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Dec 01

Focused Cost Leadership and Focused Differentiation

Reading Time: 6 mins

A company’s strategy should be based on its resources and the environment in which it operates. By focusing on cost leadership or differentiation, a company can decide how it will compete in its industry. For example, a restaurant might focus on cost leadership by offering the lowest-priced meals. A construction company, on the other hand, might focus on being the most reliable firm in the area, providing the best service when it’s needed most.

Focused cost leadership and focused differentiation strategies represent two very different ways to compete in an industry. A focused cost leader focuses on keeping costs low, while a focused differentiation firm seeks to distinguish itself from its competitors. Focused cost leaders and focused differentiation firms can coexist in the same market, but they will often compete head-to-head for customers.

 

Focused Cost Leadership Strategy

Focused cost leadership is also known as a cost focus, a generic strategy that focuses on the cost of the product and the speed of delivery. This is a great strategy for businesses that want to stay ahead of their competitors and want to appeal to the most customers without sacrificing quality. This strategy is used by many businesses and companies in the United States and is something that has been around since the late 1800s. It was first used by F.W Woolworth and has been used ever since. In other words, FCL is the ability to provide the most value at the lowest cost. This is achieved by focusing on specific customers and specific products. FCL is the opposite of focused differentiation (FD), which is the ability to offer many different products with varying costs and values. 

A business that is focused on cost leadership must produce goods or services that are either identical or extremely similar to those of its competitors but do so at a lower cost, enabling the company to provide them at lower prices than its competitors. This strategy is based on the premise that customers base their choice of which product or service to buy primarily on price. 

 

How Can a Company Benefit from the Focused Cost Leadership?

A focused cost leadership strategy is best suited to companies that operate in industries with low margins and high fixed costs. This strategy allows companies to operate with a lean cost structure, which improves the company’s ability to respond to changes in the market more quickly than its competitors.

When a company adopts a focused cost leadership strategy, it focuses on the business of being the most efficient producer of a particular product or service, hoping to achieve economies of scale and scope in production. Cost leadership firms use their efficiencies to keep prices low, sometimes even at a loss, in order to drive competitors out of the market. The goal is to achieve a dominant market share, making it difficult for other firms to compete. Advantages of a focused cost leadership strategy that allows to:

  • Assign its resources in the most efficient way possible. 
  • Focus its resources on the most profitable products, which allows it to maximize profits. 
  • Allocate fewer resources toward less profitable products, allowing the company to maximize profits and increase shareholder value.
  • Keep costs low so it can offer its products at the lowest price possible. 
  • Build a reputation for providing good quality at low prices.
  • Generate a profit even when competitors can’t because of low demand.
  • Achieve economies of scale by serving a broad range of customers.
  • Spread risk over a larger number of customers, which reduces the risk for each individual customer.

This is one of the most powerful strategies for a business to pursue its cost leadership. Since a cost leadership strategy is focused on reducing costs, it can provide a host of other benefits as well. 

 

Disadvantages 

The main disadvantage of the focused cost leadership strategy is that it requires a company to compete with much larger firms. This can be very difficult to do because a small company cannot match the economies and scope of a larger firm. This means that a company using this strategy can’t take advantage of lower costs from increased volume (economies of scale) or increased variety (economies of scope). Another disadvantage of the focused cost leadership strategy is that it is difficult to operate successfully. It can be difficult to operate a low-cost provider and a high-quality provider at the same time. This strategy can also be difficult to execute because it requires eliminating unnecessary costs while also trying to increase quality.

 

What Companies Use Focused Cost Leadership Strategy?

Some companies that use focused cost leadership strategies include Walmart, Target, Amazon, and Costco. These companies try to provide the best possible prices to the consumer even if it means sacrificing profits in the short term. Amazon has used this strategy to become the largest online retailer in the world. Walmart and Target use this strategy to compete with Amazon on price. They can also use the strategy to get into new markets. For example, Amazon has used focused cost leadership to move into industries such as healthcare and grocery delivery.

 

Focused Differentiation Strategy

A focused differentiation strategy is one of the six generic competitive strategies. It is also known as niche differentiation, niche marketing, segmentation, or product specialization. The focus of companies using a focused differentiation strategy is to specialize their operations to meet the needs of a select group of customers. 

Focused differentiation is a strategy for creating a competitive advantage. This strategy emphasizes the need to be the best at one thing; to offer something unique, better, or more valuable than what the competition provides. Focus is important because the benefits of differentiation are only realized if a company does not spread its resources too thin. By focusing on one thing that sets it apart, a company can focus its resources on becoming the best in that area.

The main advantage of the focused differentiation strategy is that it is an efficient way to create value. When a business focuses on a narrow set of customers, it can serve them better than any competitor. This strategy also enables the business to capture part of the value it creates for its target customers. The main disadvantage of this strategy is that it is difficult for a business to achieve since a company needs to put most of its resources into a narrow, targeted offering. A company implementing such a strategy offers goods or services that are unique, while at the same time avoiding the costs associated with becoming a Jack-of-all-trades. 

 

How Can a Company Benefit from a Focused Differentiation Strategy?

A company should implement a focused differentiation strategy when it believes that its product is different enough that the customer will be willing to pay a premium price. A company can increase its profit margins by implementing this strategy. It can also increase its profits by having a higher volume of sales because it is producing a product that is differentiated from the competition. The strategy can also help a company avoid competing on price. Advantages of a focused differentiation strategy that allows to:

  • Generate a lot of revenue and profits. The company is able to generate a high share of the market and a lot of revenue because of its unique selling point. Thus, the company can also gain a competitive advantage if it has an established reputation for quality or for superior customer service.
  • Be easily implemented. It requires the company only to focus on one aspect of its business, which can be either cost leadership or product differentiation. 
  • Easier to manage than a focused cost leadership strategy, which requires a large number of resources and time to implement. 

 

Disadvantages 

The disadvantage of focused differentiation is that it requires a high level of investment in order to develop skills and competencies, which are needed to provide its product or service. Another disadvantage is that if the business fails to execute the strategy well, the company will be at a disadvantage compared to other businesses that focus on cost leadership strategies. Also, such a strategy does not allow for economies of scale or scope.

 

What Companies Do Use Focused Differentiation Strategy?

The main companies that use a focused differentiation strategy are Apple, the Container Store, Starbucks and PayStubsNow. Some companies offer pay stubs generation service to employees; others build their own systems to generate pay stubs in-house. Paystub generator is an example of this strategy in practice; the technology is designed to be customized for the needs of small businesses, which is why it is considered by some to be so intuitive and easy to use.

These companies are very different from each other but have one thing in common: they are all very focused on their customers’ satisfaction. Each company has identified an aspect of their business that they believe makes them unique and better than other companies.

In the employment context, a focused differentiation strategy can be used to motivate and improve employee performance and motivation. This strategy can be used to offer employees more personal attention and more responsibility for their jobs. It can also be used to motivate employees by giving them a sense of pride in their work.

There are two main ways it can help motivate employees. One of them is that the strategy can be used to give employees an opportunity to specialize in their job. This can help employees feel more fulfilled and enjoy their work more.

 

Final Thoughts 

Each of the above-mentioned strategies has advantages and disadvantages. However, the question of their implementation completely depends on company type and purposes on the consumer market. 

 

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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