Mindshifts.com.au

Babette Bensoussan, The MindShifts Groupand Craig Fleisher, University of Windsor Since writing our book Strategic and structure analysis truly tweaked management’s Competitive Analysis – Methods and Techniques for attention. Porter’s approach was the first popular Analyzing Business Competition, we have often been foray into using industrial economic theory as an asked to identify the most useful or insightful explicit framework for strategic analysis. Strategic group analysis figured promi-nently in this theoretical evolution and remains an important component of modern strategy theory and practice.
technique is always highlydependent on the strategic issue STRATEGIC
RATIONALE
group or cluster of firms in an industry.
aspects of their competitive strategy.
BACKGROUND
Strategic group analysis is a subset of industry analysis, which looks specifically at the different groups of rival firms clustered around a similar competitive approach or strategic position. It is used, among other things, to determine the: • Different competitive positions that rival firms occupy.
• Intensity of competitive rivalry within and between • Profit potential of the various strategic groups in an distinguishes differences between groups and identifies • Implications for the competitive position of the firm Strategic group analysis plays an important role in industry analysis as it explicitly addresses a key force in While the concept of strategic group analysis dates back Porter’s industry analysis framework – competitive rivalry – to the early 1970s, it was not until 1980, with the publica- and how it both impacts and is impacted by the other four tion of Porter’s seminal work (Competitive Strategy: Techniques forces. It forms the analytical link between industry for Analyzing Industries and Competitors) that industry The five competitive forces often have disproportionate 4. Threat of substitution
impacts on the profitability across strategic groups and, by The distinct strategies between strategic groups place association, on firms within each strategic group.
emphasis on different parts of the industry’s value chain. Ifthe links in the value chain that are the source of a strategic 1. Threat of entry
groups’ competitive advantage are threatened by substitutes, Barriers to entry define both the boundaries and the group is at risk of lower profitability or worse, structure of a strategic group within an industry. Common barriers include superior cost structures, economies of scaleor learning, product/service attribute differentiation, The five forces jointly determine the profitability of the switching costs, distribution access, vertical or horizontal industry, the strategic groups in the industry, and individual diversification, capital intensity, proprietary technology, and firms within the strategic groups. Porter (1980) further suggests four factors that influence the group’s competitive However these barriers mutate over time. Innovation, for example, is a key to dislodging established barriersbecause it can radically change industry structure. The 1. Intensity of internal rivalry between firms in the same optimal strategic focus for a firm attempting to redefine competition inside of its existing strategic group is to jump to another strategic group or define a new strategic group.
3. Cost of entry into the strategic group.
4. Organizational capabilities to implement the firm’s 2. Internal rivalry
Three factors determine the intensity of rivalry between The analyst’s essential task is to best position the firm’s resources and capabilities to capitalize on opportunities and • Number of industry groups and their market share also defend against or move away from threats in the • Strategic distance between groups — the magnitude of BOOK REVIEW
• Market interdependence of groups — market Strategic and Competitive Analysis – Methods and
Techniques for Analyzing Business Competition,
Craig S. Fleisher and Babette E. Bensoussan
A directly proportional relationship exists between each (2003) Prentice Hall, NY.
of these three factors and rivalry. For example, strategic groups Strategic and Competitive Analysis comprehen-
(who by definition are pursuing different business strategies) sively examines 24 of the techniques involved in may target the same customer segment. The resulting clash analyzing business and competitive data and information for customer share increases rivalry between the groups.
including environmental analysis, industry analysis,competitor analysis, and temporal analysis models. It 3. Bargaining power of buyers and suppliers
helps business analysts and decision-makers to draw Strategic groups can influence suppliers’ and buyers’ effective conclusions from limited data and to put together information that does not often fit together atfirst glance. The book features conceptual ideas about • If the strategic groups within an industry source from business and competitive analysis along with a strong the same set or type of suppliers and sell to the same customer segment, the only differentiating feature The book was written with both the CI specialist between groups will be their strategies.
and non-specialist in mind. The book encouragesreaders to review, understand and improve the current • When strategic groups source from different types of practices of strategic and competitive analysis with suppliers and sell to different customer segments, which they are engaged. Especially relevant is the bargaining strength could be a factor of the strategic comparative methodology, called the FAROUT groups’ differing strategies and types of buyers and method, underlying the description of each technique suppliers, or a combination of both.
that helps the reader apply the proper technique undertheir particular environmental and organizationalcircumstances.
Volume 6 • Number 1 • January-February 2003 more traditional approaches to product/market segmentation FAROUT SUMMARY:
and stereotypical definitions of strategic business units.
STRATEGIC GROUP ANALYSIS
The identification of strategic opportunities and risks associated with industry evolution is also very helpful for Future orientation
dealing with change. This model encourages the analyst to High. An excellent tool for scenario analysis and look across the entire spectrum of groups to find innovative pathways of least resistance or, ideally, to build newpathways through innovation.
Accuracy
Low to medium. Highly qualitative inputs, WEAKNESSES
statistically non-verifiable, accuracy will decline if theanalysis isn’t part of a broader industry analysis.
Strategic group analysis provides little guidance on implementation and gives short shrift to the internal organi- Resource efficiency
zational capabilities needed for successful implementation of Medium. Input from various data sources both the chosen strategies. Supplementing the technique with primary and secondary may be necessary to achieve value chain analysis compensates for this weakness, and was correct identification of multiple variables.
one of the reasons Porter subsequently developed valuechain analysis.
Objectivity
Strategic group analysis does not explicitly incorporate Medium. Significant inputs are subjective and rely the importance of government and social issues as a separate on the analyst’s judgment, objectivity can be reduced by variable on the competitive dimension. It also assumes that iteration, group identity effects can drastically reduce firms have cognitive and learning abilities, which some firms display more competence in than others.
The application of strategic group analysis depends on Usefulness
identifying the strategically important dimensions of compe- High. Can be used for both current and dynamic tition. Inaccurate identification and inappropriate weighting of these variables skews the correct identification of strategicgroups, leading to ineffective strategic recommendations.
Timeliness
One problem is accessing profitability data for the Medium. Strategic group analysis can be conducted companies in the strategic groups, whether they are in a relatively short period of time.
nonpublic firms or aggregated financial results for diversifiedfirms. The best solution for this challenge is to use public From Bensoussan, Babette and Fleisher, Craig. ‘A profitability data sources and supplement them with FAROUT way to manage CI analysis.’ Competitive comparative cost analysis and disaggregated financial ratio Intelligence Magazine, April/June 2000, 3(2), 37-40.
analysis. Then map the different groups on a graph thatincorporates the two strongest strategic variables thatdifferentiate them.
competitive environment. Selecting the most attractive In-depth industry knowledge and iterative learning are industry group in which to compete is an essential the two most important ingredients to effectively choose the best two dimensions for each map axis. Often, more thanone map is constructed if more than two competitivevariables are deemed significant. Additionally, the analyst STRENGTHS
may discover that some groups overlap while other groups Strategic group analysis’ primary strength is its compre- cannot be defined by the model because they do not exhibit hensiveness: it encompasses a wide array of conceivable any type of coherent strategy or they radically oscillate variables when conducting an environmental analysis.
Strategic group analysis offers several layers of increasinglyfiner analytical procedures for making the link from broad APPLYING STRATEGIC GROUP ANALYSIS
industry structure to firm-specific strategic implications.
Without first distinguishing the differences between The process for applying strategic group analysis has industry structure as evidenced by strategic groups, average comparisons across an industry can be meaningless at bestand misleading at worst. Strategic group analysis often results in more accurate strategic analysis as opposed to the TABLE 1: KEY VARIABLES FOR DEFINING
alternative strategies, key success factors, assets and skills, and STRATEGIC GROUPS
barriers to entry. In this area you may want to look at– 3. Gauge the strength of barriers between groups.
First, identify the factors that prevent firms in one strategic group from competing with firms in another group.
McGee and Howard (1986) suggest the following three classifications of barriers (this list is by no means all • Relationship to home and host• Vertical integration government • market-related strategies – product line, market segmentation, distribution channels.
3. Identify relative competitiveness of each strategic group.
• industry supply characteristics – economies of scale, 4. Understand firms’ strategy vis a vis strategic group • firm characteristics – management skills, diversification, 5. Identify appropriate strategic responses.
Second, assess the strength of bargaining power between 1. Analyze industry structure
groups and industry buyers/suppliers. Identify the relative First, complete a five forces industry analysis. (See importance of the two sources of bargaining power between Fleisher/Bensoussan 2003, Chapter 6 for an explanation of strategic groups: common suppliers and buyers, and how to undertake an industry analysis.) This analysis will Third, determine the threat of substitutes between groups. Analyze the different value chain links that the different strategic groups compete around to determine each group’s vulnerability to the threat of substitutes.
Fourth, evaluate the intensity of internal rivalry between groups. Determine the relative impact of the four factors Once this is completed, the analyst can now refine the • intensity of internal rivalry between firms in the same identification of the unique factors of membership in a certain strategic group relative to the competitive position of • costs of entry into the strategic group, including both Second, identify all of the major competitors in the industry based on competitive variables. All of the signifi-cant • organizational capabilities to implement the firm’s participants within an industry must be identified based on the various strategic variables in the industry. (See Table 1:Porter’s Key Variables.) Porter’s list is not all inclusive, as work Fifth, undertake a Five Forces analysis of the strategic by Rumelt (1981), Gailbraith and Schendel (1983), Ackoff groups. Integrate the analysis of steps 1 through 3 to (1970), Dill (1958), and Aldrich (1979) suggest additional determine each strategic group’s relative competitive elements of the competitive dimension. However, this serves positions, the intensity of their mutual dependence, and the as a useful launch pad for brainstorming.
potential for industry volatility based on: 2. Map the strategic groups
Separate the list of significant competitors into strategic • Strength of bargaining power between groups and groups, those firms with similar strategies and competitive positions. Interviews with top managers and functional experts provide the best sources of information regarding • Intensity of internal rivalry between groups.
Volume 6 • Number 1 • January-February 2003 4. Understand firm’s strategy vis a vis strategic
Fleisher, C. and Bensoussan B.(2003) Strategic and groups’ interaction.
competitive analysis: methods and techniques for analyzing Select the firm’s membership in the optimal strategic business competition. Prentice Hall.
group. Mentally overlay the Five Forces model of the strategic Galbraith, C., & Schendel, D. E. (1983). ‘An empirical groups on top of the firm’s strengths and weaknesses. Identify analysis of strategy types.’ Strategic Management Journal, the strategic group that presents the greatest opportunity to exploit the firm’s strengths and minimize the firm’s McGee, J., & Thomas, H. (1986). ‘Strategic groups: weaknesses, given the firm’s existing strategy.
theory, research and taxonomy.’ Strategic ManagementJournal, 7(2), 141–160.
5. Identify appropriate strategic responses.
Porter, M. E. (1973). Consumer behavior, retailer power, Consider the industry’s evolution and analyze the and manufacturer strategy in consumer goods industries.
strategic opportunities and threats that accompany radical Unpublished doctoral dissertation, Harvard University.
industry change. Depending on the firm’s available ———. (1979). ‘The Structure of industries and resources, organizational capabilities, and risk preferences, companies performance.’ The Review of Economics and two different types of strategic intent can be pursued to Statistics, 61(2), 214–227.
meet the challenge of industry evolution: ———. (1980). Competitive strategy: techniques for analyzing industries and competitors. Collier Macmillan • Mildly proactive — coping strategy.
• Intensely proactive — shape-shifter strategy.
Rumelt, R. P. (1984). ‘Towards a strategic theory of the firm.’ In R. B. Lamb (ed.). Competitive strategic management.
• Create a new strategic group• Move to a better strategic group• Strengthen the existing group or the firm’s position Babette Bensoussan is a director of The MindShifts Group, an Australian globally networked organization specializing in • Move to a new group and strengthen that group.
strategic planning, marketing, and competitive intelligence, inthe Australasian region. She has carried out numerous CI Keep a cautious eye on group identity dysfunction. The projects, studies, workshops and seminars in a wide range of analyst should watch for any signs of common dangers industries and markets including microelectronics, real estate, resulting from strong identity with a strategic group, such as pharmaceuticals, tourism, water and waste-water management reduced flexibility, strategic myopia, and sub-optimizing and manufacturing operations to name a few. Babette was the first international recipient of the SCIP Fellows Award and has In conclusion, Strategic Group analysis is quite valuable published numerous articles on strategic planning, competitive as a descriptive tool and contributes to an understanding of intelligence, and strategic marketing. She is an invited speaker competitive dynamics, industry evolution and structure.
and guest lecturer both domestically and internationally. Due to the highly qualitative inputs and reliance on the Babette can be reached at babette@mindshifts.com.au.
analyst’s judgments, accuracy and objectivity will decline.
As with most good analytical tools there are no short cutsand this does take some effort to deliver.
In order to understand this technique’s relative efficacy, Dr. Craig S. Fleisher is the Odette Chair in research, and we would encourage the reader to review our FAROUT professor of business strategy and entrepreneurship, University of Summary, which assesses the technique against other Windsor, Ontario, Canada. Canada’s only SCIP Fellow, he is strategic methods of analysis across the six FAROUT co-editor of the new academic Journal of Competitive dimensions. (Fleisher/Bensoussan 2003, chapter 3.) Intelligence and Management. The author of numerous CIarticles and books, his Controversies in CompetitiveIntelligence (w/ D. Blenkhorn, Quorum Books) is due for REFERENCES:
release December 2002 and Frontiers in Managing Ackoff, R. L. (1970). A concept of corporate planning.
Competitive Intelligence (w/ D. Blenkhorn, Quorum Books) was published in 2001. He has held academic positions at the Aldrich, H. (1979). Organizations and environments.
Universities of Calgary, New Brunswick, Wilfrid Laurier (Canada), Pittsburgh (USA), Sydney (Australia) and Waikato Dill, W. R. (1958). ‘Environment as influence on (NZ) while his industry experiences include positions in strategy managerial autonomy.’ Administrative Science Quarterly, 2, consulting and mortgage banking management. Craig can be reached via e-mail at Fleisher@uwindsor.ca.

Source: http://mindshifts.com.au/wp-content/uploads/2013/12/STRATEGIC-GROUP-ANALYSIS.pdf