Manage-Wise

Bigger by the niche

Niche players think big all the time. They do not focus on staying small, even though they operate in smaller market segments. Instead, they work at being specific and significant, and they often seem able to capture market share more easily than their broader-based competitors. One of their distinct advantages over generalists is that their products and services have an appearance of specialization that acts as a protective coating, distinguishing them from their broader competitors by the way they are able to deliver service to a defined vertical market.

A word of advice

The advice for start-up businesses that is repeated in the entrepreneurial literature and promoted by market consultants is to find a niche and go from there. For established companies what was a niche market several years ago may over time have become mainstream, and other niches may have emerged, especially when volume increases and a large number of competitors saturate the available market. Thinking small applies equally well to both start-ups and established companies; in fact, when a company has been able to obtain a solid position, growth by organic means usually remains steady, and big growth leaps are rarely made and are opportunistic.

The standard alternatives for expansion are to add more product lines and/ or services, to merge or acquire, or to move into other new relevant markets. A key to doing this profitably is to focus on those areas where you can achieve the highest gains by making the smallest changes to the products and services that you currently have on offer to make them appropriate for entering the intend niches. Companies that already serve a niche market will admit that they are continually looking for ways to improve, expand, grow, and be more profitable. So there is nothing unique about this business model per se except that companies spend their time going deeper into specific market segments, with everything they do remaining congruent with the way they go about maintaining a position of exclusivity.

For niche players, competitiveness is about the being distinctive to their customers. There are two main reasons why niche companies have higher customer loyalty than their corporate rivals and their adoption and retention rates are higher: first, there are usually a limited number of providers, and second, specialized products or services usually come with some level of personalized or proprietary specifications that others find difficult to duplicate, making it harder for customers to change suppliers.

Specialization selection

There have been large global IT vendors targeting the SMB space and competing with smaller vendors that were already there and that had experience with the customers’ distinct requirements. In the early stages, both large and small vendors saw this as a new and highly specialized market (resembling a niche), requiring a complete overhaul of requirements that were not part of their standard portfolios. The reality was that the vendors were better off than they thought. SMBs had been buying software in traditional ways since their inception; however, when vendors looked at this market more closely and compared it with customer buying behavior, the differences did not necessitate the organizational rearrangements and widespread changes that had originally been anticipated.

It is common for companies seeking entrance into markets where they have little or no experience to think that they are lacking and therefore need a unique specialization, only to find upon taking the leap that they had more in common with the new markets than they thought. On the surface, there often seems to be too great a distance to bridge from a functional point of view to enable them to properly serve these new customers and compete. On these bases, going into new markets is often wrongly discarded.

The other factor is the need to bring in special people skills that may cost too much to make the venture feasible. In the majority of cases, as long as the company has done its homework in selecting the niches, the changes required to achieve the measurable benefits are not as onerous as one would think. The key to sustaining growth and profit comes down to isolating those areas where the smallest changes are sufficient to enable the company to complete alongside the already entrenched competitors.

The emerging niche

As markets evolve and small communities grow, niches continuously emerge as viable market opportunities; the question is finding the right ones. “Picking your battles” is a saying that is particularly valid when it comes to niches. The opposite is also true: a market that starts off as a niche may become mainstream. There are, of course, many examples of this throughout history: the ballpoint pen was made popular by U.S. pilots, the typewriter by blind people, the Internet by students, and the zipper by the US Army.

Interestingly, niches also grow out of niches, but what is common is for niches to emerge from broad markets and commodities. If we look at the technology industry, a saturated market for operating systems that run our computers was controlled by major IT Corporations that thought they had cornered the market. Then along came the “open-source” movement with the idea that no one should own the operating system, and that it should be available to everyone for free. Furthermore, anyone should be able to enhance the system and share it with anyone who wants his or her new version containing the added functionality.

That is the story of the Linux operating system, which was made available to the public, at virtually no cost to the user, in a highly competitive market in which well-known companies such as Microsoft, Sun Microsystems, HP, and IBM were established. Originally popular within academia and among uber-geeks, over a period of seven years, Linux became mainstream, and its technology products were a staple of thousands of vendors. Despite public objections by Microsoft, the Linux user community continued to grow, and Linux is now one of the industry’s de facto standards.

Excerpt from ‘Getting to BIG the small way’ by Frank Prestipino. Reproduced with permission © 2008, Tata McGraw-Hill Publishing Company Limited. Price: Rs 595. Vishwanath_Ghanekar@mcgraw-hill.com