GameStop Retail Closings Raise Questions about Business Strategy

200 stores to close by year's end following painful second-quarter earnings

By Jonny Lupsha, Wondrium Staff Writer

Video game retailer GameStop will close nearly 200 stores by 2020, CNBC reported. The company has had a difficult financial year, with low earnings and plummeting shares. A classic business question comes to mind: Is it better to be first or to improve upon an existing model?

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In business terms, first-mover advantage can secure a company a new market segment, while fast followers can then learn from the company’s early mistakes. Photo by Bildagentur Zoonar GmbH / Shutterstock

GameStop specializes in selling video games, consoles, accessories, and gift cards for multiple platforms such as Sony’s PlayStation, Microsoft’s XBox, and the Nintendo Switch. The company sells new games, as well as used games at reduced costs, which it gets from taking trade-ins from customers. Years ago, GameStop acquired competitors like Electronics Boutique and Software Etc., gaining a huge foothold on the video games market, but now they appear to be in considerable trouble, with the CNBC article reporting that “shares have fallen more than 60 percent year to date.” Several retailers have sold video games in the past, leading to the question of whether it’s better to be the first company to offer something or to improve upon the mistakes of a predecessor.

First-Mover Advantages (and Disadvantages)

The first company to make a bold innovation has something called a first-mover advantage, but what does that mean? “We mean the competitive advantage established by virtue of the fact that a company has entered a market first and established a position,” Dr. Michael A. Roberto, Trustee Professor of Management at Bryant University, said. “And yes, first movers sometimes do achieve tremendous advantage. Let’s take a few examples: Gillette in razors; Sony in portable stereos with its Walkman product; Coca-Cola in carbonated soft drinks; Hoover in vacuum cleaners.”

By being the first in their market—or at least early enough not to benefit from others’ experiences—those products appeared to be fresh and exciting new innovations, and in some cases, they were the only game in town. Unfortunately, it doesn’t always work out that way.

Dr. Roberto mentioned several examples of first-mover failures. One of the first social media websites was Friendster; Sony innovated with home VCRs but they hitched their star to beta tapes; Netscape has since been replaced by other Internet browsers; etc. Many products—or entire companies—who hit the market early suffered from poor decisions and have been lost to nostalgia. Other competitors or successors such as Facebook, VHS, and Google Chrome or Safari, respectively, have fared far better.

Fast-Follower Advantages (and Disadvantages)

A “fast follower” is a company who makes a product after another company introduces a similar product, in hopes of having the way paved for them already. Unlike the first mover, fast followers often see benefits coming from what they don’t have to do.

“First and most importantly, there are high costs in some cases of blazing a new trail technologically,” Dr. Roberto said. “Sometimes, moving into an entirely new category with a product customers don’t know anything about, well, there’s a lot of uncertainty there. There’s a lot of education of the consumer that needs to take place.”

Once the public is familiar with a type of product that first movers have paid to introduce to them, fast followers can save on the costs of teaching the public about it and catapult beyond them. He also referred to the “sunk-cost trap” of investing in doing things a certain way, then being unable to easily adapt to negative customer feedback and shift the product and company away from their problems in a timely manner. “You become over-committed to your initial course of action because of all the emotion, and the money, and the effort you’ve put into it,” he said. “That sunk-cost trap definitely inhibits many first movers from adapting as markets evolve, and it’s why second movers come in and supersede them in many cases.”

On the other hand, fast followers can also be seen as copycats, Johnny-come-latelies, or wannabes in the industry. Or, sometimes their product lacks a certain charm or “wow factor” the first mover’s product had. In addition, if an entire product category has a short life expectancy, any fast followers may come too little, too late to enjoy success. Finally, first movers have the opportunity to patent certain components of products and the product itself; so any imitators may spend more than they make trying to emulate or imitate the product by other means.

Business often requires quick adaptation. For GameStop, that means competing with online retailers like Amazon, which will ship physical copies of video games to customers’ doorsteps; or console developers themselves, who offer digital downloads of the same games without the need to shuffle discs in and out of their systems.

Dr. Michael A. Roberto contributed to this article. Dr. Roberto is the Trustee Professor of Management at Bryant University in Smithfield, Rhode Island. He earned an M.B.A. with High Distinction and a D.B.A. from Harvard Business School.