Business strategy requires a deep understanding of the competitive environment, extending beyond a simple industry-wide analysis. The broad industry view often obscures the reality that not all firms compete in the same way or face the same rivals. A refined approach is necessary to accurately assess competitive forces and anticipate rivals’ actions. This involves segmenting an industry into distinct clusters of firms that share similar strategic approaches, providing a nuanced view fundamental to successful positioning.
Defining the Strategic Group Concept
A strategic group is a collection of firms within an industry that pursue similar strategies along similar dimensions. This concept allows for a more granular analysis of competitive dynamics than treating the entire industry as a single unit. Firms within a group often have comparable business models, face similar market challenges, and respond to environmental changes in predictable ways.
The concept originated with economist Richard Hunt in the 1970s, but Michael Porter popularized and integrated it into competitive strategy. Porter defined it as firms following the same strategy across various dimensions, such as product quality and pricing policy. Competition is most intense among firms in the same strategic group because they vie for the same customers using nearly identical approaches. Understanding these clusters is a necessity for managers due to this high degree of intra-group rivalry.
Key Characteristics Used for Grouping
Strategic groups are formed by analyzing competitive variables that distinguish firms’ strategies within an industry. These variables reveal the underlying strategic choices made by different companies. Identifying the appropriate characteristics is the first step in segmenting a complex industry structure.
Characteristics used for grouping include:
- Product line breadth, differentiating firms with specialized offerings from those with a diversified range of products.
- Geographic scope, contrasting local or regional operators with national or global competitors.
- Distribution channel choice, such as selling directly to consumers versus relying on retail or wholesale partners.
- Pricing policy, separating low-cost providers from those pursuing a premium strategy.
- Marketing intensity, reflecting the level of advertising and brand-building expenditure.
- Vertical integration, which defines a group’s cost structure based on the extent a firm controls its supply chain.
Mapping Strategic Groups
The most common method for representing the competitive landscape is creating a two-dimensional strategic group map, often called a perceptual map. This tool plots the positions of major competitors, showing how firms cluster based on their strategic choices. Map construction begins by selecting two non-correlated strategic dimensions to serve as the X and Y axes. For example, a strategist might plot “Price Position” on one axis and “Product Quality” on the other, ensuring the axes are independent.
Each firm is positioned on the map according to its standing on the chosen dimensions; firms that cluster closely form a strategic group. To incorporate a third piece of information, the size of the circle enclosing each group often represents the total market share or revenue of the cluster. This mapping process simplifies the competitive environment by organizing rivals into distinct, comparable strategic clusters.
Strategic Implications and Value
Identifying strategic groups helps understand the underlying forces that determine industry profitability and competitive advantage. The insight gained is that competitive rivalry is most acute within a strategic group, as these firms are direct substitutes for one another in the eyes of the customer. Analyzing the moves of rivals within one’s own group allows a firm to anticipate competitive actions and plan appropriate counter-moves with greater accuracy.
The analysis also helps a firm determine its strategic positioning, deciding whether to reinforce its current group membership or attempt a strategic movement toward a different cluster. By visualizing the competitive map, a company can spot strategic white spaces—areas where no group currently exists—representing potential uncontested market opportunities. The analysis also reveals that different strategic groups often exhibit persistent differences in profitability, which informs resource allocation decisions. Executives can choose to invest in reinforcing the group’s most profitable characteristics or try to transition toward a higher-performing group.
Barriers to Movement
The existence of strategic groups and the consistent performance differences between them are explained by barriers that restrict firm movement. These structural forces maintain the separation between clusters and are categorized into two types.
Mobility barriers are factors that make it difficult or costly for an existing firm to shift from one strategic group to another within the same industry. Examples include specialized assets, such as proprietary technology or dedicated manufacturing facilities, which cannot be easily adapted for a different strategy. Significant investment in brand identity and customer loyalty also creates a barrier, making it expensive for a firm to abandon a low-cost position for a premium one.
Entry barriers are factors that prevent new firms from entering the industry and immediately joining a specific strategic group. Both types of barriers allow firms in higher-performing strategic groups to sustain their superior profitability by shielding them from imitation and increased competition from rivals in other groups.