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By implementing a cost leadership or differentiation strategy, companies choose to compete by exploiting their core competencies on an industry-wide basis and adopt a broad competitive scope.

 

Alternatively, companies can choose to follow a focus strategy by seeking to use their core competencies to serve the needs of a particular customer group in an industry. In other words, companies focus on specific, smaller segments (or niches) of customers rather than across the entire market.

 

Focused Business Level Strategies involve the same basic approaches as Broad Market Strategies.  However, opportunities may exist because:

• Large companies may overlook small niches
• Company may lack resources to compete industry-wide
• May be able to serve a narrow market segment more effectively than industry wide competitors
• Focus can allow you to direct resources to certain value chain activities to build competitive advantage
• May be able to retrofit old factories to keep costs down
• Minimise R&D costs by copying innovators
• Focused Differentiators may thrive by selecting a small market that is underserved by large players

 

Companies may choose to follow a focus strategy because:

• they are able to serve a narrow segment more effectively than competitors that choose to compete industry wide
• the narrow segment's needs are so special that industry-wide competitors choose not to meet them
• certain narrow segments are being poorly served by industry-wide competitors
• the company has a unique ability to identify the needs or preferences of narrow segments that its core competencies will enable it to meet better than its competitors

 

Focus strategies can be based either on cost leadership or differentiation.

 

Focused Cost Leadership Strategy

 

Companies that compete by following cost leadership strategies to serve narrow market niches generally target the smallest buyers in an industry (those who purchase in such small quantities that industry-wide competitors cannot serve them at the same low cost).

 

Global furniture retailer Ikea provide customers with “affordable solutions for better living” through use of the focused cost leadership strategy.  The company offers home furnishings that combine good design, function, and quality with low prices.  Ikea does this by offering low-cost, modular furniture (assembled by customers), using self-service as an alternative to having sales associates follow and pressure customers to buy.  Ikea displays its products in room-like settings so that customer can view different combinations of furniture, eliminating the need for assistance from sales associates or decorators to visualise the setting and reducing employee costs.  Customers also pick up their own purchases to reduce the company's costs.  Finally, stores address the needs of shoppers (e.g., extended hours and in-store childcare) while they shop.

 

Focused Differentiation Strategy

 

Companies following focused differentiation strategies produce customised products for small market segments. They can be successful when either the quantities involved are too small for industry-wide competitors to handle economically, or when the extent of customisation (or differentiation) requested is beyond the capabilities of the industry-wide differentiator.  For example, Manufacturers such as Ferrari, Aston Martin, and Lamborghini compete in the tiny super car category with prices starting at $150,000 and running as high as $600,000.  These cars are more than just transportation.

 

Just as was noted for industry-wide differentiators and low-cost producers, companies choosing to focus must be particularly adept at completing primary and secondary value chain activities in a superior way. Issues related to the five competitive forces are similar to those discussed for the differentiation and cost leadership strategies, except that the competitive scope of the focus is on a narrow segment rather than the industry.   You should review Figures 4-2 and 4-3 (Value-Creating Activities) as well as the earlier discussion of the five competitive forces for the cost leadership and differentiation strategies.

 

Competitive Risks of Focus Companies

 

The competitive risks of focus companies are similar to those previously noted for the cost leadership and differentiation strategies with the following additions:

 

Competitors may successfully focus on an even smaller segment of the market, "out focusing" the focuser, or focus only on the most profitable slice of the focuser's chosen segment.

 

An industry-wide competitor may recognise the attractiveness of the segment served by the focuser and mobilise its superior resources to better serve the segment's needs.

 

Preferences and needs of the narrow segment may become more similar to the broader market, reducing or eliminating the advantages of focusing.