I made things more difficult than they needed to be when I started my current business eleven years ago. I disregarded some key wisdom and experience gained in the successful, 50 year-old business my family sold in 1998. In particular, I discounted the importance and benefits of having a true niche.
Our previous company manufactured and distributed specialized photographic equipment, with few real competitors. Now I make laptop bags and other soft goods, with about a kajillion competitors. By choosing to be a small fish in a big pond, I also chose to make everything more challenging and risky. For every small company that succeeds in my category, there are dozens of others that don't.
Fortunately we do OK. We've been in the industry a long time and have a variety of advantages that carried over from the last business. We live and breathe by a critical and effective set of core values, and I think we do what we do really well (though I say that humbly, in keeping with those values). We enjoy what we do. But in retrospect, I often wish I'd sought a narrower path.
Some think that making the very best widget (even in a huge category), or having the best customer service can alone define a niche business. In a perfect world that would be true, but it's usually not. Obviously great products and service can and do build successful companies in any industry, but a small business without a genuine niche will always be faced with increased challenges in critical areas:
1. Pricing: You may be great at what you do, and your business model might stress not competing on price. Some companies do indeed thrive that way. But for most, economics 101 dictates that if "everyone else is doing it," one way or another you will face price and margin pressure. The more specialized your business, the less these market forces control your destiny.
2. Marketing: If you are a minnow in the ocean, it's hard to get noticed. Aside from the sheer number of other fish, the bigger players will always have more resources at their disposal; they can out-advertise, out-publicize, and out-distribute you. Conversely, if you have a genuine niche, the market will often come to you.
3. Barriers to entry: Investors love companies with high barriers to entry for a reason. The easier it is for anyone to jump into a business, the harder it will be to succeed. In fact, barriers to entry are often -- though not always -- what define a niche business in the first place. A good business that's difficult to replicate is a really good business.
4. Innovation: Often in crowded, commoditized industries, almost anything that can be done has been done, and differentiation comes down to nuances and variations on themes. It may always be possible to do something better, but the more competition you have, the harder it is to innovate meaningfully. And the first 3 factors above add to that challenge.
5. Longevity: There's far less job security when lots of others do what you do, and when anyone can take your place.
Of course, as with everything, there are exceptions. Despite big-box sprawl,and franchises can play in huge industries, protected by geography. Other companies successfully take on massive industries because they think they can do better than the status quo (Apple and Virgin Atlantic Airlines are two of the best examples). Others create what I'll call "mass niches" - breakout subcategories of seemingly impenetrable existing markets. Under Armour, Red Bull and Popchips are great examples of companies that have pulled that off.
But the people with enough chutzpah to take on the airline, sports apparel, snack food, beverage and consumer electronic industries need more than a good product: They need massive amounts of money (either before they start or very quickly once they do), superhuman risk tolerance, and other things atypical of most entrepreneurial endeavors. And the odds are still long -- remember, Apple lived on the brink of failure for much of its existence, before finding the "mass niche" that made it the most valuable company in the world.
When you hear people say "small businesses drive the economy," a great many of those businesses are making or doing things that few or no others do: they're highly-specialized manufacturers feeding larger industries, companies serving narrow markets, or tech companies doing things that are difficult or impossible to duplicate. Great wealth has been built this way, and if your goal is to have a healthy, enduring small business, you'll probably find your best opportunities in the niches.