Strategic groups can be defined as a group of companies within a particular industry that follows a similar strategy or similar business model. The companies that are part of the same strategic group have more competition with the members of the strategic groups than the competitors outside the strategic group.
Meaning and explanation of strategic group
A strategic group is a name given to the group of companies in a particular industry that uses a similar business model or a set of strategies. These strategic groups provide services of a specific segment of the industry. Each strategic group is segmented based on their operating environment, threats, and opportunities of the industry.
Because of this, all the companies that provide services in a particular segment of the industry are referred to as members of one strategic group. For example, in the restaurant industry, there are different strategic groups formed based on different variables such as presentation, preparation time, and pricing of the food, etc. The various strategic groups in the restaurant industry are fast food, fine dining, etc.
The composition of the strategic group depends on the way the strategic group is defined. A strategic group differentiates the direct rival of a company from its indirect rivals. The direct competitors of strategic group members are those who are part of the strategic group, and an indirect opponent of a strategic group is the one which is part of the industry but not a member of the strategic group. For example, Burger King and Mcdonalds are direct rivals to each other, whereas any fine dining restaurant will be an indirect rival to both Burger King and Mcdonalds.
The term “Strategic group” is introduced by Micheal S. Hunt, a Harward professor in 1972, in his doctoral thesis report. While studying the appliances industry, he learned that the companies that are part of subgroups have high competition among them.
Later the concept of “Strategic groups” was developed by Micheal Porter, and he applied the idea of the strategic group in his strategic analysis. He used the concept of “strategic group” to define the term mobility barrier. The notion of mobility barrier is applied to the company that becomes part of a specific strategic group.
The strategic group causes the industry to have more innovation, lower profitability, decreased prices, and better quality of products and services. Let us understand the concept of strategic groups with the help of examples.
Examples of the strategic group
The strategic groups are identified based on the similar characteristics followed by the companies. The following are the characteristics based on which the strategic group of the industry is formed
1. The pricing policy
The pricing policy is one of the main features based on which the strategic groups are formed. For example, the companies that sell products at low prices are direct competitors to one another. The giant retailers like Walmart and Target are direct competitors to each other as both follow the low pricing policy.
2. The extent of products or services diversity
The companies that provide different products and services are part of one strategic group. For example, ITC and Hindustan Unilever companies are part of one strategic group as both companies offer different products and services.
3. The extent of branding
Companies whose products and services are recognized by people based on their brand’s name and not based on the quality of the products or services are part of one strategic group. For example, cosmetic brand companies like Lakme, Bobby Brown, and Loreal companies are part of one strategic group.
4. Distribution Channel used
Companies that use similar distribution channels are part of one strategic group.
Let us take the example of the aviation industry. In the aviation industry, there are different segments, such as luxury class, business class, and economy class. The aviation companies that provide luxury class services are part of one strategic group. Similarly, the aviation companies that offer business-class services are part of one strategic group.