Strategic group is a group of firms within an industry which face the same environmental forces, have same resources and follow similar strategy in response to the environmental forces. To carry on the value chain analysis it is very important that the firm identifies the strategic group to which it belongs. Porter suggests the following dimensions to identify differences in firm strategies within an industry: i)specialization, ii) brand identification, iii) a push versus pull marketing strategy, iv) vertical integration, v)channel selection, vi) product quality, vii) technological leadership, viii) cost position, ix)service, x) price policy, xi) financial and operating leverage, xii) relationship with parent company, xiii) relationships with home and host government. We should try to locate in the same group all firms with comparable characteristics and following a similar competitive strategy.
Essentially the concept of strategic grouping is a very pragmatic approach aimed at cataloguing firms within an industry in accordance with the way they have chosen to seek competitive advantage. This segmentation is useful when one faces a high diversity of competitive positions in a fairly complex and heterogeneous industry. Typical examples of this situation are global industries with a wide variety of players, some being totally international and some purely local.
A useful tool that can guide the separation of strategic group in an industry is the so called strategic mapping. This is a two dimensional display that helps to explain the different strategies of the firm. These two dimensions should not be interdependent because otherwise the map would show an inherent correlation. Most important, managers must choose those dimensions that are most salient and relevant to their own particular industry.
Though according to Porter, move from one strategic group to another is very difficult, because every strategic group creates its own image in the market place, the following points should be kept in mind:
- Strategic groups can shift over time as the needs of the customers or different technologies evolve in the marketplace. Therefore managers should not assume that membership in a particular strategic group permanently locks the firm into a fixed strategy. With sufficient resources and focus, firms can enter or exit strategic groups over time.
- Entire strategic groups and the firms that compose them can emerge and disappear over time. Thus as the environment changes, the competitive conditions that define a strategic group may work against the entire collection of the firms, resulting in the groups long term decline if competitive conditions intensify.
- In recent years one of the more enduring trends that have defined a growing number of industries is the hastening pace of consolidation. Competitors are now seeking to buy or merge with their rivals to limit the effects of fierce price wars that negatively impact profitability. Thus consolidation within and among industries can also markedly redefine the underlying stability and membership of strategic group.