Niche businesses are terrific until they are not.

If you run a business with a narrow target market or far more-focused offering than your competitors, you are in a niche business. Just look around the Madison, Wisconsin area: Placon focuses on heat-treated plastic (thermoformed) packaging – not cardboard, glass, injection-molded plastic, or other types of packaging. All Placon investments advance excelling at thermoforming packaging; none are diverted. First Business Bank serves businesses and their owners, not businesses and consumers. “They know business” is a terrific brand promise. American Girl sells to pre-teen girls and their doting moms, not boys.

You get the picture. Because they are more narrowly targeted than broader businesses, niche businesses can tailor their offerings, investments, and operating systems to deliver differentiated customer value—allowing them to build a very solid customer base. There is a reason Duluth Trading does not sell eveningwear, even though it caters to women and men. Its niche is well-designed and constructed clothing that works great for manual activities like gardening, plumbing or building projects. Eveningwear would divert Duluth Trading merchandisers from their laser-focus on their niche.

Every niche business is nevertheless part of a larger definition of an industry. Placon is in the packaging industry, First Business in financial services and American Girl in the clothing, books, and toy business. Therein lies the Achilles heel of a niche company: its niche might rapidly shrink or disappear, leaving the business without advantages or the scale to be cost-effective against new competitors.

When does this occur? One instance is technology change that eliminates or dramatically reduces the size of the niche. Kodak missed the switch to digital cameras capturing images, leaving film for movies and medical applications.

Another instance arises when a niche business is absorbed into an industry with broader offerings. Camera companies’ niche is rapidly shrinking now that we use phones as digital cameras and video recorders. Madison’s Lunar prided itself on its “best bone density imaging machine.” It was forced to sell to GE once technology matured and cheaper products were good enough especially for less-demanding applications. Healthcare buyers wanted one-stop shopping and service, so purchased from companies with a full array of imaging equipment and support.

So what are you to do as a leader of a niche company?

• Always remember you are in a larger industry than your offering suggests. Disruption will most likely come from outside your niche. Valicom, a Madison company that helps clients manage telecommunication expenses and contracts, moved from direct services to a Software-as-a-Service platform, lest SAP and other cloud-based software companies disrupt it.

• Regularly measure the winds of change affecting your business. Identify risks to your niche and opportunities to grow beyond it or to strengthen it. Placon would not want to go into injection molding packaging, but its addition of services to fill the packages it made with its clients’ products and then ship them was a smart expansion of its offering.

• Find the thread that holds your different offerings together so that the total is greater than the sum of its parts. QTI, a Madison-based staffing firm, gets to know each strategic client’s culture so that each one of its HR service offerings (temporary staffing, temp-to-hire, executive search, etc.) delivers more value. QTI also offers invaluable talent strategy advice to its leadership-team clients.

• If the niche is going to get horrid and you can’t find the lipstick for the pig, reinvent what your business is all about. Florida-based Finfrock Industries anticipated consolidation in the precast-prestressed concrete industry, which was commoditizing. Rather than sell out, the owner transformed his family business into a design-build developer/contractor, leveraging its design and manufacturing strength in precast. The business is thriving as the leadership team recognized the bigger risk was staying the same. (Read Case Study)

Niche business owner or leader? What’s your defense strategy?