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8 . . Explain the concept of strategic groups. What are the performance implications? LO 2-7 Strategic Groups within Industries Understand the concept In an industry analysis, two assumptions are unassailable: (1) No two firms are totally differ- of strategic groups and ent, and (2) no two firms are exactly the same. The issue becomes one of identifying groups their strategy and per of firms that are more similar to each other than firms that are not, otherwise known as formance implications strategic groups. This is important because rivalry tends to be greater among firms that are 82 strategic groups alike. Strategic groups are clusters of firms that share similar strategies. After all, is Target clusters of furns that share more concerned about Nordstrom or Walmart? Is Mercedes more concerned about Similar strategies Hyundai or BMW? The answers are straightforward.** 62 PART 1 STRATEGIC ANALYSIS These examples are not meant to trivialize the strategic groups concept." Classifying an industry into strategic groups involves judgment. If it is useful as an analytical tool. we must exercise caution in deciding what dimensions to use to map these firms. Dimensions include breadth of product and geographic scope, price/quality, degree of vertical integration, type of distribution (eg, dealers, mass merchandisers, private label), and so on. Dimensions should also be selected to reflect the variety of strategie combinations in an industry. For example, if all firms in an industry have roughly the same level of product differentiation (or R&D intensity), this would not be a good dimension to select What value is the strategic groups concept as an analytical tool? First, strategle groupings help a firm identify barriers to mobility that protect a group from attacks by other groups. Mobility barriers are factors that deter the movement of firms from one strategic position to another. For example, in the chainsaw industry, the major barriers protecting the high- quality/dealer-oriented group are technology, brand image, and an established network of servicing dealers. The second value of strategic grouping is that it helps a firm Identify groups whose com petitive prisition may be marginal or lenious. We may anticipate that these competitors may exit the industry or try to move into another group. In recent years in the retail department store industry, firms such as JC Penney and Sears have experienced extremely difficult times because they were stuck in the middle, neither an aggressive discount player like Walmart nor a prestigious upscale player like Neiman Marcus Third, strategic groupings help chart the future directions of firms strategies. Arrows emanating from each strategic group can represent the direction in which the group (or a firm within the group) seems to be moving. If all strategic groups are moving in a similar direction, this could indicate a high degree of future volatility and intensity of competi- tion. In the automobile industry, for example, the competition in the minivan and sport utility segments has intensified in recent years as many firms have entered those product segments, Fourth, strategic groups are helpful in thinking through the implications of each industry trend for the strategic group as a whole. Is the trend decreasing the viability of a group? If so, in what direction should the strategic group move? Is the trend increasing or decreasing entry barriers? Will the trend decrease the ability of one group to separate itself from other groups? Such analysis can help in making predictions about industry evolution. A sharp increase in interest rates, for example, tends to have less impact on providers of higher priced goods (e... Porsches) than on providers of lower-priced goods (eg.. Chevrolet Cobalt), whose customer base is much more price-sensitive Exhibit 2.7 provides a strategic grouping of the worldwide automobile industry. The 91 firms in each group are representative: not all firms are included in the mapping. We have identified five strategic groups. In the top left-hand corner are high-end luxury automak ers that focus on a very narrow product market. Most of the cars produced by the mem. bers of this group cost well over $100,000. Some cost over twice that amount. The 2017 Ferrari California T starts at $210.843, and the 2017 Lamborghini Huracan will set you back $210,000 (in case you were wondering how to spend your employment signing bonus). Players in this market have a very exclusive clientele and face little rivalry from other strategic groups. Close to the bottom left-hand corner is a strategie group that has low-price/quality attributes and targets a narrow market. These players. Hyundai and Kia. limit competition from other strategic groups by pricing their products very low. The third group (near the middle) consists of firms such as Mercedes and BMW that are high in product pricing quality and average in their product line breadth. The fourth group (at the far right) consists of firms with a broad range of products and multiple price points. These firms have entries that compete at both the lower end of the market (e.s. the Ford Focus) and the higher end (e... Chevrolet Corvette) CHAPTER 2 ANALYZING THE EXTERNAL ENVIRONMENT OF THE FIRM 61 EXHIBIT 2.7 The World Automobile Industry: Strategic Groups High Ferrari Lamborghini Porsche Mercedes BMW Ald Price Toyota Ford General Motors Chrysler Honda Nissan Hyundal Kia Chery Geely Tata Motors Low Low Breadth of Product Line High Note: Members of each strategic group are not exhaustive, only illustrative The auto market has been very dynamic and competition has intensified in recent years. For example, some players are going more upseale with their product offerings. In 2009. Hyundai introduced its Genesis, starting at $33.000. This brings Hyundai into direct competition with entries from other strategic groups such as Toyota's Camry and Honda's Accord. And, in 2010. Hyundai introduced the Equus model. It was priced at about $60,000 to compete directly with the Lexus 460 on price. To further intensify com- petition, some upscale brands are increasingly entering lower-priced segments. In 2014, Audi introduced the Q3 SUV at a base price of only $32,500. And BMW, with its 1-series, is another well-known example. Such cars, priced in the low $30,000s, compete more directly with products from broad-line manufacturers like Ford, General Motors, and Toy. ota. This suggests that members of a strategic group can overcome mobility barriers and migrate to other groups that they find attractive if they are willing to commit time and resources Our discussion would not be complete, of course, without paying some attention to recent entries in the automobile industry that will likely lead to the formation of a new stra tegic group-placed at the bottom left corner of the grid in Exhibit 2.7. Three firms-China's Zhejiang Geely Holding Company, China's Chery Automobile Company, and India's Tata Motors-have introduced models that bring new meaning to the term "subcompact. For example, Chery's 2013 09 model sells for between 56,083 and $8,170 in the Chinese market and sports horsepower in the range of only $1 to 74. Geely's best-selling four door sedan, the Free Cruiser, retails from $5.440 to $7.046. The firm has gone more upscale with sonte offerings, such as the GX7, a sports utility vehicle with a price starting at $14.910. For low price points, India's Tata Motors has everyone beatly the proverbial mile. In January 2008 it introduced the Nano as the World's Cheapest Car with an astonishing retail price of only $2.500. It is a four door, five-seat hatchback that gets 54 miles to the gallon (but this economy originally came with a 30 horsepower motor) RT STRATEGIC ANALYSIS