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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.
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.