Combined, the characters literally mean “the one who came later (后来) occupies (居) the top position (上).” This literal meaning maps perfectly to its idiomatic usage.
The origin of 后来居上 comes from the famous historical text *Records of the Grand Historian* (《史记》). An official named Ji An complained to Emperor Xuan of Han that a junior official, Gongsun Hong, was being promoted above him and other senior ministers. The emperor wisely replied that a wise ruler should seek out talent regardless of seniority, and praised Gongsun Hong's abilities, noting that it's a sign of a healthy state when “the latecomer surpasses the old-timer.” This idiom embodies a key cultural tension and value in China. While respect for elders and seniority (论资排辈, lùn zī pái bèi) is deeply ingrained, 后来居上 champions meritocracy. It’s the idea that new talent, fresh ideas, and hard work should be rewarded, even if it means disrupting the established order. A Western parallel would be the “underdog story” or the concept of a “late bloomer.” However, 后来居上 is more specific. It's not just about an individual's personal journey of success; it's explicitly about a competitive dynamic where a newcomer directly overtakes a veteran. It's less “David vs. Goliath” (which implies a massive power imbalance) and more “the talented rookie surpassing the seasoned champion.”
后来居上 is a versatile and almost universally positive idiom used in various contexts.
It is suitable for both formal speeches and reports as well as informal conversations. It's a high-praise compliment.