Most companies operate in a competitive market, where it is crucial to outperform the competition. It can come from several factors, known as a competitive advantage. Usually, this process involves attracting customers through unique characteristics or features. For example, companies may use lower costs or better quality to outperform competitors while increasing business.
Competitive advantage provides leverage for a company over its competitors. In essence, it involves providing customers with better value than what competitors offer. Usually, companies use several techniques to achieve a competitive advantage. These techniques fall under their strategy. This strategy may differ from one company to another.
Porter’s generic strategies offer three plans through which companies can achieve competitive advantage. These include focus, differentiation, and cost leadership. Of these, differentiation relates to producing a unique product or service that competitors can’t. In contrast, cost leadership involves focusing on product costs and reducing them below competitors.
What is Focus Strategy?
The focus strategy in Porter’s generic strategies is different from the other two options. This strategy involves focusing on a niche market or a market segment. In most circumstances, companies target the whole market. Usually, it includes all customers or businesses within that market. However, the focus strategy does not target the market as a whole.
Instead, the focus strategy targets a specific market segment. Usually, this process involves identifying a specific group of customers with the needs to which a company’s products cater. In other words, it requires companies to target a market where their products and services are in demand. Through this strategy, companies focus on those customers and modify their products to compensate for their needs.
With the focus strategy, companies can charge premium prices for their products. Since this strategy targets a specific market segment, the competition within it will likely be low. Therefore, a company can dominate that segment without worrying about competitors. However, this strategy requires companies to cater to customers with that market segment or lose profits.
In some cases, the focus strategy can also target a few market segments rather than the whole market. For a smaller business with limited resources, this strategy can help attract customers and increase sales. Some companies may also allow customers to provide input into the process to understand their needs better. This way, they can cater to those needs in more detail.
Overall, the focus strategy involves aiming the business at a specific market segment. Also known as the segmentation strategy, it divides the market into location, demographic, physical, or behavioural segments. Within this strategy, companies can focus on two different objectives. These may include differentiation focus and cost-focus.
How to achieve Differentiation Focus Strategy?
The differentiation focus strategy requires companies to outperform competitors in a specific segment. It is a combination of the focus and differentiation strategy. Usually, this strategy involves identifying a market segment and using a differentiated product or service to serve customers. This differentiation may be actual or perceived by the customers.
Achieving the differentiation focus strategy is straightforward. The first step for this process involves identifying a market segment where the competition is low. Similarly, it may also require companies to look at markets where competitors may not use a differentiation strategy. Once they identify that market segment, they can employ the differentiation strategy.
After market segment identification, companies can use the same methods for achieving differentiation strategy. Usually, these methods involve increasing product quality, improving image, creating a brand, marketing products, etc. Through these techniques, companies can achieve a focus differentiation strategy. However, the methods only work in particular segments where no prior competitors exist.
Overall, achieving a differentiation focus strategy is no different from the differentiation strategy. However, it involves the additional step of identifying a particular market segment where a company’s products can thrive. Once they do so, they can employ the above techniques to increase their business and revenues. This way, they can charge premium prices while providing customers with their needs.
How to achieve Cost-Focus Strategy?
The cost-focus strategy, also known as the focus cost leadership, is the second focus strategy. This strategy requires companies to compete in a narrow market based on pricing. Although it has the same essence as the cost leadership strategy, they are different. With the cost-focus strategy, companies do not charge the lowest prices in their selected market segment.
However, it still targets the pricing of goods and services. Instead of lowering those prices to a minimum, this strategy involves charging low prices relative to other companies within the market. Therefore, it requires companies to establish the relative prices in the market segment in which they compete. Once they do so, they can aim at attracting customers with low prices.
The cost-focus strategy also involves a combination of two generic strategies, focus and cost leadership. With this strategy, the first step is to identify the market segment in which a company wants to compete. This process is similar to that in the differentiation focus strategy above. Usually, it involves looking for a market segment where the company’s products or services can strive.
Once companies identify the market segment in which they want to compete, they can reduce their costs. This process involves the same steps used to achieve the cost leadership strategy. For example, it may include reducing production costs, decreasing fixed expenses, targeting economies of scale, etc. With the cost-focus strategy, companies can dominate their specific market segment with cost leadership.
What are the advantages of the Focus Strategy?
The focus strategy can have significant advantages on its own. However, it may also include any benefits that come from cost leadership and differentiation. But those benefits only relate to cost-focus and differentiation focus, respectively. On its own, the focus strategy can have the following advantages.
When companies cater to a specific market segment, they attract loyal customers. Usually, these customers may not have their needs met by products that target the overall market. However, with the focus strategy, companies can produce products and services that answer those needs. This way, customers always stay loyal to the company until it caters to them.
The focus strategy can also reduce the competition that companies face in their target market segments. In most cases, this strategy will target segments where the competition is already low. However, once they enter those segments, more competitors are unlikely to penetrate them. Therefore, companies can become the leaders for their specific niche without worrying about competition.
One of the primary advantages of the focus strategy is that it enables small companies and businesses to enter small markets. This way, they don’t have to modify their products to cater to the market as a whole. Instead, they can focus on a specific segment and meet their needs. On top of that, this strategy can be a gateway to other generic strategies in the future.
What are the disadvantages of the Focus Strategy?
Despite its many advantages, the focus strategy can also have some disadvantages. This strategy can also get other drawbacks based on whether a company chooses a cost-focus or differentiation focus strategy. Those drawbacks relate to the cost leadership and differentiation strategies. Overall, the primary disadvantages of the focus strategy are as follows.
By focusing on a specific market segment, companies can significantly reduce their business volume. Usually, it implies that they will have fewer customers, which will result in lower sales. It is one of the most crucial drawbacks of the focus strategy. For market segments where the revenues are decreasing, this strategy is not beneficial.
Few barriers to entry
The focus strategy also has few barriers to entry. As mentioned, it is highly beneficial for small companies. However, more companies will target the same market due to the lower competition. Therefore, it can create a diluted segment. Existing companies may also identify some market segments as crucial and enter them with their substantial resources.
Companies can use the focus strategy to create a competitive advantage. However, more competitors will target the same market segment due to this success. Therefore, the focus strategy can attract competition due to the low competition within those segments. After a successful focus strategy, more cost leaders and differentiators are likely to follow the pattern.
The focus strategy is a generic strategy that requires companies to cater to a specific market segment. Companies may either use a differentiation focus or a cost focus strategy within this strategy. Usually, this strategy is more beneficial to small businesses. Apart from that, it can also have several other advantages. However, it may also come with some disadvantages, as listed above.