Smart Entrepreneurs: Find Niches in the Wake of a Market Leader

Image: 123rf.com

A market leader, in its wake can provide an effective and lucrative entry strategy for a smart entrepreneur.

Background

Biomimicry, the study of nature to solve human problems also gives us Lessons-from-nature-for-entrepreneurs.

Wake: the region of low pressure immediately behind a solid moving body. It makes it easier for the body, that is following, to move forward with a lot less energy.

Niche is a very specific segment of a much larger market with a clear set of offerings sold to a very focused target group.

Exploitation of a Wake

In Nature

Animals have been observed to use the drafting behavior in the wake of the leader for their own benefit.

The most common sight is the Canadian geese flying in V formation. The wingtip vortices, generated by the front bird, makes it easier for the rest of the flock.

Image: 123rf.com

In Human Endeavor

In cycling the bicyclist riding behind another conserves energy, especially at higher speeds. It leaves hir more energy for a break-away push to the finish line.

In Motor Racing at Formula One or Indy, along a long straight stretch, a car following close behind another uses the slipstream created by the lead car to close the gap between them. It allows the trailing car extra speed.

Niche Strategy

When you’re just starting your business, you probably don’t have enough resources and you don’t know which products will work best for you. You’ve two options:

  1. Try to be everything to everybody. Which is really nobody to no one, or
  2. Be somebody to a small group of people.

Serving a market niche instead of the whole market or even large segments of the market is an effective entry strategy for an entrepreneur.

Start with a Niche Market

You don’t have the resources and the risk of broad marketing is too high. Focus your time, energy and money in one niche and then expand when you get really very good at that one thing. Also, when you have found a tight niche, it gives you the chance to stand out in the market and get your name out.

Unlearn to Re-create

If you have come from the industry and have a great deal of expertise in it, you may have to unlearn a few things. You know in detail what the industry is doing and what every player is doing. Your first thought is to just provide the same services that you’ve grown up in and that you are familiar with. The problem is that now you will be competing against the very people that taught you. And they have the resources. It’s a no win situation, and it forces you just to compete on price.

Unlearn and use your market knowledge to create new solutions for the niche.

Be Different, Specialize

Offer something different or do it in a different way. Otherwise, your potential customers will have no reason to even consider you. They are likely to forget you and naturally migrate to the known market leader.

A tight niche makes it easy for people to understand what it is you do. You can specialize along one of several dimensions such as, geography, type of end-user, service that others are reluctant to handle, quality-price, etc. Be in a position to say, “If you’re in a situation where you need help with this, come to me.” and they will come.

Develop Expertise

You may have to learn new things and develop new ways to satisfy the target customer group. Strive to meet their needs better than the market leader who sells only casually in that segment. Build skills and customer goodwill to defend against a major competitor trying to enter your domain as the niche grows and becomes more attractive. Look at it as creating a business with no competition.

Your Niche

An ideal niche is one that is big enough to be profitable, has growth potential, and fits your aspirations. It is also one which you can serve effectively. Perhaps the most importantly, the niche is of little interest to the major competitors.

Find Niches in the Wake

Why Market Leaders Leave Niches Behind

If the market is fast growing, and the market leader is committed to remaining the leader, they are preoccupied in honing their established structure and following their successful strategy. They produce established products for mainstream customers in major markets. Unfortunately, for them, once the structure is firmly settled it becomes an anchor against the ability to change strategy. They do not like to offer products with different value proposition and features that a small group of customers value.

Good management practice calls for listening to the customer, studying market trends, invest in new technologies, and creating new and better products (for the mass market). They do it very well. You will never be able to match those initiatives.

However, they are also loathe to go after niches which may initially generate lower margins, be too small to meet their growth objectives or upsetting to the set structure.

Example: For a $10 M company a $2 M niche is a 20% growth potential worth going after with whatever it takes. For a $1B company it is a mere speck not worth changing all their processes and structural rules and investing additional resources to support those changes. They need a $200 M new market, that no niche can satisfy. If they are owned by a growth pushing, VC or a PE, firm they will ignore this ‘opportunity’ till the market grows up to meet their criteria. It may be too late by then.

Sometimes these niches reflect the disruptive changes happening in the market that may even take the leader down.

Clayton Christiansen, in The Innovator’s Dilemma states that “ Decisions made in successful organizations .. sow the seeds for eventual failure. Good management is the most powerful reason (that market leaders) failed to stay atop (a smaller niche which ultimately changed the industry)”.

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This is not a post for good managers to avoid failing to stay on top of their Market. It is about entrepreneurs exploiting the reality that market leaders always leave behind niches in their wake.

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Market Leader Wake as Haven

The market leader wake is a great hunting ground for finding niches that are effective and lucrative for a smart entrepreneur. They provide the perfect opportunity, for entrepreneurs, because:

  1. The total market development costs are borne by the leader.
  2. The fast growing market keeps the leader focused on the mass strategy. They ignore the ‘crumbs.’
  3. Markets that are small are not analyzed therefore don’t exist in their radar. Stepping outside is considered risky. Why risk it?
  4. The leader is preoccupied in developing the mass market and cannot set aside resources to develop the smaller niches.
  5. The organizational structure and capabilities rewards the supporters of the mass market and anything outside is considered Siberia.
  6. You can grow the ‘crumbs’ in the wake without having to spend a lot of your resources into market development.
  7. You get a competitor free market.

8. As the mass marketer achieves higher volume, the niche player achieves higher margins.

Unearth the Niches:

If you have been in the industry, focus on all the problems that you have become aware of the:

. issues that were not handled satisfactorily by the leading company.
. customer segments who were forced to adapt rather than be served what they really needed.
. complaints that are most often heard in the business.
. queries that the sales people get that they cannot fulfill.

These are rich sources of finding your niche(s).

Confirm the Unmet Needs:

The key is to confirm the segment’s unmet needs . Be careful not to let your own view delude your answers. Communicate with customers, prospective customers, and non-customers within each segment to discover the ‘real’ needs.

Remember: the existing mass market customers will not be a good source of this information. They are already communicating with the mass marketer and they have been taken care of them.

Designing Your Offering

While potential customers may not be able to give you extensive details, they often have a general sense of what it is they want that they’re not yet getting. Your attempt is to gain a much better understanding of what their unmet needs are— it will help them understand it, too. Your job is to decipher which alternative, will give you superior market advantage. Leave the ones that are simply nice to have.

Identifying potential niches isn’t enough, you must also examine some important factors before you commit to one or more niches:.

  1. Economically viable? You want to be sure your segment is big enough to survive and small enough for you to dominate. Preferably, no one else is working in it yet.

2. Effectively reach customers: You should have an efficient method of reaching the small group. Good news is that the internet has made history out of geography. You can still reach spread out customers efficiently.

3. Similar needs but distinct than the Mass market: The people in your niche don’t need to have precisely the same need, but similar enough to effectively cater to them. These distinct needs, should be different enough from the mass market to give you penetration as well as protection against the mass market player encroaching on your segment.

4. Limited Horizon: Be sure that the demand for the niche is not a short term phenomenon and has a long horizon. It is especially attractive if the societal forces have the trends moving your way.

5. Protection from Competitors: As the niche grows you are likely to wake up the dominant competitor. Build your features such that it is costly and unattractive for them to copy you. Generally that means that they may have to substantially change their model or give up on a cherished feature.

6. Exit Strategy: An effective strategy is to become such a thorn in the side that the big competitor finds it more effective to acquire you rather than compete with you in your area of dominance.

Mark Victor Hansen, co-author of Chicken Soup for the Soul and The One Minute Millionaire, says “Get rich in your niche.”

Look for them in the wake of a major player!

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Dr. Rajiv Tandon is an Entrepreneur, Educator and Mentor. He facilitates peer groups for CEOs of fast-growing companies in Minnesota. To learn more, sign up to get the email newsletter.

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