One strategic group has chosen a positioning strategy based on discovering and developing new blockbuster drugs. This is the so-called proprietary group, and includes companies like Pfizer, Roche, Novartis, and Merck. Developing new drugs requires consistently high R&D expenditures, because it takes 1015 years for a newly-discovered molecule to reach the market for drugs. Moreover, drug discovery and development costs have risen drastically, and can reach $1 billion. The strategy of focusing on the discovery and development of proprietary drugs also has an extreme risk element to it, because only 1 out of 10,000 discovered molecules will make it to the market for pharmaceuticals.(2)

The drug discovery and development process can be broken down into distinct sequential stages. The discovery stage can take anywhere between 2 and 10 years. In the next stage, which can take up to 4 years, a lead drug candidate is developed and pre-clinical testing is undertaken. A lead candidate then enters phase I of clinical testing, which can take up to two years. In this phase, the lead candidate is administered to 2030 healthy volunteers and its safety and dosage are evaluated. In phase II, which can take up to two years, the drug is given to 100300 patient volunteers to check for efficacy and side effects. In phase III, which can take up to three years, the drug is administered to 1,0005,000 patient volunteers to monitor reactions to long-term drug usage. The next stage, FDA review and approval, can take up to two years. This is followed by a two-year post-marketing testing period.

This implies that the firms in the strategic group focusing on proprietary drugs are pursuing a high-risk, high-return strategy. The strategy is clearly high risk given the very low odds of discovering and developing new drugs that are also commercially viablein other words, that serve a large enough market to recoup its investment (and to pay for all the other failures along the way). On the other hand, with a high risk comes a potential for high returns. Should a new drug be discovered, firms will patent protect it, and thus be able to reap profits of billions of dollars over many years.

On the other hand, the second strategic group is the so-called generic group because their positioning strategy is to focus on the low-cost manufacturing and distribution of drugs that have come off patents (so-called "me-too products"). The strategies of companies in the generic group are characterized by little R&D spending, production efficiencies (especially in large-scale manufacturing), and alternative distribution channels (such as over-the-counter). These elements combine to form a low-cost, low-risk strategy. The strategy is low cost, because the R&D investments required to understand the manufacturing behind patent-expired drugs are minimal. But this strategy is also low return because of the lack of differentiation. These firms are unable to charge high prices because their products are effectively commodities.

The companies in the proprietary drug group generally tend to outperform companies in the generic drug group. So why don't we see firms moving from a lower-performing strategic group to a higher-performing one? The answer is that strategic groups are separated by mobility barriers, or industry-specific factors that inhibit movement from one group to another. For example, the pharmaceutical companies in the proprietary drug group have built their strong R&D competence over long periods of time through large R&D investments, but also through R&D alliances and acquisitions.(3) This implies that a company in the generic group cannot easily build the R&D competence necessary to compete in the proprietary group, because not only are high investments necessary, these competencies tend to be built cumulatively over long periods of time.(4) Mobility barriers, therefore, separate strategic groups from one another. This in turn implies that differences in performance between strategic groups can remain stable over time given high-mobility barriers.

Although the strategic group model allows understanding of why clusters of firms in the same industry can exhibit differences in firm performance, the model has two important shortcomings. First, just like the five forces model, it is static. It shows a snapshot of a moving target, and thus does not allow for consideration of industry dynamics caused by innovation or other changes. Second, it does not help us to understand why there are performance differences among firms in the same strategic group.

Strategic groups typically follow different business strategies. In the pharmaceutical example in this case, the high-risk, high-return strategy of the proprietary group would be characterized as

Multiple Choice

nonmarket strategy.

cost-leadership.

targeted cost-leadership.

differentiation.

related diversification.