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.
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 MappingA 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.
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 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.
The analysis of the in an industry can offer important insights to executives. Strategic groups are sets of firms that follow similar strategies (Hunt, 1972; Short et al., 2007). More specifically, a strategic group consists of a set of industry competitors that have similar characteristics to one another but differ in important ways from the members of other groups (Figure 3.25 “Strategic Groups”).  Understanding the nature of strategic groups within an industry is important for at least three reasons. First, emphasizing the members of a firm’s group is helpful because these firms are usually its closest rivals. When assessing their firms’ performance and considering strategic moves, the other members of a group are often the best referents for executives to consider. In some cases, one or more strategic groups in the industry are irrelevant. Subway, for example, does not need to worry about competing for customers with the likes of The Keg and Earls. This is partly because firms confront : factors that make it unlikely or illogical for a firm to change strategic groups over time. Because Subway is unlikely to offer a gourmet steak as well as the experience offered by fine-dining outlets, they can largely ignore the actions taken by firms in that restaurant industry strategic group. Second, the strategies pursued by firms within other strategic groups highlight alternative paths to success. A firm may be able to borrow an idea from another strategic group and use this idea to improve its situation. During the recession of the late 2000s, mid-quality restaurant chains such as Mr. Mikes and Swiss Chalet used a variety of promotions such as coupons and meal combinations to try to attract budget-conscious consumers. Firms such as Subway and Quiznos that already offered low-priced meals still had an inherent price advantage over Mr. Mike’s and Swiss Chalet; however, there is no tipping expected at the former restaurants, but there is at the latter. It must have been tempting to executives at Mr. Mike’s and Swiss Chalet to try to expand their appeal to budget-conscious consumers by experimenting with operating formats that do not involve tipping. Third, the analysis of strategic groups can reveal gaps in the industry that represent untapped opportunities. Within the restaurant business, for example, it appears that no national chain offers both very high-quality meals and a very diverse menu. Perhaps the firm that comes the closest to filling this niche is the Cheesecake Factory, a chain of approximately 150 outlets in the United States and one location in Canada (Toronto), whose menu includes more than 200 lunch, dinner, and dessert items. The Keg already offers very high quality food; its executives could consider moving the firm toward offering a very diverse menu as well. This would involve considerable risk, however. Perhaps no national chain offers both very high quality meals and a very diverse menu because doing so is extremely difficult. Nevertheless, examining the strategic groups in an industry with an eye toward untapped opportunities offers executives a chance to consider novel ideas.
Examination of the strategic groups in an industry provides a firm’s executives with a better understanding of their closest rivals, reveals alternative paths to success, and highlights untapped opportunities.
ReferencesHunt, M. S. (1972). Competition in the major home appliance industry 1960–1970. (Unpublished doctoral dissertation). Harvard University, Cambridge, MA Short, J. C., Ketchen, D. J., Palmer, T., & Hult, G. T. (2007). Firm, strategic group, and industry influences on performance. Strategic Management Journal, 28, 147–167. Image descriptionsFigure 3.25 image description: Strategic Groups. Strategic groups are sets of firms that follow similar strategies. Understanding the nature of strategic groups within an industry is important in part because the members of a firm’s group are usually that firm’s closest rivals. Below we illustrate several strategic groups in the restaurant industry
[Return to Figure 3.25] Media AttributionsSets of firms that follow similar strategies. Factors that make it unlikely or illogical for a firm to change strategic groups over time. |
What is a strategic grouping of companies why are they useful name several companies in a grouping?
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