Business Strategy. What's Yours? Lessons from Peter Drucker Part 1 of 3.

I was first exposed to Peter Drucker when his book The Practice of Management was required reading in college. I was immediately hooked. But after business school in the early 1990's I stopped reading Mr. Drucker. I recently started reading Drucker again and I found that his books are more meaningful the second time around - probably because I have more "real-world" business experience.

Remarkably, his writings are as relevant today as they were several decades ago. And they are a breath of fresh air considering all the recycled ideas you find in most business books today.

I've selected three of my favorite Drucker reads that I feel have great relevance to this blog's readership of human resource vendors and HR professionals. I will post a summary of each over the next several months. They include:

- Entrepreneurial Strategies
- Leadership / Management
- Picking People: Basic Rules

So lets talk about entrepreneurial strategies.

I consider most HR businesses to be entrepreneurial - meaning current ownership are the founders and the businesses are in the infancy or early stage of their lifecycle. Yet, when I speak with the founding CEOs of many HR suppliers, only a few seem to have a grasp on their strategy. True, they have a "strategy" but do they thoroughly understand the implications of their chosen strategy and what external and internal forces must play out in order to achieve long term success?

Drucker's writings on entrepreneurial strategies do a superb job of classifying different types of strategies and what it takes to succeed in each. Once you understand your strategy you are better able to make the right decisions to grow your business - and fend off competitors. I'm only summarizing his article so I highly recommend you buy the book The Essential Drucker for more details - trust me, the book will inspire great ideas.

Mr. Drucker presents four types of entrepreneurial strategies:

1. Being Fustest with the Mostest
- This strategy aims at being the dominant company in your space by creating something new. As Drucker says, it’s a moon shot strategy and of all the strategies this presents the greatest risk because you either attain dominant leadership or you fail.
- When efforts begin to produce results you must mobilize resources massively and quickly to solidify your leadership position in this strategy. Otherwise, all you have accomplished was to build a market for others (see strategy #2).
- Far too many HR suppliers mistakenly pursue this strategy - and fail, often times because they did not allocate enough resources at the critical time to solidify their position or only get the idea half right. An HR supplier who pursued this strategy is Jobster. They were first with what they called "social recruiting" and while tens of millions were pumped into this company they are unlikely to become the dominant company they hoped to become. There are plenty of reasons why - some the fault of management and some that were out of their control - but they provide a great example of the risks associated with this strategy. A previous blog of mine from September of 07 spoke about some of Jobster's challenges.
- You will often hear companies who pursue this strategy say "we have no competitors". Big red flag.

2. Hitting them Where They Aren't
There are two common types of strategies in this category - Creative Imitation and Entrepreneurial Judo.
- These strategies exploit the success of others by doing something someone else has already tried but only went half way. As Drucker says, these strategies "wait for someone else to create the "new" but only approximately".
- An example outside of HR is Seiko. Dominant Swiss watch manufactures invented quartz powered digital watches but because they had so much invested in more expensive (and highly profitable) traditional watches, they were slow to roll out the 'new' less expensive watches. Seiko jumped all over the opportunity and by the time traditional Swiss watch companies understood what was happening it was too late. Seiko was the dominant player in this field.
- Like Being Fustest with the Mostest, Hitting them Where They Aren't strategies are all about market dominance. There is no second place so they are risky.
- Winning with these strategies does not require you to take away business from the pioneer but to capitalize on demand that already exists by better meeting the needs of the market.
- Hitting them Where They Aren't strategies seem to work best in technology businesses because so many high tech innovators fail to exploit their new technology. A good example of this strategy in the employee benefits space is LifeCare. The dominant players who first introduced "work-life" or "family friendly" employee benefits in the 1980s are gone. LifeCare who was late to market improved upon these initial ideas and today firmly holds a leadership position in the lucrative work-life employee benefit market.
- Common mistakes companies make that open the door for Hitting them Where They Aren't strategies include the "Not Invented Here" mentality or having business plans that limit the target market to Fortune 100 companies - what Drucker calls the "Cream" mistake. By only focusing on the large employer market many HR outsourcing and Talent Management firms in the 1990s opened the door for smaller vendors who chose not to compete with the larger outsourcing vendors and instead penetrated the larger mid market to establish a beachhead before moving up. Many thrive today.

3. Ecological Niche
- Ecological Niche strategies aim at control by focusing on creating a monopoly in a small area. The "Picks and Shovels" of a marketplace.
- These strategies typically make another successful product better without competing with it. The downside to these strategies is once the ecological niche is occupied, there is unlikely to be much growth because growth is dependent upon demand for another product/service for which you add value to - yet have limited control over its growth.
- Timing is critical. These strategies work best at the beginning of a new product category or industry.
- Businesses who pursue these strategies must constantly work at improving their product to stay relevant - a strategy of constantly making yourself obsolete.
- A classic example outside of HR are the companies that supply automobile manufactures with electrical components. As Drucker points out, few if any automobile manufactures from the 1920s are around today but most of the original suppliers of electrical technologies thrive.
- In the HR marketplace, examples include recruiting technology vendors like Arbita, eQuest, Job Target, etc. These companies help supply the infrastructure to many online recruiting and staffing services and provide the distribution infrastructure that connects the thousands of hiring organizations with the thousands of online job boards and other outlets. In the software world, these companies are also referred to as “middleware.”
- Unless you are an industry outsider, you likely have never heard of companies pursuing Ecological Niche strategies. Much of the caloric food content consumed by US consumers first passes through the food processing operations of Cargill and ADM. Though these names are unknown or only vaguely familiar to most US consumers. As Drucker says, they often "revel in their anonymity". No flamboyant CEOs here.

4. Changing the Economic Characteristics of a Product, Market or Industry.
- Drucker's final category of strategies aims to change economic characteristics of a product, market or industry by creating utility, pricing, or delivering added value to a customer.
- The classic example is Gillette. They didn't invent the razor but through a unique pricing strategy, they became the dominant player. Gillette essentially gave away the product (razor) and made money on the blades. Xerox pursued the same strategy by leasing the copier machines (sometimes at no cost) and charging for individual copies and servicing of the machines. Believe it or not, up until these pioneers, pricing had never been used as a strategy. They turned things upside down by charging for what a customer actually used versus what a manufacture made.
- Examples abound the Recruiting space: much of the online recruitment market mirrored the world of advertising. Companies paid for the exposure regardless of results. Think of the pay to post model still dominant with the major job boards. Newer, disruptive models focus on paying for results or something much closer to the ultimate result of a hire. Job matching technology vendors like Vitruva who are creating a pricing model which includes no subscription feed and no fees for job posting or resumes. They get paid farther up the value chain at a place much closer to realized value for their clients. Another example is Realmatch who charges nothing to post or search for jobs but employers pay for the details of a resume.

In all these four strategies, Drucker states that Marketing is the foundation for success. He states that companies who use marketing as the basis for strategy are likely to acquire leadership faster and with less risk.

Labels: ,