HBS Working Knowledge has an excerpt from a new book “The Keystone Advantage” by HBS professor Marco Iansiti and Roy Levien. “Think of the business environment as a series of ecosystems, they urge, with ‘keystone’ companies such as Microsoft and Wal-Mart providing for the health of all who do business with them. What are the best strategies for companies living in these ecosystems? This excerpt focuses on strategies for niche players.”
The essence of a niche strategy is to achieve specialization by taking explicit advantage of the opportunities provided by the ecosystem while avoiding the kinds of traps that challenge firms in such environments. Our observation of a variety of niche strategies in action highlights a few critical components.
The first driver of an effective niche strategy is value creation.
An effective niche strategy creates value by selecting a specialization that is truly different and whose differences are sustainable over time. A classic mistake made by a variety of new ventures during the venture capital boom of the late 1990s was selecting areas that had no staying power, such as Web calendars or Web-dispatched limousine services. Over time, it was inevitable that these new niches would merge with existing ones. The services are now broadly offered, but the firms that started developing them have ceased to exist as independent entities. In those cases in which the skills and capabilities that characterized new ecosystem domains were distinct enough to justify a truly focused strategy (for example, personal financial accounting or customer relationship management software), these strategies have endured for many years and enabled the growth of large and successful firms (such as Intuit and Siebel Systems).
A well-executed niche strategy, because of its focus, will exhibit strong defenses against a keystone and dominator trying to expand. Intuit is again a strong example here, with the continued success of its Quicken application against Microsoft Money. The key is finding a large enough market that requires specialized capabilities.