I recently read an old Peter Drucker article from 1985 titled “Creating Strategies for Growth”. Whenever I read his stuff, I’m always struck with how logical and simple he’s able to make an issue, in this case Innovation. Here are his main points, hopefully they spur your thinking about innovation in your business.
Three Major Innovation Strategies:
Drucker says there are three major strategies and one minor strategy for any business to innovate:
- The firstest with the mostest
- The second with the mostest
- Niche strategies
- Minor: Designing a product as the carrier of more profitable product or service
Let’s explore these a bit
The Firstest with the Mostest Strategy
Drucker says that DuPont offers a great example of this strategy with its breakthrough product Nylon. The fundamental strategy is to be the first in the market, and then to be the first in the market to cut the price of the product. After 60 years, Nylon remains one of the largest selling synthetic fibers, and DuPont still owns a substantial portion of the market.
What was their approach? Six years after DuPont introduced Nylon and it had made back its original investment, they cut the price substantially. This led new applications to develop for the product at a lower cost and became a barrier to entry for competitors. It required DuPont to substantially improve the product to reduce the cost and become what Drucker calls “an enlightened monopoly”. Then after another six years, DuPont cut the price again! Drucker says most economists like enlightened monopolies because they don’t behave the way monopolies are expected to, they cut prices and broaden markets.
The Second with the Mostest Strategy
Drucker says this approach is even more successful than being first in the market, it’s what he calls the IBM or Japanese strategy. How does it work?
IBM developed the first accounting machine in 1926 and it was a miserable failure and nearly bankrupted the company. They learned their lesson and vowed never to be first in the market again. The lesson here is that the first to market company wants a big profit margin and to make a quality product, which means the product has lots of features and is usually expensive. This means that the product is typically too broad and expensive, and can’t satisfy narrow needs and specific requirements of emerging market segments. The Japanese have been particularly adept at entering the low end of the market with great products at good prices for narrow market segments, which may mean substantial sales. At this point the second with the mostest can begin to improve the product, enter larger markets and generate more substantial revenue flow.
The Niche Strategy
The basic approach is well known, find an emerging or existing market and establish your products and services so well so that it simply isn’t worthwhile for any other company to enter the market because the market isn’t growing.
There are plenty of examples of this niche market strategy and Drucker points out the case of an enzyme needed for cataract operations that was patented 50 years after it was discovered. The problem was that the enzyme was unstable and couldn’t be stored. The patent represented a way to give it substantial shelf life. The market was fairly small, about $50 million at the time, and the patent owner held most of the market. So competitors were discouraged because even if they made the enzyme cheaper, they didn’t have the sales channel to displace the incumbent, and life was good for the patent owner for along time.