big business. However, we only managed to recruit 20 city managers. Fine, we’d open 20 first. Two months later, we operated in 60 cities. It didn’t matter if the people were not familiar with the food delivery business. Just throw people in there so that consumers can see our product. This is the difference in mindset between first-movers and last-movers.
(Note: To make it explicit, the first-movers are prone to make judgments based on their past successes. In Ele.me’s case, their expected return on capital was much higher than what could be considered as reasonable. The followers, on the other hand, are free from these mental traps - they can step in from a market perspective. And they really need to focus on the long-term things* to make sure they’re the last in the industry.
*Long-term things: >10X better proprietary tech, economies of scale, network effects, branding - Peter Thiel’s framework on last-mover advantage.)
When deciding on whether to enter food delivery, I was conflicted for quite a while. Ele.me had a good product and a good team. But I eventually decided that we should go in because 1). Food delivery is a big business (market size). 2. This is not a winner-take-all market (market concentration).
Ele.me was eventually acquired for US$9.5B (by Alibaba). For a group of college entrepreneurs that never held a job before, to have such an outcome when they’re about 30 years old is fantastic.
Elon Musk and Tesla
We mentioned NIO in the last lesson - why Le.com thinks NIO is too conservative and why NIO should continue to invest aggressively. The other electric car makers are followers as compared to Tesla. The electric vehicles market is huge and it won’t be a winner-take-all, which we can extrapolate from the petrol cars market.
Elon Musk’s Telsa journey is full of struggles. As a core member of the Paypal Mafia, he has been a successful serial entrepreneur and he has money. Even so, Telsa was close to bankruptcy several times. At one time, he even wanted to sell Tesla to Apple and Apple said no.
Musk also tried all sorts of ways to raise money for Tesla. He started out as an investor and not a founder of Telsa. But because of how cash-burning the electric vehicles business is, only someone like Elon Musk who has influence in the capital markets can raise enough money for Tesla. That’s how he became the CEO of Tesla.
Conclusion
To summarize in one sentence, the fundamental difference between first-movers and last-movers is the difference in mindset between innovators and followers. The innovators are prone to blind spots, while the followers (with the benefit of data) are less so.
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