Exploring the linkage between strategic groups and competitive strategy

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PAPER NO. 1238

Exploring the Linkage Between Strategic
Groups and Competitive Strategy

Avi Fiegenbaum
John McGee
Howard Thomas

College of Commerce and Business Administration
Bureau of Economic and Business Research
University of Illinois, Urbana-Champaign

BEBR

FACULTY WORKING PAPER MO. 1238
e g e of Commerce and Business Administration
University of Illinois at Urbana-Charapaign
April 1*86

Exploring the Linkage Between Strategi
Grcups 3r. d Competitive Strategy

A v i Fiegenbaum, Assistant
Department of Business Administration

John McGee
Temple ton College, Oxford

Howard Thomas, Professor
Department of Business Administration

Digitized by the Internet Archive

in 2011 with funding from

University of Illinois Urbana-Champaign

http://www.archive.org/details/exploringlinkage1238fieg

ABSTRACT

Since Hunt (1972) coined the term "strategic groups" in his study
on the home appliance industry, a growing body of literature, both
theoretical and empirical, has used this concept in different ways for
different purposes. This paper reviews existing literature and
explores the linkage between strategic groups and competitive stra-
tegy. The STRATEGIC SPACE (SSP) concept is proposed in order to help
the resolution of such issues as the identification of strategic groups
and understanding the dynamic behavior of strategic groups.

INTRODUCTION
In the last decade, the nature of a firm's competitive strategy
has been realized by both practitioners and academicians as an impor-
tant element in business success. Competitive strategy "... involves
positioning a business to maximize the value of the capabilities that
distinguish it from its competitors" (Porter (1980:47)). According to
this definition, two major questions are raised in competitive stra-
tegy analysis:

1. Who are the firm's competitors?

2. What kind of strategic decisions should an organization take
in order to position itself relative to its competitors?

In economics, an industry is often used to define competitive
boundaries. Two criteria normally define the boundaries of the
industry: markets and technologies. The market criterion (e.g.,
Caves (1977)) includes within a specific industry those firms that
have products sufficiently similar as to be close substitutes. This
similarity is tested by the cross-elasticity of demand. The tech-
nological criterion (e.g., Andrews (1951)) focuses upon the classifi-
cation of firms according to the similarity of their production proc-
esses. In the United States, the Standard Industrial Classification,
or S.I.C., follows the market criterion by defining industries in pro-
duct terms. (See McGee and Thomas (1986) for a comprehensive dis-
cussion. )

With the difficulties of satisfying both market and technological
criteria, and with the increasing industrial complexity since World
War II — diversification of products, participation in several "indus-
tries" and multinational activity — the definition of the set of

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competitors for a given firm (i.e., the industry) has become increas-
ingly imprecise. To illustrate the problem, (Huff> Thomas, and
Fiegenbaum (1985)) consider the response of Walter Wriston, the Chief
Executive Officer of CITICORP, when asked to identify his competitors:

Sometimes Wriston mentions Morgan Guaranty... other-
wise, Wriston sees his competition as being Merrill
Lynch, the American Telephone and Telegraph Company,
Sears Roebuck and company, Prudential-Bache and the
American Express company. (Bennett (1983:16))

These comments indicate that the problem of defining the firm's com-
petitors (i.e., industry or competitive set) is an increasingly dif-
ficult issue in formulating competitive strategy.

In his doctoral dissertation on competitive processes in the
"white goods" industry, Hunt (1972) coined the term "Strategic Group"
(SG) for the finer classifications that exist within industries. He
observed that different firms in the industry adopted different stra-
tegies in order to achieve their organizational goals. Indeed, firms
similar in their strategic behavior were clustered into a strategic
group.

The concept of strategic groups allows firms to make more sense of
competition in analyzing complex industries (McGee and Thomas
(1985)), in defining firms' competitors, and in illustrating the com-
petitive positions available within an industry. Based on the concept
of strategic groups, Caves and Porter (1977) generalized the theory of
entry barriers (Bain (1956), Vernon (1972), Scherer (1980)) and devised
the term "mobility barriers." The theory of Mobility barriers argues
that barriers not only protect firms in a strategic group from entry
by firms outside the industry but also provide barriers to firms

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within the industry shifting strategy positions from one strategic
group to another.

Based on the concepts of strategic groups and mobility barriers,
Porter (1979) developed a theory that explains interfirm performance
differences. According to this theory, the structure of strategic
groups (the height of mobility barriers, number of strategic groups,
distance between groups, etc.) affects the process of rivalry within
the industry and hence both the average profit and the dispersion of
firms' profits. In addition, mobility barriers enable some strategic
groups to maintain persistent performance advantages over other stra-
tegic groups. Thus, the concept of strategic groups provides impor-
tant frameworks for analyzing competitive strategy.

In the next section we review the literature on strategic groups
and go on to link, the strategic group concept with the analysis of
competitive strategy.

STRATEGIC GROUPS: LITERATURE REVIEW
For research on strategic groups, it is crucial to understand what
the word "strategy" means. Therefore, the first part of this section
illustrates some different approaches which have been suggested for
operationalizing the strategy concept. Workable guidelines (rather
than theoretical arguments) are stated to provide benchmarks for iden-
tifying a firm's strategy. In the second part of this section, stra-
tegic groups studies are reviewed from a number of relevant perspec-
tives and important findings are summarized.

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Strategy

Despite many studies exploring different aspects of firms' strat-
egy, there is no clear consensus on the word's definition. The word
"comes from the Greek strategos , a 'general' which in turn comes from
roots meaning 'army' and 'lead'" (Bracker (1980: 219)). A strategist
in Greek literature was, therefore, the individual who planned and
managed wars. In the last three decades, the importance of a
"strategist's viewpoint" for running an organization was realized by
both business practitioners and academicians. Chandler, a business
historian, is one of the pioneers in the development of the field.
According to Chandler (1962: 13) "strategy" is:

... the determination of the basic long-term goals
and objectives of an enterprise and the adoption
of courses of action and the allocation of resources
necessary for carrying out these goals.

Chandler did not differentiate the processes of strategic formulation
from the concept itself. He also ignored the important strategic link
between the firm and its environment. However, Chandler's study was
the springboard for further contributions concerned with the defini-
tion and the meaning of the concept. Many other authors (e.g.,
Andrews (1971), Ansoff (1965), Cannon (1968), Steiner (1969), Katz
(1970), Ackoff (1970), Paine and Naumes (1974), Glueck (1976)), also
addressed different aspects of strategy. These include such perspec-
tives as its breadth, its components, the characteristics of its
objectives, the levels of strategy, and so forth.

Chaffee (1985) examined studies on the strategy concept and
classified them into "three models of strategy." First, according to
the linear model, strategy consists of decisions, actions, and plans

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that will be taken by the firm in order to achieve its goals. The
strategy of firms which fit this model is characterized by changing
markets, products, and other activities. The writings of Chandler
(1962), Cannon (1968), Andrews (1971), Drucker (1974), and Steiner and
Miner (1977) rest on such a linear model. Second, adaptive strategy
is concerned with the development of a viable match between the oppor-
tunities and risks present in the external environment and the organi-
zation's capabilities and resources for exploiting those opportunities'
(Hofer (1973: 3)). Adaptive strategy tries to achieve a match between
the firm and its environment. In contrast to the linear model the
adaptive model considers a firm's action or reaction as a response to
the nature and magnitude of environmental changes and pressures.
Hofer (1973), Hofer and Schendel (1978), Mintzberg (1978), Quinn
(1980), Gluck et. al (1982) employ this model. Finally, Chaffee calls
the third model interpretive strategy, for it looks at strategy from
the viewpoint of the organization's culture. In this model, strategy
becomes the "orienting metaphors to motivate behavior expected to pro-
duce favorable organizational results" (Chaffee (1985:83)). Different
groups and stakeholders can affect the firm's strategy and, therefore,
good strategy can be achieved by fostering sound communication and
relationships between the various stakeholders. Such writers as
Pettigrew (1977), Van Cauwenbergh and Cool (1982), Dirsmith and
Covaleski (1983), and Chaffee (1985) emphasize the relevance of the
interpretive model.

In trying to find a workable guideline (rather than theoretical
arguments) to identify strategy, the following statements should be
considered:

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(1) Strategy is "a pattern in a stream of decisions" (Mintzberg
(1978: 934)). This view of strategy stresses the longitudinal
nature of strategic development and its internal consistency.

(2) "The decision must be important to the success of the enter-
prise" (Shirley (1983: 265)). This statement emphasizes that
only decisions that can affect the success (or failure) of the
enterprise should be considered as strategic decisions.

(3) It is important to relate strategy to organizational level.
Hofer and Schendel (1978) emphasize four levels of an organi-
zation that different strategic questions should be raised in
each level. At the enterprise strategy level, strategy is
concerned with the question of "how can we maintain the poli-
tical legitimacy of the organizations?" (Hofer and Schendel
(1978:15)). At the corporate strategy level, the question is
"what set of businesses should we be in?" (Hofer and Schendel
(1978: 27)). At the business strategy level, the question is
"how to compete in a particular industry or product/market
segment." (Hofer and Schendel (1982: 27)). And at the
functional strategy level, the question is on the
"Maximization of resource productivity" (Hofer and Schendel
(1978:29)).

(4) For each level of organizational strategy, four components of
strategic decisions can be identified:

1. Scope, that is, the extent of the organization's present
and planned interactions with its environment.

2. Resource Deployment, that is, the level and pattern of
the organization's past and present resource and skill
deployments.

3. Competitive Advantage, that is, the unique position an
organization develops vis-a-vis its competitors.

4. Synergy, that is, the joint effects that are sought from
the organization's resource deployments and/or scope
decisions" (Hofer and Schendel (1978: 25)).

(5) It is important, as noted by Mintzberg (1978), to distinguish
between two major kinds of strategies, intended and realized.
Intended strategy is an ex-ante concept whereas realized strat-
egy is an ex-post result. Mintzberg suggests that these two
strategies should be studied so that "...the interplay between
intended and realized strategies may lead us to the heart of
this complex organizational process" (Mintzberg (1978: 934)).

In summary, the five perspectives above can serve as a guideline

for the purpose of formulating strategic groups. More specifically,

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iteras 1, 3 and 4 (longitudinal, level and component, respectively)
define what may be called the Strategic Space (SSP). Either intended

Insert Figure 1 About Here

or realized strategy can be drawn on this space (item 5). Item (2)
above emphasizes that strategic decisions are important to the success
(or failure) of the organization. Therefore, the important dimensions
which define strategic groups should reflect matters of salience and
importance to the company.

Strategic Groups: Review and Perspectives
Since Hunt (1972) coined the term, both theoretical and empirical
literature has used the concept of "strategic groups'" in different
ways. Researchers in industrial organization economics, strategic
management, marketing, among others, have all employed the concept.
An extensive research review is available in McGee and Thomas (1986).
In this paper the review of studies on strategic groups falls into the
following categories.

1. Fundamentals of strategic groups theory.

2. The theory of strategic structure within an industry and firm
performance.

3. Strategic group formation and the behavior of firms and
groups over time.

4. Summary of the empirical studies on strategic groups.

5. The relevance of strategic groups for competitive strategy
analysis.

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Fundamentals of Strategic Groups Theory

The traditional paradigm in the field of industrial organization

economics argues that firm performance is strongly influenced by

market structure. Market structure includes elements such as seller

concentration, barriers to entry and exit, product differentiation,

industry growth, and economies of scale (see Bain (1956), Vernon

(1972), Caves (1977), Scherer (1980)). The logic of this paradigm is

that market structure influences the market conduct of the firms and

that in turn determines market performance. The crucial assumption is

that all firms are profit maximizers and sharing the constraints of

market structure, will tend to behave in the same way.

Firms in an industry are assumed to be alike in all
economically important dimensions except for their
size (Porter (1979; 214)).

The homogeneity assumption, which considers each firms' behavior

(strategy) to be alike, was the reason that firm behavior elements

were ignored in the structure/performance paradigm. A number of

empirical studies (e.g., Comanor and Wilson (1967), Hall and Weiss

(1967), Collins and Preston (1968), Shepherd (1972), Gale (1972),

Bass, Cattin and Wittink (1978)) have confirmed that firms' profits in

an industry can be partially explained by market structure elements.

In the last decade, more attention has been paid to the relevance

of firms' behavior. Newer industrial organization (10) paradigms

attempt to integrate more formally the firm's performance with its

conduct as well as with the market structure. The main argument in

the "behavioralist " paradigm, namely, that a firm's strategic choice

has an impact on the firm's performance, brings the industrial

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organization and strategic management disciplines closer to each
other. Strategic management writers argue that the study of a firm's
conduct should be the primary focus for research (see Porter (1981a)
for the contribution of 1.0. to strategic management.) Empirical
studies (e.g., Hatten (1974), Patton (1976)) have shown that firm-
level conduct (strategy) variable(s) contribute to the explanatory
power of the structure/performance paradigm.

Investigating the strategic patterns in the '"white goods" industry,
Hunt (1972) realized that within the industry, groups of firms use
different strategies. Hunt coined the novel term strategic groups to
characterize the strategic diversity within the industry. According
to Hunt (1972; 8-16) a strategic group is defined as:

A group of firms within the industry that are highly
symmetric ... with respect to cost structure, degree
of product differentiation, degree of vertical inte-
gration, and the degree of product diversification
... formal organization, control systems, and manage-
ment rewards and punishments ... (and) the personal
views and preferences for various possible outcomes.

From an industrial organization point of view, the clustering of

companies into strategic groups has an important contribution to the

structure/conduct/performance paradigm. The empirical findings have

shown that the explanation of firm performance in an industry improves

when strategic group factors are included as independent variables

(e.g., Newman (1973)). In addition, different relationships between

profit and strategy were found for firms in different strategic groups

(e.g., Hatten (1974), Patton (1976)). From a strategic management

point of view, the recognition of strategic groups within an industry

has the important implication that it occupies an intermediate level

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between Che industry and the firm for analyzing the nature of com-
petitive strategy.

Based on the concept of strategic groups, Caves and Porter (1977)
developed the concept of mobility barriers, a modification of the
entry barrier (Bain (1956)) idea. Theories about entry barriers argue
that existing firms are protected from new entrants into the industry
by such elements as economies of scale, product differentiation, and
the like. The mobility barriers theory argues that barriers impede
not only newcomers but also firms in the same industry but with dif-
ferent asset configurations who might wish to improve their relative
strategic positioning by moving into another strategic group.

In summary, it is argued here that the strategic groups concept is
important. More specifically, the concept is important in examining
the structure/conduct/performance paradigm, the nature of intra-industry
structures and their effects on firm performance, and the duality of
mobility barriers and strategic groups. Two topics are explored in
the following sections, namely, the theory of the strategic structure
within an industry and firm performance, and strategic groups for-
mation and the behavior of firms and groups over time.

The Theory of the Strategic Structure Within
an Industry and Company's Performance

Porter (1979, 1980) presents a theory of the determinants of firm

profit performance based on the strategic structure within the

industry. Based on the concepts of strategic groups and mobility

barriers, the theoretical explanation is divided into the following

steps :

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a) The configuration of strategic groups within the industry has
an impact on the overall performance of the industry. Porter (1979;
218) suggested that the number and size distribution of strategic
groups, the strategic distance among strategic groups, and the market
interdependence among groups are the major variables which define con-
figuration. The greater the number of strategic groups, when most of
the groups have equal size, then the greater is the rivalry among them
or the greater is the chance of tacit collusion. On the other hand,
when few strategic groups exist, and the size distribution of these
groups is not equal, this structure gives advantage to the large stra-
tegic groups; tacit collusion is not expected.

It is also expected that the greater the distance among strategic
groups, the more difficult will be any tacit collusion, and the more
likely strong rivalry will exist within the industry.

Market interdependence indicates the degree to which different
strategic groups compete for the same customers. It is expected that
with a high level of interdependency , competition will not only be
intense but varied in form reflecting the diverse asset structures of
competitors.

Hergert (1983) developed statistical measures for the strategic
groups configuration. He was able to show that some of the expected
relationships between strategic groups configurations and industry

Harrigan (1985) and Hergert (1985) have measured strategic
distance in terms of the distance (difference) between the centroids
of the strategic groups (defined in terms of the relevant and impor-
tant strategic variables).

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profits were in the expected direction (as were hypothesized by Porter
(1979)).

b) The location of the strategic group relative to other strate-
gic groups may convey advantages or disadvantages to the group's
members. There are several possible reasons. First , some types of
strategies are more suited to market conditions than others, and can
result in superior performance. Thus, firms which belong to better
performing strategic groups will have the opportunity to achieve above
industry average profit. Second, each strategic group has a different
ability to protect itself from competitive firms in other strategic
groups (Caves and Porter (1977)). Strategic groups with significantly
superior mobility barriers are better able to exploit profit oppor-
tunities. McGee (1985) and McGee and Thomas (1986) categorized the
mobility barriers into three classes: market, supply and firm-specific
strategic variables. In addition, mobility barriers may also arise
from what Lippman and Rumelt (1981) called the concept of "uncertain
iraitability , " meaning that even if a firm wants to replicate the stra-
tegy of firms in a superior strategic group, it may fail because of

its uncertainty about how to imitate and implement that strategy in
practice. Third, the degree to which firms in the same strategic
group compete amongst each other can also affect the average profit of
the group relative to other groups. When firms in the same strategic
group try to improve their position, other firms may retaliate, and
the potential profit of the strategic group as a whole may decrease.

c) The location of the firm within the strategic group affects

the firm's performance. The rationale for this proposition is given by
Porter (1979; 218-219):

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While firms following similar strategies will likely
be of comparable scale, scale differences may work to
the disadvantage of smaller firms in the group where
there are aspects of the strategy (e.g., captive dis-
tribution) subject to economies of scale.

d) The ability of the firm to implement its strategy will also
affect the firm's performance. Some firms are better organized,
managed, controlled than others, which will give them superior perfor-
mance (see Galbraith and Nathanson (1978) for a comprehensive
discussion on strategic implementation).

In summary, the concept of strategic groups was developed by
Porter in order to structure a theory of interfirm performance dif-
ferences. Four elements are the fundamentals of this theory. First,
the configuration of strategic groups (e.g., the number of groups and
the size distribution of groups) has an impact on the overall perfor-
mance of the industry. Second, the location of a strategic group
relative to other industry level strategic groups may have performance
implications for group members. Third, the location of the firm
within the strategic group may influence its performance. Fourth, the
ability of the firm to implement its strategy may affect its perfor-
mance.

Strategic Groups Formation and the Behavior of Firms and Groups
Over Time

Why and how do strategic groups form? How do they behave over
time? How do firms move within and between groups? These questions
have not yet attracted much attention.

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The Formation of Strategic Groups:

A necessary condition for the formation of strategic groups is that
companies within an industry behave differently. Economics and organi-
zation theories suggest several rationales for this phenomenon.

a) Different firms have different goals: profit maximizing
(Stigler (1964)), revenue maximizing (Baumol (1967)), growth maximizing
(Morris (1964), Williamson (1966)) or management utility maximizing
(Williamson (1963).

b) Even if firms compete for the same goal, different strategies
can be used to achieve those goals. Hergert (1983: II-2) developed
an industry level mathematical model which assumed that member firms
maximize the same goals (utility function) and yet found that they
achieved them through the use of markedly different strategies. This
implies that firms within industries may adopt dissimilar strategies
even when they are trying to achieve similiar goals.

c) Firms make different assumptions about the future potential of
the industry (Porter 1980; 49), which may lead them to behave dif-
ferently.

d) Firms have different skills and resources. For example, new
entrants don't have the same experience as established firms
(Henderson (1979)), giving the latter firms a potential competitive
advantage over new entrants. To compete effectively, the new entrants
will look for other competitive dimensions: unique skills or resources
in marketing, production, research and development, and the like.

e) Changes in the industry environment — growth or decline in
demand, technical change or whatever — will affect different firms in
different ways.

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Firm-level and Group-level Behavior Over Time:

To understand Che dynamic characteristics of strategic groups
requires two levels of investigation: the firm and group.

Firm level: The theory of strategic groups argues that firms
within an industry can be clustered into groups. Most studies in the
area of strategic groups either specify current strategic groups or
investigate the relationship between performance and strategy for dif-
ferent strategic groups. However, it is argued here that strategic
group studies can contribute to our understanding of the firm's strate-
gic behavior. More specifically, once strategic groups are iden-
tified, and firms make sense of the strategies of close competitors,
it is likely that strategic group members (firms) will follow similar
strategies over time. Several explanations can be offered to support
this viewpoint. First, firms in the same strategic group have similar
assumptions about the future potential of the industry (Porter
(1980)). Secondly, strategic group members have similar goals and the
skills that are required to achieve these goals. If there is either
an external or an internal change in the industry, all strategic group
members are expected to react in the same way (Caves and Porter (1977:
251)). This argument is consistent with the adaptive model of firm's
strategy (Chaffee (1985)). Moreover, taking the adaptive model one
step further, firms within the same strategic group have similar
mechanisms for strategic adaptation, and these adaptation mechanisms
differ across strategic groups. Even if a firm is not "happy" with
its current strategy, it is not easy to move to a more successful
strategic group. Such strategic barriers such as mobility barriers

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(Caves and Porter (1977), McGee and Thomas (1986)), uncertain inst-
ability (Rumelt (1981)) and inertia (Huff, Thomas and Fiegenbaum
(1985)) may induce firms to remain in the same strategic group. Three
empirical studies on firm movement among strategic groups support this
proposition. Oster (1982) observed that few firms moved between the
two strategic groups she defined (as below and above the industry
average of advertising over last year sales). Fiegenbaum and Primeaux
((1983), (1985)) also found low level of firm movement among strate-
gic groups when strategic groups were defined in terms of market
share and several other strategic variables.

In summary, strategic group members will probably follow similar
strategies over time. Similarities involving strategic assumptions,
goals, skills, and the strategic barriers that prevent firms from
easily moving among strategic groups explain this phenomenon, and stu-
dies, such as Oster (1982) and Fiegenbaum and Primeaux ((1983),
(1985)) provide empirical support.

Group level: In the previous section it is argued that strategic
group members will follow similar strategies over time. Therefore,
the composition of strategic group membership is most likely to be the
same over time. However, another important aspect of strategic group
behavior over time is whether or not the strategic group as an entity
will move toward a new strategic position in the strategic space.

Organization theories argue that the organization's environment is
unstable (e.g., Dess and Beard (1984)) and that firms are trying to
adapt their strategic behavior to environmental change (e.g., Miller
and Friesen (1980), Hofer and Schendel (1978), Chaffee (1985)). The

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final outcome may be that the strategic group as a whole will be
located in a new position over time. This, however, depends on the
strategic group members' ability to differentiate themselves viably
from other strategic groups.

In addition, the studies of Kumar, Thomas, and Fiegenbaum (1984a,
1984b) have looked at strategic groups from a different angle in order
to identify the feasible strategic group positions within the strate-
gic space. These studies are primarily deductive in nature and
explore a fundamental theoretical issue; namely, whether there are
limits to the numbers of strategic groups which may exist within a
specific industry context. Using the notion of equilibrium as a
benchmark, Kumar et al. (1984a) specified the strategic groups that
may exist in equilibrium under "dominant strategy" assumptions. The
concept of dominant strategy assumes that only firms which have the
"right strategic mix" (strategy) will survive the competitive game.
The weaker firms will be dominated by the more successful firms.
Kumar et al. (1984b) also used a game theoretic approach to investi-
gate some other properties of strategic groups in equilibrium. They
concluded that in a monopolistic competitive market, the number of
strategic groups that will exist in equilibrium depends on environmen-
tal conditions "if there are K uncontrollable variables in the utility
function, then there can be at most (K + 1) strategic groups in a
"structurally stable "equilibrium" (p. 8). (The K structurally
uncontrollable variables, represent the environmental variables of the
model) .

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These approaches in strategic group studies are important because
they include the future as another important dimension for strategic
group analysis. They argue that equilibrium positions represent
viable future competitive positions which will emerge as the industry
evolves. (Also see Camerer (1985) for the importance of equilibrium
and game theoretic approaches for "redirecting research in business
policy and strategy").

In summary, the strategic rationale of firms and the pattern of
group behavior over time have been examined here. Tt is argued that
group membership is likely to remain stable over time. On the other
hand, the strategic group as a whole may be located in a new position
on the strategic space over time. Studies by Kumar, Thomas, and
Fiegenbaum (1984a, 1984b) have also suggested an alternative way of
examining strategic groups, namely, in terms of their future rather
than past or present orientation. In the next paragraph, the empiri-
cal studies on strategic groups will be reviewed.

Empirical Studies on Strategic Groups

Since Hunt (1972) published his study on strategic groups in the
home appliance industry, several writers have explored various impor-
tant aspects of the strategic group concept. Table 1 compares these
studies summarizing them along the following dimensions:

(*) The author and year of publication.

(*) The level of strategic grouping.

(*) The component(s) of the strategic grouping.

(*) Intended vs. realized strategic groups.

(*) The sample in the study.

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(*) Static vs. dynamic treatment.

(*) The variable(s) used to cluster strategic groups.

(*) The technique used to cluster strategic groups.

(*) The definitions of strategic groups.

(*) The main findings of each study.
Some of the important issues arising from these empirical studies are
discussed below. First, it can be seen that existing studies have
investigated strategic groups at different strategy levels (column 2),
specifically, corporate, business, and functional perspectives.

Insert Table 1 About Here

Corporate-level strategy examines the issue of which set of busi-
nesses the organization should develop whereas business-level strategy
addresses the issue of how to compete in a particular industry or
product/market segment. Nevertheless, in some existing studies it is
sometimes hard to differentiate between these two levels. For example,
in the research of Hunt (1972), Newman (1973, 1978) and Ramsler (1982),
it is clear that strategic groups were formed according to corporate
level strategy, since the criterion variables for grouping were the
dispersion of the firms' product/market activities. Further, studies
such as Porter (1979), Oster (1982), Primeaux (1983, 1985), Ryans and
Wittink (1985), Fiegenbaum and Primeaux ((1983), (1985)), Baird and
Sudharshan (1983), Hayes et al. (1983), implicity identified corporate
level strategy since the criterion variables used to cluster strategic
groups reflected particular aspects of the entire organization (e.g. ,

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investment strategy, advertising strategy). On the other hand, stud-
ies such as Hatten (1974) and Patton (1976) exemplify strategic
groups specified at the business level. This is because most of the
firms in the brewing industry are not diversified in other industries
and the product is relatively homogeneous. Finally, the studies of
Frazier and Howell (1983) and Hawes and Crittenden (1984) defined
strategic groups according to functional (marketing) level strategy.

Second, the studies have identified strategic groups according to
the components of the firm's strategy (Column 3). Most of the studies
used either scope or resource deployment criteria (see Hofer and
Schendel (1978)) but some of them used both these components (Ramsler
(1982), Fiol (1984)).

Third, the formation of strategic groups depends upon the strat-
egy definition used (i.e., strategy as intentions (ex-ante strategy
formulation) or realizations (ex-post inference of intended strategy)
(Mintzberg (1978)) Column 4). Most studies have used the realized
strategy definition to define strategic groups by inferring strategic
intent from ex-post archival financial statement information. Only two
stud-ies, Dess and Davis (1984), and Hawes and Crittenden (1984) appear
to have defined strategic groups using strategy as intentions. They
used a questionnaire to derive perceptual data which they then analyzed
to form strategic groups.

Fourth, many industries have been studied. They range from con-
sumer goods industries to producer goods industries, and from single
product industries to multi-product industries (see Column 5).

-21-

Fifth, few studies have analyzed the dynamic aspects of strategic
groups. Only Oster (1982), Ryans and Wittink (1985), and Fiegenbaum
and Primeaux ((1983), (1985)) have looked at some dynamic aspects of
strategic groups (see Column 6).

Sixth, different strategic dimensions have been used to cluster
strategic groups (see Column 7). Some of the authors used such single
criteria as market share (Porter (1979), Primeaux (1983, 1985),
Fiegenbaum and Primeaux (1983)), advertising to sales ratio (Oster
(1982)), and security prices (Ryans and Wittink (1985)). Other writers
(e.g., Hatten (1974), Hergert (1983)) used multivariate criteria.

Seventh, strategic groups have been identified using either sta-
tistical or rule of thumb procedures (see Column 8). By rule of thumb
we mean that the writer had information about the industries that,
based with the information on the criterion variables, allowed them to
sort the firms logically into strategic groups (e.g., Hunt (1972),
Porter (1979), Harrigan (1981)).

On the other hand, some writers who used multiple criteria to
identify strategic groups have used such statistical packages as
cluster analysis or three mode factor analysis (e.g., Harrigan (1985),
Baird and Sudharshan (1983), respectively).

Eighth, different strategic groups were identified in the
various studies (see Column 9). In one case no single strategic group
was identified in six out of fifty industries. (Hergert (1983: 111-28))
while in other studies many strategic groups were consistently iden-
tified (e.g., Newman (1973, 1978), Baird and Sudharshan (1983)). Each

-22-

writer named the various strategic groups according to some properties
that dominated the strategic group membership.

Finally, the main conclusions and purposes of each study can be
specified. The main conclusion of Hunt's (1972) study, which was the
springboard for the whole field of research, was that strategic group
structure can be identified in the home appliance industry. Other
studies have reinforced Hunt's conclusions in different industries
and at different levels of firm strategy.

Some writers have investigated the structure/conduct/performance
paradigm of industrial organization economics. Writers such as Newman
(1973, 1978), Hatten (1974), Patton (1976), Hergert (1983), have
focused on this aspect of strategic groups. Primeaux (1983, 1985) was
able to show that different strategic groups occur at different stages
of the investment life cycle. Oster (1982), and Fiegenbaum and
Primeaux ((1983), (1985)) examined, movement among strategic groups.
The low level of movement seen in these studies may have important
implications for the dynamics of competitive strategy. Yet the main
studies in the area of strategic groups are 'data-driven.' That is,
they identify a number of key strategic dimensions drawn from Porter's
(1980:127) or McGee and Thomas's (1986) listing of key strategic
variables and typically use cluster analysis with data bases such as
COMPUSTAT to form groups of firms who 'cluster' together in terms of
their observed strategic behavior. Criticisms have been voiced (McGee
and Thomas (1986) as to whether the observed groups made sense to
managers within those industries or other interested parties such as
investment analysts. What is clearly needed Is the adoption of

-23-

multiple frameworks (McGee and Thomas 1986) for better understanding
of the complexity which exists in competitive and often fragmented
service industries. Therefore, it would seem sensible to study man-
agers' beliefs and perceptions about competition and competitors in
order to identify the frameworks they use in competitive positioning.
Such an approach would clearly identify key strategic dimensions which
managers perceive to be important in formulating strategy and provide
a better basis for understanding the nature of the strategic dimen-
sions which characterize strategic group formation. Further, it would
provide insights into the groupings which make sense to managers and
industry analysts and also allow comparison to be made between the
quantitative 'data-driven' groupings and the perceptual groupings.
Perhaps themes such as policy dialogue (Thomas (1984)) and triangula-
tion in research strategy (Denzin (1978), Jick (1979)) can help
researchers and managers make better sense of the strategic group con-
cept.

In the next section, the linkage between strategic groups and com-
petitive strategy is explored.

STRATEGIC GROUPS AND THEIR RELEVANCE FOR COMPETITIVE STRATEGY
Even though many studies have explored different aspects of stra-
tegic groups, it is still unclear how the concept of strategic groups
can be applied to define and analyze competitive strategy. Therefore,
these existing research studies are categorized in terms of factors
that are important for formulation of competitive strategy.

-24-

The Identification of the Relevant Strategic Dimensions

The identification of the relevant strategic dimensions used by
firms in a given industry is a key and often neglected issue in some of
the more 'data-driven' studies which determine strategic groups.
While these dimensions are extremely important for making sense of
strategic groups, they can also be used to assess the mobility
barriers (Caves and Porter (1977)) that protect strategic group mem-
bership from attack by other firms. For firms which are in the
"superior" performing strategic groups, the knowledge of the barriers
that protect them can aid their strategic planners in making decisions
about where to recommend further investment to protect and reinforce those
key strategic barriers. On the other hand, a firm which wants to move
to another strategic group may be able to identify a potentially
vulnerable strategic dimension (barrier) which may match its com-
petitive skills and strengths, hence provide the firm with a "gateway"
to entry into that strategic group.

Researchers need to develop better research instruments for iden-
tifying key strategic dimensions. Approaches such as perceptual
mapping in marketing and other cognitive mapping techniques (Eden
(1984)) can help managers identify their strategic group maps.
The maps of industry analysts and brokers can be identified through
appropriately designed questionnaires which use closed ended questions
and analyze results using multi-dimensional scaling to form relevant
groupings.

-25-

The Identification of Strategic Group Members

An important rationale for forming strategic groups is to enable
planners to identify and better understand the behavior of com-
petitors. But, who are the competitors? In complex industries where
firms compete on different strategic dimensions, the definition of the
set of competitors for a given firm is not always clear. Porter (1980)
suggested that firms in the same strategic group should recognize each
other as close competitors while firms in different strategic groups are
less closely competitive. Therefore, knowing strategic group membership
(the competitors) can aid planners in understanding the bases of
competition and in making more effective competitive strategy decisions.

For planners it is important to compare groups defined on the
basis of industry wisdom (e.g., analysts, managers insights, etc.)
with those derived from empirical, quantitative studies. Differences
in these groups may allow managers and analysts to review and
reinterpret their notions of competition.

The theorv of the strategic structure within an industry and

i - -- - - -- - - -

2
interfirm performance differences

Porter (1979) presented a theory of the determinants of firm-level

profit based on the strategic structure within the industry. According

to this theory and the empirical findings that partially support it,

firms following similiar strategies will tend to have similiar

performance profiles.

The underlying theory is explained in pages 10 and 11 of this

paper.

-26-

For example, suppose that two strategic groups exist within an
industry (SGI, SG2) and two performance measures, risk and return, are
considered by the companies (see Figure 2).

Insert Figure 2 About Here

It can be seen that different performance levels can be associated
with each strategic group. This information may help strategic plan-
ners. For example, should firms stay in the same strategic group and
benefit from the average level of performance, or to try and move to
another more attractive strategic group requiring a different finan-
cial and capital structure profile but which provides an improved
potential average profit level.
The causal relationship between structure, strategy and performance

Some writers, among them Hatten (1974), Patton (1976), Hergert
(1983), found that different relationships exist between performance
measures and elements of industry structure and strategy for firms in
different strategic groups. Thus, careful modelling of the strategy-
structure relationship should highlight the important strategic factors
(and variables) for each strategic group and indicate how they differ
across groups. For example, in one of the Purdue brewing studies
(Patton (1976)) the relationship between Debt (strategic element) and
ROE (a performance measure), was examined for each strategic group. For
the national brewer strategic group and for the small regional brewer
strategic group positive relationships were found (regression
coefficients of 0.15 and 0.33 respectively). On the other hand, for the
large regional strategic group the relationship was found to be

-27-

negative (regression coefficients of -0.61). Clearly the relevance of
debt and the influence of debt varies markedly across strategic
groups. Similar patterns can be found for other key strategic dimen-
sions in those and other studies. Therefore, the strategic importance
of certain key dimensions can more clearly be assessed.

Porter (1980: 138-140) also argued that the structure of strate-
gic groups has implications in explaining industry rivalry, and hence,
firm performance. Strategic groups characteristics, such as, the
number of strategic groups, the extent to which different strategic
groups are competing for the same customers, and the strategic
distance among strategic groups were mentioned by Porter as important
elements. Hergert (1983) showed empirically that the characteristics
of strategic group structure affect the market performance of firms
within industries.

In summary, the strategic groups structure within an industry has
an impact on firms performance. Therefore, when either existing or
potential firms are trying to evaluate their future performance poten-
tial, the strategic groups structure as well as the characteristics of
the specific group should be considered.
Understanding Strategic Group Dynamics

Understanding dynamics in strategic management is crucial since
the formulation of competitive strategy is an evolutionary process.
Several writers have investigated dynamic aspects of strategic groups.
Oster (1982), and Fiegenbaum and Primeaux (1983, 1985) found a low
level of movement among strategic groups. Huff, Thomas, and
Fiegenbaum (1985) have considered the role of grounded theories and

-28-

model building approaches in understanding strategic group dynamics
and speculate that organizational inertia barriers (MacMillan and
McCafferty (1982), Harrigan (1980)) as well as mobility barriers may
hinder shifts between groups and thus explain the low level of move-
ment. Further research on this topic should provide important guide-
lines for the determination of competitive strategy.

The Prediction of Benchmark Strategic Groups

The studies of Kumar, Thomas, and Fiegenbaum (1984a, 1984b) have
highlighted another aspect of strategic group dynamics. Examining
the nature of the future strategic group equilibrium as the industry
evolves can provide guidelines (benchmarks) for strategic planners
in examining the viability of alternative competitive strategies.
Some future strategic group positions may appear more attractive as the
firm considers the match between its skills and the available environ-
mental opportunities.

SUMMARY
Today, 13 years after the publication of Hunt's (1972) study,
there is much confusion about the implementation of the strategic
group concept (McGee and Thomas (1986)). The main problem is that
different researchers have used different measures to describe the
firms' strategy. They range from one variable (e.g., market share) to
many variables. Most of the studies have treated the problem sta-
tically, rather than dynamically. According to Mintzberg (1978: 934),
strategy is "a pattern in a stream of decisions," that is, the
behavior over time of a firm's actions, an aspect not considered in

-29-

most studies. In their study of the brewing industry Hatten and
Schendel (1977: 110) concluded that "attention to homogeneity over
time, as across sections, is likely to be worthwhile." Indeed, in a
later study Hatten and Hatten (1985) found that both group membership
and the strategic relationships clearly changed over time.

Huff, Thomas, and Fiegenbaum (1985) argued for more research into
the dynamics of strategic groups. Since the firm's environment and
its expectations and objectives are not stable over time, it is reaso-
nable to expect that the structure of strategic groups may also
change over time.

It is clearly important to investigate the linkage between
strategic groups and competitive strategy processes so as to develop a
clearer theoretical framework for the determination of strategic
groups. One key issue in this framework is the appropriate definition
of strategy.

For more than three decades, researchers in the field of strategic
management have discussed this question of definition. Broadly
defined, a firm's strategy matches its internal resources and skills
against the threats and opportunities created by its external environ-
ment (Hofer and Schendel (1978: 12)). Most would argue that a firm's
strategy can be described in terms of three major dimensions:

1) The level of strategy (enterprise, corporate, business, and
functional ) .

2) The component of strategic decisions (scope, resource,
deployment, competitive advantage, and synergism).

3) The influence of time on strategic decisions.

-30-

These three dimensions capture the nature of the strategic
environment. Figure 1 defines the dimensions of the STRATEGIC SPACE
(SSP). Thus, a firm's strategic decisions in each level of the

organization and for each time period can be depicted in terms of the
SSP. It can be seen immediately that strategic groups can be defined
for each level of the organization, for each strategic component, and
for each time period as well as for any combination of the three.

Following Porter's (1981b) suggestion in an anti-trust symposium,
and McGee and Thomas's (1985) paper, in-depth historical analysis of an
industry can supplement strategic group analysis by enabling managers
and extra-firm policy makers to make sense of complex industries.
Further, the industry study of strategic groups obtained by quantitative
approaches such as multivariate analysis should be validated by managers
and industry analysts as they try to understand competition and close
competitors in an industry. It should be noted that little follow-up
with industry participants has been reported except in the case of the
Purdue brewing industry studies (Hatten (1974) and others) and the more
recent studies of Frazier and Howell (1983), Dess and Davis (1984) and
Hawes and Crittenden (1984). This richer industry-study approach is
also consistent with studies on strategic groups by Hunt (1972) on the
home appliance industry and by Hatten (1974) and Patton (1976) on the
brewing industry.

CONCLUSIONS
Studying strategic groups can highlight different aspects of
competitive strategy. First, identifying the strategic dimensions

-31-

that define strategic groups is a key issue in understanding how
competitors formulate their strategies. Second, strategic groups help
us understand which firms compete strongly with each other. Third,
strategic groups can throw light upon the character and performance
differences associated with the range of competitive strategies
adopted in the industry. Fourth, the strategic groups structure can
be used as a framework for modelling competition and hence in explain-
ing performance differences between strategic groups. Fifth, an
understanding of the dynamics of strategic groups is useful in
explaining changes in competitive strategy over time. Sixth, the
concept of benchmark strategic groups (which represent long-run
competitive equilibruim positions) may be important in understanding
future strategic group positions.

-32-

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D/372

Figure 1

TIME

i<?r

Resource Competitive
\C\-yt s^ Scope Deployment Advantage Synergism

Enterprise
Corporate
Business
Functional

LEVEL

Figure 1: The Strategic Space (SSP)

Figure 2

Figure 2: Risk/Return Groups
Risk ... "

4

3h

Return (ROE)

Cf

s*e cjf ee

A 3 A «w 3

-1 Q. □ v_ n.

55

od a.

*
a. -•

ss

a

3 i 3 N

C I r. -.

ft »- 3" —

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*- CT — *-

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_ , N MANCHESTER