By Geoffrey Moore, MDV Venture Partner
What you are likely to find in a downturn is that niche markets will take precedence over mass markets. That is because the most compelling value propositions—the ones that move even a tight-fisted customer to spend in tough times—tend to be local rather than global. Thus the financial services industry will be under enormous pressure to spend on compliance solutions, the health care industry on productivity solutions, and the media and advertising communities on better targeted marketing solutions. General purpose productivity investments, by contrast, are more likely to be put on hold.
The result of these circumstances is that mass markets in a recession become severely commoditized, rewarding only the lowest cost producers. Companies who chase them anyway become unsustainably unprofitable and end up being consolidated. Companies who focus on niche markets, by contrast, find their customers are more loyal and their offers more valuable. As a result they can charge higher margins over what is admittedly a smaller landscape, finding profitability in a downsized form. Niche market winners, in other words, live to fight another day.
For companies under $500 M, a single niche market can offer immediate returns at a sufficient scale to warrant a major strategic bet. For large established corporations, on the other hand, no single niche market moves the needle sufficiently by itself. These companies must instead attack large numbers of niche markets simultaneously in order to create meaningful total returns. How is this possible?
The answer is to focus individual business units (or their moral equivalents in your form of organization) on finding the growth niches within their existing installed bases. Merhdad Baghai and his colleagues outline this idea effectively in their book The Granularity of Growth (see also an article of the same title in the May, 2007, McKinsey Quarterly). Their research shows that even in the lowest growth markets there are pockets of high growth, either in terms of geographical regions or specialized populations. To capitalize on these opportunities corporations need to modify their offerings and their go-to-market programs, but not radically. More than anything else, they simply need to focus, to overspend within the niches, and under-spend elsewhere. This is not radical, but it is disruptive and does require a change in management methods, key metrics, compensation incentives, and reporting systems.
Big or small, niche market strategy is the order of the day for all companies except the lowest cost consolidator. For that company alone commoditization is an ally, and its goal is to drive prices so low as to clear the field. Such scorching the earth will not penetrate deeply into niche markets, however, for the value gained from customized offerings exceeds the cost saved from a commodity purchase.
