Peter Drucker was known as the consummate corporate consultant but in the mid-1980s, he wrote a bestselling book about entrepreneurship and how small organizations could not only beat their direct competitors, but also how even startups could successfully challenge large corporations . It turned out he taught an early course in entrepreneurship thirty years earlier and developed some interesting strategies which work both for big companies and startups.
Dominating a New and Unserved Market
The rise of Apple Computers provides an outstanding example of how you might come from nowhere to dominate a new and unserved market. Steve Jobs and Steve Wozniak were two entrepreneurs who hadn’t graduated from college. Nevertheless, they developed the first fully widely used personal computer and not only created a great company, but an entire industry.
The genius of Jobs and Wozniak was that though they lacked almost everything including money, they recognized the need and were willing to scrape together the sufficient resources needed to dominate a potential new market before IBM or anyone else could challenge them. By the time IBM got interested and entered, Steve Jobs had even acquired sufficient self-confidence (some might say arrogance) to place an advertisement welcoming IBM to the competitive fray. Of course this was a little premature because Apple had left a weak spot for IBM by not allowing anyone else to develop software for their computer. This was a major mistake and IBM capitalized on it and recovered from its own error in not recognizing the opportunity. But it was “the Two Steves” who got there first and exploited it.
Fill the Missing Ingredient with Entrepreneurial Judo
Drucker thought “entrepreneurial judo,” a name that bestowed a particular low risk strategy because early developers frequently make mistakes with the very products that they themselves originally introduced. So sometimes it is relatively easy to take a market away from one that was there first by using that company’s own strength by filling in something important that was missing.
Japanese companies took the transistor market this way. It was invented by Bell Labs in the U.S., but was basically ignored and put on the back burner because Bell didn’t think the technology existed to really make it successful. The missing ingredient was this technology, and Japanese companies supplied it and captured the entire market.
Henry Ford successfully innovated by producing the everyman’s car in the Model T and famously (or infamously) maintaining that buyers could have any color they desired so long as it was black. But others took much of his market by the simple tactic of giving the buyers the many options that Ford’s Model T lacked. Then to turn the whole thing around again, it was Ford with their Mustang that took advantage of the observed consumers’ unfulfilled desire for a semi-sports car which nevertheless had bucket seats, a padded dash and “four in the floor.”
Finding and Occupying a Specialized “Ecological Niche”
An ecological niche is the place or function of a given organism within its ecosystem. Drucker differentiates this approach as one primarily emphasizing positional occupation and control versus grappling with competition. According to Drucker occupying an ecological niche can even make an company immune from competition altogether because the whole point is to be inconspicuous or to be in a market of what appears to be of limited potential, despite the product’s being essential, so that no one else is likely to compete until it’s too late. The marketer places his offering or company in the optimum niche, for it, in its very own ecosystem.
Drucker saw three distinct ways for implementing this approach. First, he suggested gaining a toll-gate position. In other words, you control an essential piece of something else needed by competitors such that would-be competitors cannot do business without what you supply. A company called Sierra Engineering Company got itself into this position by being the only company that could manufacture a unique valve for oxygen breathing masks for aviators. If you wanted to sell oxygen breathing masks, you needed that valve.
The other two ways to occupy a specialized ecological niche was to either have a specialty skill, or to work in a specialty market. Life is so specialized today, that it is not so difficult to acquire a specialty in which few can compete in a specific market. Once a chiropractor was a chiropractor, just as a doctor of medicine was a doctor of medicine. This is no longer an accurate description of either of these professions. For example if you want a board certified upper cervical chiropractor, there are only a handful in all of the U.S. One man I know flies several hundred miles each way between two major cities several times a year get the services from one who is board-certified.
Changing the Characteristics of a Product, a Market, or Industry
This strategy does not require the introduction of an innovation. In this approach, the strategy is the innovation. Drucker’s examples included:
• Creating utility
• Adapting to the customer’s social and economic reality
• Delivering what represents true value to the customer
Years ago when I studied economics at the University of Chicago, I learned that utils was shorthand for utility, and that utility in turn was actually a measurement of relative customer satisfaction. Drucker suggested changing the product or service to increase customer satisfaction. The ice cream cone might fall into this category, although stories abound as to who came up with the idea first, the first patent in the world was issued in 1903 to an Italian immigrant by the name of Italo Marciony, He had come up with the idea as early as 1896 to solve the problem of his customer’s breaking or walking off accidently with the glassware that he had used to serve his ice cream previously. He increased their utils by enabling them to eat what they had formally broken or wandered off with. In this case, the marketer increased his own utils as well by saving the cost of glassware previously lost. The number of ways to increase utils are infinite. A manufacturer of exercise equipment added additional exercises available online to his buyers. A restaurant added a free glass of wine with each meal, making the experience far more enjoyable and romantic. The U.S. Post Office Department made it easier to ship packages by providing free boxes of various sizes for priority shipping and charging a flat rate price according to box size instead of by weight. Their utils dramatized by the slogan, “If it fits it ships” dramatically increased sales.
Adapting to the Customer’s Social and Economic Reality
Many managers speak of the “irrational customer.” Drucker said that there was no such thing. He stated that the marketer must assume that the customer is always rational, ever though this reality may be far different from the marketer’s. Mary Kay Ash, the famed founder of Mary Kay Ash Cosmetics, who gave away Pink Cadillacs to her most successful saleswomen, once told the story about saving the money to buy her first car on her birthday. She did the financial analyses, looked at the various models from the various manufacturers, checked all the sticker prices, and selected the exact car she wanted. Believe it or not, she even had the money in cash in her purse! However, in those days women didn’t buy many cars, and she was ignored by the only salesman present. Finally, she got his attention, but he was so condescending in his attitude that she asked to speak to the manager. She was told he was out to lunch for an hour. Having an hour to kill, she went to the showroom of a competitor nearby. Here the salesman treated her so well, even though “she was just looking” that she bought the car he showed her and didn’t return to talk with the manager at the first dealership. Irrational? Maybe, but not in her reality. Remember, it is the customer’s reality that counts.
Delivering what Represents True Value to the Customer
True value, is up to the customer, not the marketer. This is critical because customers, or organizational buyers, don’t purchase a product or service. They purchase satisfaction of a want or need. This means they purchase value as they see it.
Some companies spend millions providing additions that they think represent more value. Unfortunately the customer doesn’t think that these additions represent value for them. To a teenage girl, value might be defined primarily by fashion. Even comfort might come in a poor second. Durability and price might be of far less importance. True value as perceived by the customer will win out every time.
If you want to win in the marketplace regardless of whether you are a small startup or a giant corporation, Drucker’s unique entrepreneurial strategies can make it happen.
L&MB Magazine 6 - Q2, 2016
Leadership and Management booksSubscribe now