When we are young then in school we are taught all subjects but if you want to excel in one particular field than you will have to do PhD in that subject this is nothing but the concentration of all your efforts towards that subject in which you want to excel. In the case of companies, some company follows a similar strategy where they direct all their money and resources towards the production and marketing of one product and this strategy is called concentration strategy. In order to understand more about concentration strategy, one should look at the advantages and disadvantages of concentration strategy –
Concentration Strategy Advantages
Benefits of Specialization
The biggest advantage as far as concentration strategy is concerned is that due to company focusing only on one product it gains specialization in production and marketing of that product because once company keep producing one product for long time than company find cheaper and efficient ways to produce as well as market the product which in turn results in saving cost and earning profits due to specialization in producing a product.
Competitive Advantage
In case of PHD if one student is focusing only on one subject and other is studying both for PhD and postgraduate degree than student who is focusing only on PhD is more likely to excel than another student, similarly in case of companies when company is focusing only on one product than chances of it getting competitive advantage on one particular product over its competitors are more as compared to those companies which produces and markets many products.
Cheap Factor of Production
When a company specializes in selling and marketing on one product than it has a competitive advantage not only while selling the product but also in the procurement of various factors of production at competitive rates. Hence whether its procurement of raw materials at cheap rates from suppliers or getting the best talent in terms of manpower as today’s generation love specialization and they love to work with those companies which are specialist and market leader in their respective fields.
Concentration Strategy Disadvantages
Lack of Diversification
When you put all eggs in one basket and that basket falls than all your eggs similarly biggest problem with concentration strategy is that there is a lack of diversification and since company is dependent on one product any problem in the demand for product which may be due to change in technology, change in consumer taste, government policy and other factors can result in complete slowdown in sales as well as profits as far as company is concerned.
Saturation of Demand for Product
Demand for product cannot be infinite as everything has its limit and when company is selling only one product than it cannot grow in the same way as diversified firm can grow because the scope for demand in case of diversified firm is higher and there is no risk of saturation of demand which is the case with the company following concentration strategy.
Low Customer Base
In case of companies following concentration strategy, they target a small group of consumers to sell their product because wider the product range of company larger will be the customer base and since company following concentration strategy has one product naturally its customer base will be low and any big company cannot survive with a lower customer base. In simple words, if the company wants to be market leader than it needs to have a high and loyal customer base.
As one can see from the above pros and cons of concentration strategy that a company cannot blindly follow above strategy rather it should carefully read and assess above points and then take the decision whether it wants to operate only as concentrated firm or operate as diversified firm.