Lessons From Peter Drucker

Drucker's 4 Approaches to Entrepreneurial Success

William Cohen, Ph.D.
Posted: 06/02/2011

Drucker was an entrepreneur, and in many ways he promoted entrepreneurial approaches for all business functions, whether they were inherently entrepreneurial or not. Perhaps his most well-known question suggested that any manager ask himself: "What business are you in?" This question applied to both entrepreneurial and non-entrepreneurial activities, to all specialties, and to the most junior level employee, as well as the CEO. So did his ideas about entrepreneurial approaches to success in our business activities.

Drucker’s Four Systematic Approaches for Success

Drucker categorized four general approaches for success, each having their own prerequisites and best fit for certain situations:

  • Achieving Dominance
  • Supply the "missing ingredient"
  • Finding and occupying a specialized "ecological niche"
  • Changing economic characteristics

Achieving Dominance

Drucker gave this approach the rather imaginative title of "Fustest with the Mostest," which he attributed to a Confederate cavalry general during the Civil War. The general had learned that the secret of success was getting to a decisive position with superior power before his adversary could do so.

How Apple Did It

Before Apple came along, there was no personal computer market. The IBM 5100, the Wang 2200, the Hewlett Packard 9830 series, and the Datapoint 2200 dominated professional/business computers. Their products sold for from $5,000 to $20,000. Large companies with lots of resources manufactured these products, with IBM controlling 70 percent of the overall market. IBM not only had the resources and marketing clout, but the undisputed best research and development team around.

Neither Jobs nor Wozniak, Apple’s founders, had the money, the technical know-how, the marketing background/experience, a development team, production facilities to build anything, nor a distribution system. Neither was even a college graduate. However, the two entrepreneurs did recognize the need for personal computers that were relatively inexpensive and could be used by anyone at home or in a business. They realized that such a market did not exist. However, if the two could gather the superior resources necessary to develop a successful personal computer, they could both create and dominate this market before anyone could challenge them.

In a few short years, Apple had 500 retailers selling its computers in the United States. Soon Apple added 100,000 square feet of manufacturing capacity to the 22,000 square feet it already had. It expanded its distribution through five independent distributors to reach a greatly increased number of retail outlets. Less than four years after beginning operations, the year Apple Computer went public, sales hit $200 million with $12 million net profit. A year after that, it became the undisputed number one in its primary market and drove most of its attacking competitors out of business. Apple has had many ups and downs since, but no one can deny the successful application of the strategy of being "the fustest with the mostest" to both create and dominate a market.

Supply the Missing Ingredient

Drucker gave this approach a colorful name too: "Hit Them Where They Ain’t." These words came from Baseball Hall of Famer Wee Willie Keeler. At 5’ 4", Keeler was one of the shortest players ever to play for a major league team. Despite his short stature, his .385 career batting average after the 1898 (yes, that’s 1898, not 1998) season is the highest average in history at season's end for a player with more than 1,000 hits. His strategy was simple: hit the ball to parts of the field not well protected by opposing players. Every batter tried for success by hitting the thrown pitch of a ball with his bat. Wee Willie added "Hit them where they ain’t." You can use this success approach in different ways. The obvious is fulfilling a need that a competitor is not. However, you can also interpret this as fulfilling a need that no one else in your company or organization is fulfilling. That’s an effective approach to success too.

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 from the two previous approaches by contrasting it as one primarily emphasizing positional occupation and control versus the previous strategies emphasizing grappling with competition or potential competition. According to Drucker, occupying an ecological niche can make a manager immune from competition altogether because the whole point is to be inconspicuous or to be working in some area that appears to only have limited potential, despite the there being an essential, but unrecognized element present.

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 that is needed, such that would-be competitors cannot do business without what you supply. If you have the only Chinese-speakers in your department and there is a sudden need within your company, the popularity of your department is probably going to increase.

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 which with 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 less than 50 in all of the U.S. One man I know drives several hundred miles each way between two major cities several times a year get these services. If you needed this specialized work, you would probably do the same.

Changing Economic Characteristics

Drucker’s final success approach is the only one that does not require the introduction of an innovation. In this approach, the strategy is the innovation such that you change certain economic characteristics in what you provide to others.

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. So, the idea is just to change things by increasing 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 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 used. He increased their utils by enabling them to eat the container that they had broken or wandered off with previously. In another example, 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 described by the slogan, "If it fits, it ships" dramatically increased sales by changing how their service was viewed by those that used it. Creating utils is easy. All you need to do is to ask yourself what would truly make things easier, or better for your customer or the other organizations in your company that you support.

Adapting to the Customer’s Social and Economic Reality

Sometimes we speak of the "irrational customer" or "irrational individuals" we support outside of our organization. Drucker said that there was no such thing. He stated that we must assume that these others are always rational, ever though their reality may be far different from ours. Mary Kay Ash, the famed CEO of Mary Kay Cosmetics, once told the story about saving the money to buy her first new 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 salesman. 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 not the one she had originally decided on after much analysis. Irrational? Maybe, but not in her reality.

Consider this: If you don’t know the best between three products and you need to make an immediate purchase, how do you make a decision among the highest quality product of the three? Most potential customers go for the most expensive. Irrational? Not in their reality. Remember, it is the one who buys your product or service whose reality counts.

That’s why true value, like quality, is up to the customer or those you support, and not you. This is critical because customers, or organizational users, aren’t just interested in a product or service. They want satisfaction of a want or need. This means they want value.

Want to be successful? Try following Drucker’s four approaches to entrepreneurial success. They’ll work whether you consider yourself an entrepreneur or not.

William Cohen, Ph.D.
Posted: 06/02/2011