One of the most difficult questions facing entrepreneurs is how broadly to serve a heterogeneous market. That is, whether it is better to serve a narrow segment of the market, hoping to flourish by gaining a relatively high and increasing market share within that segment, or whether it is better to attempt to appeal to a broader cross-section of the market, thereby allowing the firm to succeed with a lower market share among the customers whom it is targeting. A narrower focus permits more concentrated use of fixed resources, facilitates the building of customer loyalty, and lowers the threat of retaliation from generalist incumbents but requires a much higher market share within the firms' target market to succeed. Porter (1980) has identified three generic strategies available to firms: low cost, differentiation, and focus. By focus he means that the firm should develop the ability To serve a particular target customer group very well (often at the expense of other potential customer groups). Implicit in the firm's choice to adopt a focus strategy is that it must address the question of how broadly to focus in terms of any given product attribute, given its resources and opportunities A fundamental element of the firm's choice of focus is that it is affected by and in turn affects that of its rivals. That is, focus is a strategic variable in the sense of the word "strategic" meant by game theorists-each firm's optimal choice of action depends on the actions taken by other firms. The literature on the optimal degree of focus for new ventures has reached very mixed conclusions. The early authors looking at the question were fairly consistent in their recommendation that a highly focused or niche strategy was generally most appropriate. Later authors recommended that new ventures should enter markets aggressively, facing larger incumbents head on. The latest studies develop what we describe as a contingency approach, arguing that the best approach depends on industry conditions. We think that this literature is now at a point where we can advance our understanding by looking at specific industries in some detail As our understanding expands, broader empirical work is becoming increasingly difficult because of the number of factors that must he built into any cross-sectional model of`new venture performance. We hope, then, to develop an understanding of one industry that is generally similar bz nature to many other industries. From this understanding conclusions of interest to both researchers and practitioners carr be drawn. Future studies of other industries with different fundamental structures will provide similar benefits. More specifically, this paper is mt empirical inquiry into the microbrewery segment of the U.S. brewing industry, designed to investigate the relative merits of specialist firms' different degrees of focus. The question addressed is whether focus affects specialist firms' short-run performance in an industry where there are entrenched generalists as well as many new entrpreneurial specialist entrants. The analysis confirms several widely held beliefs of industry participants and observers: that microbreweries are far more likely to attempt to serve too broad a market segment than to focus too narrowly; that microbreweries are in direct competition with imports; and that microbreweries benefit from having many microbrewery rivals within the same state. Furthermore, there appear to be some small learning and/or reputation effects in the operation of microbreweries as well as a minor novelty factor that benefits recently opened establishments. We must note, however, that the majority of the variation in the performance of microbreweries stems from differences in the management organization or market of individual breweries not captured explicitly by other variables included in the study. This finding, perhaps, should not be surprising, given the huge variation in the backgrounds, skills, and outlooks of microbrewery owners during the segment's early days. The lessons learned from this research are of obvious importance to entrepreneurs in many industries. It is a very common situation I br an entrepreneur to enter a stable industry in which established firms are already in place, sewing a broad cross section of the market. Ou,findings show that in such circumstances a narrowly focused approach to the market is best. We can think of numerous examples of where entrepreneurs have either succeeded by focussing on a particular segment of the market or failed by not doing so. III fact, there are many cases in which firms have done first one and then the other. For example, and People Express Airlines at first flourished by focussing on the needs of budget-conscious leisure travellers and then collapsed in part because it began to try to serve business travelers and others who are less price sensitive on certain routes. One of the hallmarks of an entrepreneurial business is that it suffers severe resource constraints. Because the entrepreneur's choice of breadth of focus will have profound effects on the resource requirements of the business, it is clear that the choice of which segment or segments of the market on which to focus is a fundamental decision made by all entrepreneurs. This paper serves to illustrate the importance of this focus decision and to provide some guidance for entrepreneurs concerning the appropriate degree of focus to adopt in entering art established market. (C) 2001 Elsevier Science Inc.
