|Home BADM449 Handout #8||Joseph T. Mahoney|
College of Business
Department of Business Administration
BADM449 Strategic Management/Business Policy
2. Brand identification
3. Product Quality
4. Technological Leadership
5. Cost position
6. Vertical integration
8. Financial Leverage
The strategies and performance of individual firms within an industry often differ significantly. In many cases, groups of firms can be identified that are pursuing similar strategies that differ from the strategies of other groups of firms in an industry. In this note, we explain the concept of these "strategic groups" and provide some instruction on how to do strategic group analysis. We also undertake a strategic group analysis of the automobile industry as described in the case, Saturn, A Different Kind of Car Company.
Conducting industry analysis with Porter's five forces model identifies the forces that help explain the average level of performance in an industry. One limitation of this model is that it treats all firms as if they were identical in conduct and performance. However, within many industries, the strategies, rivalry, and performance of individual firms differ significantly. For example, in the watch (timepiece) industry, Timex and Rolex differ so much that it seems unlikely that they consider each other as a competitor. Therefore, it is often useful to identify a unit of analysis that is smaller than the industry.
A strategic group is made up of firms that face similar competitive environments and pursue similar strategies along particular strategic dimensions. A firm's membership in a particular strategic group helps define the competitive environment (opportunities and threats) the firm faces. Using strategic groups as our focus, we can study the forces that determine performance in different groups as well as the question of sustainability of superior performance in some groups.
The first question we face in strategic group analysis is identifying the groups. Firms in a particular group pursue similar strategies along particular strategic dimensions. Dimensions that are commonly used in defining strategic groups include: Specialization, Brand Identification, Product Quality, Technological Leadership, Cost Position, Vertical Integration, Service, Financial Leverage (for more details see the first page above). Typically, two or three of these dimensions are chosen and these dimensions form the axes for a graph (called a strategic map) on which the positions of the firms in the industry are plotted.
Unfortunately, the theory of strategic groups does not shed much light on which variables we should choose for our analysis. In general, we want to select the strategic dimensions that reveal the most significant differences in firm strategies and performance across the industry. The best heuristic (i.e., rule of thumb) is to choose dimensions that reflect differences requiring significant commitments on the part of firms in the industry. These variables can be cardinal (e.g., annual R&D budget), ordinal (e.g., low customer service to high customer service), or even noncontinuous categories (e.g., direct marketing and/or retail outlet distribution channels). It is also important that these variables not be correlated, otherwise, the strategic group may well be a diagonal line that reveals little about rivalry and performance. Having chosen the strategic dimensions, we map the locations of the firms, and identify the boundaries of the strategic groups.
Drawing the strategic map does not complete our strategic group analysis. Rather, we use the map to analyze how the strength of the five forces differ between the strategic groups. In strategic groups facing stronger external threats, rivalry is generally more intense and average performance lower. This result implies that the average performance of some strategic groups is higher than others, and raises the question why firms in poor performing groups do not reposition themselves into better performing groups. The existence of mobility barriers restrict or even prevent firms from moving from one strategic group to another. Mobility barriers are analogous to entry barriers except that they impede movement between strategic groups rather than into an industry. These mobility barriers protect the firms in higher performing groups from increased rivalry and the erosion of their economic profits. Factors that restrict entry into an industry can also restrict movement between strategic groups, for example, capital requirements, economies of scale, learning by doing, product differentiation, government policy, expected retaliation, and government policy.
An analysis of the strategic groups of the automobile begins with the choice of strategic dimensions. In this case, we have chosen to characterize the firms by their degree of vertical integration and their degree of product scope. These two dimensions tell us a great deal about how firms in the industry differ in ways that require significant commitments from thefirms.
Until the oil crisis of the 1970s, the major players in the US automobile industry were General Motors, Ford, and Chrysler/Dodge. These firms were (and continue to be) highly vertically integrated, following the assembly line strategies developed by Henry Ford to improve efficiency through specialization and economies of scale. They also offer a wide variety of automobile models, ranging from small to luxury cars. Because these auto makers followed similar strategies and faced similar opportunities and threats within their strategic group, it was easier for them to engage in tacit collusion, allowing them to avoid price competition and to enjoy above-normal profits.
In the decades just before the 1970s, a new group of automobile manufacturers began to make their presence known. Their strategic group was initially characterized by a relatively narrow product range and limited vertical integration. As an alternative to vertical integration, the Japanese firms that comprise this group fostered close relationships with their suppliers. This aided in the development of a new paradigm for efficient manufacturing based on lower inventory costs through just-in-time (JIT) and flexible manufacturing practices. Their early products gained a reputation for fuel efficiency and high quality, both of which were in high demand during the energy crisis of the 1970s. In time, these firms have expanded their product scope to rival that of US firms.
The apparent success of the strategies employed in the Japanese strategic group provides firms in this group with performance above the average level of the world automobile industry. So, why haven't the American auto makers responded more quickly to the Japanese challenge and eroded more of their competitive advantage? The answer resides in identifying the mobility barriers in this industry. The similarities that reduced price competition between American auto manufacturers may have also limited their ability to respond to the threat of the new strategic group. Their earlier strategies did not endow them with the resources and capabilities needed to compete when demand shifted to smaller cars.
|Last Update: January 05, 2006|