Michael Porter in his work on Competitive Strategy (1980) postulates that structural analysis at the industry level provides several useful insights into the five competitive forces and the broad methodologies by which the competitive forces can be managed by individual firms. He also suggests that industry level structural analysis by itself is not adequate to explain why some firms facing the same industry environment are more profitable than others. Porter proposes that structural analysis within industries would be a useful adjunct to structural analysis of the industries to explain differences in the performance of firms in the same industry.
Porter suggests the following thirteen strategic dimensions as being capable of providing companies within an industry with varied strategic options to differentiate themselves. These are: specialization, brand identification, push versus pull, channel selection, product quality, technological leadership, vertical integration, cost position, service, price policy, leverage, relationship with parent company, and relationship to home and host government. Porter states that the level to which each of the strategic dimensions plays out is related to the nature of the industry while in some cases the strategic dimensions are, in fact, related.
Thereupon Porter proposes that characterization of the strategies of all significant competitors in an industry along these dimensions is the first step in structural analysis within industries. This activity, he holds, allows for mapping of the industry into strategic groups. A strategic group is defined by Porter as the group of firms in an industry following the same or similar strategy along the strategic dimensions. There could be just one strategic group in an industry, if all firms follow the same strategy or each firm could constitute a strategic group if each firm follows an entirely different strategy.
According to Porter, the strategic group is an analytical device designed to aid in structural analysis. It is an intermediate frame of reference between looking at the firm as a whole and each firm separately. Strategic groups are claimed to explain differences in performance and profitability of firms in a more perceptive manner. In a concept analogous to entry barriers, Porter proposes mobility barriers as barriers that prevent a firm shifting strategic position from one strategic group to the other. Porter hypothesizes that firms in strategic groups with high mobility barriers will have greater profit potential than those in strategic groups with lower mobility barriers. He states that strategic groups and mobility barriers change over time.
Reapplying concepts of structural analysis, Porter proposes that strategic groups experience all the concepts of industry level competitive forces, namely, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, threat of entry and rivalry among firms. The firm’s profitability is seen to be a resultant of the interplay of common industry characteristics, characteristics of the strategic group and firm’s position within its strategic group. Other related concepts relate to scale and cost position of strategic groups. Porter proposes structural analysis within industries together with the concepts of strategic groups and mobility barriers as a powerful analytical tool to explain causes of firm profitability and formulate c3B line-height: 115%; mso-bidi-font-family: Calibri;">As can be seen, the twelve dimensions of the author are more perceptive of strategy, and hence better qualifiers for strategic grouping. More interestingly, each of these can be well defined and well measured. Product specialization can be defined in terms of sales per product family. Manufacturing integration can be defined in terms of value added in-house. Import intensity is defined as consumption of imported materials and components as a percentage of sales. Export orientation is defined as export income as a percentage of sales. R&D intensity is seen in terms of R&D expenditure (capital and revenue) as a percentage of sales. Financial leverage could be shareholder funds as a percentage of total capital employed. There could be other leading and lagging indicators too. Patent applications made, patents granted or patents commercialized as well as new product counts could reflect the R&D intensity, for example.
Constraints of multiple dimensions
The essence of strategic grouping is to correlate the strategic dimensions of a firm to its performance. It would be of interest to compare a group of firms which are mapped on the dimensions of product specialization and manufacturing integration to other groups at different levels in terms of their physical and financial performance. A study of the Indian automobile industry suggests that strategic groups which are high on product diversification (ie., low on product specialization) and high on manufacturing integration scored better on physical and financial performance. Similarly, groups which are low on import intensity and high on export intensity tended to do better on performance. Groups which are high on R&D intensity and low on financial leverage also scored well.
Strategic groups being two dimensional have their limitations in predicting the impact of multiple variables on firm performance. Porter tries to circumvent the limitation by suggesting that strategic groups of firms which are mapped on any two dimensions could be further elaborated by bubbles which denote the size of the business and adding other parameters into the description of the group. For example, in a strategic grouping drawn on the dimensions of specialization (narrow line, full line) and vertical integration (high vertical integration and assembler) could be further described in terms of manufacturing cost (low or high), customer service (low or high) and quality (low or high). Despite Porter’s prescription strategic groups serve as a descriptive analytical tool rather than a quantitative analytical tool.
Strategic grouping as a technique works well when firms in an industry are characterized by a few, preferably two, dominant dimensions that are the most important in terms of strategic calibration. For example, in the automobile industry, dimensions of product specialization and manufacturing integration are the two strategic dimensions that could be significantly varied across firms. Other dimensions such as quality and environmental friendliness could be seen as essential dimensions in any case. Strategic grouping also works well when there are a number of firms in an industry which facilitates plotting of the firms into several strategic groups.
Taking stock at this stage, the need to fix the foundation of Porter’s strategic grouping through more perceptive strategic dimensioning and more selective application to relevant industries needs to be noted. As with any theory, mere elegance of strategic thinking cannot translate itself into tangible analytical support that can be quantified. It would be better to recognize this limitation of strategic grouping. This awareness enables a better appreciation of the other two concepts of using strategic groups for establishing mobility barriers and analyzing competitive forces to complete the framework of structural analyv class="MsoNormal" style="margin: 0in 0in 10pt;">
Physical and financial performance, in fact, determines the mobility of firms across strategic groups. A firm in a high product specialization and low vertical integration strategic group should have high financial performance to be able to move to a strategic group that is defined by high product diversification and high vertical integration, which by the very nature requires high capital intensity. If the profitability of such a lean strategic group is weighed down by other factors, say a heavy dependence on high cost imports, the firm in such a strategic group would face high mobility barriers. Mobility barriers, therefore, are not external to strategic groups but are themselves intrinsic characteristics of strategic groups.
Physical and financial performance, in fact, determines the mobility of firms across strategic groups. A firm in a high product specialization and low vertical integration strategic group should have high financial performance to be able to move to a strategic group that is defined by high product diversification and high vertical integration, which by the very nature requires high capital intensity. If the profitability of such a lean strategic group is weighed down by other factors, say a heavy dependence on high cost imports, the firm in such a strategic group would face high mobility barriers. Mobility barriers, therefore, are not external to strategic groups but are themselves intrinsic characteristics of strategic groups.
Just as an industry with high entry barriers enables monopolistic or duopolistic industry structure with superior profitability, a strategic group which has significant entry barriers would have higher potential for profitability. That said, compared to cross-industry movement cross-strategic group movement is a more common occurrence. A classic case is seen in white goods industry and fast moving consumer goods industry where firms constantly seek to move across strategic groups. Part of the reason is that most firms in these industries possess some common attributes in terms of product development capability, manufacturing capability, brand differentiation, investments in trade channels and so on. This enables the typical firm in these industries bridge the mobility barriers. As an axiom, mobility barriers can be interpreted in terms of core competencies required for strategic groups.
Strategic groups and derived power
Firms in strategic groups could get the energy to transcend mobility barriers through derived power. Such derived power accrues through being a subsidiary of a major corporation, being a part of a major conglomerate or being a corporation well respected by the regulatory bodies, including the governments. Access to external power as above helps firms move into different strategic groups more effortlessly, relative to standalone firms. As an example, Tata Motors would be able to introduce superior quality steel for its automotive purposes by virtue of having Tata Steel in its conglomerate fold. A subsidiary of a multinational corporation would have the ability to secure better financial leverage or hop across strategic groups requiring higher capital even if its current strategic group has little financial surplus to offer.
Inability to be mobile across strategic groups or even exit the industry drives industry consolidation. Equity relationships between needy firms and endowed firms, through mergers and acquisitions, lead to redraw of strategic groups. Shifting strategic preferences of firms also lead to structural reconfiguration. The acquisition of Henkel’s detergent business by Jyothi Laboratories is a case in point. Mobility across strategic groups has to be carefully thought through; otherwise there could be a risk of the acquiring or the acquired firm, or rather the merged entity, being in an inferior strategic group than they were in the pre-consolidation phase.
Globalization and strategic groups
Globalization has added an entirely new strategic dimension to the theory of strategic groups. Strategic groups of the same industry tend to vary dramatically across nations. It is also not automatic that characteristics of a multinational are exhibited in the same manner in all the countries the corporation exists. A corporation that is vertically integrated in the headquarters country need not be so in another country. Understanding of the local industrial characteristics helps companies with global corporations become better members of strategic groups. Global developments affect the principal and its subsidiaries differentially. Apart from different strategic dimensions pursued across nations, the extent to which countries are coupled (or decoupled) with global economic developments, especially of the developed world, have a major impact on how strategic groups are formed, how they perform and how they reconfigure.
Posted by Dr CB Rao on September 24, 2011