Strategic Groups

[Page 789]Fundamentals

The term strategic group was first coined in 1972 by Michael S. Hunt, who suggested that firms within an industry use heterogeneous survival strategies. Since then, a number of studies from the industrial organization (IO) economics stream have examined the existence of strategic groups in different industries. More recently, scholars have used managerial cognition and organizational ecology as the theoretical foundations to study strategic groups. The managerial cognition theory suggests that managers tend to focus on certain firms in an industry most similar to their own firms, resulting in a strategic group. Organizational ecology scholars suggest that the patterns of competition and population dynamics within an industry vary for different groups of firms. In spite of these advances, the theoretical foundation for study of strategic groups remains weak.

On the basis of the managerial cognition theory, some scholars have suggested the concept of strategic group identity to explain the emergence of strategic groups in an industry and the consequences of the same for firm behaviors and outcomes. According to Margaret Peteraf and Mark Shanley, strategic group identity refers to a set of mutual understandings, among members of a cognitive intraindustry group, regarding the central, enduring, and distinctive characteristics of the group. The strategic group identity is developed based on the interactions among social learning, social identification, economic forces, and historical and institutional forces. The emergence and persistence of a strategic group depends on the strength of the strategic group identity.

Based on the IO literature as outlined by J. Lee, K. Lee, and S. Rho, scholars have identified four sets of factors that make the basis to analyze the emergence and persistence of strategic groups: mobility barriers, strategic interactions, firm rivalry, and dynamic capabilities. Mobility barriers across strategic groups limit the extent of imitation and entry by members of different strategic groups. As a consequence, some strategic groups are able to maintain a higher level of profitability compared to others. The mobility barriers could arise as a result of huge investments in innovation and advertising and the path of dependency in developing such capabilities. Strategic interactions occur by way of collusion between firms within a strategic group and may help sustain the group by limiting entry by imitators. With respect to firm rivalry, there are two competing views. One view suggests that there is less rivalry between firms within a group than across groups. This is because firms within a strategic group have mutual dependence and use tacit collusion to maintain the entry barriers and superior performance. The other view suggests that there is a greater level of rivalry between firms within a group than with firms outside a group. The very existence of mobility barriers implies that firms within a strategic group do not need to be concerned about competition with firms outside the strategic group. There is no conclusive empirical evidence about which of the above holds true. Finally, dynamic capabilities are the capabilities that firms need to sustain their competitive advantage. For a strategic group to remain differentiated from another strategic group and maintain a higher level of performance, the firms within this strategic group need to rely on dynamic capabilities.

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