I love niche businesses.  Companies pursuing a niche strategy serve narrow target markets with a product or service uniquely designed for that market. Most start-ups are niche businesses, like Exact Sciences. It brought one noninvasive cancer test (for colon cancer) to the market. The company disrupted the invasive colonoscopy market and opened testing to younger patients and those reticent to have a colonoscopy.

The only problem with a niche strategy is that there’s no guarantee today’s non-competitors will stay in their swim lanes.  If they move into yours, you may not be able to defend your market position. Let’s look at some examples.

The New York Times’ coverage of Amazon’s cloud computing business, A.W.S. (for Amazon Web Services) offers one case study.  A.W.S. now packages software as part of its web-hosting offering. A.W.S. users find it easier to get their software needs fulfilled (e.g., data management tools for their websites) by buying Amazon’s bundled software-webhosting solutions.  The parallel is acquiring your hotel and car when you purchase your flight on United Airline’s website. The difference is that A.W.S. developed its own software to replace other companies’ proprietary software and used open-source software, helping A.W.S. secure revenue that would otherwise have gone to companies that initially designed the software solutions.  (By way of contrast, United Airlines does not own hotels; it merely offers hotel chains another distribution channel.)

United Healthcare is pulling off a similar strategy.  Initially operating as a health insurer and benefits manager, it added information technology and business intelligence services that help employers, providers, and other insurers better manage population health.  The services are bundled under the brand Optum.  More recently, United Healthcare acquired primary care providers and has become one of the top-10 healthcare systems in the U.S. In Las Vegas, it is also expanding into many specialty areas, providing an early indication of its growth strategy.  Hospitals with a lot of patients covered by United Healthcare are at risk of losing those patients in the future.

When non-competitors move into your space, your niche can become far less attractive as the above examples show. Therefore, if you are a niche company, make sure non-competitors remain within your sight.  And evaluate changing your strategy to create a stronger business.

How can a niche company defend itself?

One option is to expand beyond your niche, building a more defensible position.  Both A.W.S. and United Healthcare moved beyond their current offering boundaries to build a stronger business.

Similarly, Netflix saved its business by becoming a producer of content, not merely a streaming service.  Exact Sciences acquired Genomic Health to offer a broad array of noninvasive blood-based cancer diagnostic tests.  In so doing, it built much better protection for its leadership in colon cancer testing.  SubZero acquired Wolf to offer a complete line of kitchen appliances.

Another option is to narrow your niche even further.  An independent movie theater could become an art-film house, attracting a more loyal audience for films unavailable through streaming or in commercial theaters.

A final approach is to strengthen your niche by better differentiating your offering.  Decades ago, an anesthesia systems company discovered that patient and machine monitors were rapidly entering the market to improve patient safety. The entrance of monitoring risked turning anesthesia machines into mere furniture stands for monitors, thus reducing hospital spending on new machines. So the company built monitoring modalities into their machines, creating an even-safer anesthesia solution, and thereby defending the company’s niche.  Growth surged as hospitals wanted the “safest” solution.  More important, the company better served surgical patients as well as anesthesiologists and the hospitals that employed them.

The overall lesson for a niche business is to never assume that where you currently compete is where you should compete tomorrow.  Industries change.  Competitors change.  So should your marketplace strategy.

What are you doing to defend your niche?