Strategic Groups: Implications for Formulation of Strategy

Formulating competitive strategy in an industry can be viewed as the choice of which strategic group to compete in. This choice may involve selecting the existing group that involves the best trade-off between profit potential and the firm’s costs of entering it, or it may involve the creation of an entirely new strategic group. Struc-tural analysis within an industry points to the factors that will deter-mine the success of a particular strategic positioning for the firm.

As described in the Introduction, the broadest guidance for the formulation of strategy is stated in terms of matching a firm’s strengths and weaknesses, particularly its distinctive competence, to the opportunities and risk in its environment. The principles of structural analysis within an industry allow us to be much more con-crete and specific about just what a firm’s strengths, weaknesses, distinctive competence, and industry opportunities and risks are. A firm’s strengths and weaknesses can be listed as follows:

If the key mobility barriers into a firm‘s strategic group are based, for example, on its broad product line, proprietary technology, or absolute cost advantages due to experience, these sources of mobility barriers define some of the firm‘s key strengths. Or if the most desir-able strategic group in the firm‘s industry is protected by mobility barriers resting on the achievement of economies of scale through a captive distribution and service organization, the lack of such a fac-tor becomes one of the firm‘s key weaknesses. Structural analysis gives us a framework for systematically identifying a firm‘s key strengths and weaknesses relative to competitors. These strengths and weaknesses are not cast in concrete but can change as industry evolution realigns the relative position of strategic groups or as firms innovate or make investments to change their structural position.

This framework for viewing strengths and weaknesses illumi-nates two fundamentally different types: structural and implementa- tional. Structural strengths and weaknesses rest on the underlying characteristics of industry structure, such as mobility barriers, deter-minants of relative bargaining power, and so on. As such they are relatively stable and difficult to overcome. Strengths and weaknesses in implementation, based on differences in a firm‘s ability to execute strategies, rest on people and managerial abilities. As such, they may be more ephemeral, though not necessarily. In any case, it is impor-tant to make a distinction between the two in analysis of strategy.

The strategic opportunities facing the firm in its industry can also be made more concrete by using these concepts. Opportunities can be divided into a number of categories:

  • create a new strategic group;
  • shift to a more favorably situated strategic group;
  • strengthen the structural position of the existing group or the firm‘s position in the group;
  • shift to a new group and strengthen that group’s structural position.

Perhaps the class of opportunities with the highest payoff is in creating a new strategic group. Technological changes or evolution in the structure of the industry often open up possibilities for entirely new strategic groups. Even without such stimuli, the visionary firm might be able to perceive a new, favorably situated strategic group not perceived by its competitors. American Motors, for example, identified a uniquely positioned compact car in the mid-1950s, for a time overcoming serious disadvantages vis-à-vis the Big Three. Timex created a new conception of a low-price, reliable watch, coupling new manufacturing techniques with a new distribution and marketing approach. More recently, Hanes created an entirely new group in hosiery with its L’eggs strategy. Although vision is a scarce com-modity, structural analysis can help direct thinking toward the areas of change that would yield the highest payoff.

Another class of potential strategic opportunity is represented by the more favorably situated strategic groups in the industry that the firm might choose to enter.

A third type of strategic opportunity is the possibility for the firm to make investments or adjustments that improve the structural position of its existing strategic group or its position within the group, for example, increase mobility barriers, improve position vis- à-vis substitute products, strengthen marketing ability, and so on. It is also possible to view such investments and adjustments as creating a new and better strategic group.

A final type of strategic opportunity is that of entering other strategic groups and increasing their mobility barriers or otherwise improving their position. Structural evolution in an industry is a powerful creator of possibilities to make this change as well as to im-prove the firm’s position in its existing group.

The risks facing a firm can be identified by using the same basic concepts:

  • risks of other firms entering its strategic group;
  • risks of factors reducing the mobility barriers of the firm’s strategic group, lowering power with customers or suppliers, worsening position relative to substitute products, or expos-ing it to greater rivalry;
  • risks that accompany investments designed to improve the firm’s position by increasing mobility barriers;
  • risks of attempting to overcome mobility barriers into more desirable strategic groups or entirely new groups.

The first two can be viewed as threats to the firm’s existing position, or risks of inaction, whereas the latter are risks of pursuing opportu-nities.

The firm’s choice of strategies, or which strategic group to com-pete in, is a process of relating all these factors. Many, if not most, major strategic breakthroughs come about because of changing structure. Structural analysis shows how a firm’s existing strategic position coupled with existing industry structure translates into per-formance in the marketplace. If industry structure is unchanging, then the cost of overcoming mobility barriers to move to another strategic group already occupied by other firms may well eliminate the benefits. However, if the firm can perceive an entirely new stra-tegic position that is favorable structurally, or if it can change its po-sition at a time when industry evolution lowers the cost of shifting, then a truly significant improvement in performance can result. The framework identified here should illuminate what to look for in such a repositioning.

The three generic strategies identified in Chapter 2 represent three broad and consistent approaches to successful strategic positioning. In the context of this chapter, they are different broad types of strategic groups that can be successful depending on the economics of the particular industry. This chapter has added a lot more flesh and blood to the analysis of the generic strategies. It is clear, based on this chapter, that the generic strategies rest on creating (in differ-ent ways) mobility barriers; favorable position with buyers, suppli-ers, and substitutes; and insulation from rivalry. Our extended con-cept of structural analysis, then, is a way of making the notion of generic strategies clearer and more operational.

Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.

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