Strategic Groups

Strategic groups consist of organisations within the same industry that are pursuing equivalent strategies, targeting groups of customers that have similar profiles. Aston Martin’s strategic group is likely to have Ferrari, Lotus, Lamborghini, etc. All these companies follow similar strategies and face similar strategic challenges.

There is a range of attributes that can be used to identify strategic groups. Some examples are:

• Size of the company
• Assets and skills
• Scope of the operation
• Breadth of the product range
• Choice of distribution channel
• Relative product quality
• Brand image

For many companies, analysing every competitor in its generic industry, would be an arduous task in terms of management time and company resources. Defining an organisation’s strategic group allows a company to concentrate its analysis on its direct competitors and to examine them in more detail.

For each competitor in their strategic group an organisation needs, establish the following:

Competitors’ Objectives

Competitors’ objectives can be identified by analysing three important factors. They are:

Whether the competitors’ current performance is likely to fulfil their goals. If not, the competitor may start a change of strategy.

How likely the competitor is to commit further investment to the business. Financial goals may show this. Investment is more likely from companies that have goals that are long-term in nature, such as market share and sales growth, rather than organisations under pressure to produce short-term profitability. This also reveals potential trade-offs the competitor may be willing to take. If short-term profitability is the key goal, then the rival is likely to be willing to lose market share in the short term in order to achieve its profitability targets.

The future direction of the competitor’s strategy. The organisation may have non-financial goals, such as gaining technology leadership.

Competitor’s Current and Past Strategies

There are three areas that should be explored to establish a competitor’s current activities. They are:

Identification of the current markets/market segments within which the competitor currently operates. This will show the scope of the business.

Identification of the way the competitor has chosen to compete in those markets. Is it based on quality of service, brand image, or on price? This may be an indication of whether a low cost or differentiation strategy is being pursued.

Comparison between the current strategy and past strategies can be instructive. Firstly, it can illustrate the direction the competitor is moving in terms of product and market development over time. It can also highlight strategies that the organisation has tried in the past and have failed. The competitor is unlikely to try these approaches again without considerable reservations.

Competitor’s Capabilities

An analysis of a competitor’s assets and competencies allow a judgement to be made about how well-equipped they are to address the market, given the dynamics in the industry and the trends in the external environment. To evaluate a competitor’s potential challenge to an organisation, several areas need to be examined (Lehman and Weiner, 1991).

Management Capabilities

The background and previous approaches of leader-managers in a competitor company can give clues as to their likely future strategy. The level of centralisation or de-centralisation of management decisions will also influence decision-making. Recruitment and promotion policies, along with remuneration and rewards scheme give an indication as to the culture and style of the management team.

Marketing Capabilities

An analysis of the competitor’s actions with the marketing mix uncovers the areas where their marketing skills are high and where areas of vulnerability exist. There are several questions that can be asked: How good is the competitor’s product line? Do they have a strong brand image? Is their advertising effective? How good are their distribution channels? How strong is their relationship with customers?

Innovation Capabilities

Evaluating a competitor’s ability to innovate allows an organisation to judge how likely the rival is to introduce new products and services or even modern technology. Assessing the quality of a competitor’s technical staff, its technical facilities, and level of investment in research and development will indicate their likely potential in this area.

Production Capabilities

The configuration of a competitor’s production infrastructure can highlight areas that may place them at an advantage or conversely point out areas that are problematic to a competitor. Such factors could be geographic spread of plant, level of vertical integration or level of capacity utilisation.

Financial Capabilities

The ability to finance developments is a critical area. Competitors that have strong cashflows, or are a division of a major group, may have the ability to finance investment not available to other competitors.

Competitors’ Future Strategies and Reactions

One of the aims of the competitor analysis, so far, has been to gather information on rivals to establish their likely future strategy. Equally important is to evaluate competitor’s reactions to any strategic moves the organisation might instigate. The reactions of organisations can be categorised into four types of response (Kotler et al., 1996):

Certain Retaliation

The competitor is guaranteed to react in an aggressive manner to any challenge. Market leaders are likely to react in this manner against any threat to their dominant position. Companies that have an aggressive culture may also fall into this category.

Failure to React

Competitors can be lulled into a false sense of security in an industry that, over a prolonged period, has seen very little change. In this situation companies can be extremely slow to react to a competitive move. The classic example is British motorcycle companies failing to react to the entry of Japanese manufacturers into the lower end of the market.

Specific Reactions

Some competitors may react, but only to competitive moves in certain areas. For instance, they may always react to any price reductions, or sales promotions, as they believe these will have an important impact on their business. But they may fail to respond to a competitor’s increase in advertising expenditure. The more visible the competitor’s move the more likely a competitor is to respond. Actions that are less visible, such as support material for the sales force or dealerships, are less likely to face a response.

Inconsistent Reactions

These companies’ reactions are simply not predictable. They react aggressively, on occasion, but at other times ignore similar competitive challenges.