Tuesday, October 9, 2012

Strategic Planning Analogy #471: Two Kinds of Niches

Every so often, I hear of a story about someone discovering a famous painting in amongst a pile of junk.  I remember an elderly Milwaukee couple back in 1991 finding an old Van Gogh which they sold for $1.43 million.  In 2009, a famous painting by famous Paris artist Ary Scheffer from 1851 was found in a janitor’s closet in a rural Minnesota church.  It was appraised at $53,000 and is now prominently displayed at a Minneapolis art museum. 

And just recently, in 2012, an estate was going up for sale in Switzerland.  As people were getting the estate ready for sale, they discovered a painting by Goya which nobody knew was there, called “Lot and his Daughters,” which was painted around 1770.  It was estimated to be worth about $700,000. 

There have been enough stories about people finding expensive art treasures amongst junk that there are many who spend their time going to garage sales and estate sales to buy lots of old art work in hopes of finding a hidden treasure somewhere in the pile.

That seems like a lot of work for low odds of success.

Just because a work of art is old does not mean that it is valuable.  There are tons of old pieces of art that are fairly worthless.  You can collect warehouses full of old art and end up with nothing but a big pile of relatively worthless junk. What makes a work of art valuable is when it is both old AND is associated with an artist who was a leader in a particular style of art (like Van Gogh or Goya).

A similar situation exists in the business world.  There are business gurus who are advocating the advantage of the small niche.  They say that it is very difficult to make money appealing to the broad, average middle market and that the real money is made working in smaller, specialized niches.  An example would be underperforming large department stores versus overperforming small specialty niche stores.

So then, word gets out that “small” is good.  But as it turns out, that advice is about as useful as telling an art collector that “old” is good.  Yes, old is good in art, but only if attached to an artist who was a leader in an important style of art.  Similarly, having a small share in a business strategy is only a good idea if you are also a leader in meaningful type of specialty.  It isn’t being small that’s important as much as it is in being a leader in some important way.  It is more important to become the “Van Gogh” or the “Goya” of your niche than to just aim to be small. 

The principle here is that there is a vast difference between owning a niche product and owning a niche category.  A niche product is merely a product or service with a small market share.  For example, you may be the 10th largest brand of toothpaste.  By contrast, a niche category is a solution desired by a minority of the population.  For example, a niche category would be those looking for toothpaste for sensitive teeth.

The key difference here is that a niche product is merely small in volume.  There are lots of reasons why a company can have a small volume, and many of those reasons are not good.  For example, it may just be an inferior product when compared to the higher selling brands. As is often the case, small volumes occur because consumers do not care to purchase the product.   In fact, most times, small volume does not lead to success any more than being old leads to artistic treasure.

Niche categories are different.  They may be small, but they have a purpose.  They have a strong appeal to a particular segment which will prefer it over a larger segment because it better suits their needs. Just as an old painting only becomes valuable when associated with category leadership (like Van Gogh in impressionism), a small volume toothpaste only becomes valuable if it is associated with leadership in a category niche (like best for sensitive teeth).  So the goal is not to have a strategy around being small, but around owning a category—even if the category is relatively small.

The Laws of Business Work Against The Merely Small
There are many business laws which work against the small volume niche product:

  1. The Law of Scale:  There are typically economies of scale in being large (production, labor, distribution, etc.) which make it more difficult for the small operator to compete.  They are at a natural cost disadvantage.
  2. The Law of Consolidation:  All markets eventually consolidate into a small handful of brands.  Sometimes only 2 or 3 meaningful brands remain. The third brand is often unprofitable and unless a smaller brand owns a niche, it is almost certainly not providing an adequate return on investment.  As a result, the lesser brands tend to disappear.
  3. The Law of Networking:  In the social networked economy, the importance of having the most connections is critical.  As a result, sometimes there can only be one major player (think Facebook).
  4. The Law of Bribery:  If there is no natural reason for people to prefer your brand, then they will choose other brands.  The only way to counter that trend is to “bribe” people to purchase from you via heavy price promotions or gimmicks.  This is typically not sustainable over the long term. 
  5. The Law of Losers:  If you get the image of being a “loser” brand, then customers will not want to associate with your product (since it will make them look like a loser for using it).  And it is easy for a small niche product to get a loser image since—if it were a winner—then you would expect it to have a high market share.

The Best Way To Fight These Laws is Via Category Ownership
If you are the leader in a category niche, you are better able to withstand those forces mentioned above, even if you are relatively small.  For example, you may still be at a cost advantage to the big brands, but you will have the cost advantage over the lesser brands within the category where you are a leader.  In addition, because you are better suited to the category because of your specialization, the category segment may be willing to pay a meaningful premium for your product (it meets their needs better than the big mass brands).

You can avoid the excessive bribery because of the natural demand which comes from being the most desired solution within that category.  In a world of consolidation, the category leader is typically immune (if the category is large enough).  And finally, if you own a category, you are not a “loser” to those who desire that category.

The Best Strategic Approach
Therefore, the first step in a good strategy is often to seek a place category leadership.  As I said in an earlier blog, there are eight questions to ask yourself when choosing where to seek category leadership:

      1)      Is the position Desirable?
      2)      Is the position Sizeable?
      3)      Is the position Ownable?
      4)      Is the position Preferable? 
      5)      Is the position Achievable?
      6)      Is the position Believable?
      7)      Is the position Understandable?
      8)      Is the position Profitable?

By answering these questions, you will find or create a category where you can win big.

The next step is to do what it takes to create, keep and strengthen that leadership position for yourself.  You need to convert the dream to a reality with an action plan.

Third, once you own the category, you can focus on growing the category.  Since you will gain the majority of the benefits of the category growth, it is worth investing in it, even if others also benefit a little bit. Think about how Campbell’s became a leader in the US soup category and shifted its emphasis to getting people to consume more soup. 

Or think about how Chaboni first worked to own the Greek yogurt niche category niche in the US.  Then it moved to make Greek yogurt an ever larger category in the US.   By contrast, Fage—the yogurt market leader in Greece—was content to be merely be a niche product in the US.  As a result, Fage ended up not only being a niche product in the overall US yogurt market but a distant niche product within the US Greek yogurt category (even though it was introduced to the US well before Chaboni).  By settling for merely being small, Fage ended up doing poorly in the US.  Chaboni, by owning a small category and then making the category big, did very well. 

Finally, once you become the category leader, you can devote more time to leveraging that leadership position.  In the digital world, this is often referred to as finding a way to “monetize” all those visitors.  For example, first Facebook tried to own its category.  Then they grew the category from college students to everyone.  Now they are focused on monetizing the category.  This has made it nearly impossible for anyone else to succeed in that space.  That is, except for firms like Linkedin, which decided to own a niche category—business and professional social networking—and is doing well because of that category ownership.

Although there are a lot of successful companies or brands which are small, that doesn’t mean that merely being small guarantees success.  In fact, there are many laws of business which work against the smaller players.  True success comes from being a category leader, even if the category is relatively small.  That’s because category leadership creates advantages which can be leveraged into growing the category or increasing the your share of the money made within the category.

On the PBS TV show Antiques Roadshow, people bring in old items from their homes to be appraised for their value as an antique.  The show likes to air all the examples where the appraisals are surprisingly high.  They tend not to emphasize all the instances where the appraisers tell the people what they own has little value.  This bias can give the false impression that almost anything really old is really valuable.  Similarly, the business press likes to tell the stories of all the little businesses which beat the odds and are successful.  This bias can give the false impression of the odds of success for small companies.  Don’t fall for the deception.  Only put small into your strategic goals if it is also accompanied by category ownership. 

No comments:

Post a Comment