Specialist versus Generalist Positioning: Demand Heterogeneity, Technology Scalability and Endogenous Market Segmentation

At the heart of competitive strategy is the question of where firms choose to position themselves within an industry. We characterize when generalists desegment markets, and when they are “stuck in the middle” because they are outcompeted by specialists. In our formal equilibrium model, firms face a positioning trade-off between cost and quality that is moderated by a choice of technologies that vary in their scalability. On the demand side, we incorporate consumer heterogeneity via two segments that vary in their willingness to pay for quality. Specialists in our model correspond to Porter’s generic strategies, with a “cost leader” targeting the low-end segment and a “differentiator” targeting the high-end segment. Generalists target both segments and hence have greater ability to exploit economies of scale. Central to our analysis is the interplay between the extent of demand heterogeneity and technology scalability. We show that this interplay determines when a Generalist is stuck in the middle; when it dominates from the middle with an intermediate quality level that outcompetes Specialist firms optimally positioned for cost leadership and differentiation; and when it dominates from above with a quality level greater than even that of a Differentiator. We explicitly link positioning on a cost-quality frontier to the value-bar analysis that is widely used in strategy teaching, and show how cost allocation rules impact positioning choices and competitive outcomes.