Opportunities knock - Solving old problems or riding the crest of an emerging market can find you a niche.
By Tom Mckaskill

Many entrepreneurs waste their time trying to create a business in an area where there are already established products. They seem to think that just by being better, quicker and/or cheaper they can build a sustainable business. But if the consumers in that sector are already getting acceptable products or services, then the market is destined to become commoditised and consolidated, and only large companies will survive. To survive and build sustainable growth, small and medium-size enterprises must find and exploit emerging markets or create products and services that provide better solutions to old problems. But where should you look for niche markets that are capable of creating premium profits?

Professor Clayton Christensen, from the Harvard Business School, and Michael Raynor have recently published a book called The Innovator's Solution, which examines the problem of sustained growth. They state that 90% of all publicly traded companies in the United States are not able to achieve more than a few years of sustained growth that achieves above-average shareholder returns. They argue that this is not because of a lack of managerial ability or the avoidance of risk. Growth, they argue, comes from two sources: capturing a share of a growing market where consumers are still seeking better products, and finding new solutions to enduring problems.

Niche markets are usually found where customers' problems are being poorly dealt with or where products are too complex, too expensive or too large to be used effectively by some potential consumers. Often these niche markets are overlooked by larger companies, which do not take them seriously or consider the niche too small to bother with.

History is littered with examples that demonstrate this theory. Small disk drives opened up the computer games market for products such as PlayStation, transistors caused the portable-radio boom, laptops and mobile phones freed people from the office. Another example is amateur photography. Historically, camera manufacturers competed in clarity, accessories and size. Then along came the digital camera. Early versions were clumsy, had low resolution, a poor viewing window and produced poor-quality photos. But they allowed a tourist to check his photo before leaving the scene, solving a problem that the conventional camera could not. There was also a hassle with sending photos to friends and relatives. It was a time-consuming and costly exercise to have copies made for people who looked at them only once. Now with digital photos and e-mail, you can send out any number of photos to friends, who can have a look and then delete them.

The small and medium-size enterprise sector has historically been the source of most radical inventions and new business concepts. Many larger companies get locked into their current products and markets, and are blinded by the race to incrementally develop products that their customers are already using. Large corporations find it hard to offer customised products for certain segments of their market because their manufacturing and distribution systems are best suited to large volumes. The small enterprise can nip away at the periphery with tightly focused, niche-market products, or find new ways of solving a problem and undermine the market share of the larger companies.

Many people think it requires a product or process invention to capture a share of an existing market. In fact, these account for a minor proportion of new start-up companies. Remember, most entrepreneurs create successful companies by finding niche markets that large corporations serve poorly.

Where do you look for such opportunities? Most successful start-ups are within an industry that is already familiar to the entrepreneur, so look around your own industry for problems that need innovative solutions.

• Is there a sector that is using a general-purpose product or service where a more specialised product or service might work better?
• Can you strip out some features or functions and offer a cheaper but equally effective product?
• Are you able to offer a more personalised service or a less personalised service that might appeal to a segment of the market?
• Is there an innovative way of doing business that has worked in another industry that might work in yours?
• What problem is too expensive to solve? Can you develop a less expensive solution?
• Is there a process with many steps that involves excessive customer time and cost? Can you reduce the steps by automating or eliminating part of the process?

Alternatively, can you take a product and use it for a different problem? Baby shampoo opened up the market for daily adult shampoo. Baking soda was used to remove odors from fridges. Look at how people are using products in innovative ways - this may be your next venture.