Choice of Focus strategy

The Choice of Focus

Focus strategies rest on differences among segments, either differ­ ences in the firm’s optimal  value   chain   or differences in the buyer value chain that  lead to differing purchase  criteria. The  existence of costs of coordination, compromise, or inflexibility in serving multiple segments is the strategic underpinning  of sustainable  focus strategies. By optimizing its value chain for only one or a few segments,   the focuser achieves cost leadership or differentiation in its segment or segments compared to more broadly-targeted firms that must compro­ mise. Focus strategies involve the entire value chain and not just mar­ keting activities, as in market segmentation.

Focus strategies can encompass more than one segment and en­ compass several segments with strong interrelationships. However, the ability of a firm to   optimize for any   segment  is generally   diminished by broadening the target. Note that a firm can focus within an industry at the same time as it achieves interrelationships with business units competing in other industries that do not  force it to compromise  in serving the target segments. The choice of competitive scope involves simultaneously understanding interrelationships at both levels (see Chapter 15).

Firms can choose different groups of segments on which to focus, which may or may not  overlap. Figure  7-10  illustrates a case where a number of firms are supplying information  products  to financial services firms. Company A has adopted a product-based focus strategy of supplying one product  variety (data  bases) to all buyers. Company B, on the other  hand,  has adopted  a buyer-based  focus strategy in which it sells the full array of products to insurance companies. Com­ pany C has yet another  focus strategy which concentrates  exclusively on providing consulting advice to finance companies. Its buyers either acquire the data  elsewhere or generate  it themselves. Company  C’s focus strategy does not  overlap with the segments served   by companies A and B.

As noted above, focus   strategies   involving   several   segments   rest on the presence of strong interrelationships among the segments that outweigh the suboptimization of serving more than one. For example, company A has maximized  interrelationships  based on shared  R&D and production  of only data  bases, which  offset the fact that  each buyer type would ideally prefer   a   somewhat  different   type   of data base and perhaps  a different delivery system.   Company  B, on   the other hand, has chosen a buyer-based focus strategy that gains competi­ tive advantage through optimizing its delivery and selling system for insurance companies. Company C has opted for the potential differenti­ ation benefits of offering   only   consulting  to   finance companies  and the internal benefits of product  specialization, while forgoing potential scale economies of a broader  focus. Thus  each company  has built a focus strategy based on different interrelationships and different com­ petitive advantages, and each bears different costs of compromise.

Figure   7-10.    Alternative Focus Strategies in a Financial Information   Industry

Interesting competitive issues arise in segments where focus strate­ gies with different   segment  interrelationships  overlap.   In   Figure  7­ 10 this occurs in the upper left-hand segment in the matrix. In that segment, the   different   focus   strategies   create   competitive   advantages and disadvantages of  different types for   the   two   firms competing  in the segment.   Company  A   brings   extensive   low-cost   data  bases   and an acute understanding  of data base design, while Company  B brings an in-depth understanding of insurance companies and cost advantages from offering a full line. Just as interrelationships can lead to competi­ tive advantages,   they   can   also   make  a   firm   inflexible   in   competing in a segment. For  example, company  A could not  easily modify its data base management system to better respond to the needs of insur­ ance company buyers because of the effect this would have on its activities   with   banking  and   finance companies.  The   relative position of companies A   and  B in   an overlapping  segment  is a function of net competitive advantage of interrelationships with other segments. Constraints  in responding  that  arise from interrelationships can lead to   a competitive   interaction  in   which   firms   try   to   shift competition in a segment in the direction that best exploits their own segment interrelationships or advantages, while forcing competitors to compro­ mise theirs.

2. The Feasibility of New Segments to Focus  On

The feasibility of a focus strategy  in a segment depends on the size of a segment and whether  it will support  the cost of a tailored value chain.   Even if a tailored value chain  would be more  responsive to the needs of a particular  new segment,  the costs of the tailored chain may not  be recoupable. Thus  many  potential  segments should not be served  with focus strategies.

There are four ways that new segments emerge as viable for focus strategies. The  first is that  tailoring gets less costly. Falling economies of scale may allow a focus strategy, for example. The  second reason focus on a new segment  becomes viable is that  the segment grows enough to overcome  the fixed cost of serving it.   A   third  reason is that firms exploit interrelationships with other industries to overcome scale thresholds in serving the segment. Finally, a segment may become viable if a firm   pursues  it globally,   using volume  in many  countries to overcome scale economies. Here the firm is pursuing geographic interrelationships.

Firms can preempt new focus strategies by perceiving new segmen­ tation schemes or by identifying opportunities to make  new segments viable. Recent reductions in scale economies have occurred in some technologies, including computerized  manufacturing  and design. These, coupled with enhanced  ability to   exploit   interrelationships among business units (Chapter 9) and compete globally, will be contin­ ually creating opportunities for new focus strategies in the 1980s.

3. The  Sustainability of a Focus Strategy

I have discussed how a firm can choose a segment or small group of segments on which to focus, based on the attractiveness of those segments and the interrelationships among them. A final issue in choos­ing a focus strategy is the sustainability of the focus strategy against competitors. The  sustainability of a focus strategy  is determined  by three factors:

  • Sustainability against broadly-targeted competitors. The size and sustainability of the competitive advantage  created through  fo­ cus vis-a-vis more broadly-targeted competitors.
  • Sustainability against imitators.The mobility barriers to imitat­ ing the focus strategy or being   outfocused  by   a competitor with an even narrower target.
  • Sustainability against segment substitution. The risk that buyers will be drawn  away to other  segments the focuser does not serve.


Broadly-targeted competitors may either already compete in a focuser’s segment or be potential entrants to the segment as an exten­ sion of their existing base in other segments. The focuser’s competitive advantage over a more broadly-targeted competitor is a function of:

  • the degree of compromise a broadly-targeted competitor faces in serving the focuser’s segments  and other  segments at the same time
  • the competitive advantage of sharing value activities with other segments in which the broadly-targeted competitor operates

The more  different the focuser’s value chain is from   the value chain required to serve other  segments, the   more  sustainable is the focus strategy.   In the airconditioning  industry  in the United  States and Europe, for example, the distribution channels that serve the resi­ dential and   commercial  market  are separate  from   those that  serve the industrial market. In Latin America, Asia, and the Middle  East, however, the same channels  tend  to stock the whole line. A focus strategy has been much more successful and  sustainable in the United States and Europe than  in other parts  of the world, because focusers can tailor the value chain to the channel that specializes in their target segment.   The  focus strategy   is more  sustainable  as buyer  needs in the target segment are more different and unusual vis-a-vis other segments.

The problems of Royal Crown in the soft drink industry illustrate these principles. Royal Crown focuses on colas, unlike Coke and Pepsi, which supply a broader line of soft drink  flavors. Supplying only colas does not  involve a significantly different value chain   than  supplying a broad line. Buyer needs and purchasing  behavior  are not  much different for colas than for other flavors except for the flavor preference. Conversely, supplying a broad line allows significant benefits of sharing activities in production, distribution, and marketing. Hence Royal Crown’s focus strategy leads to no competitive advantage against its broadly-targeted competitors, only disadvantages. On the other hand, Mercedes gains strong advantages  through  focus in automobiles  by using a tailored value   chain   compared  to   its   broad-line  competitors. M ead’s strategic  evolution in   the   paper  container  industry  illus­ trates how the factors underlying  the sustainability of a focus strategy can change. In response to intense cost competition  in high volume containers in   the   late   1970’s,   M ead   chose   a   focus   strategy   targeted at low volume, high value-added segments. In the early 1980’s, how­ ever, new continuous-run paper corrugators were developed that oper­ ated faster but at the same time required much  less setup time. This made it increasingly possible for broad  line competitors  to service small orders economically. Mead was forced to modify its focus strat­ egy and serve a broader  range of segments  while investing in the new equipment. In this case, the value chain  required  to serve Mead’s target segments became less different from that required to efficiently serve the high volume  segments.

The sustainability of a focus strategy will erode if a segment’s differences from others  fall over time, if technological  change reduces the cost of compromise in serving multiple  segments or increases the ability to reap interrelationships (see Chapter 9), or if a tailored value chain for the segment becomes too expensive relative to a more stan­ dardized chain. Hence there is an im portant dynamic element in choos­ ing the segments on which to focus, reflecting an ongoing tradeoff between the advantages of focus on a particular segment and the gains of sharing through competing in multiple segments.


The  second type   of risk   facing   a focuser is that  another  firm will choose to replicate the focus strategy,  either  a firm new to the industry   or one dissatisfied with its existing strategy. The  sustainability of a focus strategy against imitators  is based   on   the sustainability of the competitive advantage a focuser possesses, analyzed  using the con­ cepts in Chapters 3 and 4. The mobility barriers to imitating a focus strategy are the scale economies, differentiation, channel  loyalty, an d / or other barriers unique to the focus strategy. The height of the barriers against imitation   of a   focus strategy  thus  depends  on   the   structure of the particular segment. Imitating K odak’s high-end focus in copiers, for example, requires that a firm overcome barriers due to proprietary technology as well as economies of scale in establishing an   in-house sales and service network.

The size of  a segment  can affect the threat  of  imitation  of a focus strategy. In a small segment,   even modest  scale economies may be significant relative to segment size if they cannot be offset by interre­ lationships, and competitors may not be interested in entering. Con­ versely, in a growing industry  there  is the continual  possibility not only that  a focus strategy will   be imitated  but  also   that  a focuser will be “ outfocused”  as ever-narrower  segments   become   viable.   In the rapidly   growing   information   industry,   for   example,   outfocusing is pervasive as firms develop ever more specialized data bases for nar­ rower target buyer groups.


The final determinant  of the sustainability of a focus strategy   is the risk   of segment  substitution.  A   focus   strategy   concentrating  on a segment is vulnerable  to the disappearance  of that  segment. This may be the result of changes in the environment,  technology, or com­ petitor behavior. The risk of segment substitution  is analyzed  in the same way as substitution in general (see Chapter 8). Segment substitu­ tion can be influenced by competitors just as industry-level substitution can— if anything, even more so. Competitors often attem pt to shift demand away from a focuser’s segments through techniques such as marketing, technological innovation, or even lobbying for government standards that  worsen conditions  in the segment.   Where  a focuser faces competitors serving much  larger  segments, there  is a risk that their advertising spending and other marketing  may shape buyer  atti­ tudes and lead buyers away from the focuser’s segment.

Pitfalls and Opportunities for Focusers and Broadly-Targeted Competitors

Several im portant lessons emerge from this analysis both  for fo­ cusers and for broadly-targeted competitors:

Successful focus strategies must involve compromise costs for com­ petitors. Focusing  on a segment or group  of segments is not sufficient to achieve competitive advantage in and of itself. The chosen segments must  involve buyers  with different   needs,   or   require   a value chain that differs from that which serves other  segments. I t is differences between the focuser’s segment and other segments that lead to subop. timization by   broadly-targeted  competitors,  and   provide  the   source of a sustainable competitive advantage for the focuser.

Identifying a new way o f segmenting an industry can be a major opportunity. A properly constructed industry segmentation matrix will often expose segments that are not reflected in the behavior of existing competitors. By identifying a new way of segmenting  the industry, a firm can often design a focus strategy around a product variety, buyer group, channel, or geographic subdivision that has not previously been recognized as a segment but that has structural or value chain differ­ ences. New segments can be narrower or broader than  segments cur­ rently   recognized.   Its   differences   imply   that  the   new   segment   needs a   distinctive   strategy   and   value chain,  and   that  competitors  serving it together with other segments will be suboptimizing.

The firm that  recognizes a meaningful  new segmentation  first can often gain a sustainable competitive  advantage preemptively. Fed­ eral Express, for example, saw the small parcel requiring  overnight delivery as a segment that  no firm had focused on before. Federal Express designed a strategy around  this segment involving a reconfig­ ured value chain, and gained enormous  advantages  over competitors who were serving it as part  of broader  strategies.   Similarly,   Century 21 was first to recognize a broader nationwide segment in real estate brokerage.

Broad targeting does not necessarily lead to competitive advantage where there are industry segments. A broadly-targeted competitor must gain sustainable competitive advantage from competing in multiple segments if it is to enjoy above-average returns. These competitive advantages usually come from the interrelationships  among  segments. A cost leadership strategy rests on achieving a   low-cost   position through the scale and other advantages of competing in many segments. A differentiation strategy is based on achieving uniqueness in meeting use or signaling criteria   that  are   widely   valued   by   many  segments. W ithout some tangible competitive advantage from breadth, the struc­tural differences among segments will usually guarantee that a broadly- targeted competitor will be “stuck in the middle.”

Broadly-targeted firm s often serve too many segments. A firm aim­ ing at an overly broad strategic target runs the risk of suboptimization, increasing its vulnerability to focusers. Reducing  the number  of seg­ ments served may decrease vulnerability,   as well as increase profitabil­ ity through eliminating unattractive segments. A broadly-targeted firm should consider  dropping out of segments where:

  • it gains little advantages from interrelationships with other seg­ ments
  • it is forced to modify its entire strategy in order to serve the segment
  • the segment is structurally unattractive
  • sales and growth potential in the segment is limited
  • defensive considerations do not require presence in the segment to block competitors

The relevant segments and breadth o f target must be continually examined. The strategically meaningful segments in an industry  will evolve over time due to   shifts in buyer  behavior,  the emergence of new buyer groups, and technology that  alters segment  interrelation­ ships. Thus the choice competitive scope within an industry must be continually reexamined. A firm cannot automatically  accept a histori­ cally important segmentation as meaningful, despite the fact that old segmentations have a tendency to fade slowly from managers’ minds. Viewing the choice of segments served as a permanent decision will inevitably bring strategic disaster.

New technology is changing old assumptions about  segmentation. New technology, particularly microelectronics and information  sys­ tems, is creating opportunities for both new focus and new broadly- targeted strategies. Flexibility in manufacturing,  logistics, and  other value activities is making it possible for broadly-targeted firms to tailor activities to segments while maintaining a single value chain. This is reducing opportunities  for sustainable  focus in   some   industries.   At the same time, the same technological revolution is making  strategies tailored to new segments viable. Computer-aided design, for example, k lowering the design cost of new product varieties. Firms must pay particular attention to how the new technologies might shake up the traditional logic of focus or broad targeting in their industries.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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