Niche and core competence
In my experience the businesses that scale the most successfully are those that are focused on a very very tight niche and have, or develop, a really narrow core competence. This goes contrary to the instincts of the start up entreepmenur who quite rightly follows the money. That's wise!
I would though propose that to scale you have to focus and indeed would argue that as they get going the market will tell the startup entrepreneur what they do that's valuable and then they should focus.
To illustrate, I remember a £30M revenues client of mine that simply made little metal collars costing a few pence each. A manufacturer in the UK. I asked how they competed with the low cost regions. They replied simply by being really really good at making these things. We're in over half the cars in the world holding the steering column in place and two thirds of the disc drives holding the spindle in place. We make these things in such volume that no-one can compete with us both because of the volume and also because we've been doing it for a long time in big volumes we've become really really good at doing so.
In the rest of this article I'll explain separately the relevance of the two concepts of niche and core competence. I use a taxi driver metaphor to illustrate the importance of having a niche in business and hopefully make it obvious why it's much better to be a big fish in a small pond than a small fish in a big pond. I use a dartboard method similarly to explain how it's important to understand what's target type of business, what is slightly off target but you'll accept, and what is not good business.
Your niche
Taxi drivers metaphor
I go into a local pub in Bladon and I meet a taxi driver. I ask him where his marketplace is. “Don’t be stupid, I can drive anywhere!”, he says. “I can serve the whole of the UK.”
That’s a huge marketplace, containing roughly 65 million people.
I ask him what his marketing budget is. “About £2,000 per year.”
That’s £0.00003076923 to spend on each prospect. Pretty tight!
After a bite to eat, I leave and go to another pub in the village, where I meet another taxi driver. To compare, I ask him what his marketplace is. “Bladon!” he answers. “I’m the specialist Bladon taxi driver.”
His marketplace contains around 500 people.
With a £2,000 budget, he can afford to spend £4 on each prospect in the area.
He spends this on local leaflets, delivered by a young person to every door in the village every Saturday morning. Not only that, but the leaflet highlights that he can be at your door within five minutes of a booking.
Which of these taxi drivers will be successful?
It’s obvious when I put it like that, isn’t it?
But this isn’t always apparent to entrepreneurs who love to grab every opportunity with both hands!
Some think they need to go for success in a massive market. They think they only need 0.1% of a massive market.
This may be true, but in my experience it’s much better to go for 30% of a smaller marketplace.
This approach is both more powerful in marketing sense and more economic. You can spend more per person, and make the message more targeted.
The appeal is far more personalised and relevant than with Mr. Bloggs’s nationwide taxis. Operationally, it is also more efficient. Clients are nearby.
If we look at the biggest companies in the world, they succeed through focus on a very specific niche.
The ‘geeks’ at Google could have built software to do anything, but they built their global reputation on the very narrow target of being the world’s best search engine.
The same goes for Facebook; lots of smart technologists that could have built anything. But they didn’t build a CRM system, an accounting system or even a search engine. No, they pivoted slightly from their original idea and then grew as a social network.
This doesn’t mean you need to say no to expansion, as long as it sits within a strategy.
Having a narrow focus doesn’t actually prevent you being flexible and taking opportunities are they arise. I explain this by using my “dartboard model.”
Your core competence
Dartboard metaphor
If someone comes up to the Bladon taxi driver and asks him to take them to Heathrow, he’ll probably say yes. It’s not the bull’s eye, but it’s useful income and is a related business in a way that most would expect.
The bull’s eye is where you get most of your revenue, and the rest of the dartboard is where you score points. You miss the jackpot, but you still benefit.
Of course, you can miss the dartboard. No points. The Bladon taxi driver is experienced with a vehicle, but if someone offers him money to change their tyres he’d probably say that was not his business. (Although I guess he might do it almost as a favour for a favourite little old lady customer who uses him every day.)
As a business, you need to be clear about where your bull’s eye is! You need to be clear what is acceptable business and what is not!
You could have multiple dart boards with multiple bull’s eyes. This works because the client for business A won’t see business B. These might even be separate brands under the same umbrella, leveraging the marketing and operational power of a bigger entity.
For example, a company might make high-quality windows for historic listed buildings. Every window is slightly different and needs advanced design to work. They may also develop a second stream of business to make custom windows for renovation builds. Another premium sector.
They cannot though (or should not) take mass orders from housing developers for 10,000 windows at £50 each. They simply aren’t geared up to make money from that seemingly-attractive order.
That needs a different type of operation with a very different structure and a very different culture.
I would consider that as missing the dart board. The product portfolio must be developed with core competencies in mind.