BUS4098 Week 3

Why Do Firms Cluster in Strategic Groups

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Business Simulation

©2016 South University

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Why Do Firms Cluster in Strategic Groups

Recognize that all the firms will not go after the same customers by using the same method in an industry such as restaurants or footwear. But why do these firms appear to cluster in groups? These clusters emerge over time. Firms and customers figure out different sets of traits that satisfy particular customer groups best. Let's go back to our example of restaurants. In the fast food group, individual firms experiment with different ranges of menus, value menu pricing, and other elements of their formula. When one firm finds something that increases sales, others quickly copy it. If the new idea does not work, it is abandoned and no one else tries it because it is shown wanting by a similar firm. As firms focus on copying each other’s successes, they tend to look more and more alike. Everyone wants to present the best combination for the segment they are serving.

This does not mean that new segments will not work in the industry. Restaurants such as Quiznos and Moe's Grill have done a good job of developing the "fast casual" segment just a bit above fast food. But Burger King, McDonalds, and the rest have only made limited moves to copy the format and menus of these new firms. Quiznos and Moe's Grill are in a new but different strategic group, and the burger chains cannot move away from what makes their current positions effective. Because the new "fast casual" group is close to the traditional fast food business, it does have some impact on demand but nowhere near the impact that the rivals within the group have on each other.

You just studied the example of the restaurant industry to understand why firms cluster in strategic groups and how they face the biggest competition from other firms within their group. Now let's discuss strategic groups in reference to the footwear simulation.

Strategic Groups in the Footwear Simulation

In the footwear simulation, the competitive intelligence reports provide you with strategic group maps for each market every year. These eight maps give a clue as to who is in your strategic group. But be careful; strategy is more than just two dimensions, which the decision screens you deal with each week will remind you. What would those maps look like if other strategic dimensions were used rather than the ones the simulation generates? A piece of paper only lets you look at two dimensions at a time, but researchers look at clusters in seven or more dimensional spaces through computer analysis. You cannot do this, but you can construct simple maps with other dimensions to check whether the clusters represented in the maps in the competitive intelligence reports are robust.

One of the important things you and other managers have to consider when making choices of strategic dimensions is—which ones are important in which market. For example, you cannot expect the dimensions that are important to customers in Asia to be as important to customers in North America.

Also don't forget the private label markets. You don't get private label market maps generated for you by the simulation, but there will be firms that look a lot like each other in that market also. Wouldn't you like to find out who they are?

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Business Simulation

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[Parent Lecture Name]

Finally, when thinking about strategic groups, you should think about who can or will like to change group membership. In Week 2 you learned that commitments such as factory and celebrity purchase limit firms' flexibility. Therefore, the choices the firms make to join a strategic group also limit the likelihood that they will move to another group. For example, a firm that has invested heavily in manufacturing capacity in order to compete as a low-unit-cost volume producer will have a hard time moving to a low-volume, boutique position in the industry, especially when the firms already in the low- volume boutique position have contracted with celebrities and the low-unit-cost firm has not done so.

But firms do change positions. It might be that a firm is facing trouble in its current position, and it does not see any way in which it can do well in the group in the future. Importantly, these are often firms which have the least to lose in terms of resources and capabilities oriented toward their current group. In fact, it is the absence of these resources and capabilities that are not allowing the firms to do well.

When firms move, they tend to move into strategic groups close to the group they are leaving. This is because such moves do not require extensive strategic reconfiguration. Choosing a new strategic group depends on how strongly the firms in the new group currently compete. Therefore, when firms move out of their group due to weak performance, they move to new positions that are close by and are not occupied by strong firms.