The concept of a strategic group is an analytical tool for understanding competition within an industry. It helps a business organize competitors into clusters of firms pursuing similar competitive approaches. This grouping allows strategists to clarify the immediate competitive landscape, anticipate moves by the closest competitors, and identify opportunities for differentiation.
Defining Strategic Groups
A strategic group is a collection of firms within a single industry that follow the same or a very similar strategy along a set of defined strategic dimensions. These dimensions include factors such as product quality, pricing, distribution methods, and technological scope. The firms within a group share comparable business models and often possess similar resources and capabilities. Firms belonging to the same strategic group compete more intensely with each other than they do with firms outside of their cluster.
Key Dimensions Used to Map Strategic Groups
The process of mapping strategic groups relies on identifying the underlying variables that differentiate how companies choose to compete. By plotting firms based on their choices across these different dimensions, distinct clusters of similar-minded competitors emerge. Effective dimensions for mapping must represent significant strategic choices that involve substantial resource commitments and are difficult to reverse quickly.
Product Line Breadth
This dimension describes the variety or range of products and services a firm offers to its customers. Some firms may choose to be highly specialized, offering a deep but narrow product line to a specific niche, while others adopt a broad-line strategy, selling many different types of products to serve a wider customer base.
Distribution Channel
Firms make strategic choices about how their product or service reaches the final customer, which determines their distribution channel. This can range from direct-to-consumer online sales, use of third-party retail partners, reliance on a network of franchised stores, or a combination of multiple channels.
Pricing Strategy
A firm’s pricing strategy reflects its underlying cost structure and intended value proposition. Competitors often cluster into groups based on their approach, such as those pursuing a low-cost, low-price model versus those focused on a high-quality, premium-price position.
Level of Vertical Integration
Vertical integration refers to the extent a firm owns and controls the various stages of its own value chain, from raw material sourcing to final distribution. A highly integrated firm internally manages many of these activities, while a less integrated firm relies more on external suppliers and partners.
Geographic Scope
This defines the extent of the territory a company chooses to compete within, ranging from a single city or region to a national or global presence. The commitment to a broad geographic scope requires significant investment in infrastructure, logistics, and localized operational capacity.
Why Strategic Group Analysis is Essential
This analysis allows a business to precisely identify its most immediate and direct rivals, which is a necessary first step in any competitive planning. Since firms in the same group share similar strategies, their competitive actions and reactions are often predictable and closely linked. Understanding these clusters clarifies the dynamics of rivalry and can help forecast the likely response to a strategic move, such as a price change or product launch. Strategic group mapping also helps in understanding the underlying structure of an industry beyond the simple industry-wide analysis. By identifying different clusters, a strategist can pinpoint areas in the market that are highly contested versus those that are relatively underserved.
Strategic Groups Versus Market Segments
The concepts of strategic groups and market segments are often confused, but they focus on distinct aspects of the competitive landscape. A strategic group is defined by the supply side—it clusters competitors based on the similarity of their business models and competitive strategies. This grouping answers the question of how firms choose to compete. Market segmentation, by contrast, is defined by the demand side—it clusters customers based on similar needs, demographics, or purchasing behaviors. Segmentation answers the question of who the customer is and what they want. A single customer market segment can be simultaneously served by firms belonging to multiple different strategic groups. For example, “health-conscious consumers” may be targeted by both premium-priced, organic grocery stores and low-cost, private-label healthy food producers.
Implications for Competitive Strategy
This analysis defines the boundaries and potential for movement within an industry, particularly through the concepts of mobility barriers and intra-group rivalry.
Mobility Barriers
Mobility barriers are obstacles that make it difficult or costly for a firm to shift its strategic position from one group to another within the same industry. These barriers are analogous to industry entry barriers but apply specifically to movement between groups. Factors like high capital requirements for establishing a global distribution network, the time needed to build a strong national brand reputation, or proprietary technology can serve as mobility barriers. These obstacles protect the profitability of firms in successful groups by preventing rivals from easily imitating their strategy.
Intra-Group Rivalry
Competition is most intense among the firms clustered within the same strategic group because they are fighting for the same customers using nearly identical approaches. Since their products, distribution, and cost structures are closely aligned, any action by one firm, such as a price cut, is felt immediately and directly by the others. This high degree of similarity leads to frequent and aggressive competitive interaction, increasing the risk of price wars and eroding profitability for all members of the group.
Practical Examples of Strategic Groups in Action
The airline industry illustrates distinct strategic groups operating within the same sector:
Legacy Carriers (full-service airlines) compete on an extensive hub-and-spoke network, a wide range of services including business class, and a global geographic scope. These firms have high fixed costs due to large fleets and substantial vertical integration of their operations.
Budget Carriers utilize a fundamentally different strategy, competing primarily on a low-price, no-frills model. They use a simplified fleet, point-to-point routes, and minimal in-flight service. Their distribution relies heavily on direct online sales, and vertical integration is minimized to reduce costs.
Regional Commuter Airlines focus on a narrow geographic scope, serving smaller cities and often acting as feeders to the larger legacy carrier hubs.