If the innovator succeeds, it will have a nearly impenetrable position.
The fourth major entrepreneurial strategy, occupying an ecological niche, allows an innovator to establish a virtual monopoly in a small niche market. The first niche strategy is the tollbooth strategy. Under the tollbooth strategy, the innovator creates a product or service that is an indispensable part of a larger process. Then the cost of using the product becomes eventually irrelevant. Here the market must be so limited that whoever occupies the niche first is able to effectively bar anyone else from entering it.
Here is an example: Alcon, a company started in the late 1950s by a salesman for a major pharmaceutical company. He had known all along that there was a major incongruity in the operation for senile cataracts in the eyes. There was one dangerous procedure in the surgery where the surgeon had to sever a piece of muscle tissue with a slight risk of bleeding that would destroy the eye. The innovator read up on what was known about this muscle and found almost immediately that an enzyme dissolved it without bleeding or cutting. But there had been no way to prevent this enzyme from disintegrating and to give it shelf life. Then the innovator found that since 1890 a number of substances had been developed to give enzymes stability and shelf life. He patented the application of one of these substances to the enzyme, and within eighteen months he had the world market for the stuff.
Successful innovators price according to what the customer pays for.
Under the other entrepreneurial strategies, the innovator has to come up with an innovative product or service; here the strategy itself is the innovation. The innovative strategy converts an existing product or service into something new by changing its utility, its value, and its economic characteristics. There is new economic value and new customers, but no new product or service. Often the most successful way to change the economic characteristics of a product or service is to change its pricing. In the end the producer gets the least the same amount of money, if not a good deal more. But the way pricing is structured reflects the customer’s reality rather than the reality of the producer.
Here is an example. The Internet was designed as an information network. And most providers charged for access to it, such as for hosting an e-mail address. But Yahoo and other companies give away Internet access. It gets paid for by advertisers whose ads the customers have to see when they go online. Yahoo asked: “Who is the customer?” Its answer: “It’s a supplier who wants access to a potential customer.” This changed the characteristics of the industry. It gave the Internet a new dimension.
Entrepreneurial Judo turns what the market leaders consider their strengths into the very weaknesses that defeat them.
The Japanese judo master looks for the strength that is his opponent’s pride and joy. He assumes, and does so with high probability, that the opponent bases his strategy on this strength in every fight. And then the judo master figures out where this continuing reliance on a particular strength leaves the opponent vulnerable and undefended. Then he turns his opponent’s strength into the opponent’s fatal weakness that defeats the opponent.
Businesses, like judo fighters, tend to become set in their behaviors. And then Entrepreneurial Judo turns what the market leaders consider their strengths into the very weaknesses that defeat them. For example, the Japanese became the leaders in one American market after the other: first in copiers, then in machine tools, then in consumer electronics, then in automobiles, and then in fax machines. The strategy was always the same. They turned what the Americans considered their strength into a weakness that defeated the American companies. The Americans saw high profitability as their greatest strength. And thus they focused on the high end of the market and left the mass market undersupplied and underserviced. The Japanese moved in with low-cost products with minimum features. The Americans didn’t even try to fight them. But when the Japanese had taken over the mass market they had the cash flow to move in on the high-end market, too. And they soon came to dominate both the mass market and the high-end market.
“Hitting them where they aren’t” outflanks the leader by creative imitation.
Here, the innovator doesn’t create a major new product or service. Instead, it takes something just created by somebody else and improves upon it. This is imitation. But it is creative imitation because the innovator reworks the new product or service to better satisfy customers’ wants and needs. Once the innovator succeeds in creating what customers want, it can achieve leadership and take control of the market.
The perfect example is how IBM became the leading producer of PCs in the 1970s. Apple invented the PC. When the Apple appeared, it was an instant sensation. IBM set to work to outflank the Apple. It asked, “What are Apple’s shortcomings?” Within eighteen months IBM had on the market a PC that did everything the PC customers needed and wanted but had what the Apple lacked: software. And within another year IBM’s PC had become the market leader worldwide; it held that position for more than ten years. And Apple had become marginal. It almost went under and only turned itself around into a respectable niche player twenty-odd years later, in the late 1990s.
“First with the most” was the expression used by a Confederate general to describe his cavalry unit’s consistent victories in the Civil War. In business, it describes the strategy in which an innovator looks to attain leadership, if not outright dominance. This is the entrepreneurial strategy with the potentially highest rewards; but it’s also the most risky one. There can be no mistakes or second chances. The outcome is either market and industry leadership or nothing at all. Entrepreneurs must be right the first time; otherwise, they fail. For every innovator that succeeds with this strategy, dozens fail. Yet if the “first with the most” strategy succeeds, the innovator reaps tremendous rewards. It’s the strategy that underlies the success and market leadership of such giants as 3M, Procter & Gamble, Intel, and Microsoft.
Yet there is a special risk to this strategy: to achieve initial success, then to be outflanked by someone practicing the next entrepreneurial strategy, “hitting them where they aren’t.” For example, the two young engineers who started the Apple computer company in the proverbial garage, without financial backers or previous business experience, aimed from the beginning at creating an industry and dominating it. But they were soon outflanked by IBM.
Creativity is sexy, but the real problem is the shockingly high mortality rate of healthy new products or services.
There usually are more good ideas in even the stodgiest organization than can possibly be exploited. The real problem is the shockingly high mortality rate of healthy new products or services. And like yesterday’s infant mortality rate, the mortality rate of new products and services is totally unnecessary. It can be reduced fairly fast and without spending a great deal of money. Much of it is simply the result of ignorance of the entrepreneurial strategies. The right entrepreneurial strategy has a very high chance of success.
There are four specifically entrepreneurial strategies aiming at market leadership: being “Fustest with the Mostest“; “Hitting Them Where They Ain’t“; finding and occupying a specialized “ecological niche (tollbooth strategy, specialty-skill strategy, specialty market)”; and changing the economic characteristics of a product, a market, or an industry. These four strategies are not mutually exclusive. One and the same entrepreneur often combines two, sometimes even elements of three, in one strategy. Still, each of these four has its prerequisites. Each fits certain kinds of innovation and does not fit others. Each requires specific behavior on the part of the entrepreneur. Finally, each has its own limitations and carries its own risks.
Finding and realizing the potential of a business is psychologically difficult.
Finding and realizing the potential of a business is psychologically difficult. It will always be opposed from within because it means breaking with old, established habits. It often means giving up the very skill people are proudest of. To fight the threat, to manage an imbalance, and above all to make a process efficient despite its inherent weaknesses, requires great effort.
Searching for the potential of opportunity in a company’s vulnerabilities, limitations, and weaknesses is therefore likely to be resented by its most accomplished people as a direct attack on their position, pride, and power. This is the reason why the opportunities are often not realized by the industry leaders but by people on or near the outside. That this area is difficult, both objectively and psychologically, only means that businesses have to work hard at it and that managements have to stress it heavily.
“Opportunity is where you find it,” not where it finds you.
Luck, chance, and catastrophe affect business as they do all human endeavors. But luck never built a business. Prosperity and growth come only to the business that systematically finds and exploits its potential. No matter how successfully a business organizes itself for the challenges and opportunities of the present, it will still be far below its optimum performance. Its potential is always greater than its realized actuality.
Dangers and weaknesses indicate where to look for business potential. To convert them from problems into opportunities brings extraordinary returns. Opportunities have to be reflected against the experience of a company and against its past successes and failures. Sometimes all that is needed to accomplish this transformation is a change in the attitude of the executives. Three questions will bring out the hidden potential of a business:
What are the restraints and limitations that make the business vulnerable?
What are the imbalances of the business?
What are we afraid of, what do we see as a threat to this business—and how can we use it as an opportunity?
