Focused Cost Leadership and Focused Differentiation

Focused cost leadership is the first of two focus strategies. A focused cost leadership strategy requires competing based on price to target a narrow market ( ... Skiptocontent Chapter5:SelectingBusiness-LevelStrategy FocusedCostLeadershipandFocusedDifferentiation Describethenatureoffocusedcostleadershipandfocuseddifferentiation. Knowtheadvantagesanddisadvantagesoffocusstrategies. Companiesthatuseacostleadershipstrategyandthosethatuseadifferentiationstrategyshareoneimportantcharacteristic:bothgroupstrytobeattractivetocustomersingeneral.Theseeffortstoappealtoabroadrangeofconsumerscanbecontrastedwithstrategiesthatinvolvetargetingarelativelynarrownicheofpotentialcustomers.Theselatterstrategiesareknownasfocusstrategies (Porter,1980). TheNatureoftheFocusCostLeadershipStrategy Focusedcostleadership isthefirstoftwofocusstrategies.Afocusedcostleadershipstrategyrequirescompetingbasedonpricetotargetanarrowmarket(Figure5.12“FocusedCostLeadership”).Afirmthatfollowsthisstrategydoesnotnecessarilychargethelowestpricesintheindustry.Instead,itchargeslowpricesrelativetootherfirmsthatcompetewithinthetargetmarket.Forexample,youmightbeabletobuymilkcheaperbydrivingtoabig-boxgrocerystoreinyourlocalcommunityortown,butthelocalcornerstoreisthecheapestwithinwalkingdistance.Redbox,amajorDVDrentalcompany,usesvendingmachinesplacedoutsidegrocerystoresandotherretailoutletstorentDVDsofmoviesfor$1.Therearewaystoviewmoviesevencheaper,suchasthroughtheflat-feestreamingvideosubscriptionsofferedbyNetflix.ButamongfirmsthatrentactualDVDs,Redboxoffersunparalleledlevelsoflowpriceandhighconvenience. Figure5.12FocusedCostLeadership[Imagedescription] Anotherimportantpointisthatthenatureofthenarrowtargetmarketvariesacrossfirmsthatuseafocusedcostleadershipstrategy.Insomecases,thetargetmarketisdefinedbydemographics.Claire’s,forexample,seekstoappealtoyoungwomenbysellinginexpensivejewelry,accessories,andearpiercings.Claire’suseofafocusedcostleadershipstrategyhasbeenverysuccessful;thefirmhasabout50locationsinCanada, locatedin shoppingmalls. Figure5.13:RedboxmachinesareavailableatseverallocationsinsouthernOntario. Inothercases,thetargetmarketisdefinedbythesaleschannelusedtoreachcustomers.Mostpizzashopsoffersit-downservice,delivery,orboth.Incontrast,PapaMurphy’ssellspizzasthatcustomerscookathome.Becausetheseinexpensivepizzasarebakedathomeratherthaninthestore, PapaMurphy’s mayattractcustomersthatmightnototherwisebeabletoaffordapreparedpizza.Incontrasttomostfast-foodrestaurants,CheckersDriveInintheUnitedStatesisadrive-through-onlyoperation.Toservecustomersquickly,eachstorehastwodrive-throughlanes:oneoneithersideofthebuilding.Checkerssavesmoneyinavarietyofwaysbynotofferingindoorseatingtoitscustomers—its buildingsarecheapertoconstruct,itsutilitycostsarelower,anditneedsfeweremployees.Thesesavingsallowthefirmtoofferlargeburgersatverylowpricesandstillremainprofitable.CheckersisnotinCanadayet. TheNatureoftheFocusedDifferentiationStrategy Focuseddifferentiation isthesecondoftwofocusstrategies.Afocuseddifferentiationstrategyrequiresofferinguniquefeaturesthatfulfillthedemandsofanarrowmarket(Figure5.14“FocusedDifferentiation”).Aswithafocusedlow-coststrategy,narrowmarketsaredefinedindifferentwaysindifferentsettings.Somefirmsusingafocuseddifferentiationstrategyconcentratetheireffortsonaparticularsaleschannel,suchassellingovertheInternetonly.Otherstargetparticulardemographicgroups.OneexampleisBreezesResorts,acompanythatcaterstocoupleswithoutchildren.Thefirmoperatesseventropicalresortswherevacationersareguaranteedthattheywillnotbeannoyedbyloudanddisruptivechildren.Whileadifferentiationstrategyinvolvesofferinguniquefeaturesthatappealtoavarietyofcustomers,theneedtosatisfythedesiresofanarrowmarketmeansthatthepursuitofuniquenessisoftentakentotheproverbial“nextlevel”byfirmsusingafocuseddifferentiationstrategy.Thustheuniquefeaturesprovidedbyfirmsfollowingafocuseddifferentiationstrategyareoftenspecialized. Figure5.14FocusedDifferentiation[Imagedescription] Whenitcomestouniqueness,fewofferingscantopKopiLuwakcoffeebeans.High-qualitycoffeebeansoftensellfor$10to$15apound.Incontrast,KopiLuwakcoffeebeanssellforhundredsofdollarsperpound(Cat’sAssCoffee,2010). Thispriceisdrivenbytherarityofthebeansandtheirratherbizarrenature.Asnotedina2010articleintheNewYorkTimes,thesebeans arefoundinthedroppingsofthecivet,anocturnal,furry,long-tailedcatlikeanimalthatprowlsSoutheastAsia’scoffee-growinglandsforthetastiest,ripestcoffeecherries.Theciveteventuallyexcretesthehard,indigestibleinnardsofthefruit—essentially,incipientcoffeebeans—thoughonlyaftertheyhavebeenfermentedintheanimal’sstomachacidsandenzymestoproduceabrewdescribedassmooth,chocolatyanddevoidofanybitteraftertaste(Onishi,2010).AlthoughmanyconsumersconsiderKopiLuwaktobedisgusting,arelativelysmallgroupofcoffeeenthusiastshasembracedthecoffeeandmadeitaprofitableproduct.Thisillustratestheessenceofafocuseddifferentiationstrategy—effectivelyservingthespecializedneedsofanichemarketcancreategreatriches.LargernichesareservedbyWholeFoodsMarketandMercedes-Benz.Althoughmostgrocerystoresdevoteasectionoftheirshelvestonaturalandorganicproducts,WholeFoodsMarketworkstosellsuchproductsexclusively.Forcustomers,thelargeselectionoforganicgoodscomesatasteepprice.Indeed,thesupermarket’sreputationforhighpriceshasledtoawrynickname—“WholePaycheck”—butasizablenumberofconsumersarewillingtopayapremiumtofeelbetteraboutthefoodtheybuy.ThededicationofMercedes-Benztocutting-edgetechnology,styling,andsafetyinnovationshasmadethefirm’svehiclesprizedbythosewhoarerichenoughtoaffordthem.Thisappealhasexistingformanydecades.In1970,acid-rockerJanisJoplinrecordedasongcalled“Mercedes-Benz”thathighlightedtheautomaker’sallure.SincethenMercedes-Benzhasusedthesonginseveraltelevisioncommercials,includingduringthe2011SuperBowl. Figure5.15:JanisJoplin’smusicaltributetoMercedes-Benzunderscorestheallureofthebrand. DevelopingaFocusedDifferentiationStrategyatAugustinoLoPrinziGuitarsandUkuleles AugustinoLoPrinziGuitarsandUkulelesinClearwater,Florida,buildshigh-endcustominstruments.Thefounderofthecompany,AugustinoLoPrinzi,hasbeenabuilderofcustomguitarsforfivedecades.Whileareasonablygoodmass-producedguitarcanbepurchasedelsewhereforafewhundreddollars,LoPrinzi’shandmademodelsstartat$1,100,andsomesellformorethan$10,000.Thefirm’scustomershaveincludedprofessionalmusicianssuchasDanFogelberg,LeoKottke,HerbOhta(Ohta-San),LyleRitz,AndrésSegovia,andB.J.Thomas.Theirinstrumentscanbefoundathttp://www.augustinoloprinzi.com.WeaskedAugustinoabouthisfirm(Short,2007). Question: Werethereotherentrepreneurialopportunitiesyouconsideredbeforeyoubeganmakingguitars? AugustinoLoprinzi: Ioriginallythoughtofpursuingacareerincommercialart,butIfoundmytruelovewasinclassicalguitarbuilding.Iwastrainedbymyfathertobeabarberfromaveryyoungage,andaftermytermintheservice,Iopenedabarbershop. Question: Whatisthemostexpensiveguitaryou’veeversold? Loprinzi: $17,500. Question: Howoldwereyouwhenyoustartedyourfirstbusinessintheguitarindustry? Loprinzi: Iwasinmyearlytwenties. Question: Howdidyougetyourbreakwithmorefamouscustomers? Loprinzi: Ithinkwordofmouthhadalotdowithit. Question: YouhavebeenactiveinJapan.DothepreferencesofJapanesecustomersdifferfromthoseofAmericans? Loprinzi: Yes.TheJapanesewantonlyhigh-endinstruments.AestheticsareveryimportanttotheJapanesealongwithhigh-qualitymaterialsandworkmanship.TheU.S.marketseemstocareingenerallessaboutornamentationandmoreaboutqualityworkmanship,tone,andplayability. Question: Howdoyoustayaheadinyourindustry? Loprinzi: Alwaystrytostayabreastonwhatthemusicindustryisdoing.Wedothisbyreadingseveralmusicindustrypublications,talkingwithsuppliers,andkeepinganeyeonthetrendsgoingoninothercountriesbecauseusuallytheycomefullcircle.Also,forthepastseveralyearsbyfollowingtheInternetforumsandsuchhasbeenextremelybeneficial. AdvantagesandDisadvantagesoftheFocusedStrategies Eachgenericstrategyoffersadvantagesthatfirmscanpotentiallyleveragetoenhancetheirsuccessaswellasdisadvantagesthatmayunderminetheirsuccess.Inthecaseoffocusdifferentiation,oneadvantageisthatveryhighpricescanbecharged.Indeed,thesefirmsoftenpricetheirwaresfarabovewhatischargedbyfirmsfollowingadifferentiationstrategy(Figure5.16“ExecutingaFocusStrategy”).REI(RecreationalEquipmentInc.),forexample,commandsaheftypremiumforitsoutdoorsportinggoodsandclothesthatfeaturenamebrands,suchasTheNorthFaceandMarmot.NatNast’sfocusdifferentiationstrategycentersonsellingmen’ssilkcampshirtswitha1950sretroflair.Theseshirtsretailformorethan$100.FocusedcostleaderssuchasCheckersDriveIndonotchargehighpriceslikeREIandNatNastdo,buttheirlow-coststructuresenablethemtoenjoyhealthyprofitmargins.Asecondadvantageofusingafocusstrategyisthatfirmsoftendeveloptremendousexpertiseaboutthegoodsandservicesthattheyoffer.Consumersseekoutnotonlytheproductitself,butarewillingtopayapricepremiumforveryknowledgeablesalesstafftoadviseonwhichspecializedproductbestsuitstheirneeds,suchashigher-endcameras.Inmarketssuchascampingequipmentwhereproductcomparisonknowledgeisimportant,rivalsandnewentrantsmayfinditdifficulttocompetewithfirmsfollowingafocusstrategy. Figure5.16ExecutingaFocusStrategy[Imagedescription] Intermsofdisadvantages,thelimiteddemandavailablewithinanichecancauseproblems.First,afirmcouldfinditsgrowthambitionsstymied.Onceitstargetmarketisbeingwellserved,expansiontoothermarketsmightbetheonlywaytoexpand,andthisoftenrequiresdevelopinganewsetofskills.Also,thenichecoulddisappearorbetakenoverbylargercompetitors.ManygunstoreshavestruggledandevengoneoutofbusinesssincetheU.S.Walmartandsportinggoodsstoressuchas WholesaleSportsandCanadianTirehavestartedcarryinganimpressivearrayoffirearms. Figure5.17:IncontrasttotackyHawaiiansouvenirs,thequalityofKamakaukulelesmakesthemafavouriteofukulelephenomJakeShimabukuroandotherswhoarewillingtopay$1,000ormoreforahigh-endinstrument. Finally,damagingattacksmaycomenotonlyfromlargerfirmsbutalsofromsmalleronesthatadoptanevennarrowerfocus.Asportinggoodsstorethatsellscamping,hiking,kayaking,andskiinggoods,forexample,mightlosebusinesstoastorethatfocusessolelyonskiapparelbecausethelattercanprovidemoreguidanceabouthowskierscanstaywarmandavoidbrokenbones. StrategyattheMovies Zoolander Oneman’strashisanotherman’sfashion?That’swhatfashionmogulJacobimMugatuwascountingoninthe2001comedyZoolander.Inhiscontinuedefforttobethemostcutting-edgedesignerinthefashionindustry,Mugatudevelopedanewlineofclothinginspired“bythestreetwalkersandhobosthatsurroundus.”Hisnewproductline,Derelicte,characterizedbydressesmadeofburlapandparkingconesandpantsmadeofgarbagebagsandtincans,wasdevelopedforcustomerswhovaluedtheuniquenessofhis…eclecticdesign.Emphasizinguniqueproductsistypicalofacompanyfollowingadifferentiationstrategy;however,Mugatutargetedaveryspecificsetofcustomers.Fewpeoplewouldprobablybeenticedtoweargarbageforthesakeoffashion.Bycateringtoanichetargetmarket,Mugatuwentfromasimpledifferentiationstrategytoafocuseddifferentiation.Mugatu’sDerelictecampaigninZoolanderisoneillustrationofhowaparticularfirmmightdevelopafocuseddifferentiationstrategy. Figure5.18:Womanwearingtrashbags. Focusstrategiescanbeeffectivebusiness-levelstrategiestotheextentthatafirmcanmatchtheirgoodsandservicestospecificnichemarkets. Whatarethreedifferentdemographicsthatfirmsmighttargettoestablishafocusstrategy? Whatisanexampleofabusinessthatyouthinkisfocusedintoonarrowafashiontobesuccessful?Howmightitchangetobemoresuccessful? References Cat’sAssCoffee.(2010).Retrievedfrom http://www.catsasscoffee.com/order3.html Onishi,N.(2010,April17).Fromdungtocoffeebrewwithnoaftertaste. NewYorkTimes.Retrievedfrom http://www.nytimes.com/2010/04/18/world/asia/18civetcoffee.html?pagewanted=all Porter,M.E.(1980). Competitivestrategy:Techniquesforanalyzingindustriesandcompetitors.NewYork,NY:FreePress. Short,J.C.(2007).Atouchofthemasters’hands:AninterviewwithAugustinoandDonnaLoprinzi. JournalofAppliedManagementandEntrepreneurship, 12,103–109. Imagedescriptions Figure5.12imagedescription:FocusedCostLeadership Firmsthatcompetebasedonpriceandtargetanarrowmarketarefollowingafocusedcostleadershipstrategy.Severalexamplesoffirmspursuingafocusedcostleadershipstrategyareillustratedbelow. RedboxrentsDVDsandvideogamesthroughvendingmachinesforonly$1.RedboxmachinesareavailableatseverallocationsinsouthernOntario. PapaMurphy’ssellspizzasthatcustomerscookathome.Becausetheseinexpensivepizzasarebakedathomeratherthaninthestore,PapaMurphy’smayattractcustomersthatmightnototherwisebeabletoaffordapreparedpizza.PapaMurphy’shasseveraloutletsinwesternCanada. Claire’sthreethousand+locationstargetyoungwomenwithinexpensivejewelry,accessories,andearpiercings.Thestrategyhasworked:Claire’shasoverthreethousandlocationsandhasstoresin95percentofU.S.shoppingmalls. Providingindoorseatingcreatesexpensesforfast-foodrestaurants.CheckersDriveInkeepsitscostslowbynotofferingindoorseating.Checkerstargetsdrive-thrucustomersandoffersthembigburgersatrock-bottomprices. ReturntoFigure5.12 Figure5.14imagedescription:FocusedDifferentiation Firmsthatcompetebasedonuniquenessandtargetanarrowmarketarefollowingafocuseddifferentiationstrategy.Severalexamplesoffirmspursuingafocuseddifferentiationstrategyareillustratedbelow. WholeFoodsMarketfocusesonsellingnaturalandorganicproducts.Thesupermarket’sreputationforhighpriceshasledtoawrynickname–“WholePaycheck”—butasizablenumberofconsumersarewillingtopayapremiuminordertofeelbetteraboutthefoodtheyarebuying.Afterall,youarewhatyoueat! AtBuild-A-BearWorkshop,customersenjoyaninteractiveprocessofdesigningandassemblingteddybears.Build-A-Bearcustomersarewillingtopayapremiumpricebecausetheyreceiveaunique,hands-onexperienceratherthansimplybuyingastuffedtoy. Youcanbuyacinnamonrollcheaperelsewhere,butCinnabon’spriceypastriesaresodeliciousthatsugar-obsessedsnackerslineuptobuythem.PerhapsinanodtoCinnabon’sstrategy,thebrandisownedbyaparentcompanynamedFocusBrands. ThededicationofMercedes-Benztocutting-edgetechnology,styling,andsafetyinnovationshasmadethefirm’svehiclesprizedbythosewhoarerichenoughtoaffordthem. ReturntoFigure5.14 Figure5.16imagedescription:ExecutingaFocusStrategy Usingoneofthefocusstrategiesoffersfirmsimportantadvantagesanddisadvantages.Belowweillustratedafewexamplesinrelationtoanindustrywheremanydifferenttypesoffocusexist–sportinggoods. Advantages Highpricescanbecharged.SportingLifeofToronto,forexample,commandsapremiumfortheiroutdoorsportinggoodsandclothesthatfeaturenamebrandssuchasCanadaGooseandDiTrani. Firmsusingafocusstrategyoftendevelopgreatexpertiseaboutthegoodorservicebeingsold.Thus,customersmaygravitatetowardaspecialtystoreinordertotakeadvantageoflimitedvacationtime.Oryoumightuseyoursmartphonetoscanbarcodesforpricecomparisons,specs,productreleases,andavailabilityatotherstores. Disadvantages Limiteddemandexistsforspecializedgoodsandservices,soeverypotentialsalecounts. Theareaoffocusmaybetakenoverbyothersorevendisappearovertime.ManygunstoreswentoutofbusinessafterlargeretailerssuchasWalmartstartedcarryinganarrayoffirearms. Otherfirmsmayprovideanevennarrowerfocus.Anoutdoorsportinggoodsstore,forexample,mightlosebusinesstoastorethatfocusessolelyonskiapparelbecausethelattercanprovidemoreguidanceabouthowskierscanstaywarmandavoidbrokenbones. ReturntoFigure5.16 MediaAttributionsFigure5.12:Attributioninformationforallincludedimagesisinthechapterconclusion.Redbox-dvd-rentals:Abigmacandsavingprivateryanplease©ValerieEverettislicensedunderaCCBY-SA(AttributionShareAlike)licenseFigure5.14:Attributioninformationforallincludedimagesisinthechapterconclusion.S-KlasseW221©FadiislicensedunderaCCBY-SA(AttributionShareAlike)licenseFigure5.16:Attributioninformationforallincludedimagesisinthechapterconclusion.Jake-shimabukuro©SurfupusaislicensedunderaPublicDomainlicenseTrashbagsLadyEastVillage©DavidShankboneislicensedunderaCCBY(Attribution)licenseGenericbusinessapproachesthatinvolvetargetingarelativelynarrownicheofpotentialcustomers. Agenericbusinessstrategythatrequirescompetingbasedonpricetotargetanarrowmarket. Agenericbusinessstrategythatrequiresofferinguniquefeaturesthatfulfillthedemandsofanarrowmarket. 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