Focus strategy

From CEOpedia | Management online

A focus strategy is one of Porter's generic strategies based on competitive scope. A focus strategy targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others[1].

Focus strategy - one of generic strategies

Competitive strategy is concerned with how a company, business unit, or organization achieves a competitive advantage in its domain of activity. A group of generic strategies helps set focus for businesses. Generic strategies are primary sorts of strategies applicable in a wide range of business situations[2]. According to Porter, strategies allow organizations to gain competitive advantage from three different bases: cost leadership, differentiation, and focus. Porter calls these bases generic strategies[3].

All three are based on the general principle of competitive advantage "the delivering of superior value to customers and, in doing so, earning an above-average return for the company and its stakeholders"[4].

Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive. Differentiation strategy is aimed at producing products and services considered unique industrywide and directed at consumers who are relatively price-insensitive. Focus strategy means producing products and services that fulfill the needs of small groups of consumers[5].

There are two alternative types of focus strategies[6]:

  • Low-cost focus strategy - offers products or services to a small range (niche group) of customers at the lowest price available on the market
  • Best-value (differentiation) focus strategy - offers products or services to a small range of customers at the best price-value available on the market. It aims to offer a niche group of customers products or services that meet their tastes and requirements better than rivals’ products do.

Both focus strategies target a small market as it is not effective to pursue a focus strategy in a large market because economies of scale would generally favor a low-cost or best-value cost leaderships strategy to gain and/or sustain competitive advantage[7].

Serving the demands of a specific buyer group better than any competitor is at the core of a focus strategy. As represented in customer needs, a cost or differentiation advantage must be provided to the target group. The target market must be kept apart from competing offerings, particularly those from one's own product line. The advantage must be considered to prevent opponents from making up ground[8].

Practicality of focus strategy

A successful focus strategy requires a market niche that is sizable enough, has strong growth potential, and is optional to the success of other significant competitors. Market penetration and market development strategies have significant benefits for focusing. Only in conjunction with differentiation - or cost leadership-based strategies can midsize and big businesses successfully pursue focus strategies. In essence, every company employs a differentiated strategy. The other companies must find other ways to differentiate their products because one company can do it at the lowest cost. Focus tactics are most effective when customers have distinct preferences or requirements and when competing businesses are not trying to specialize in the same target sector[9].

Criteria when the focus strategy could be attractive for businesses[10]:

  1. Sizable, profitable and growing market niche
  2. When industry leaders do not consider the niche to be crucial to their own success
  3. When industry leaders consider it too costly or challenging to meet the specialized needs of the target market niche while taking care of their mainstream customers
  4. When the industry has many different niches and segments, thereby allowing a company with a focus strategy to pick a competitively attractive niche suited to its resources
  5. When few, if any, other rivals are attempting to specialize in the same target segment

To address these needs, a corporation utilizing a focused approach typically adopts a functional organization. This structure is suitable because it can handle the operations required to produce and market a limited range of goods to one or more market segments[11].

Examples of focus strategy

Cost focus strategy examples:

Ryanair targets budget-conscious travelers who rarely need to connect flights when it comes to air travel, which means that Ryanair follows cost focus strategy targeting price-conscious travelers[12]. More Low-cost Examples of firms that use this strategy include Jiffy Lube International and Pizza Hut, as well as local used car dealers and hot dog restaurants[13].

Best-value (differentiation) focus strategy examples:

The Belgian company Ecover follows a differentiation focus strategy in the home detergent industry, charging more than competitors since its eco-friendly cleaning solutions are aimed at environmentally sensitive consumers[14]. Other best-value (differentiation) focus strategy examples of firms include Cannondale (top-of-the-line mountain bikes), Maytag (washing machines), and Lone Star Restaurants (steak house), as well as bed-and-breakfast inns and local retail boutiques[15].

Risks of focus strategy

The likelihood that many rivals will identify a good focus strategy and duplicate it, as well as the possibility that consumer preferences would shift toward the product, features the market wants, are risks of adopting a focus strategy. To better serve a well-defined but narrow market than rivals who service a broader market, an organization may use a focus strategy to focus on a certain client base, geographic regions, or product-line segments[16].

Importance of focus strategy

The concept of a focus strategy is significant because it offers an intellectual foundation for the existence of small businesses and the potential of entrepreneurship. Without focus strategies advantages, entrepreneurs would never succeed since large companies with significant economies of scale and scope would easily compete small businesses into extinction. It strongly connects to crucial marketing concepts like market segmentation and the served market. Market segmentation is a crucial strategic choice that determines which markets to target. The market that the company actively tries to service, whether it be a significant market sector or a portion of the overall market (i.e., its customer focus or target group). Key performance indicators like market share and growth rate are calculated based on this served market[17].

Advantages of Focus strategy

A focus strategy has several advantages, including the ability to customize products or services to meet the needs of a specific niche segment, increase market share in the focused area, and improve customer loyalty. Additionally, a focus strategy can help to reduce marketing costs and increase profitability, as companies no longer need to spread their efforts across multiple segments. Furthermore, a focus strategy can lead to a greater level of expertise in a specific area, which can help to create a competitive advantage over competitors. Finally, a focus strategy can help to create a stronger brand identity and recognition in the chosen segment.

Limitations of Focus strategy

A focus strategy has some limitations that need to be taken into account when considering its use. These include:

  • The firm may lack the resources and capabilities to compete in a broader market. By targeting a narrow segment, the firm may not have the resources or expertise to expand into other areas.
  • A focus strategy can limit the firm’s potential for growth. By focusing on a narrow segment, the firm may miss out on opportunities in other segments which could lead to greater success.
  • A focus strategy can also lead to increased competition in the target segment as other firms may decide to target the same segment.
  • A focus strategy may also limit the firm’s ability to respond to changing market conditions or customer needs. As the firm’s focus is on a specific segment, it may be difficult to adjust to changes in the broader market.
  • Finally, a focus strategy may lead to a lack of diversification and increased risk. By relying on a single segment, the firm may be more vulnerable to external shocks and market downturns.

Other approaches related to Focus strategy

A focus strategy is a type of competitive strategy that involves targeting a narrow market segment or domain of activity and tailoring products or services to meet the needs of that specific segment. Other approaches related to this strategy include:

  • Cost leadership strategy: This strategy focuses on reducing costs and increasing efficiency throughout the organization to offer the lowest price on the market.
  • Differentiation strategy: This strategy focuses on creating a product or service that is distinct from competitors and provides additional value to customers.
  • Market segmentation strategy: This strategy involves dividing a larger market into smaller segments and then targeting specific segments with tailored products or services.

In summary, a focus strategy is a type of competitive strategy that involves targeting a narrow market segment or domain of activity and tailoring products or services to meet the needs of that specific segment. Other related approaches include cost leadership, differentiation, and market segmentation strategies.

Footnotes

  1. ↑ Whittington et al., 2019, p.210
  2. ↑ Whittington et al., 2019, p.204
  3. ↑ David, 2011, p.151
  4. ↑ McGee, 2015
  5. ↑ David, 2011, p.151
  6. ↑ David, 2011, p.151
  7. ↑ David, 2011, p.151
  8. ↑ McGee, 2015
  9. ↑ David, 2011, p.154
  10. ↑ David, 2011, p.155
  11. ↑ Hill et al., 2014, p.430
  12. ↑ Whittington et al., 2019, p.210
  13. ↑ David, 2011, p.151
  14. ↑ Whittington et al., 2019, p.210
  15. ↑ David, 2011, p.151
  16. ↑ David, 2011, pp.154-155
  17. ↑ McGee, 2015


Focus strategy — recommended articles
Pricing strategy — Concentrated marketing — Concentration strategy — Market niche strategy — Competitive position — Strategic position — Beachhead market — Imitator strategy — Flanker brand

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References

Author: Annija Petersone

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