The Benefits of Targeting Fewer Markets

Beyond a robust economy, where does growth come from? In my experience, most firms seek growth by moving into new markets. But the most successful firms I've worked with serve only a few (typically 3-5) core markets. Large firms, of course, can serve many more markets and still offer substantial resources devoted to each. Small to mid-sized firms, on the other hand, are wise to concentrate their more limited resources on fewer markets.

Research supports this approach. From strategy guru Michael Porter to professional services consultant extraordinaire David Maister to Hinge Marketing's study of high-growth firms, the advice is consistent—it's better to go deep than broad. Professional service firms that focus on a few markets not only grow faster, but are generally more profitable. This has been evident among the small to mid-sized firms I've worked with over the last 25 years. Market-focused firms commonly have profit margins that are 2-3x that of diversified firms.

How can this be? It's really pretty simple: Knowledge of the client's business creates added value. Many technical professionals seem to think that it's how much they know about their own business that really matters. But from the client's perspective, they find greater value in our services when we can tailor them to their specific needs, which is possible only when we understand what they do and how they succeed. Market specialization also leads to better consolidation of internal resources and competencies, leading to greater efficiency.

There are, of course, some advantages to market diversification. Specialization can make you vulnerable to a downturn in a market sector you're heavily invested in. Thus many firm principals consider diversification a less risky strategy than focusing on a few markets. Even in a strong economy, different markets grow at different rates. Market diversification may elevate your chances of being in the right place at the right time. 

But market diversification has its shortcomings. Many firms boast of their breadth but offer little depth in terms of client sector knowledge, specialized expertise, or marketplace reputation. Diversified A/E firms often face organizational hurdles as well. It's harder to pool resources, build strategic consensus, collaborate across business units, avoid turf battles, or cross sell services when spread across multiple markets. 

While in theory market diversification offers greater flexibility to respond to shifting marketplace trends, I've seen this ability frequently hampered by internal competition. Concentrating management attention and resources on a promising market sector typically means diverting it from one or more other sectors. Many firms find this difficult to do, and their diversity ends up constraining rather than enabling their strategic dexterity.

So let me offer some advice to those firm leaders who recognize the need for strengthening their firm's market focus:

Pick a few target markets to focus on strategically. Your selections may be guided by a number of criteria—current revenue, sector growth potential, firm experience, staff expertise, etc. This may or may not involve choosing to exit other sectors—which is worth considering—but I'm not suggesting ignoring other markets on which you depend or compromising your financial performance. The intent is to give special attention to positioning your firm as a key player within your target markets (which are likely defined both by client type and geographic area).

Assemble market sector teams. You want to assemble individuals who will form your "centers of excellence" for each target market. Each team should have a committed leader to keep the effort moving forward. These teams will be responsible for driving the activities mentioned below. Give them this particular charge: Determine how to increase your firm's market share within your target markets. Don't merely settle for a "growth share" in a growing market; that's not a strategy for sustainable success over the long term.

Do your research. Client and market research seems to be an area of weakness in most A/E firms. As I noted in my previous post, firms that do frequent research grow at a much faster rate and are more profitable. In this case, developing your credentials within your target markets requires considerable knowledge about those markets and key clients. Adequate research is essential.

Actively participate in relevant trade associations. This involves more than attending meetings and conferences; you want to contribute to the organization's mission. Committee or task force participation is strongly advised, especially where you can help address technical, legislative, or regulatory issues of importance to that industry. This positions your firm as an advocate for clients in that industry, not just another firm seeking to do business with them.

Target marketing efforts on those core markets. As I've written about previously in this space, effective marketing is that which serves clients. Deep understanding of your clients' business enables you to better serve their needs and interests through your marketing. Don't make the mistake of focusing on promoting your firm's technical services or projects. Instead, address those issues of greatest importance to clients through a content or inbound marketing strategy. This helps establish you as a thought leader within your core markets.

Set up a system to share market information. You want to build organizational competency within your core markets, which means sharing the information and insights you accumulate through research and experience. Many firms default to simply posting this information on their intranet, but that's far too passive an approach to facilitate knowledge sharing. Instead you want to schedule regular meetings or conference calls for your market sector teams to share this information.

As I often tell firms, there's a big difference between serving a market and being viewed as a key player in that market. How do you think clients in your target markets think of you: As an outsider offering services to them or an insider working for the betterment of their industry? Yeah, it takes a considerable effort to position your firm in the latter category. That's all the more reason to focus on a few key markets.