3.3 Strategic Groups and Industry Life Cycle

Strategic groups are subsets of firms within an industry pursuing similar competitive strategies. They help understand the competitive landscape, identify direct competitors, and reveal mobility barriers that protect groups from new entrants or firms switching between groups.

Strategic group mapping uses key dimensions like product scope, geographic reach, and pricing strategy to visualize groups. Firms with similar positions are clustered together, with circle size indicating market share or other metrics. This analysis complements broader industry analysis tools.

Strategic Groups

Strategic groups in industry analysis

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• Strategic groups are subsets of firms within an industry that pursue similar competitive strategies
  • Firms within a strategic group often have similar characteristics such as cost structure (low-cost vs. premium pricing), target market (mass market vs. niche segments), or product offerings (basic vs. feature-rich)
• Analyzing strategic groups helps understand the competitive landscape of an industry
  • Identifies direct competitors and their relative positioning (market leaders vs. followers)
  • Reveals mobility barriers that protect groups from new entrants (high capital requirements) or firms switching between groups (specialized expertise)
• Strategic group analysis complements other industry analysis tools like Porter's Five Forces model which examines the broader competitive forces shaping an industry (bargaining power of buyers and suppliers)

Characteristics of strategic group mapping

• Key dimensions used to define strategic groups include:
  • Product scope and diversity (narrow vs. broad product line)
  • Geographic scope (local vs. regional vs. national vs. global reach)
  • Distribution channels used (direct sales vs. retail vs. e-commerce)
  • Level of vertical integration (in-house production vs. outsourcing)
  • Cost structure and pricing strategy (low-cost vs. differentiation)
  • Brand identity and marketing approach (mass-market vs. premium positioning)
  • Technological leadership and innovation focus (follower vs. pioneer)
• These dimensions are plotted on a two-dimensional map to visualize strategic groups
  • Firms with similar positions along the chosen dimensions are grouped together (clusters)
  • Size of the circles representing each group can indicate market share or other relevant metrics (revenue, profitability)

Industry Life Cycle

Stages of industry life cycle

1. Introduction stage
   • New industry or product category emerges (electric vehicles)
   • High uncertainty and low initial sales due to limited awareness and adoption
   • Key success factors: innovation (product development), educating customers (marketing), and securing resources (funding)
2. Growth stage
   • Rapid market acceptance and sales growth as the product gains traction (smartphones)
   • Increasing competition as new entrants are attracted by growth potential (app developers)
   • Key success factors: expanding production capacity (manufacturing), building brand loyalty (advertising), and securing distribution (retail partnerships)
3. Maturity stage
   • Sales growth slows as the market becomes saturated (personal computers)
   • Intense competition and price pressure as firms fight for market share (discounting)
   • Key success factors: cost efficiency (lean operations), differentiation (value-added features), and customer retention (loyalty programs)
4. Decline stage
   • Sales decline as the product becomes obsolete or is replaced by substitutes (film cameras)
   • Some firms exit the market (Kodak), while others consolidate (mergers) or harvest remaining profits (milking strategy)
   • Key success factors: minimizing costs (downsizing), divesting assets (sell-offs), and managing cash flow (debt reduction)

Competitive dynamics of strategic groups

• Rivalry within strategic groups
  • Firms within the same strategic group are direct competitors (Coca-Cola vs. Pepsi)
  • Intensity of rivalry depends on factors such as the number of firms (fragmented vs. concentrated), market growth rate (slow vs. fast), and exit barriers (specialized assets)
  • Firms may engage in price wars (discounting), advertising battles (comparative ads), or innovation races (feature one-upmanship) to gain an advantage
• Rivalry across strategic groups
  • Firms in different strategic groups can still compete for the same customers (Rolex vs. Timex)
  • Rivalry across groups depends on the degree of substitutability between their offerings (fast food vs. casual dining)
  • Changes in one group's strategy can impact the competitive dynamics in other groups (market entry)
• Mobility barriers
  • Factors that prevent firms from easily moving between strategic groups
  • Examples include economies of scale (manufacturing efficiency), brand loyalty (customer retention), access to distribution channels (retail shelf space), and proprietary technology (patents)
  • High mobility barriers protect profitable groups from new entrants and maintain stable competitive positions (market leaders)