Imagine your one shop high street business has been doing well until the opening of a brand new town-centre redevelopment packed with major retailers, including one of your competitors. What do you do? Decide to wave the white flag and call it a day? Or find a way for your business to keep trading alongside the competition?

It may not necessarily be pressure from larger competitors that forces a need for change in smaller businesses. Many traditional industries have contracted and all but disappeared, giving way to cheaper imports or new technologies. The way many small outlets have survived is by changing business direction and finding a niche market in which to operate profitably. This usually involves a particular group of customers whose needs they can serve really well.

There are three common situations related to changes in the market that pose a real threat to smaller businesses.

• The market is expanding and has now caught the attention of big corporations with their massive marketing and buying power.
• The market is maturing and it is getting overcrowded or products are pouring in from abroad.
• The market is declining due to changing habits, out-of-date technology or population movements.

Each situation involves different threats and offers different opportunities, but the brave entrepreneur who can plan and take action can still be successful in any of them.

The threat

There are several ways to react when faced with a threat to your business:

• You can compete head on – but this usually ends in a price war that you are unlikely to benefit from in the long term.
• You can sell out – a good strategy if you can spot the threat early enough to allow a potential purchaser time to turn the business round.
• You can change your business model – say by moving from manufacturing to importing, or to selling by direct mail or online rather than retail.
• You can find or create a niche market – where you can find shelter from the mainstream storm.

Pros and cons of a niche market

Operating a business in a niche means looking for groups of customers with distinctive traits who may be looking for a special combination of benefits. Consequently, a niche market is, by definition, limited – but that does not necessarily mean it is unprofitable. There are several niche sports car manufacturers in the motor industry that make excellent profits, for instance.

A niche market exists on the fringes and so is less exposed to different commercial pressures than larger markets. By the same token, it has less marketing exposure. Prospective customers are fewer, but possibly easier to identify and target. There should also be fewer competitors, but this is because there is less product to compete over.

Living with the competition

Surprisingly, your best ally can often be your larger competitors. The key is to understand the dynamics of the market and the characteristics of the main players, particularly your competition. That way you can usually get them to help you and keep you alive rather than squash you.

This is because you can develop a beneficial relationship with them by filling the gaps in their services. Most large competitors are quite cumbersome. They can depend on rigid systems for efficiency that prevent flexibility or a personal approach. They want to sell neatly packaged (and managed) solutions and so don’t like non-routine requests. Growth is their mantra.

What does this mean for you if you face being crushed, squeezed or starved? The answer is to find a niche that is too small, too difficult, too variable or too personal for the big corporations to want to deal with. That said, you have to look objectively at your business, and see which of these areas you can address most profitably because of your:

• Specialised skills.
• Greater flexibility.
• Convenient location.
• Unique solutions.

Above all, you need to seek your business’s unique selling point, or USP. Businesses under threat need to take the initiative. A small garden centre, for example, will soon be out-priced by the big DIY outlets that often have a garden centre in-house. But these may not offer home delivery of plants, and they probably don’t have the staff resources to give the detailed gardening advice that people appreciate.

It is vital to research your potential market thoroughly: test it and keep monitoring it – be prepared to change direction again if necessary.

Competing in a dying trade

Like most manufacturing industries, shoemaking has had a rough ride over the past 10 years. Northampton-based company W J Brookes had been in business in the area for over 100 years. Primarily making men’s footwear, mainly high fashion but some traditional, the firm’s biggest market during the 1980s and early 1990s was European export, mainly to Germany. The company employed 77 people, mostly skilled shoemakers.

Managing director Steve Pateman says, “We enjoyed a very good 10 to 12 years until the Government raised the value of the pound. Ninety-five percent of our sales were exports, so this had a devastating effect on trade.
We hadn’t put our prices up, but the strength of the pound meant that our customers were paying far more.

Overnight we lost our continental customers – and almost the business.” Meanwhile, the domestic market was being flooded by cheaper imports from places like Spain and Portugal. What ultimately saved the company could be described as a stroke of luck – but is really a tribute to Pateman’s opportunism.

“We tried various things with little success,” says Pateman. “One day a call came in from someone who wanted to buy ladies’ shoes but in men’s sizes. It was an unusual request, but at that stage we had reached desperation point and I was prepared to try anything to keep the business going.” It transpired that there was a huge demand from men who liked to wear ladies’ shoes but the types of firm that made this footwear were generally small and could not meet the market demand.

Pateman says, “I found the names of some prospective wholesale buyers and spent the afternoon ringing round to see what the interest was. The response from every buyer was relief – we were just what they had been looking for – a supplier who could fulfil their requirements for quality, price, fitting, and delivery. We set ourselves apart from other suppliers by making footwear to suit the size and weight of men, rather thanmaking ladies footwear that men could buy. That was definitely what our customers wanted.”

Competing in an expanding market

Computer retailing has also undergone major changes over the last decade; direct selling and falling prices have left smaller companies out on a limb. In 1998, Manchester-based Tier1 Asset Management began looking for a niche in order to survive. Today the organisation still buys redundant personal computers from large companies to re-sell them. But far more importantly, it now offers a data protection service that is essential when getting rid of old computers. Managing director Jonathan Rose says: “As we were, it was difficult to compete. With prices falling, profits from re-sale were being wiped out. Also the Y2K issue saw every corporation upgrading thousands of machines and the second-hand market was saturated. So we began looking for a service-type business and considered a niche – something different that was service rather than produced. We came up with the idea of a data protection service to wipe hard disks of all data.” This service is how the company now makes most of its money.

The company tested the market at arm’s length alongside its core business, approaching the main dealers and distributors to find out the extent of demand. However, as is common in niches, market education proved to be vital and harder than they imagined.

“The problem is that large organisations are only just beginning to appreciate the significance of removing all company data left on old computer systems. We have to market our service to the top level of management because ultimately it carries the responsibility for company computer data.” However, client referrals are also a good source of new business – as often happens in specialist fields.

Mining a residual market

A by-product of the various technology revolutions is that there are often situations where large suppliers abandon a market because the technology has been superceded. However, there may be a large number of people who
continue to use it, either because they’re happy with it or they can’t afford to upgrade equipment. This creates an after-market for consumables or spares that can last many years.

For example, Gestetner virtually created the market for stencil duplicators and built a worldwide network. Many competitors joined in. However, as photocopiers took over, most of the rivals dropped out or even sold their duplicator divisions to Gestetner. So, for many years, it enjoyed a near-monopoly of a gradually declining but still profitable market, particularly in developing countries.

In another case, a Mini car restorer managed to buy a huge stock of spares, some of which were very rare, from a distributor who wanted to get out of what was, as far as he was concerned, a dying market. Combining this with his restoration activities, the restorer has created an award-winning business catering to classic car enthusiasts around the world. There are many instances, both local and national, where existing suppliers abandon a market which still has life in it – either because they are no longer interested or because they see richer pickings elsewhere. This leaves a vacuum for people who genuinely know and care about that market to create a specialist niche business which can thrive for a surprisingly long time.

When a market is abandoned by a business, it may be prescient of you to get involved and pick up fantastic bargains from big suppliers who want to offload their stock. Moreover, they may be only too pleased to have an outlet still available for their customers and so will pass their business on to you.

Handling a niche

What can you do to make inroads into a niche market?

• Look to diversify in areas where you know you can offer a different service or different product.
• Do plenty of market research. A common mistake that many business owners make is to misread the market. Remember that the turnover you need to survive probably requires customers from a larger catchment area than when you were offering a more generalised product or service.
• Be prepared to use new channels to reach customers. For example, Steve Pateman found thatmen prefer to buy ladies’ shoes for themselves direct, via the Internet or mail order, rather than via retail outlets.
• Explain your uniqueness in your customers’ terms. Study pricing carefully. People are usually reticent when it comes to discussing money and consequently smaller businesses often tend to over-price or under-price. Research the competition, and remember that people will pay more for a specialist service.
• Remember that a niche business evolves like any other. You have to keep developing your niche to keep up with customer demands.

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