Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic: both groups try to be attractive to customers in general. These efforts to appeal to broad markets can be contrasted with strategies that involve targeting a relatively narrow niche of potential customers. These latter strategies are known as focus strategies (Porter, 1980).
The Nature of the Focus Cost Leadership Strategy
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 (Table 5.6 “Focused Cost Leadership”). A firm that follows this strategy does not necessarily charge the lowest prices in the industry. Instead, it charges low prices relative to other firms that compete within the target market. Redbox, for example, uses vending machines placed outside grocery stores and other retail outlets to rent DVDs of movies for $1. There are ways to view movies even cheaper, such as through the flat-fee streaming video subscriptions offered by Netflix. But among firms that rent actual DVDs, Redbox offers unparalleled levels of low price and high convenience.
Table 5.6 Focused Cost Leadership Firms that compete based on price and target a narrow market are following a focused cost leadership strategy.
Several examples of firms pursuing a focused cost leadership strategy are illustrated below.
Redbox rents DVDs and video games through vending machines for only $1.
Papa Murphy’s targets its inexpensive take-and-bake pizzas at value-conscious families. Because the pizzas are baked at home rather than in the store, Papa Murphy’s is permitted to accept food stamps. This allows the firm to attract customers that might not otherwise be able to afford a restaurant-quality pizza.
Claire’s three thousand+ locations target young women with inexpensive jewelry, accessories, and ear piercings. The strategy has worked: Claire’s has over three thousand locations and has stores in 95 percent of U.S. shopping malls.
Providing indoor seating creates expenses for fast-food restaurants. Checkers Drive In keeps its costs low by not offering indoor seating. Checkers targets drive-thru customers and offers them big burgers at rock-bottom prices.