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Michael Porter’s generic strategies are a valuable framework for identifying a suitable segment to acquire a strategic advantage in every industry.
Competitive Advantage, written by Michael Porter in 1985, is the cornerstone for most modern corporate strategies. Porter outlined the several approaches that businesses can use to carve out a niche in any market. Each of these is an instance of a generic strategy. They’re known as generic because they’re used for a wide range of products and services in various sectors and organizations.
Cost Leadership (low, no expenses), Differentiation (exclusive or superior items) and Focus were Porter’s early strategies. Later, he subdivided Focus into two approaches: Differentiation Focus (unique approach differentiation in a concentrated market) and Cost Focus (cost-cutting, lower costs in a focused market).
Let’s dive into the topic of cost focus and understand it better.
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What Is Cost Focus?
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Cost Focus Examples
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What Is A Cost Focus Strategy?
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Why Does A Cost Focus Strategy Work?
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How To Create A Cost Focus Strategy?
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Cost Focus Strategy Examples
What Is Cost Focus?
Cost-focused organizations are those that strive to build a lesser-cost advantage but only within a particular market sector. These products will be simple, vaguely comparable to typical industry products (you can price more renowned products at a higher price) and acceptable to a sufficient customer base to generate a profit.
Budget food goods or other domestic tools distributed only by local supermarkets are each a cost focus strategy example. Another cost focus example is a low-cost airline that operates in specialized routes.
Cost Focus Examples
The energy drink market has grown in popularity in recent years. Initially, Red Bull was the only energy drink available. Then came Monster. What strategy did they employ? Monster sold 500-ml cans for $2, while Red Bull sold 250-ml cans for $2.5. The cost of a liter of Red Bull is $10. Monster, priced at $4 per liter, concentrated on their costs and pricing. This cost focus strategy example shows why and how they’ve grown into a highly lucrative corporation today.
Other cost focus examples include Coca-Cola, Rolls-Royce and Walmart.
What Is A Cost Focus Strategy?
A cost focus strategy is when an organization tries to attract potential customers solely based on pricing. Organizations that employ this strategy try to beat their rivals’ prices for the least value for their goods on the market. Organizations that apply this method frequently target a definite market segment. That’s why Monster, a small organization that catered to a definite market group, makes a noteworthy cost focus strategy example.
A cost focus strategy also entails concentrating on lowering operational costs as much as feasible within an organization. As a result, many people conflate cost focus with price focus. Businesses that work on a budget seek ways to minimize the price they spend for stock and aim to sell items for the lowest possible price. They strive to be price leaders, but this can occasionally drain their profit margin, resulting in low per-sale earnings. Cost focus is concerned with lowering expenses, increasing financial efficiency and providing enticingly low pricing, thereby increasing the selling price of goods or services.
Why Does A Cost Focus Strategy Work?
Using a cost focus strategy has the following advantages:
- It draws customers. The key to cost focus is that customers think they’re receiving a good deal.
- It ensures supply chain efficiency. Organizations can reduce the costs of negotiating with third parties and intermediary organizations if their supply chain process is optimized.
- Administrative expenses reduce because of automation and technological advancements.
- Finding financial drains has never been easier because of technology. Sync your software with your point-of-sale system to make business administration smoother and more efficient.
- You can stock in large quantities. Bulk buying and building a stable network of suppliers are two ways to get favorable cost advantages.
- Process automation allows for faster product development. Standardizing processes and systems reduces time-to-market by minimizing the time required to produce things.
The above points explain why a cost focus strategy works for organizations, and why using them in different segments can reap benefits.
How To Create A Cost Focus Strategy?
Businesses must lower expenses in other aspects of the organization, such as marketing, labor, distribution and packaging to implement a cost focus strategy without affecting revenue. Monetarily, cost leaders must be strict and look for methods to increase overall operating efficiency.
Let’s look at some methods you might implement as a cost-cutting strategy in your organization.
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Look Around
Shopping around may seem self-evident, but it can save your organization a lot of money over the long term. It’s natural to believe that because you’ve been a loyal customer for a long time, you’ll receive the highest discounts. They are businesses, so you might get a better deal elsewhere. Or, at the very least, ask your existing source to match prices.
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Utilize Innovative Technology
Improved sales and business technology might mean the difference between an organization surviving and prospering. Adopt a point-of-sale (POS) system tailored to your sector and include adjustments and add-ons that fit into your organization’s needs.
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Raise Asset Utilization
High asset utilization in the hospitality business refers to getting the most out of service in an amount of time. A bar or restaurant that attempts to improve table turnaround time (catering to more customers who remain for a shorter time rather than welcoming people to sit for longer hours) is an example of a cost focus strategy.
Implement the adobe methods in your organization as per the needs. These methods will give you an edge over other organizations.
Cost Focus Strategy Examples
Different brands have adopted cost focus strategies in their business processes. Let us look at a few examples of how they use a cost focus strategy.
Coca-Cola
Coca-Cola’s Diet Coke is perhaps a global example of cost focus strategy. They created this product specifically for persons who have diabetes or other comparable conditions. For those who prefer low-sugar beverages, Diet Coke was a fantastic addition.
Rolls-Royce
Another cost focus strategy example, Rolls-Royce is a name that almost everyone is familiar with. The legendary British brand has established itself as one of the world’s premier luxury car manufacturers. Because they solely make luxury cars, the corporation has a laser-like cost focus strategy.
If a business is supplying a rare item or a product containing rare ingredients, it must ensure that it has access to those ingredients regularly. A cost focus strategy is an excellent alternative to adopt if an organization can accurately handle these resources.
With Harappa’s Creating Solutions course, learn how to conceptualize and implement cost focus and other strategies, depending on what your business needs. Our skilled faculty and carefully planned course will give you a competitive edge in your workplace. Sign up today!
