In the course of our work we see businesses of all shapes and sizes and in varying industries. We also see a wide range of financial performance across these businesses. While there are many ways a company can make money, we find that some of the highest returns are generated by companies that serve a very narrow niche.
Niche businesses often have to sacrifice size for the sake of returns and profits. When executing a niche strategy, you often have a very narrow focus on the types of products, services, or customers you serve. This focus requires a great degree of operating discipline. Many private company owners equate success with the size of their top line, not their bottom line. Niche players, however, understand that difference and often forgo top line for the sake of creating very high margins and returns on assets and equity.
One of the reasons a niche strategy can be successful is that it is easier for the company to execute because there are fewer variables to manage. A niche player that concentrates its energy on, say, three product lines has a number of advantages over a company with nine product lines. Managing three products is easier and takes less people than managing nine. It also takes far less carrying cost and working capital to turnover three product lines versus a business with three times as many products.
Another advantage of a niche strategy is that it can insulate you from attracting large competitors because if the niche is small enough, it may not be worth it for a large company to enter the space.
When thinking through your strategy, give some consideration to whether you are focused enough or your financial and human resources are spread too thin to execute well. If so, a niche strategy may be your answer.
Mario O. Vicari is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
Has your company considered a strategy as a niche player? Share in the comments.
