The first step in structural analysis within industries is to char-acterize the strategies of all significant competitors along these di-mensions. This activity then allows for the mapping of the industry into strategic groups. A strategic group is the group of firms in an in-dustry following the same or a similar strategy along the strategic di-mensions. An industry could have only one strategic group if all the firms followed essentially the same strategy. At the other extreme, each firm could be a different strategic group. Usually, however, there are a small number of strategic groups which capture the essen-tial strategic differences among firms in the industry. For example, in the major appliance industry one strategic group (with GE as the prototype) is characterized by broad product lines, heavy national advertising, extensive integration, and captive distribution and serv-ice. Another group consists of specialist producers like Maytag fo-cusing on the high-quality, high-price segment with selective distri-bution. Another group (like Roper and Design and Manufacturing) produces unadvertised products for private label. One or two addi-tional groups might be identified as well.
Note that for purposes of defining strategic groups, the strategic dimensions must include the firm‘s relationship to its parent. In an industry like ammonium fertilizer, for example, some firms are divi-sions of oil companies, some are divisions of chemical companies, some are parts of farmers’ cooperatives, and the rest are indepen-dents. Each of these different types of firms is managed with some–what differing objectives. Often relationships to the parent also translate into differences in the other dimensions of strategy—for example, all the divisions of oil companies in nitrogen fertilizer have quite similar strategies—because the relationship has a lot to do with the resources and other strengths available to the firm and the phi-losophy with which it is operated. The same sorts of arguments ap-ply to the differing relationships firms may have with their home and/or host goverments, which also must be part of defining strate-gic groups.
Strategic groups often differ in their product or marketing ap-proach, but not always. Sometimes, as in corn milling and the manu-facture of chemicals or sugar, groups’ products are identical but manufacturing, logistics, and vertical integration approaches differ. Or firms might be following strategies but have differing relation-ships to parent companies or host governments that affect their ob-jectives. Strategic groups are not equivalent to market segments or segmentation strategies but are defined on the basis of a broader conception of strategic posture.
Strategic groups are present for a wide variety of reasons, such as firms’ differing initial strengths and weaknesses, differing times of entry into the business, and historical accidents. (I will have more to say on this subject later in this chapter.) However, once groups have formed, the firms in the same strategic group generally resem-ble one another closely in many ways besides their broad strategies. They tend to have similar market shares and also to be affected by and respond similarly to external events or competitive moves in the industry because of their similar strategies. This latter characteristic is important in using a strategic group map as an analytical tool.
The strategic groups in an industry can be displayed on a map like the hypothetical one shown in Figure 7-1. The number of axes are obviously limited by the two-dimensional character of a printed page, which means that the analyst must select a few particularly im-portant strategic dimensions along which to construct a map.2 It is useful to represent the collective market share of the firms in each strategic group with the size of symbols for subsequent analysis.
FIGURE 7-1. A Map of Strategic Groups in a Hypothetical Industry
The strategic group is an analytical device designed to aid in structural analysis. It is an intermediate frame of reference between looking at the industry as a whole and considering each firm sepa-rately. Ultimately every firm is unique, and thus classifying firms into strategic groups inevitably raises questions of judgment about what degree of strategic difference is important. These judgments must necessarily relate to structural analysis: a difference in strategy among firms is important enough to recognize in defining strategic groups if it significantly affects the structural position of the firms. I will return later to these practical considerations of mapping strate-gic groups and using the map as an analytical tool.
In the rare case of only one strategic group existing in an indus-try, the industry can be analyzed fully by using the techniques of structural analysis presented in Chapter 1. In this case the industry’s structure will yield the same potential level of sustainable profitabil–ity to all firms. The actual profitability of particular firms in the in-dustry should differ in the long run only insofar as they differ in their ability to implement the common strategy. If there are several strategic groups in an industry, however, the analysis is more com-plicated. The profit potential of firms in different strategic groups is often different, quite apart from their implementation abilities, be-cause the five broad competitive forces will not have equal impact on different strategic groups.
1. STRATEGIC GROUPS AND MOBILITY BARRIERS
Entry barriers have been viewed so far as industry characteris-tics that deter new firms from coming into the industry. The major sources of entry barriers that have been identified are economies of scale, product differentiation, switching costs, cost advantages, ac-cess to distribution channels, capital requirements, and government policy. Yet although some of the sources of entry barriers will pro-tect all firms in the industry, it is clear that overall entry barriers de-pend on the particular strategic group that the entrant seeks to join. Entering the appliance industry as a nationally branded, broad-line, vertically integrated firm will be a great deal more difficult than en-tering as an assembler of a narrow line of unbranded goods for small private label accounts. Differences in strategy may imply differences in product differentiation, differences in the achievement of econo-mies of scale, differences in capital requirements, and potential dif-ferences in all the other sources of entry barriers. If barriers caused by production economies of scale exist, for example, they will be most significant in protecting the strategic group consisting of firms with large plants and extensive vertical integration. Economies of scale in distribution, if they exist in the industry, will create barriers to entry into strategic groups with captive distribution organiza-tions. Cost advantages from accumulated experience, if they are im-portant in the industry, create barriers protecting the groups consist-ing of experienced firms (although not inexperienced ones). And so on for each other source of entry barriers.
Differences in firms’ relations to their parents may affect entry barriers as well. The strategic group including those firms that have a vertical relationship to their parents, for example, may enjoy supe-rior access to raw materials or larger financial resources with which to retaliate against potential entrants than a strategic group consist-ing of independent competitors. Or firms who share distribution channels with another division of their parent company may reap economies of scale that their competitors cannot match, thereby de-terring entry.
This view that entry barriers depend on the target strategic group carries another important implication. Entry barriers not only protect firms in a strategic group from entry by firms outside the in-dustry but also provide barriers to shifting strategic position from one strategic group to another. For example, the narrow-line, un- branded appliance assembler described earlier will face many if not most of the same difficulties in entering the strategic group consist-ing of the broad-line, nationally branded, integrated firms as would an entirely new entrant. Factors creating entry barriers that result from competing with a particular strategy—because they affect economies of scale, product differentiation, switching costs, capital requirements, absolute cost advantages, or access to distribution— elevate the cost to other firms of adopting that strategy. This cost of adopting the new strategy can eliminate the expected gains from the change.
The same underlying economic factors leading to entry barriers can thus be framed more generally as mobility barriers, or factors that deter the movement of firms from one strategic position to an-other. The movement of a firm from a position outside the industry to a strategic group in the industry (entry) becomes one of a contin-uum of possibilities, using this broader concept of barriers.
Mobility barriers provide the first major reason why some firms in an industry will be persistently more profitable than others. Dif-ferent strategic groups carry with them different levels of mobility barriers, which provide some firms with persistent advantages over others. The firms in strategic groups with high mobility barriers will have greater profit potential than those in groups with lower mobil-ity barriers. These barriers also provide a rationale for why firms continue to compete with different strategies despite the fact that all strategies are not equally successful. One asks oneself why successful strategies are not quickly imitated. Without mobility barriers, firms with successful strategies would be quickly imitated by others, and firms’ profitability would tend toward equality except for differ-ences in their abilities to execute the best strategy in an operational sense. Without deterrents, for example, computer manufacturers like Control Data and Honeywell would jump at the chance to adopt IBM’s strategy, with its lower costs and superior service and distri-bution network. The existence of mobility barriers means that some firms like IBM can enjoy systematic advantages over others, through economies of scale, absolute cost advantages, and so on, which can be overcome only by strategic breakthroughs that lead to structural change in the industry, and not merely through better execution. Fi-nally, the presence of mobility barriers means that market shares of firms in some strategic groups in an industry can be very stable, and yet there can be rapid entry and exit (or turnover) in other strategic groups in the industry.
Just like entry barriers, mobility barriers can change; and as they do (such as if the manufacturing process becomes more capital intensive) firms often abandon some strategic groups and jump into new ones, changing the pattern of strategic groups. Mobility barriers can also be influenced by firm choices of strategy. A company in an undifferentiated product industry, for example, can attempt to cre-ate a new strategic group (with higher mobility barriers) by investing heavily in advertising to develop brand identification (like Perdue is doing in fresh chicken). Or it can try to introduce a new manufactur-ing process with greater economies of scale (Castle & Cooke and Ralston Purina in mushroom farming).5 Investments in building mo-bility barriers are generally risky, however, and to some extent trade short–term profitability for long-term profitability.
Some firms will face lower costs than others in overcoming par-ticular mobility barriers depending on their existing strategic posi-tions and their inventory of skills and resources. Diversified firms can also enjoy reductions in mobility barriers because of opportuni-ties for sharing operations or functions. The implications of these factors for decisions to enter new businesses will be discussed in Chapter 16.
After mapping the strategic groups in an industry, the second step in structural analysis within an industry is to assess the height and composition of the mobility barriers protecting each group.
2. MOBILITY BARRIERS AND GROUP FORMATION
Strategic groups form and change in an industry for a variety of reasons. First, firms often begin with or later develop differences in skills or resources, and thus select different strategies. The well-situ-ated firms outdistance others in the race toward the strategic groups protected by high mobility barriers as the industry develops. Secondj firms differ in their goals or risk posture. Some firms may be more prone to making risky investments in building mobility barriers than others. Business units that differ in their relationship to a parent company (e.g., being vertically related, unrelated, or a free-standing firm) may differ in goals in ways that will lead to differences in strat-egy, as may international competitors with different situations in their other markets than domestic firms.
The historical development of an industry provides another ex-planation for why firms differ in their strategies. In some industries, being an early entrant provides access to strategies more costly to later entrants. Mobility barriers from scale economies, product dif-ferentiation, and other causes may also change, either as a result of firm‘s investments or exogenous causes. Changing mobility barriers mean that early entrants into the industry may pursue very different strategies than later entrants, some of which may not be available to later entrants. The irreversibility of many forms of investment deci-sions sometimes precludes early entrants from adopting the strate-gies of the later entrants who have the advantages of hindsight.
A related point is that the process of historical evolution of an industry tends to lead to the self-selection of different types of en-trants at different times. For example, later entrants into an industry may tend to be firms with increased financial resources who can af-ford to wait until some of the uncertainties in the industry are re-solved. Firms with few resources, on the other hand, could have been compelled to enter early when capital costs of entry were low.
Changes in the structure of the industry can either facilitate the formation of new strategic groups or work to homogenize groups. For example, as an industry increases in total size, strategies involv-ing vertical integration, captive distribution channels, and in-house servicing may become increasingly feasible for the aggressive firm, promoting the formation of new strategic groups. Similarly, techno–logical changes or changes in buyers’ behavior can shift industry boundaries, bringing entirely new strategic groups into play.” Con-versely, maturity in an industry, which lessens the buyer’s desire for service capability or for the reassurance embodied in the manufac-turer having a full product line, can work to reduce the mobility bar-riers that accrue to some strategic dimensions, leading to a reduction in the number of strategic groups. As a consequence of all these fac-tors, we would expect to see the array of strategic groups and the dis–tribution of profit rates of firms within an industry change over time.
3. STRATEGIC GROUPS AND BARGAINING POWER
Just as different strategic groups are protected by differing mo-bility barriers, they enjoy differing degrees of bargaining power with suppliers or customers. If we examine the factors leading to the pres-ence or absence of bargaining power discussed in Chapter 1, it is ap-parent that they relate to some extent to the strategy adopted by the particular firm. For example, concerning bargaining power with buyers, Hewlett-Packard (HP) is in a strategic group in electronic calculators emphasizing high quality and technological leadership and focusing on the sophisticated user. Although such a strategy may limit HP’s potential market share, it does expose it to less price- sensitive and less powerful buyers than the firms competing with es-sentially standardized products in the mass market, where buyers have little need for sophisticated product features. Relating this ex-ample to the terminology of Chapter 1, HP’s products are more dif-ferentiated than those of the mass market competitors, its buyers are more quality-oriented, and the cost of the calculator is smaller rela-tive to the buyers’ budgets and to the value of the service they want it to perform. An example where different strategic groups have dif-fering bargaining power with suppliers is the much greater volume of purchases and threat of backward integration that large, broad-line, national department store chains like Sears have as bargaining levers with suppliers relative to local, single-unit department stores.
Strategic groups will have differing amounts of power vis-à-vis suppliers and buyers for two categories of reasons, both illustrated in the examples above: Their strategies may yield them differing de-grees of vulnerability to common suppliers or buyers; or their strate-gies may involve dealing with different suppliers or buyers with cor-respondingly different levels of bargaining power. The extent to which relative power can vary depends on the industry; in some in-dustries all strategic groups could be in essentially the same position with respect to suppliers and buyers.
The third step in structural analysis within an industry, then, is to assess the relative bargaining power of each strategic group in the industry with its suppliers and buyers.
4. STRATEGIC GROUPS AND THE THREAT OF SUBSTITUTES
Strategic groups may also face differing levels of exposure to competition from substitute products if they are focusing on differ-ent parts of the product line, serving different customers, operating at different levels of quality or technological sophistication, have different cost positions, and so on. Such differences may make them more or less vulnerable to substitutes even though the strategic groups are all in the same industry.
For example, a minicomputer firm focusing on business cus-tomers, selling machines complete with software to perform a wide variety of functions, will be less vulnerable to substitution from mi-crocomputers than a firm primarily selling to industrial buyers for repetitive process-control applications. Or a mining company with a low-cost ore source may be less vulnerable to a substitute material whose advantage is solely based on price than a mining company with a high-cost ore source that has based its strategy on a high level of customer service.
Therefore, the fourth step in structural analysis within an indus-try is to assess the relative position of each strategic group vis-à-vis substitute products.
5. STRATEGIC GROUPS AND RIVALRY AMONG FIRMS
The presence of more than one strategic group in an industry has implications for industry rivalry, or competition in price, advertis-ing, service, and other variables. Some of the structural features that determine the strength of competitive rivalry (Chapter 1) may apply to all firms in the industry and thus provide the context in which the strategic groups interact. Broadly speaking, however, the existence of multiple strategic groups usually means that the forces of compet–itive rivalry are not faced equally by all firms in the industry.
The first point to be made is that the presence of several strate-gic groups will often affect the overall level of rivalry in the industry. Their presence will generally increase rivalry because it implies greater diversity or asymmetry among firms in the industry in the sense defined in Chapter 1. Differences in strategy and external cir-cumstances mean that firms will have differing preferences about risk taking, time horizon, price levels, quality levels, and so on. These differences will complicate the process of firms understanding each others’ intentions and reacting to them, and will thus increase the likelihood of repeated outbreaks of warfare. The industry with a complicated map of strategic groups will tend to be more competi–tive as a whole than one with few groups. Recent research has veri-fied this point in a number of contexts.5
Not all differences in strategy are equally significant in affecting industry rivalry, however, and the process of competitive rivalry is not symmetrical. Some firms are more exposed to damaging price cutting and other forms of rivalry from other strategic groups than others. Four factors determine how strongly the strategic groups in an industry will interact in competing for customers:
- the market interdependence among groups, or the extent to which their customer targets overlap;
- the product differentiation achieved by the groups;
- the number of strategic groups and their relative sizes;
- the strategic distance among groups, or the extent to which strategies diverge.
The most important influence on rivalry among strategic groups is their market interdependence, or the degree to which differ-ent strategic groups are competing for the same customers or com-peting for customers in distinctly different market segments. When strategic groups have high market interdependence, differences in strategy will lead to the most vigorous rivalry, for example, in fer-tilizer where the customer (the farmer) is the same for all groups. When strategic groups are targeting very different segments, their interest in and effect on each other is much less severe. As the cus-tomers they are selling to become more distinguished, the rivalry be-comes more (but not the same) as if the groups were in different in-dustries.
The second key factor influencing rivalry is the degree of prod-uct differentiation created by the groups’ strategies. If divergent strategies lead to distinct and differing brand preferences by custom–ers, then rivalry among the groups will tend to be much less than if the product offerings are seen as interchangeable.
The more numerous and more equal in size (market share) the strategic groups, the more their strategic asymmetry generally in-creases competitive rivalry, other things being equal. Numerous groups imply great diversity and a high probability that one group will trigger an outbreak of warfare by attacking the position of other groups through price cutting or other tactics. Conversely, if groups are greatly unequal in size—for example, one strategic group con-stitutes a small share of an industry and another is a very large share—their strategic differences are likely to have little impact on the way they compete with each other, since the power of the small group to affect the large groups through competitive tactics is prob-ably low.
The final factor, strategic distance, refers to the degree to which strategies in different groups diverge in terms of the key variables, such as brand identification, cost position, and technological leader-ship, as well as in external circumstances, such as relationships to parents or governments. The more the strategic distance among groups, other things being equal, the more vigorous competitive skirmishing is likely to be among the firms. Firms pursuing widely different strategic approaches tend to have quite different ideas about how to compete and a difficult time understanding each others’ behavior and avoiding mistaken reactions and outbreaks of warfare. In ammonium fertilizer, as an instance, oil company partic-ipants, chemical company participants, cooperatives, and indepen-dents all have very different objectives and constraints. For exam-ple, tax benefits and unusual motives have led cooperatives to expand even when overall industry conditions were poor. Oil companies did the same thing for different reasons in the 1960s.
AH four factors interrelate to determine the pattern of rivalry for customers among strategic groups in an industry. For example, the most volatile situation, likely to be associated with intense com-petition, is the one in which several equally balanced strategic groups, each following markedly different strategies, are competing for the same basic customer. Conversely, a situation likely to be more stable (and profitable) is one in which there are only a few large strategic groups that each compete for distinct customer seg-ments with strategies that do not differ except along a few dimen-sions.
A particular strategic group will face rivalry from other groups based on the factors just discussed. It will be most exposed to bouts of rivalry from the other strategic groups that share market interde-pendence. The volatility of this rivalry will depend on the other con-ditions identified above. A particular group will be most exposed to rivalry from other strategic groups, for example, if they compete for the same market segments with products perceived as similar, are relatively equal in size, and follow quite different strategic ap-proaches for getting the product to market (have high strategic dis-tance). Achieving stability will be extremely difficult for such a stra-tegic group, and outbreaks of aggressive warfare are likely to insure a very competitive outcome for it. However, a strategic group that has a large collective share and/or targets its efforts to distinct mar-ket segments not served by other strategic groups and achieves high product differentiation is likely to be more insulated from inter- group rivalry. The secure strategic groups that are the most insulated from rivalry will only be able to maintain profitability, however, if mobility barriers protect them from shifts in strategic position by other firms.
Thus, strategic groups affect the pattern of rivalry within the in-dustry. This process is illustrated schematically by the strategic group map shown in Figure 7-2, which is similar to Figure 7-1 except that the horizontal axis is the target customer segment of the strate-gic group in order to measure market interdependence. The vertical axis is another key dimension of strategy in the industry. The let–tered symbols are strategic groups, their size proportional to the col–lective market share of firms in the group. The shape of the groups is used to represent their overall strategic configuration, with differ-ences in shape representing strategic distance. Applying the analysis presented earlier, it is clear that Group D will be much less affected by industry rivalry than Group A. Group A competes with similarly large Groups B and C, who use very different strategies to reach the same basic customer segment. Firms in these three groups are in con-stant warfare. Group D, on the other hand, competes for a different segment and interacts most strongly in reaching this segment with Groups E and F, who are smaller and follow similar strategies (they could be viewed as “specialist” producers following the “round” strategy or close variants to it).
The fifth step in structural analysis within an industry, then, is to assess the pattern of market interdependence among stra-tegic groups and their vulnerability to warfare initiated by other groups.
FIGURE 7-2. Strategic Group Mapping and intergroup Rivalry
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.