Cost leadership strategy and differentiation strategy share one important characteristic: both are used to attract customers in general. The policies to appeal to broad markets can be contrasted with strategies that target a relatively narrower niche of potential customers. These strategies are known as focus strategies and they are applicable to both cost leadership and differentiation.
A focused cost leadership strategy needs to compete based on price to target a niche market. An organization following it may not charge the lowest prices in the industry. Instead, they may charge low prices relative to other organizations in the market.
The nature of the narrow target market changes across organizations that use a focused cost leadership strategy. Sometimes, the target market is defined by demographics.
In all other instances, the target market is described using the sales channel.
FOCUSED COST LEADERSHIP STRATEGY − AN EXAMPLE
Papa Murphy’s sells ‘cook at home’ pizzas. These inexpensive pizzas are baked at home. So, the law permits Papa Murphy’s to receive food stamps as payment. This allows Papa Murphy’s to attract customers that might not otherwise be able to afford a prepared pizza.
A focused differentiation strategy provides unique features that fulfil the demands of a narrow segment of market. Some firms using a focused differentiation strategy use the efforts on a particular sales channel, such as selling products online only. Others target specific demographic niches.
A differentiation strategy includes providing unique features to attract a variety of customers. However, the need to satisfy a narrow market demand means that the desire of uniqueness is taken to the “next level” by firms in a focused differentiation strategy. Therefore, the unique features of a focused differentiation strategy are often specialized.
FOCUSED DIFFERENTIATION STRATEGY − AN EXAMPLE
Mercedes-Benz is into cutting-edge technology, styling, and safety innovations. This appeal has been available for many decades. In 1970, acid-rocker Janis Joplin recorded a song called “Mercedes Benz” that highlighted the automaker’s allure. Since then, Mercedes-Benz has used the song in several television commercials, including during the 2011 Super Bowl.
● In the case of focus differentiation, very high prices can be charged. Indeed, these firms often price their goods far above the general, following a differentiation strategy.
● Firms often develop exemplary expertise about the goods and services that they offer in focused strategies. In markets where product knowledge is vital, rivals and new entrants find it difficult to compete with the firms that follow a focus strategy.
● The limited demand available within a niche is problematic. First, the growth ambitions can get stymied. Once its target market is served well, expansion might be the only way to grow, and this needs a new set of skills.
● The niche could get diluted or be taken over by larger players. For example, many gun stores have gone out of business since Walmart and sporting goods stores have started carrying an impressive array of firearms.