In his book, Innovation and Entrepreneurship, Peter Drucker presented how innovation and entrepreneurship can be a purposeful and systematic discipline. That discipline is still as relevant to today’s business environment as when the book was published back in 1985. The book explains the challenges faced by many organizations and analyzes the opportunities which can be leveraged for success.
Drucker wrote that entrepreneurship requires two combined approaches: entrepreneurial strategies and entrepreneurial management. Entrepreneurial management is practices and policies that live internally within the enterprise. Entrepreneurial strategies, on the other hand, are practices and policies required for working with the external element, the marketplace.
Drucker further believed that there are four important and distinct entrepreneurial strategies we should be aware of. These are:
- Being “Fustest with the Mostest”
- “Hitting Them Where They Ain’t”
- Finding and occupying a specialized “ecological niche”
- Changing the economic characteristics of a product, a market, or an industry.
These four strategies need not be mutually exclusive. A successful entrepreneur often combines two, sometimes even three elements, in one strategy.
Successful practitioners of “Fustest with the Mostest” and “Hitting Them Where They Ain’t” can become big and highly visible companies. Successful practitioners of the ecological niche take the cash and wallow in their anonymity. The whole point of the ecological niche strategy is to be so inconspicuous that no one is likely to try to compete in the same segment.
To practice an ecological niche, Drucker outlined three distinct niche strategies, each with its requirements, its limitations, and its risks:
- The toll-gate strategy
- The specialty skill strategy
- The specialty market strategy
The toll-gate strategy positions a firm as a leader in a market space that is so limited as to make it unattractive for any would-be competitor. The toll-gate position is thus in many ways the most desirable position a company can occupy, but it has stringent requirements.
The product must be essential to a process. The risk of not using it must be infinitely greater than the cost of the product. The market must be so limited that whoever occupies it first preempts it. It must be a true “ecological niche” which one species fills completely, and which at the same time is small and discreet enough not to attract rivals.
Such toll-gate positions can be difficult to find. Normally they occur only in an incongruity situation. The incongruity might be an incongruity in the rhythm or the logic of a process. Or it might be an incongruity between economic realities—between the cost of malfunction and the cost of adequate protection.
The toll-gate position also has severe limitations and serious risks. It is a static position. Once a company successfully occupies an ecological niche, there is unlikely to be much growth. There is nothing the company that occupies the toll-gate position can do to increase its business or to control it. No matter how good its product or how cheap, the demand is dependent upon the demand for the process or product to which the toll-gate product furnishes an ingredient.
The toll-gate position might be impregnable—or nearly so. But it can only control within a narrow radius. Once the toll-gate strategy has attained its objective, the company is “mature.” It can only grow as fast as its end users grow. But it can go down fast. It can become obsolete almost overnight if someone finds a different way of satisfying the same end use.
The company that deploys the toll-gate strategy must never exploit its monopoly. It must not abuse its monopoly to exploit, to extort, to maltreat his customers. If it does, the users will put another supplier into business, or they will switch to less-effective substitutes which they can then control.