It helps understand who are the most direct competitors of any given organisation, on what basis competitive rivalry is likely to take place within each group and how it is different from one group to another. Mobility between groups depends on the extent to which there are barriers to entry between one group and another. Just as a new market space often can be found by looking across substitute industries so it can be found by looking across strategic groups. The term refers to a group of companies within an industry that pursue a similar strategy.
In most industries, all the fundamental strategic differences among industry players are captured by a small number of strategic groups. Strategic Groups can generally be ranked in a rough hierarchical order built on two dimension of performance. Most companies focus on improving their competitive position within a strategic group. The key to creating a new market space across existing strategic groups is to understand what factors determine buyers decisions to trade up or down from one group to another.
Kim and Mauborgne(2004) Harvard Business Reviewon Innovation, p10 Carrying out a strategic group analysis * Identify relevant competitors and their competitive behaviour/strategic dimensions * Identify opportunities and threats * Better understanding of dynamics over time * Centrality of mobility barriers From the analysis * Analyse attractiveness of each group by performing a five forces analysis * Identifiy mobility barriers that prevent movement between groups
Assess gaps that you or competitor can move into Strategic Choices May be about position in the market * Become the compass for corporate strategy * Purpose of a business level strategy is to create differences between firm and competitors Outward Facing In Strategic options Porters Generic Strategies Porter’s generic strategies remain one of the most widely accepted typology of strategic options for businesses. According to Porter there are three generic strategies through which you can seek competitive advantage * Cost leadership * Differentiation * Focus (either Cost or Differentiation)
Cost leadership – This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio. To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals. The cost leadership strategy usually targets a broad market and benefits from economies of scale Positives Process efficiency and efficient manufacturing * Production capabilities cause a high barrier to entry for competitors * Negatives * Competitor can lower cost * Advancements in technology competition may leapfrog in production capabilities * Sustainability is based on competitor not being able to match price or source lower cost materials
Effects of inflation on cost Create a competitive advantage * reducing production costs and therefore increasing the amount of profit made on each sale as the business believes that its brand can command a remium price or * by reducing production costs and passing on the cost saving to customers in the hope that it will increase sales and market share Low cost producers include Ryan Air Differentiation – Differentiate the products in some way in order to compete successfully. A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs which are possibly under-served, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy.
Positives * Reputation for quality and innovation * Leading in research and development with a creative product development team * Negatives * Competitor imitations * Quick change in customer tastes * Heavy reliant on patents Create a competitive advantage * Creating a business that stands out from the rest through development of product or service features which are different from competitors and appeal to customers including functionality, customer support and product quality Differentiation producers include Apple
Focus – Concentrates on a narrow segment within the market in attempt to achieve either a cost advantage or differentiation. The premise is that a customer needs can be better met by focusing on it entirely. A firm using a focus strategy often enjoys a high degree of customer loyalty and this discourages others from competing directly. Positives * Customer loyalty creates barrier to entry for competitor * Ability to tailor a broad range of products to a narrow market segment * Strong brand image Negatives * Competitor imitation * Creates a mobility barrier to other segments
Create a competitive advantage * Catering for the specific needs and wants of a niche market while pursuing a cost or differentiation to suit that segment Focus producers include Roll Royce Comments on Generic Strategies According to Porter’s framework, a business can maximize performance either by striving to be the low cost producer in an industry or by differentiating its line of products or services from those of other businesses; either of these two approaches can be accompanied by a focus of organizational efforts on a given segment of the market
These generic strategies represent the three ways in which an organisation could provide its customers with what they wanted at a better price, or more effectively than others. Essentially Porter maintained that companies compete either on price (cost), on perceived value (differentiation), or by focusing on a very specific customer (market segmentation). Some businesses will attempt to adopt all three strategies; cost leadership, differentiation and focus. A business adopting all three strategies is known as “stuck in the middle”.
They have no clear business strategy and are attempting to be everything to everyone. This is likely to increase running costs and cause confusion, as it is difficult to please all sectors of the market. Middle of the road businesses usually do the worst in their industry because they are not concentrating on one business strength. Competing through lower prices or through offering more perceived value became a very popular way to think of competitive advantage.
For many business people, however these strategies were a bit to general and they wanted to think about different value and price combinations in more detail. The problem with generic strategies – “You cant be remarkable by following someone else who is remarkable… The thing that all really great companies have in common is that they have nothing in common” (S Godin, 2003) Hybrid Strategies Authors like Bowman and Faulkner have offered “extensions” of Porters framework. Their main contribution is the emphasis on the success of hybrid strategies.
Hybrid strategies basically mean: balancing the lowest cost base possible to enable reinvestment in low price and differentiation The success of the strategy depends on the ability to deliver enhanced benefits to a customer together with a low price and making enough profit to reinvest into differentiation. It has been argued that if differentiation can be achieved there is no need for lower price as you have the competitive advantage and can charge what you wish. A hybrid strategy can be very successful and hard for competitors to copy.
However there is a danger that the organisation can drift into a stuck in the middle position and being out flanked by both a low priced and differentiating competitors at the same time. Successful Hybrid strategists include Ikea, They produce furniture that is acceptable to customers at a low cost compared to competitors. Offering basic warehouses and by the customer assembling themselves at home keeps cost down. They differentiate as they offer great design products based around a contemporary lifestyle. To achieve its position good design, affordable prices and Ikeas competitive level of quality creates value for customers.