Strategic Group Analysis - The Strategy Story

Strategic group analysis is a technique used in strategic management and marketing that helps a business understand the landscape of its industry. The concept involves grouping businesses within an industry into ‘strategic groups’ based on key strategic dimensions, such as cost structure, product quality, distribution channels, market segments, and level of vertical integration.

Steps in performing a strategic group analysis:

Step 1: Identify Key Characteristics

Identifying key characteristics or strategic dimensions is crucial in strategic group analysis. These characteristics represent the different elements by which firms in a particular industry compete and differentiate themselves. They provide the basis for grouping businesses into strategic groups. Here are some common key characteristics:

Product or Service Attributes: The nature of the product or service itself can be a defining characteristic. This could include quality, variety, features, design, and brand reputation. Companies focusing on high-quality luxury goods would be grouped separately from those selling affordable, everyday items.
Price: Price is often a key differentiator among companies. Some companies might position themselves as low-cost providers, while others might compete by offering premium products at higher prices.
Distribution Channels: How a company gets its product or service to the market can also differentiate it from others. This could involve selling directly to consumers online, through retail outlets, or via third-party distributors.
Customer Segments: The particular customer segments that a company targets can define its strategic group. Some companies focus on mass markets, while others might focus on niche segments, such as luxury consumers or specific demographic groups.
Geographic Coverage: Some companies operate locally, others regionally, nationally, or globally. The scope of a company’s operations can be a defining characteristic.
Level of Vertical Integration: The extent to which a company controls its supply chain can also be a key characteristic. Some companies own production facilities, while others outsource production to third parties.
Innovation and Technological Advancements: Firms can also be differentiated based on their innovation level or technology use.

It’s important to note that the key characteristics can vary greatly from one industry to another. For example, in the technology industry, key characteristics include innovation, market speed, and intellectual property. In contrast, in the food industry, key characteristics include taste, nutritional content, price, and distribution. Therefore, it is vital to understand the specifics of your industry when identifying key characteristics.

Step 2: Categorize

Once you’ve identified your industry’s key characteristics or strategic dimensions, the next step is to categorize the companies based on these dimensions. Essentially, you’re creating a classification system based on the similarities and differences among companies.

Create Categories Based on Each Characteristic: Identify the different categories that companies can fall into for each key characteristic. For example, if the price is a key characteristic, the categories might be “low price,” “medium price,” and “high price.” If the distribution is a key characteristic, the categories might be “online,” “brick-and-mortar,” and “multichannel.”
Assign Each Company to a Category for Each Characteristic: Look at each company in the industry and determine which category it falls into for each characteristic. Some companies may clearly fall into one category, while others may straddle two categories.
Identify Strategic Groups: Once companies have been categorized, you can begin to see companies with similar strategic characteristics. These are your strategic groups. For instance, all companies that are “high price” and “high quality” might constitute one strategic group, while those that are “low price” and “low quality” might constitute another.

Keep in mind the process of categorization should be flexible. It’s an interpretive exercise that requires a good understanding of the industry and the firms within it. It may also require making judgment calls when firms straddle categories or when categories are not clear-cut.

Also, the number of strategic groups will depend on the number of key characteristics and the complexity of the industry. There may be only a few strategic groups in a simple industry with only a few key characteristics. In contrast, there could be many strategic groups in a complex industry with many key characteristics.

Step 3: Create a Strategic Group Map

Once you have identified the key characteristics and categorized companies accordingly, you can visualize this information by creating a strategic group map.

A strategic group map is a graphical representation that shows the market positions of each firm in an industry. Each axis of the map typically represents a different strategic dimension or characteristic. The most important or defining characteristics are often selected as the axes.

Here’s how you create a strategic group map:

Choose Axes: The axes of the map represent key strategic dimensions. Commonly, the x-axis represents price range (low to high), while the y-axis might represent product or service quality (low to high). However, these can vary based on the specific industry and key characteristics identified.
Plot Companies: Once the axes are defined, each company in the industry is plotted on the map based on where they fall in terms of the two characteristics. For example, a high-priced, high-quality company would be plotted in the top-right quadrant.
Identify Groups: After plotting the companies, you can draw circles or other shapes to define the strategic groups. Companies that are close together on the map are considered part of the same strategic group. This means they have similar strategies and likely face similar opportunities and threats.
Analyze: The map can now be analyzed to draw insights. You can see which strategic groups are crowded with competitors, which are underserved, and which companies are outliers. You might also see opportunities for a company to shift from one strategic group to another.

A strategic group map can provide useful insights into the competitive dynamics of an industry. It can show gaps in the market, highlight the competitive intensity within and between groups, and identify potential risks and opportunities. However, it’s worth noting that these maps simplify reality and may not capture all the nuances of an industry or company’s strategy.

Step 4: Analyse Competitive Dynamics

Analyzing competitive dynamics involves understanding how the different firms or strategic groups within an industry compete with one another. This includes looking at both the intensity of competition within strategic groups and competition between different strategic groups.

Here are some elements to consider:

Intensity of Competition Within Groups: Typically, firms within the same strategic group are more directly competitive than firms in other groups. This is because they target the same customers, operate in the same markets, and use similar strategies. Therefore, it’s essential to assess the intensity of this competition, which can be influenced by factors such as the number of competitors, their relative size, and the market’s growth rate.
Competition Between Groups: While competition is usually more intense within strategic groups, there is also competition between different groups. For example, a budget airline (low price, low service) still competes to some extent with premium airlines (high price, high service). Understanding these dynamics can help reveal potential threats and opportunities.
Barriers to Mobility: Barriers to mobility prevent a firm from moving from one strategic group to another. These might include capital requirements, technology constraints, customer loyalty, or regulatory hurdles. Assessing these barriers can help determine how easily a firm can change its strategy to enter a different strategic group.
Market Trends: This involves looking at changes in the market that may affect competitive dynamics, such as evolving customer preferences, technological advancements, or regulatory changes. These trends can shift the competitive balance between strategic groups.
Relative Performance: Compare the performance of different strategic groups in terms of profitability, growth, market share, etc. This can help identify which strategies are most effective in the current market conditions.
Potential Entrants and Substitutes: These can also influence competitive dynamics. Potential entrants can add new competition, while substitutes can provide alternatives that customers might choose instead of the products or services of the existing companies.

By understanding these elements, a company can better assess its relative competitive position and make more informed strategic decisions. This might involve strengthening its position within its current strategic group, repositioning to a different group, or identifying ways to reshape the competitive dynamics to its advantage.

Step 5: Identify Opportunities and Threats

After the strategic groups are mapped out and the competitive dynamics analyzed, the final step is identifying opportunities and threats. This involves leveraging your understanding of the market landscape to pinpoint areas of potential growth, competitive advantages, and potential risks or challenges your company may face. Here are some ways to do that:

Opportunities:

Unfilled Niches: Look for strategic spaces on the map that are not densely populated. These may represent underserved market segments or unmet customer needs that your company could fill.
Shifting Market Trends: Keep an eye on industry trends and changes in customer preferences. These could present opportunities for your company to innovate or adapt its strategy to meet emerging demands.
New Technology: Advances in technology or changes in the regulatory landscape could open up new opportunities. For instance, you might find ways to leverage technology to streamline operations or create new products or services.

Threats:

Competitive Intensity: A densely populated strategic group suggests high competition, which could threaten profitability. Be aware of strategic groups with many direct competitors.
Barriers to Entry/Mobility: High barriers could pose a threat if your company wants to move into a different strategic group. On the other hand, low barriers could be a threat if they allow new competitors to enter your strategic group easily.
Substitute Products or Services: These could lure away your customers. Keep an eye on developments in other industries that could lead to substitute products or services.
Changes in the External Environment: Changes in the wider macro-environment (economic, social, technological, environmental, and legal factors) could pose threats. For example, new regulations could impose additional costs or restrictions on your company.

The aim of identifying opportunities and threats is to inform strategic decisions. The insights gained can help your company build on its strengths, shore up its weaknesses, seize opportunities, and guard against threats. Finally, it’s important to regularly revisit and update your strategic group analysis, as the competitive landscape can change over time.

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