Most new and growing businesses start out by identifying and serving a niche market. This niche might be a market segment or a geographic area not well served by current offerings. By developing a structure and a process tailored to delivering value to this niche, companies can typically make higher margins and returns.
It is often not that difficult to find a niche. They often occupy market-sizes below the ‘meaningful money’ radar of large companies. Despite the adage ‘Think global, act local’ there is still typically a cut-off point of ‘locality’ below which a large company loses too many economies of scale to really compete with an SME.
The challenge for many SME’s though comes from success.You build a nice and successful business to a certain size and then either the niche becomes interesting to a large company, if you have developed a new market, or you come to dominate it and you struggle to find further growth from it.
Your choices then are either to just accept a low or no growth future (hard to maintain staff interest and career progression), find another niche (difficult to find synergies so complexities of management abound with little competitive advantage) or to grow with the niche into the mainstream marketplace and start to face competition from much large competitors.The challenge of this final option is that big competitors are often ‘inept’ because the scale of their business demands them to be so. ie the demands of large scale process inevitably conflict with flexibility, though there are some exceptions to this. Consequently, the hardest challenge for an SME is to maintain their original differentiator in the face of the economics and operational demands of scale.
McKinsey produced an interesting article on PE ratios and hence market returns. This tends to reflect the fact that companies of similar sizes tend to be structured in similar ways and to produce similar returns, over the long term. It is good for SME’s to be self aware, so that as they grow they resist the factors that will influence their decision-making in the same way as their larger peers for as long as possible. Resistance may be futile but it is vital not to pick a fight head on with a much bigger competitor in a commodity market-place, so work on developing those differentiators that can scale for as long as possible.As Michael Porter said and I paraphrase ‘Be cheap or be different.’