Porter’s Generic Strategies – Focus Strategy

Focus Strategy is the  strategy which believes in concentrating on a small segment defined in terms of customer segment or geographical territory. A focus strategy means carefully choosing the arena to compete in and narrowing the competitive scope. By selecting carefully  a segment and meeting the needs of that segment better than competitors who target more broadly defined segments, companies can gain competitive advantage. A focus strategy takes advantage of the differences between the target segments and other segments in the industry. It is these differences that result in a segment being poorly served by the broad-scope competitor. The firm that focuses on cost may be able to outperform the broad-based firm through its ability to strip out frills not valued by the segment. Alternatively, the product or service can be differentiated, taking into account the unique needs of the segment.

Focus Strategy

A focus strategy can be pursued using either a differentiation or a low €‘cost approach.

  1. If a company adopts a focused low €‘cost strategy, it competes against the market cost leader only in those segments where it has no cost disadvantage, such as small niches or complex products that do not lend themselves to economies of scale.
  2. If a company adopts a focused differentiation strategy, it competes against the differentiator by exploiting their knowledge of a small customer set or of a particular specialization within the broader range of products.  Focused differentiators may also be more innovative than larger firms, because the focuser is concentrating on the needs of just one type of customer.

To become a focuser a company must make choices about its product, market, and distinctive competencies.

  • Product differentiation is low for a focused cost leader and high for a focused differentiator.
  • Market segmentation is low, with the focuser filling just one or a few niches.
  • The choice of distinctive competency depends on the company’s source of competitive advantage. If it is differentiation, the competency could be R&D or service; if it is low cost, the competency could be local manufacturing.

The focused strategy provides businesses with some advantages. Focusers can find a niche that is unfilled by the large firms, and then develop a specialized product to fill that need. Focused companies can also grow by taking over other focusers. Other advantages exist, as discussed in terms of Porter’s Five Forces Model.

  • Focusers are protected against rivals because it can provide a product or service at a price or quality others cannot offer.
  • Powerful suppliers are a threat because the focuser buys in such small volumes that it has less bargaining power. However, if the company is pursuing a focused differentiation strategy and can pass on price increases, this is less of a problem.
  • A focuser’s ability to satisfy unique customer needs gives the company power over its buyers; they cannot get the same thing from other companies.
  • Potential entrants have to overcome the hurdle of consumer loyalty, so the focuser is somewhat protected.
  • Substitute products must overcome consumer brand loyalty, so again, the focuser is somewhat protected.

The obvious danger with the focus strategy is that the target segment may shrink or disappear over time for some reason. A new player may ‘outfocus’ the firm. Alternatively, shifting from broad to narrow targeting usually means a dramatic reduction in volumes. This can raise unit costs if the overheads have not been trimmed to match the smaller outputs demanded by the narrower customer base. If the focuser’s niche suddenly disappears because of changes in technology or consumer tastes, it is hard to switch to a new niche quickly. Also large differentiators may compete for the focuser’s niche if it becomes very profitable, as occurred in IBM’s fight with Apple.

Example 1: Ikea — Focused Cost Leadership

Ikea is one of the known global home furniture and household goods retailer which is a privately owned company. It was established by Ingvar Kamarad Sweden and in year 2008 the company owned 244 Ikea stores in 24 nations and the management is still planning to open 23 new stores. The company has also 32 stores on 16 nations and these stores were still managed and owned by franchisees outside the Ikea Group which extends the global reach of Ikea to 35 territories overseas. The Ikea Group has also been able to diversify their products beyond furnishings and furniture into food products and prefabricated housing. The company has been able to ensure that they have franchise agreements among most of the overseas operations to ensure capitalization of local marketing expertise and practices of the franchisees. The concept and trademark of Ike is owned by Ikea Systems BV and the operations of the company are basically controlled by Ingka Holding.

Primarily, the company is based on providing broad range of well-designed, functional home furnishing goods at an affordable cost to attract more customers. This concept of the Ikea is the foundation of their business operations which includes product designing, manufacturing, transportation, retailing, and assembling. The company sees to it that they work hard in attaining their business goals and providing quality products and services among their target market.

IKEA follows the focused cost leadership strategy. Young buyers in search of stylish and fashionable furniture and household accessories at a low cost are IKEA’s targeted market segment. For these customers, the firm offers home furnishings that combine good design, functionality and acceptable quality at low prices. According to the firm, low cost is always a priority. This applies to every phase of their activities.

IKEA emphasises several activities to keep its costs low. For example, instead of relying primarily on third party manufacturers, the firm’s engineers design low-cost, modular furniture ready for assembly by customers. IKEA also positions its products in domestic settings. Typically, competitors’ furniture stores display multiple varieties of a single item in separate rooms, meaning that their customers examine living room sofas in one room, tables in another room, chairs in yet another location, and accessories somewhere else entirely. In contrast, IKEA’s customers can view different furniture combinations (complete with sofas, chairs, tables, and so forth) in a single setting, which eliminates the need for sales associates or decorators to help the customer imagine how a furniture arrangement would look when placed in the customer’s home. This approach requires fewer sales personnel, allowing IKEA to keep its costs low. A third practice that helps keep IKEA’s costs low is expecting customers to transport their own purchases rather than providing a delivery service.

Although a cost leader, IKEA also offers some differentiated features that appeal to its target customers, including in-store playrooms for children, wheelchairs for customer use and extended hours. Stores outside those in the home country have “Sweden Shops” that sell Swedish specialties, such as herring, crisp bread, Swedish caviar and gingerbread biscuits. IKEA believes that these services and products are uniquely aligned with the needs of its customers, who are young, not wealthy, likely to have children, and because they work for a living, need to shop outside of regular hours. Thus, IKEA’s focused cost leadership strategy finds the firm offering some differentiated features with its low-cost products.

IKEA customers are actively involved in the shopping experience. The IKEA Concept relies on customers to choose, collect, transport and assemble IKEA products themselves. Customer involvement contributes to IKEA low prices. That is the idea behind: “You do your part. We do our part. Together we save money.”

IKEA had been successful in almost all countries, because of public awareness of the IKEA brand. IKEA is far more than a furniture merchant. It sells a lifestyle that customers around the world embrace as a signal that they have arrived, that they have good taste and recognize value.

Example 2: Zara — Focused Differentiation Strategy

Zara is a phenomenon in the textile industry; it was a start-up in Spain and gradually has evolved to be today a very successful leader quoted company in its industry.

Zara, the most profitable brand of Inditex SA, the Spanish clothing retail group, opened its first store in 1975 in La Coruña, Spain, they have expanded operations into 45 countries with 531 stores located in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa. Throughout this expansion Zara has remained focused on its core fashion philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. In order to realized these results Zara developed a business model that incorporated the following three goals for operations: develop a system the requires short lead times, decrease quantities produced to decrease inventory risk, and increase the number of available styles and/or choice. These goals helped to formulate a unique value proposition: to combine moderate prices with the ability to offer new clothing styles faster than its competitors. These three goals helped to shape  Zara’s current business model.

Capabilities of Zara, or the required resources needed to exploit the opportunities and execute this conceptual strategy, are numerous for Zara. Zara maintains tight control over their production processes keeping design and manufacturing in-house or with some strategic partnerships located nearby Headquarters. Value drivers for Zara are both tangible and intangible in the benefits that are returned to all stakeholders. Tangibly, Inditex, the parent company of Zara, has 11.02% net margin on operations and their market capitalization (Equity — market value) is â €š ¬13, 981 (in thousands) in 2002. Their net working capital (current assets — current liabilities) is â €š ¬133 (in thousands) . Additionally, the  success of Zara  can be demonstrated through their outstanding financial performance. From 1996 to 2000, Inditex SA tripled their corporate profits and in 2001, a year of overall economic downturn in the retail industry, Inditex SA saw a 31% increase in profits. Intangibly, customer loyalty and brand recognition have provided significant value to Zara. The number of consumers they attract continues to rise and their brand is synonymous with the cutting edge of fashion at affordable prices. The successful implementation of Zara’s  business model  provides great value to stakeholders and differentiates their business from their peers.

  • Vertical integration:  A distinctive feature of Zara’s business model, has allowed the company to successfully develop a strong merchandising strategy. This strategy has led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. Zara manufactures 60% of its own products. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce. Also, 85% of this production is done through the season, which allows the chain to constantly provide its costumer with very updated products. Traditional retailers lack this flexibility. Traditional retailers are obligated to place production orders to manufacturers overseas at least 6 months in advance of the season. Zara purchases its fabric in advance , much of it in grienge form this gives flexibility to color & print, to desired effect.
  • Low current inventory:  Regular customers know that new products are introduced every two weeks and most likely would not be available tomorrow. Therefore, Zara’s scarcity climate allows the company to sell more items at full price. This strategy minimizes Zara’s total cost because it reduces 15-20% of markdown merchandise compare to a traditional retailer. Zara’s centralized distribution facility gives the chain a  competitive advantage  by minimizing the lead-time of their goods, distribution center is a place where merchandise is moved rather than stored. The current ratio shows that for every euro in short-term debt, Inditex has 1.02 million euros in current assets. H&M however, has 3.40 million euros in current assets for every euro in short-term debt. The company designs and cuts its fabric in-house and it acquires fabrics in only four colors to keep costs low. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories.
  • Technology:  Whether measured by IT workers as a percentage of total employees or total spending as a percentage of sales, Zaras IT expenditure is less than one-fourth the fashion industry average. Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact, making sure that every dollar spend on tech has a payoff. It still uses the DOS system without much networking capability, whereas its competitors like Prada use  RFID technology, Benneton uses SAP.
  • Marketing & Advertising:  Zara also has an advantage over its competitors due to its low advertising costs. Zara’s advertising investment is 0-.3% as compared to traditional retailers who expends 3 — 4%. Zara relies mainly on its stores to project their image. For that reason, Zara has a department, which exclusively works in acquiring global prime real estate locations. In addition, this department is responsible for the frequent refurbishing of store layouts, as well as the creation of a common window display for Zara’s global stores.

Controlling notorious bottlenecks along the supply chain is key to speed. For example dyeing and fit are critical processes within the supply chain. Zara is a large investor in a dye and finishing plant-a notorious bottleneck. Its control allows them to oversee the dyeing process. A further trouble spot is sewing. Even though Zara uses sub-contractors some subcontractors, it carries out the bulk of all cutting itself-a crucial process that determines fit. 60% of the manufacturing processes are outsourced in countries close to the Zara headquarters in Spain to help achieve a quick turnaround. Zara maintains a strong relationship with their contractors and suppliers-viewing them as part of the company. To successfully react to consumers demands, design decisions are delayed as long as possible. Typically, Zara pre-commits to 50%-60% of its production in advance of the season, whereas other clothing retailers commit to 80%-90%. Thus  Zara reserves mill capacities to ensure production facilities are available when needed.

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