It is the strategy of the firm that directs its resources to the profitable growth of a single product, in a single market with a single dominant technology.
The firm tries to thoroughly exploit its expertise in a delimited competitive arena and increase the sale of its existing products in the existing market:
1) Increasing sales to current customers (buy toothpaste and get toothbrush free offers).
2) Woo customers from competitors products (offer the Santro car at attractive, initial price to woo the potential buyers of Maruti car).
3) Convert non-users into users (draw the rural folks to buy toothpaste colour televisions, Tata Sumo vehicle etc).
Successful firms tend to rely on doing what they know they are best at doing. For example, to increase its tea sales, Tata tea might cut prices, increase advertising, get its products into more stores or obtain better store displays and point of purchase merchandising from its retailers. Basically Tata tea management would like to increase usage of tea by current customers and attract customers of other tea brands (HLL, Nestle, Duncan etc) to Tata tea.
Not a risky option?
This strategy is concerned with getting more milk out of the cow. It covers opportunities through the increased penetration of present markets using the company’s present products. This main element of corporate thinking in this area is concerned with how much, how fast and what quantity of resources should be committed to these actions. The company’s position in the market, intensity of competition and the cost of attaining additional market share. This is the least risky option because the company is dealing with known products and with markets in which it has experience. Examples abound of companies that have improved their position even in mature industries by a judicious use of advertising and other marketing tools. (HLL, Nirma, Godrej soaps).
Concentration reduces the amount of resources needed to increase market share or sales revenues, and as such is a low risk strategy. However, it is also a high risk strategy as you are putting all eggs in one basket. And the firm may become a victim in case of a slowdown in the economy (say heavy vehicle manufacturers like Ashok Leyland, TELCO etc) In most cases however, firms that have pursued concentrated growth strategy have enjoyed exceptional returns (Bajaj Auto, McDonald’s, Good Year). The success of such a strategy can be traced back to the firm’s use of superior insights into its technology, product and customer to obtain a sustainable competitive advantage.
Concentration helps a firm to specialize in a few areas and gain rich experience. Expertise and specialized knowledge over a period of time having lived with fairly predictable conditions, managers are able to have a better grip over market forces. Decisions flow smoothly, systems and procedures are in place; employees are familiar with market conditions and organizational changes tend to be less threatening. The firm is able to survive and grow through time tested technologies, proven products and familiar markets. Concentration of course, is not always on the credit side of the ledger.
Conditions that favour concentration growth:
Concentrated growth may become the favoured route when the firm’s environment is characterized by certain conditions:
1) When the firm’s industry is resistant to major technological advancements. In such a scenario, product demand remains stable and entry barriers to industry such as capitalization are high.
2) When the firm’s target markets are not product saturated — that is, there are gaps that the firm fills with alternatives
3) When the firm’s product market are sufficiently distinctive to dissuade competitors in an adjacent product market from trying to invade the firm’s segment.
4) When the market is fairly stable without seasonal or cyclical swings.
Source: Strategic Management