What are strategic groups?

  • by

Understanding strategic groups

Strategic groups can be thought of as groupings of firms, within an industry, that each presume a similar strategy. There may for example be different ways of competing within a marketplace – some firms that tend to concentrate on the lower end of the market, others targeting a more premium segment, and others going after specific niches. Or there may be very different capabilities assigned with firms – the capabilities to develop new medical drugs being very different from the capabilities of generic manufacturers who manufacture after patents have expired.

Mobility barriers, and why profitability differences can persist across strategic groups

When examining profitability within an industry, it is not unusual to see that firms within a grouping have similar profit abilities – some strategic groupings with elevated earnings relative to others. Part of the reason why these differences can persist over time is that there exists mobility barriers that prevent firms in one grouping from moving to another. Were it not for mobility barriers, firms in a lower profitability strategic grouping could move to a more profitable strategic grouping.

Of course, change is not easy, and certain changes may be prohibitively difficult for firms. If we compare generic medical drug manufactures and companies that develop their own drugs – it may be prohibitively difficult for the generics to build out their development capabilities to move position. Even if greater profits can be made with internally developed drugs, the difficulty in actually reconfiguring the firm to this strategic group prevent generic manufacturers from being able to readily move.

Identifying strategic groups

Identifying strategic groups involves consideration of the key decisions made by firms in an industry. What are the factors that either on the operations side, choices made regarding how the firm operates, or market-side decisions, that influence the firm’s offerings from the perspective of the customer? There are often sets of related decisions – choices on multiple dimensions that several firms have made, likely both influencing the company’s operations as well as how the firm is positioned from the perspective of the market.

Related topics: