I bet you’ve spent your career in businesses that make money by solving problems and bringing value to the market.
I have too, and we all want our ventures to be successful.
This is why we all obsess about quality, customer service, price etc.
But here’s the rub.
The market rewards us (with sales and hopefully profits) by solving problems for clients uniquely well. The better we are, the more sales we win and money we make.
And as our resources are finite, this creates a desire to niche down and focus on increasingly specialised areas that we can be better and better at and ultimately own.
But as we niche down, we face choices.
And it’s not the obvious one about the size of the market. We all know that niche markets offer smaller (but possibly richer) pools of opportunity. That’s one for another blog.
This is about resilience.
Focusing on a niche or having a generalist strategy are not binary yes/no choices.
In this article I will explore the trade-offs involved, to help you build out a profitable long term business.
Let’s start with specialisation.
Specialisation.
A Thompson’s gazelle can run at up to 50 mph and turn on a sixpence, making it incredibly hard to catch. It has evolved this way to avoid the many predators that see it as prey on its savanna and grassland territories.
“Forget these Guys”
Only a cheetah can chase down a Thompson’s gazelle in a foot race over a medium distance. As a result, on open ground with nowhere to hide and plentiful gazelle present, the cheetah owns the niche.
But it comes at a cost.
For flat out speed, the cheetah has sacrificed weight and strength. This means it can’t take down larger prey and it can’t defend its own kills from heavier slower predators like hyenas, lions and leopards.
This specialisation strategy works fine as long as there are plenty of gazelle and open hunting environments.
But when the rains come and the grasses grow, the cheetah loses its speed advantage to predators that stalk in the long grass. And when the gazelle are depleted, the cheetah can’t revert to bigger game to tide it over.
The niche is narrow and it only works for the specialist when all the criteria of the niche are met.
Translating it into Business.
Being highly specialised in many ways is a good strategy, because:
- It opens up an opportunity to take wins that no one else can reach.
- Solving problems that no one else can, often provides unique profit opportunities.
- Niches can have high barriers for entry and be very defendable for those who invest in the effort to own them.
But, operating in a specialised niche by necessity means your business will be lean, highly adapted and designed for one job and one job only.
And that’s the rub.
With specialisation comes a reduction in resilience.
Example:
When Holden stopped producing cars in Australia in 2017 it marked the end of a 69 year era. Ultimately the strong Australian dollar had made exports uncompetitive and at the same time imports more competitive which forced Holden into becoming an importer rather than manufacturer of motor vehicles.
Some modelling showed up to 65,000 jobs within Australia were affected (directly and indirectly).
This was predominantly in the supply chain, where thousands of small specialised companies operated for decades with Holden (GM) as their predominant (or even only customer), making everything from seat covers, to door mouldings, wing mirrors, gear sticks and a multitude of components and controls.
There would have been some very good years. But ultimately, the highly specialised nature of these businesses meant that many did not survive this shift in their environment.
This is not to suggest that a specialised niche strategy is a bad idea and that a generalist strategy is the solution. Broad generalist strategies can also fail when times change.
Example:
Woolworths Group PLC, a well-known British retail company, had a long history in the UK, offering a variety of products, including toys, entertainment, homeware, and clothing. The company operated a chain of high-street stores known for their pick 'n' mix sweets and diverse merchandise.
Woolworths followed a broad generalist strategy, attempting to cater to a wide range of consumer needs. However, the company faced increasing competition from more specialised retailers, and its business model struggled to adapt to changing consumer preferences and the rise of online shopping.
One of the key challenges Woolworths faced was an inability to compete effectively with online retailers and supermarkets offering similar products at competitive prices. Additionally, the company's financial troubles and debt burden became significant hurdles.
In 2008, Woolworths went into administration, and its stores across the UK were closed. The closure marked the end of an era for a retailer that had been a familiar presence on the British high street for nearly a century.
The Necessity to Niche.
The world has changed so fast in the last ten years.
Small companies now have access to global markets, sales and marketing tools, content creation and
distribution channels in a way more sophisticated than we thought possible even ten years ago.
An internet connection and some free software and anyone can be selling globally in very little time and at very little cost.
This means that specialised niches can be served far more effectively than ever before. This increases competition and makes it a necessity to innovate and solve problems/create value in novel and highly competitive ways.
The truth is we have to niche down, just to own our piece of the market and win opportunities.
So the question is not whether to niche, but how to do it whilst avoiding ruinous exposure to even the subtlest of shifts in the market now that our companies are so finely adapted and one dimensional.
The Lesson for Business.
In my experience there have consistently been three questions worth asking to best guard against such a fate:
- How durable is the demand for this service? i.e. is it fundamental and guaranteed like the need for healthcare, funeral services, dentists, food and beverages etc? Or can it be reinvented, replaced, disrupted with technology and hence shift or even disappear? The answer will shape your approach to risk management.
- How can the resources of the business be redeployed? Can the skills, assets, IP and culture be flexibly adapted to a changing environment? This may not be in serving a completely different sector. It may be in repurposing a physical product into a digital one, or offering different payment models and seasonal services to smooth out swings in demand.
In terms of redeployment, there are examples everywhere.
Example:
Netflix was originally founded in 1997 as a DVD-by-mail rental service, but it faced challenges as streaming services began to gain popularity in the mid-2000s.
Anticipating the shift in consumer behaviour towards digital streaming, Netflix decided to redeploy its assets and transition from a DVD rental business to an online streaming platform. In 2007, Netflix introduced its streaming service and the rest is history.
Smaller companies can do this too.
Example:
Slack Technologies was originally founded in 2009 as a gaming company called Tiny Speck. The company's primary product, a massively multiplayer online game called Glitch, did not gain widespread success.
Facing challenges in the gaming market, Tiny Speck decided to pivot and redeploy its assets. The company shifted its focus from gaming to developing a communication platform for team collaboration. This new product, named Slack, was officially launched in 2013.
Slack started as an internal communication tool for Tiny Speck but was later spun off into its own company, Slack Technologies. The platform quickly gained popularity as a workplace communication and collaboration tool and is now a big success.
Another example is ski resorts adopting summer holiday options for mountain biking and walking as the winter seasons are reduced through climate change. They are essentially repurposing the existing facilities and assets to avoid their niche being terminally disrupted.
And thirdly…
How quickly can this ship be turned around if necessary i.e. how much of the operating expenditure is fixed cost, how long are contracts commitments, tenancies and other term agreements in terms of preventing the company from being flexible and adaptive?
The Takeaway
Having a niche or working across a broad generalist sector still comes down to solving problems for customers in a valuable way. The broader approach just tends to require more resources and is usually the preserve of larger organisations.
But in the examples given, both niche companies and generalist companies fell foul of the same fate which was ultimately a failure to adapt.
By having a deep understanding of the durability of the demand you are serving it is possible to operate in a narrow niche with a degree of safety.
Further resilience can be baked in by understanding the core competencies of the company and how they might be creatively redeployed.
And finally, consideration should be given to the time it takes to make change and the breathing space afforded by lower fixed costs and strong working capital and cash positions. Time is a business’ friend when it comes to adapting to change.
It’s an exciting time to run a business.
So niche down hard and be known for something.
And at the same time be consciously adaptive to the inevitable change.
How resilient is your business?
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