Abstract: A strategic group consists of a set of industry competitors that have similar characteristics to one another. Pursuant to strategic group clustering is the concept of strategic group analysis (SGA). SGA is a management concept which separates companies within the same industry with similar business models, aligned or similar line resources and or a similar strategy combination. SGA in an industry is meant to offer insights to executives so as to effectively determine competitive strategies to increase earnings, market share and the best and most efficient processes. In conducting SGA, leaders and executives of companies believe that it becomes easier and timelier to react to competitive dynamics which are part of the overall industry whereas enhancing their survival. Common criteria to develop a group involve looking at brand identification issues, cost position, channel selection, outsourcing strategies and operating leverage. However, this is a subjective view. SGA only, cannot guarantee executives and investors success factors adequate for competitiveness in the ever turbulent market arena. Various authors argue that competitive strength is guaranteed by a combination of factors and not one. Proponents of Resource Based View (RBV) of the firm articulate that performance differences among firms are largely driven by heterogeneity in resources and other capabilities. As such, it is not the grouping of firms that matter but which firm among the group has resource muscle over others. The explicit consideration of firm’s resources provides a richer understanding of strategic groups. In the recent past various articles assess the research progress made into strategic groups, with the view to identifying other linkages of strategic management requisite for competitive success. This paper therefore critically undertakes an empirical review on the interrelationships between, strategic group analyses, resource based view and sustaining organizational performance.
Keywords: Strategy, strategic groups, strategic group’s analysis, firm performance, dynamic capabilities, and resource based view.
The concept of strategic groups has generated considerable debate and controversy among researchers and practioners since its introduction in the early 1970s. These controversies relate to not only questions regarding the usefulness of the concept in advancing research in strategic management but also to whether strategic groups actually exist and if so what is the most appropriate methodological approach for identifying them. Although there have been attempts to develop a strong theoretical foundation for the existence of strategic groups (Hunt, 1972; Porter, 1979). Strategic groups that can be defined ‘as a subset of industry competitors that have similar characteristics’ (Ketchen et al., 2004). The recognition of the existence of distinct strategic groups within an industry represents a compromise between the assumption of homogeneity of firms competing within an industry and the competing assumption of each firm being completely distinct from all other firms within the industry. Groups arise within an industry because of mobility barriers, product/market heterogeneity, and resources that are not easily imitated (Mehra and Floyd, 1998; Ketchen et al., 2004). Firms within the same group are expected to have similar strategies and resources and compete intensely against each other (DeSarbo and Grewal, 2008). This paper does not in any way postulate the inexistence of strategic groups but cements its theory on the fact strategic groups exist and may assist in realizing and sustaining organizational performance.
Strategy is defined as a general direction set for the company’s overall vision and its various components to achieve a desired state in the future. The components expresses how and through what the goals will be achieved in the long-term. Strategy therefore results from the detailed strategic planning process. A strategy is about integrating organizational activities and utilizing and allocating the scarce resources within the organizational environment so as to meet the present objectives. However, while crafting a strategy, it is essential to consider that decisions are not taken in a vacuum and that any action taken by a firm is likely to be met by a reaction from those affected; competitors, customers, employees or suppliers. Analysis is therefore critical before strategy implementation. The concept of strategic groups and the original development of theory about strategic groups originated in the early 1970s at Harvard, where a number of doctoral researchers, guided by Caves and Spence, studied the existence of structural (strategic) asymmetries within industries, their implication for market equilibrium, and modelling the competitive behavior of firms on the basis of these asymmetries. A strategic group can be from any type of business and depending on the industry, are defined within a dimensional construct. Strategists will often display the market position of each competing company on a two-dimensional grid (See Figure. 1).
Strategic Groups Analysis (SGA) 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 will comprise of a set of industry competitors that have similar characteristics to one another but differ in important ways from the members of other groups. A strategic group analysis looks at the positions of the various players within a competitive market. It will examine the underlying factors which help to determine the profitability of a company. This analysis will also account for the competitive dynamics which are part of the overall industry. Strategic groups can be created to examine a wide variety of issues that may need to be addressed. Common reasons to develop a group involve looking at brand identification issues, cost position, channel selection, and operating leverage. Each dimension that is available within an industry or competitive relationship holds the potential of having a strategic group created for it. Strategic groups can be established based on the following criteria: Product quality and standards, specialization of products and services, Product brand loyalty and identification, marketing or distribution channels, level of technology position and adoption, cost position based on product life cycle and pricing policy. Parent company strength and strength of existing relationship, financial capacity or operating leverage, possible direction of integration; vertical or horizontal, Government relationship based on legal-political and legislative mechanisms also are important criteria factors.
In the 1990s, researchers proposed the resource based view (Wernerfelt, 1984; Barney, 1991; Wernerfelt, 1995; Barney, 1997, 2001), suggesting that firms can be viewed as a collection of resources, skills and routines, the application of which results in positions of sustainable competitive advantage. This perspective assumes that a firm’s unique set of resources and skills protects it from imitation and provides the base for accumulation of superior profits through differentiation. Thus, success is assumed not to be a function of intra-industry structure, but rather one of an effective application of accumulated resources. Both strategic group theory and the resource based perspective attempt to explain diversity within industries. In one respect, the resource based theory adopts a pre-strategy position, providing an inventory of firm resources and the routines that convert them into effective strategies. In contrast, strategic group theory adopts a post-strategy position, offering taxonomy of strategies employed by firms, where individual firms are classified into strategic groups through comparison of past strategic investments.
In summary, strategic groups represent different industry positions separated by mobility barriers with the underlying assumption that industry success is primarily derived from intra-industry structure. In contrast, the alternative resource based view (Barney, 2001; Barney, 1991; Barney, 1997; Wernerfelt, 1984, 1995) suggested that firms’ are in fact a sum of their parts, an association of resources, skills and routines the application of which results in positions of sustainable competitive advantage. The underlying assumption is that unique sets of resources and skills protect the firm from imitation and provide the base for accumulation of superior profits through differentiation. Thus, industry success is assumed not to be a function of intra-industry structure but to derive from application of accumulated resources. This papers attempts to critically analyses strategic group analysis as an important factor in sustaining organizational performance from a resource based view perspective.
Strategic groups are derived from firms that follow similar approaches or strategies to achieve results. Strategic group consists of a set of industry competitors that have similar characteristics to one another. In order to visualize the segmentation of strategic groups, it is useful to design a "map" (Müller-Stewens 2005). Three steps are taken:
Two or more criteria which can help you classify the strategic groups must be determined. These criteria form the axis, where you can sketch the segmentation matrix. (For our case of illustration we take average price of the product versus the breadth of the product line, may be to establish market share).
Position the companies in the sector on the map.
Finally, divide the companies into strategic groups. The companies which are closest to each other form a strategic group. Further, you can illustrate the market share of the strategic groups by the size of the circles (which is not configured in the diagram in this case). The diagram below illustrates the determinations of strategic groups based on average price of the product and breadth of the product line:
Figure is Available in PDF Format
Source: Strategic groups within the automotive industry, (Müller-Stewens & Lechner, 2005).
The environmental tools of analysis (Michael Porters Five Forces analysis) are thereafter used to identify the mobility barriers that inhibit the movement of firms between strategic groups. According to Mascarenhas and Aaker (1989), scholars have usually given strategies the meaning of “conducts” or “activities,” which include functional-level strategies, positioning, manufacturing, pricing, targeting, and distribution strategies. Dess and Davis (1984) express their analysis of strategic groups and “competitive methods” within the paints and allied products industry to Porter’s (1980) basic competitive strategies.
Strategic group analysis rightfully indicates important market niches that competitors are not capitalizing on. This analysis is also useful to managers in order to identify what the most direct competitors are and on what basis they compete. A re-look at the overall industry structure indicate types of strategic groups that can be found. A case in point is the strategic groups dominated by “solitary ﬁrms,” organizations strategically unique within the industry, and strategic groups populated by more ﬁrms (McNamara, Deephouse, and Luce, 2003). These authors found that some companies called core firms are tightly aligned with the strategic group characteristics. Other companies called secondary firms are loosely aligned with them. The traditional disaggregation of fashion companies’ value chains makes this analytical approach suitable for this industry as well. Generally, two main strategic groups are traditionally recognized in terms of production models in the textile and clothing industry: clothing operators (manufacturers or retailers) who are able to contribute and affect fashion trends; and companies that are part of the supply chains of the former and compete with each other through their ability to react quickly to demand needs and fashion trends imposed by others (Guercini and Runfola 2004). SGA was also applied in a bid to determine the main strategic groups in the Northern Ireland clothing industry. The differences between these groups were considered in terms of competitive locations (the extent of their market) and associated competitive pressure. The applicability of Porter’s theories adopted the approach of segregating commitment to marketing, commitment to design, commitment to own branding, commitment to training, and management intensity for strategic differentiation for Irish clothing companies
What is alternative view of competition analysis based on SGA?
Eduardo González & Juan Victoria (2002), the Authors of “How much do Strategic Groups matter”, one of the main statements of the Resource Based View of the firm contends that performance differences among firms are driven by heterogeneity in resources and capabilities. The explicit consideration of firm resources provides a richer understanding of strategic groups (Mascarenhas and Aaker, 1989; Mehra, 1994). They argue that indeed it provides a solid rationality to explain the existence and temporal persistence of performance differences across industries, across strategic groups within each industry and among firms within each strategic group. The existence of inimitable resources and the associated mobility barriers are a necessary condition for the existence of significant performance differences across strategic groups (Mehra and Floyd, 1998). However this view does not provide a comparative platform with two or more variables that can be used within a grid of vertical and horizontal axis that can confirm or reject other play factors. While quoting Mason, (1939) and Porter, (1980) they argue that industry drivers generate systematic differences in the performance of firms competing in different industries. Second, they say, a firm itself may have a competitive advantage or disadvantage with respect to other firms in its industry (Barney, 1991; Peteraf, 1993). Strategic groups however must be derived from many factor considerations and not a single driver that is assumed to affect their constructs. This is demonstrated within the automotive industry as in Figure 1, (Müller-Stewens & Lechner, 2005).
The argument of Resource Based View of the firm contending that performance differences among firms are driven by heterogeneity in resources and capabilities only is not adequate.
Why understand other factors in strategic group analysis contribution to overall performance?
Understanding the nature of strategic groups within an industry is important for at least three reasons if accurate interpretation of the market threats is to be achieved: First, 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. But firms do not worry of all competitors. This is partly because firms confront mobility barriers, factors that make it unlikely or illogical for a firm to change strategic groups over time. Since some players offer insignificant competition, their actions can largely be ignored by industry strategic groups. Secondly, the strategies pursued by firms within other strategic groups highlight alternative paths to success (Janice, 2012). A firm may be able to borrow an idea from another strategic group and use this idea to improve its situation. Finally, strategic groups’ analysis normally reveals 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. It therefore becomes difficult to establish strategic group clusters based on a single fundamental; range of food products in this case. Strategy model, market channels and others must be on the grid to determine the actual causal success factors.
The method used for this paper was a critical empirical review of works of various authors on strategic group analysis. Alternative views that challenge strategic group analysis as the only contributor to organizational competitiveness positioning and success was also evaluated.
Results and Discussions
Though strategic group analysis based on heterogeneity of resources and capabilities provides an alternative view of strategic group analysis, it is heavily challenged. A firm can have resources and fail in processes and logistics that are both in-bound and outbound. Indeed it works only when the group thoroughly understands the market. There must be an understanding of what interests each market for a strategic group analysis to be useful. Missing one data point can be enough to turn a successful venture into one that is unsuccessful. Secondly, a firm must be able to identify mobility barriers to enter or exit the market. If those barriers cannot be identified, then the maximum potential of the company in that marketplace will never be achieved. The analysis must also look at how a company can exit the market and what barriers might exist there as well. Most companies do the first half of the equation, but then fail to look at an exit strategy. Third, it is based on assumptions about competitor strength in market share and strategies. If you want to know what the competition is doing, then you must make assumptions about their goals and strategies.
Fourth, even when there is opportunities present, heterogeneity of resources and capabilities may not equate to profitable opportunities. That is why businesses test strategies with a limited sample of a demographic before jumping into the entire market. Market testing is expensive as well. Lastly, relying on resource capacity and capability only creates inaccurate information unless there is validity to the assumptions that were made. If a strategic group analysis makes deductions based on the assumption that turns out to be incorrect, time, resources as well as opportunity to exploit an alternative are lost.
Conclusions and Recommendation
Strategic groups and the resource based view of the firm are frequently perceived as opposite positions, but both are in fact complements. The resource based view informs strategic group analysis through offering a richer finer grained perspective on strategy and an additional lens for group interpretation. The strategic group and resource based perspectives of the firm represent different but complementary perspectives on competitive strategies and performance. Any attempt at building on the merits of both the strategic group and resource based perspectives must account for the varying degrees of influence of both group factors and firm resources on performance
This work provides a basis for further research. The study identified both the critical success factors and the strategic groups that can be tested in other industries to check its validity and applicability. Further, more questions need to be answered as to whether strategic group analysis is worthy investing in as an alternative to relying on aggressive strategy based on Resource Based View.
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