Peter Drucker’s four key strategies for overcoming larger competitors

Peter Drucker recognized that small organizations could have advantages over larger competitors and that these advantages can be very important in particular situations. From this simple realization, he developed four strategies through which smaller companies can defeat larger, more powerful competitors.

Drucker’s four strategies for ‘David companies’ to employ against ‘Goliath competitors’ are:

1. Dominating a new market or industry.
2. Developing a market that is currently unserved.
3. Finding and occupying a specialized niche.
4. Changing the financial calculations of the seller-buyer transaction.

Dominating a new market or industry

The basic idea here is simple. A business can enter and dominate a new market or industry before anybody else does. Likely, the best example of how this can be done comes from the late Steve Jobs.

Many companies and individuals knew how to make personal computers and giant organizations like IBM made huge computers priced at millions for government and large corporations, while smaller businesses were marketing computers primarily for games.

Jobs could not even build a single computer board by himself, but his friend Steve Wozniak could. Jobs saw the potential and had the confidence and ability to commit and convince others, not only creating a new industry for personal computers with Apple, but also dominating it.

Developing a market that is currently unserved

First, you need to ask yourself why the market is unserved. Typically, it is because a product with potential, which has already been introduced, has a shortcoming, which can be corrected. Drucker believed this to be a minimal risk strategy.

Sony licensed the transistor and its radio application from Bell Labs and took over the market by reducing the price significantly. Even the term ‘transistor’ was coined by an American and although invented by Bell Labs, was overpriced. Sony found what it took to serve the market.

Finding and occupying a specialized niche

Drucker differentiated this approach by contrasting it as emphasizing positional occupation and control as opposed to previous strategies emphasizing grappling with competition.

According to Drucker, occupying a niche can make a marketer immune from competition altogether, because the whole point is to be inconspicuous or to be in a market of what appears to be limited potential, despite the products being essential, so that no one else is likely to compete until it is too late. The marketer places his offering or company in the optimum niche. Essentially, it means being where the competition is not until it is too late.

Changing the financial characteristics of the situation

Drucker’s final marketing approach for a ‘David’ beating a ‘Goliath’ goes beyond just dropping the price. All you need to do is to ask yourself what would truly make things easier, or better for your customers from their point of view.

Price has long been a tactic used by clever marketers. However, Drucker went further in this marketing strategy, saying that pricing should be done in accordance with the needs of the customers and what they buy, not what the supplier sells.

Gillette became a major name in razors when King Gillette practically gave away the safety razor itself, when he realized he could make more money selling the blades over the lifetime of the user if he did.

The photography industry provides many good examples for this approach. Who would have thought that cameras would essentially be given to the customer along with the film? After all, neither is what customers really want. What they really want are the photos. Therefore, customers today can buy a throwaway camera, film, and developed photos at an economical price.

"Ask yourself what would truly make things easier, or better for your customers from their point of view."

Other companies had the idea to mail free film to customers. A customer would shoot the film and mail the exposed rolls to the developer in protective envelopes, along with a cheque covering the number and types of photos they wanted. When the order was fulfilled, customers would find two more rolls of free film. Of course, you do not need to buy photo glossies nowadays. You could also order your pictures on CDs.

With the advent of digital cameras, along with cameras built into our mobile phones, the need now is primarily that of photo storage. Not to worry, companies will store your digital photos and, in many cases, will not charge you anything. They even facilitate building your photo albums and emailing these albums out to friends and family. Of course, pricing is calculated so that glossies, CDs, or printing your photos on cards, coffee mugs, or other items can all be accomplished, and that is where these companies profit.

The US Post Office pricing shipments depending on the particular size of the box they can fit in is also an example of changing the pricing. Notice how the pricing has changed from what the seller provides, such as camera, film and developing, to what the buyer really wants. That is the key to this strategy.

Adapting to the customer’s social and economic reality

Many marketers speak of the ‘irrational customer’ but Drucker said that there was no such thing. He stated that the marketer must assume that the customer is always rational, even though this reality may be a far different rationality from the marketers.

Mary Kay Ash, the famed CEO of Mary Kay Ash Cosmetics, who built a billion-dollar company out of a $5,000 investment, once told a story about saving the money to buy her first new car on her birthday. She did the financial analysis before going to a showroom, looked at the various models from the manufacturers in catalogues, checked all the sticker prices, and selected the exact car she wanted. She even had the money in cash in her purse ready to pay for the exact car she had selected with certain options from a catalogue and previous incognito visits to a showroom.

However, in those days most women did not buy cars, and when she went to make the purchase, she was ignored by the only salesman present who was selling the car she wanted. Finally, she got his attention, but he was so condescending in his attitude that she asked to speak to the manager, who she was told was out to lunch for an hour. Having an hour to spare, she went to the showroom of a competitor nearby. Here the salesman treated her so well, though she was a woman, that she ignored her previous decision and bought the car he showed her without further analysis. She did not return to talk with the manager at the first dealership. Irrational? Maybe, but not in her reality.

Similarly, when considering tactical pricing, consider that if you do not know the best from a selection of products and you want to make an immediate purchase, how do you know which is of the highest quality? Many potential customers go for the most expensive. Irrational? Not in their reality. Remember, it is the customer’s reality that counts.

Delivering what represents true value to the customer

True value, like quality, is up to the customer, not the marketer. This is critical because customers, or organizational buyers, do not purchase a product or service. They purchase satisfaction of a want or need. This means they purchase value and that may be perceived from a variety of sources.

Some companies spend millions providing additions that they believe represent benefit and are appreciated by the customer. Unfortunately, the customer may not think that these additions represent value. To a teenage girl, value might be defined primarily by fashion and perceived appearance by peers. That is, the fashion of what the teenager wears in her geographical area at that time. Even comfort or quality might come in a poor second. To the same teenage girl’s mother, value may be represented by durability and to her father, it might be price.

That is why it is so important to conduct research to find out who is using the product or service, who might influence the purchase decision and who is putting out the money. It is what the customer, and whoever might influence that customer (directly or indirectly), consider to be of value, not the supplier or marketer that is important. Some marketers consider this irrational, however, value is part of the customer’s reality.

All of this combined fits together to support the idea that with Drucker’s four strategies, you can defeat a much larger and stronger competitor just as David defeated Goliath. In addition, you will not need a sling!

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