The Importance of Narrow Focus and Differentiation

Craig  McLaughlin

February 22, 2016

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This article was first published on The Financial Brand.

Noted Harvard professor and the foremost authority on competitive strategy, Michael Porter, is quoted as a saying, “The essence of strategy is choosing what NOT to do.” He further explains, “A firm’s relative position within its industry determines whether a firm’s profitability is above or below the industry average. The fundamental basis of above-average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation.”

These lessons are more true in a digital economy than ever before and are the keys to success for a financial services industry that is facing new competitors, a more demanding consumer and a transformation of the products and services that have been the bedrock upon which the industry was built.

The Power of Focus

The focus strategy concentrates on a narrow segment and within that segment seeks to achieve either a cost advantage or differentiation. For example, following the differentiation focus strategy, Betterment – the largest automated investing service – clearly has a strong advantage by focusing on a narrow segment.

Everything becomes easier when your strategy is narrowly focused on a single market segment. Your people are aligned more clearly. You can present a brand story to the market that is clearer, more succinct, and digestible. The user experience you provide can be laser-focused on intuitively addressing the user need (and as a result, the market need).

The app economy is a great example of the customer increasingly becoming more inclined to buy best-of-breed from the focused specialist instead of the industry generalist. It’s akin to a rollback of the Wal-Mart one-stop shop phenomenon back to the day of single-domain sources. Instead of customers buying multiple mediocre financial services from a mega supplier, customers are buying services from individual specialty purveyors – much like our grandparents going to a bakery, butcher shop, and produce market instead of to a Wal-Mart.

Read the full article at The Financial Brand.