Concentration strategy

From CEOpedia | Management online

The concentration strategy is one of the competition strategies undertaken by the company in order to build and maintain a competitive advantage in the long-term and to obtain better results than those obtained by competitors in a given sector. This strategy consists in focusing the company's activities on a specific group of buyers, on a specific assortment of products or on a specific geographic market. It is based on a clear product and market specialization and avoiding competition in the entire market.

The essence of the concentration strategy

The concentration strategy, in contrast to other competition strategies, focuses primarily on the good service of a specific market segment, the implementation of strategic goals relating not to the entire sector, but only to a given segment. This fact is justified by the fact that the company is much easier and more efficient to meet the requirements of a strategically narrow segment than its competitors who operate on a larger scale - the entire sector. This measure not only translates into an increase in overall customer satisfaction, but it can also contribute to reducing the service costs of the sector.

The concentration strategy is based on an accurate determination of the specific needs of the selected small market segment and matching its offer to it. The company focuses on the selected product, essential for customers, or on the production itself, which requires full product specialization. The essence of this strategy is based on finding a market niche of a size sufficient to conduct current operations and, at the same time, having development potential. The choice of a segment must be made after prior analysis of: accessibility for the company (in terms of its offer), profitability, sales revenues, demand, intensity of competition in a given segment, segment servicing costs, costs of reaching customers and sales service. The offered product should fully reflect the quality requirements of customers.

The condition for undertaking this strategy is to accurately determine the market gap and fully focus on it. Such concentration does not require a large financial outlay from the company, but it must be preceded by thorough, reliable marketing research, aimed at determining the preferences and needs of buyers, and as a consequence constituting the basis for choosing the target segment.

Such concentration of activity on a specific group of buyers, on the one hand, eliminates the need to adjust prices to the price level offered by competitors, on the other hand it carries a certain risk, which can include:

  • finding competitive sub-segment by companies (within the segment in which the company operates as part of the concentration strategy), and thus even greater concentration,
  • less and less attractive product offered, due to the appearance of substitute products in the sector,
  • increasing cost difference between a focused company and a competition that operates on a larger scale.

The concentration strategy is associated with resignation from a certain market service, and hence from a certain volume of sales. However, it is burdened with relatively low risk. Small segments are not the subject of interest of large companies, which can provide a focused company with the possibility of operating in a specific monopolistic structure - limited to a selected segment.

In terms of logistics, the concentration strategy is oriented to the needs of a specific group of clients, assumes high flexibility of deliveries and an increased level of service compared to competitors.

Strategy of concentration on the background of other competitive strategies

ME Porter has distinguished three basic competition strategies that can be applied both individually and in combinations. These are defined as general or defensive strategies aimed at achieving success in the sector. You can include them:

  • cost leadership,
  • differentiation (differentiation),
  • concentration.

The choice and implementation of the strategy is determined by many factors, each of which requires a different set of resources and skills, different organizational solutions and procedures, as well as leadership styles. They can also lead to different organizational cultures and organizational climate. The two basic selection criteria include:

  • adjusting the strategy to the company's strengths,
  • choosing the strategy that is the most difficult to follow by competitors.

What's more, the choice of the right strategy is also dictated by the size of the company, the nature of the sector and competition. Large companies operating in industrial sectors compete on the principle of diversification and cost leadership, while the concentration strategy is reserved primarily for smaller companies.

The key to the success of small businesses is finding such market segments that will allow the company to reveal its assets, advantages and overcome weaknesses. Finding a niche market can be a source of opportunities for a small company and the opportunity to reveal its potential.

Example of concentration strategy

An example of a focused company is the Martin-Brower company - the third largest food distributor in the United States. The company limited the group of selectors to several leading chains of fast-food outlets, based on meeting the needs of specific customer groups, storing only the required range, applying consistent order cycles, locating warehouses near their location. The effect of this action is rapid development and higher profitability of the company

Advantages of Concentration strategy

  • Focused Resources: A concentration strategy allows the company to focus its resources on a specific area or product, increasing efficiency and reducing waste. This can help the company to be more competitive as it can better optimize its resources and gain a better understanding of its target market.
  • Reduced Risk: Concentrating resources on a specific area or product reduces the risk of diversification. The company can focus its efforts on one area and achieve success without risking the entire business.
  • Easier to Manage: Focusing on a single area or product is easier for a company to manage and control. This strategy allows for easier decision making, which can help the company to save time and money.
  • Higher Profits: By focusing resources on a specific area or product, the company can increase its profits by gaining a better understanding of its target market and creating competitive advantages.
  • Stronger Brand: Concentrating resources on a single area or product allows the company to build a stronger brand and create a competitive advantage. This can help the company to gain more customers and market share.

Limitations of Concentration strategy

  • The concentration strategy can be risky in the long run if the product or market becomes saturated. The company is then more exposed to external changes and can suffer from low profitability.
  • The concentration strategy may also lead to over-dependence on a single product or market and lack of diversification. This can result in a lack of flexibility and an inability to react quickly and effectively to changes in the market.
  • The concentration strategy may also limit the company's potential to grow, as it has limited itself to a single market or product. This may result in a lack of new opportunities and thus slower growth.
  • The concentration strategy may also lead to increased competition, as the company is now competing in a much smaller market. This can lead to higher costs and lower profits.

Other approaches related to Concentration strategy

A Concentration strategy can also involve other approaches, such as:

  • Market Niche: This strategy involves targeting a specific segment of the market in which the company can compete more effectively due to its knowledge and resources.
  • Cost Leadership: This strategy involves reducing costs in order to be able to offer lower prices than the competition.
  • Differentiation: This strategy involves creating a unique product or service that is different from the competition in order to stand out from the crowd.
  • Product Leadership: This strategy involves creating innovative products in order to stay ahead of the competition.

In summary, a Concentration strategy is a way for a company to focus its activities on a specific market, product or customer segment, in order to gain a competitive advantage. Other approaches, such as market niche, cost leadership, differentiation and product leadership, can also be used to gain a competitive edge.

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