“In competitive markets, firms need to develop competitive positioning strategies carefully relative to their competitors in order to achieve enduring competitive success.”Michael E. Porter
Competition is often regarded as a threat, but at the same time, it plays a significant role in the development of a company. Competition encourages a business to find unique ways to attract customers to their products and services away from that of their rivals, and in doing so they are able to successfully achieve a competitive advantage.
To achieve enduring competitive success in an industry, a company must thoroughly understand its competitive landscape and develop competitive positioning strategies. One effective tool used to gain insight into direct competitors and analyze their market positions is the strategic group analysis. The analysis provides the data indispensable in the design of the marketing strategy of a company.
This post explores the concept of strategic group analysis, conducting the analysis using strategic group maps and the necessary templates for effective collaboration.
What is a Strategic Group
Strategic groups are common in most industries. Companies, within the same industry, that employ similar strategies with similar resources or have comparable business models, belong to one strategic group. Strategic groups
- Have similar characteristics
- Have similar market shares
- Respond to market trends or competition (threats and opportunities) in similar ways
- Offer similar customer service
Michael S. Hunt, a Harvard Professor, who first coined the term in his doctoral thesis report in 1972, specifies that companies within the same strategic group are very similar to each other in terms of ‘cost structure, degree of product diversification, formal organization, control systems, and perceptions and preferences of individuals’.
Competition among companies that are in the same strategic group is often aggressive as they are generally trying to win over the same customers. The action of one company will evoke fierce reactions from the rest who don’t want to lose their market share in the industry.
An industry can consist of one or more strategic groups. At the same time, a strategic group can contain only one or more members.
Strategic Group Example
A simple example of a strategic group would be the fast-food restaurant chains in the foodservice industry. Other strategic groups in this industry include fine-dining restaurants, cafes, and family restaurants among many others. Fast-food chains differentiate themselves from these other strategic groups in terms of their relatively low-prices, quick-service, variety of food, and more.
Strategic Group Analysis
Strategic group analysis is used to examine the competitive environment and the rivalry among competitors within an industry.
- Identify the strategic direction of the direct rivals in the industry. This will in turn help shape the strategic moves of your own organization.
- Identify the strategies used by companies in other strategic groups. In certain difficult situations, your organization can use these alternative paths to success as solutions.
- Discover untapped opportunities in the industry by revealing the gaps (i.e. disclose areas where there is limited or no competition)
Mapping Strategic Groups
The strategy group map is used as the primary tool in the analysis of strategic groups. It helps visualize and analyze the competitive positions of industry rivals based on variables (common characteristics) relevant to their strategic significance.
Identify your main competitors
This, you may already be aware of. However, it’s beneficial to analyze them even more thoroughly before creating the map. Look into the services or products they offer, the impact they are making on the market, their future strategies, objectives, and their strengths and weaknesses.
Focus on the top direct rivals – at least five of them. As you gather insight, you can record them using a competitor profile, which you can refer to in future planning initiatives.
Identify the strategic characteristics that differentiate the companies
Organizations that belong in the same strategic group can be differentiated based on certain characteristics. These include aspects such as;
- Product quality and features
- Extent of product/ service diversity
- Number of market segments served
- Distribution channels
- Brand image
- Degree of vertical integration
- Price policy
- Company size
- Cost position
- Capacity utilization
Plot the companies on the graph
Draw a two-variable map with the axes represented by two of the least correlated variables that you identified in the earlier step (i.e. geographic coverage and price). Assign each company a position on the map. Those that are placed closest to each other belong to one strategic group. The size of the circle can be adjusted to highlight the market share held by each of these strategic groups.
Using pairs of different variables, you can repeat the exercise until you discover a pattern that groups companies together frequently. This exercise will reveal that either the industry is homogenous and the companies compete on the same basis, or heterogeneous where each company forms its own strategic group.
Interpret the map and identify future competitive strategies
Based on your analysis, you now know who your direct rivals are and where they stand. It will help you understand your own strategy in relation to strategic group interactions.
As you interpret the map, you’ll be able to identify attractive as well as unattractive positions in the industry that you can consider moving to gain a competitive advantage.
What Are Your Thoughts on the Strategic Group Analysis?
Strategic groups play a significant role in the formulation, implementation, and monitoring of the strategy of an organization. The strategic group analysis helps assess strategic dynamics and shifts in the industry. It also helps identify the current and potential strategic moves of the competitors in the market – which in turn is essential to determining the strategic decisions of your own organization.
Let us know how the strategic group analysis has helped you gain useful insight into your own competitive landscape, in the comments below.