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What Is a Concentration Strategy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 November 2016
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A concentration strategy is a type of approach that is used in both business and investment situations. As an approach to doing business, the strategy involves a company choosing to focus most of its resources on the development of a specific product or at least a small group of products that are aimed at a specific market. As an approach to investing, a concentration strategy calls for choosing a small group of stocks to compose the portfolio, rather than going for a more diversified collection of investments. There are benefits as well as potential liabilities associated with using a concentration strategy, including the potential of being so invested in one market that a sudden economic turndown could lead to failure.

As applied in a business operation, the purpose of a concentration strategy is to provide a singular focus to the product line, and the market in which the company chooses to compete. Doing so can sometimes lead to that particular business being viewed as a specialist or expert in a given industry, since all resources are aimed at creating and marketing the best possible products in that field. At times, a company may choose this course of specialization and achieve so much success that it begins to set the standard in that industry, providing the benchmark to which competitors must aspire in order to remain in business.

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When successful, the concentration strategy makes it possible to build a strong reputation within a market as well as generate significant name value among consumers. In fact, the name of the singular product may become so entrenched in the minds of consumers that it comes into common use as a slang term for all products of that type, whether they are made by the company or not. At the same time, the perception of superior quality is often cultivated, based on the fact that the company does one thing and does it well.

While a concentration strategy can work very well, there are some potential pitfalls to this approach. Shifts in the demands of consumers could mean the market for the singular product begins to shrink, a situation that could leave the company in financial difficulty. Innovations in technology may render the product obsolete, effectively bringing production to an end. Companies that do not diversify are often vulnerable during economic slowdowns, especially if the product in question is perceived as a luxury rather than a necessity. Unless the business has sufficient financial reserves to ride out the downturn, there is a good chance the company will fail.

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bear78
Post 3

@fify-- That's what the article was emphasizing too. A company has to do a lot of market research and has to have a lot of faith in their product if they're going to go with a concentration strategy. Or the strategy will backfire and their investment will go to waste when the product doesn't hit it off with the consumers of if the competition proves too much.

I'm not sure which strategy is better actually. Concentration strategy is good in that, the company doesn't look like it's trying to do everything. That never has a good reputation with consumers, they would rather buy from "expert" companies that make one or two products but make them well.

On the

other hand, diversification might give the company a better chance to succeed. If one product doesn't do well, and another does, they can start concentrating on the successful product without losing too much money.

I guess both strategies have advantages and risks, it's up to the company to determine which is the best for them.

fify
Post 2

@ankara-- That sounds like a good plan but what if that one product doesn't do well? Then it's all over isn't it?

bluedolphin
Post 1

I think what happens in the food industry is that a company starts off with concentration strategy and after they establish themselves, they begin to diversify their products.

For example, a company might start off with crackers and after their product does well and after their label and product becomes a favorite, they might also go into cookies or potato chips.

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