Competing both ways: How combining Porter's low‐cost and focus strategies hurts firm performance

Abstract

Abstract Research Summary This study empirically examines the impact of firms' pursuing multiple generic strategies, namely, Porter's low‐cost and focus strategies. We conceptualize pursuing cost efficiency advantage as low‐cost strategy and restraining rivalry through horizontal differentiation as focus strategy. Although we corroborate earlier Strategy research that each of these strategies alone may have a positive impact on firm profitability, we highlight that mechanisms driving the interaction of these two strategies are, in fact, nonadditive in nature, consistent with recent analytical work. Using the context of the scheduled U.S. passenger airline industry over two decades, we empirically show that combining a low‐cost strategy with a focus strategy is, indeed, detrimental to firm profitability, which has important implications for scholarship and practice. Managerial Summary Firms have effectively used low‐cost or focus strategies to improve their performance. Our study demonstrates that although firms pursuing either strategy individually can benefit, pursuing these two generic strategies of low‐cost and focus simultaneously actually hurts firms' profitability. In essence, we show that when firms pursuing a low‐cost strategy already possess a cost efficiency advantage over their rivals for the full customer base, firms have nothing to gain by simultaneously limiting rivalry—through focusing on a smaller customer segment—and thus giving away revenue to rivals. Our insights regarding the combination of different generic strategies caution managers to not be misled by the performance gains of either low‐cost and focus strategies individually, but to realize that these two in tandem actually may harm profitability.

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