Meaning of Strategic Groups
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. These strategies include pricing practices, level of technology investment and leadership, product scope and scale capabilities, and product quality. By identifying strategic groups, analysts and managers are better able to understand the different types of strategies that multiple firms are adopting within the same industry. For example, the restaurant industry can be divided into several strategic groups including fast-food and fine-dining based on variables such as preparation time, pricing and presentation. The number of groups within an industry and their composition depends on the dimensions used to define the groups.
The concept of strategic groups in strategic management stems from an observation by Hunt (1972). Hunt coined the term strategic groups to describe a group of firms within the industry that are highly symmetric with respect to cost structure, the degree of vertical integration, and the degree of product differentiation, formal organization, control systems, management rewards/punishments, and the personal views and preferences for various possible outcomes (Hunt, 1972, p. 8).
Since then the most commonly used definition of strategic groups has been that provided by Porter: A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimension (Porter, 1980, p. 129).
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.
Strategic Group Mapping
A useful tool that can guide the separation of strategic group in an industry is the so called strategic group 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.
Strategic group maps are not difficult to create; however, there are a few simple guidelines managers want to use when developing them.
- Identify key competitive attributes. As mentioned previously, many firms share similar competitive attributes such as pricing practices and product scope. The first step in developing a strategic group map is to identify key competitive attributes that logically differentiate firms in a competitive set. This is not always known in advance of creating the map so it is important to be ready to create multiple maps using different variables.
- Create map based upon two key attribute variables. For the variables selected, assign each variable to the X and Y axis, respectively. Also, select a logical gradation value for each axis so that differences will be readily observable. When complete, plot each firm’s location on the map for the industry being analyzed. As each firm is plotted use a third variable–such as revenue–to represent the actual plot size of each firm. Using a variable like revenue helps the reader understand the relative performance of each firm in terms of the third variable.
- Identify strategic groups. Once all of the firms have been plotted, enclose each group of firms that emerges in a shape that reflects the positioning on the strategic group. At this point, assess whether or not the differences between each group are meaningful or whether other variables must be selected from which another set of strategic groups can be drawn.
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.
Strategic group creation and analysis provides an effective way to develop a clearer understanding of how firms within an industry compete. Since each strategic group depicts firms with similar–if not identical–competitive attributes within the industry,the map helps managers identify important differences among competitive positions.These differences can be subject to further analysis to helps explain more subtle differences in performance.