Market segments based strategic groups: what are they? and some propositions.

ABSTRACT

The concept of strategic groups has been around since Hunt (1972) first coined that term. This concept has been studied in depth in the area of strategic management, but has been barely touched upon in strategic marketing. The author of this paper thinks that the concept of strategic groups has an equal if not greater relevance to strategic marketing, since it is very strongly fled to the concept of market segments, which is regarded as the biggest contribution of the marketing discipline to the field of business (Biggadike, 1981). Even though strategic groups have been studied quite thoroughly in strategic management, there is still a lot of confusion, and there is very little consensus on a number of issues related to this concept. This paper attempts to clarify the concept of strategic groups and resolve other issues related to it. In particular, issues related to: (1) the definition of the concept of strategic groups, (2) competition between strategic groups, and (3) the relationship between group membership and their performance. The paper then offers some propositions related to the above three areas.

Keywords: Strategic groups, group membership, group performance, strategic map.

1. INTRODUCTION

The term, strategic groups was first used by Hunt (1972) when he studied the home appliance industry and found that groups of firms were following different strategies. However, since then, a number of scholars have defined strategic groups in a number of different ways. Probably the biggest criticism against the concept of strategic group is that it is not theory based, and there are others who think that strategic groups are nothing more than a creation of the statistical method (cluster analysis) used in identifying strategic groups.

The definition that is most commonly used by scholars is the one put forth by Porter (1979, pg 215), who states, "... an industry can thus be viewed as composed of clusters or groups of firms, where each group consists of firms following similar strategies in terms of the key decision variables". Even though this author agrees with a large part of Porter's definition, there are a lot of underlying issues in Porter's definition that have added to the confusion and have led authors to also misinterpret this concept.

For instance, Bogner, Mahoney and Thomas (1998), and McGee and Thomas (1986), think that strategic groups are firms in an industry with similar cost structures, resource profiles, product diversification and formal organization. However, this author disagrees with this. For instance, BMW, Mercedes Benz (a division of Daimler-Chrysler), Lexus (a division of Toyota), Infiniti (a division of Nissan), compete with Cadillac (a division of General Motors). Similarly, Seiko (a manufacturer of watches) has different brands of watches--Seiko, Pulsar, and Lorus, which compete with Citizen in one segment, and Timex in another. It is quite clear that these competitors do not have similar resource profiles, cost structures, product diversification or formal organization. In fact the companies may be very different on all of the above factors. This author thinks that in the final analysis, firms with multiple SBUs and multiple products (brands) compete against each other in different market segments through their brands or strategic business units. The corporations as a whole may or may not compete at the corporate level. Thus, firms can have very dissimilar cost structures, resource profile, product diversifications, and formal organizations, and still compete with one another in different segments.

The concept of strategic groups has been empirically analyzed and supported by the findings of a number of scholars. For instance, Newman (1973, 1978) finds that strategic groups in the chemical goods industry differ on the degree of vertical integration, product differentiation and product diversification. Porter's (1973) study of the consumer goods industry found the differences to be primarily based on the relative size of firms, which is also supported by the findings of Caves and Pugel's (1980) study of some US manufacturing industries. Harrigan's (1980) study of some declining industries like baby food, cigar, leather tanners, etc., report the differences to be along the dimension of the strategic posture of firms. McGee and Thomas (1986), and Thomas and Venkatraman (1988) use factors like market position, resource commitments and assets to identify strategic groups in an industry, while Itami (1988) uses factors like technological skills, brand name reputation and management ability to do the same.

Studies of the brewing industry by Hatten (1974), Hatten and Schendel (1977), and Hatten, Schendel and Cooper (1978), find that strategic groups are formed due to differences on manufacturing, marketing, financial, and structural variables. Oster's (1982) study of 19 consumer goods industries reports that product strategy is the main element for the formation of strategic groups. Primeaux (1985) finds differences in size and investment behavior as the primary reason for the existence of strategic groups in the textiles petroleum business. Howell and Frazier's (1983) investigation of the medical supply and equipment business show that the differences between groups are mainly due to the customer groups and customer needs served by firms. Hergert's (1983) study of some 2450 SBUs from 50 manufacturing industries shoe a mix of variables like advertising, R&D, assets, sales, and market share to be the reason for the formation of strategic groups.

A study of the paints industry by Dess and Davis (1984) report that strategic groups differ on 21 marketing variables, while Hawes and Crittenden (1984) report that differences in marketing strategy variables contributed to the formation of strategic groups. Lahti's (1983) study of the Finnish knitwear industry show that size and the nature of the product group the firms were selling led to the formation of strategic groups. Mascarenhas and Aaker (1989) report the existence of three strategic groups in the oil-drilling industry. Lewis and Thomas's (1990) study of the U.K. retail grocery industry find strategic groups to exist based on grocery store size, and a relationship between size and profitability. Finally, Galbraith, Merrill, and Morgan's (1994) study of the market for non-tactical Navy information systems report the existence of three different strategic groups.

The current debate on issues relating to strategic groups revolve around three areas: (1) the definition of the concept, i.e., do strategic groups really exist, or are they methodological artifacts, and not theory based, (2) competition between strategic groups, i.e., do different strategic groups compete with each other, and finally (3) the relationship between strategic groups and performance, i.e., are firms in one strategic group more profitable than firms in other groups. Thus, this paper has three goals: (1) to define the concept of strategic groups so that it is theory based, and from a strategic marketing perspective instead of a strategic management (resource allocation) perspective, (2) to clarify how competition takes place within and among strategic groups, and (3) to clarify the strategy-performance relationship of firms in strategic groups. Propositions are then offered in the above three areas.

2. METHODOLOGICAL ARTIFACTS OR THEORY BASED

There are those who assert that strategic groups exist, and are theory based, however, there are others who have stressed that strategic groups do not exist. Those who believe that strategic groups exist include Cool and Schendel (1987), Figenbaum and Thomas (1990), Harrigan (1980, 1985), McGee and Thomas (1986), Nath and Gruca (1997), Porac, et al., (1995), and Thomas and Venkatraman (1988). Those who think that strategic groups are nothing more than artifacts of the methodology (cluster analysis), used to study them, include Barney and Hoskisson (1990), Cool (1985), Cool and Schendel (1988), Hatten and Hatten (1987), Reger and Huff (1993), Tang and Thomas (1992), and Thomas and Venkatraman (1988).

This author agrees with the latter group, since the former group has failed to give the theoretical foundation for the concept of strategic groups. This author thinks that this debate can be resolved only if the concept of strategic groups is grounded in theory, i.e., researchers should first clarify what is meant by the term strategic groups, what types of strategic groups will exist, and why, i.e., a-priori rather than ex post facto. Secondly, based on this theory, researchers should then use statistical methods like cluster analysis to support that theory. If the former is absent, then one has to conclude that strategic groups are nothing more than a creation of the methods used to identify strategic groups.

This author thinks that strategic groups should be defined using only one criterion--the market based strategies used by firms belonging to the different groups. Unfortunately, this has not been done so far. For this end, this author thinks that the best approach in setting the theoretical foundation for strategic groups is to use either Porter's (1985) generic strategies of low-cost, differentiation, and niche, or to use Miles and Snow's (1978) strategic typologies of prospectors, analyzers, defenders, reactors. The next step should then be to perform cluster analysis to support these theories. Not too long ago, Nayyar (1989), and McGee and Thomas (1989) made an attempt to clarify some unresolved issues in this debate. However, subsequent papers on this topic still seem to be very confusing. The first problem with the issue of "strategic groups" is its definition. The definition(s) put forth by scholars have been very diverse, contributing to the confusion.

One of issues that have contributed to this confusion is that scholars have used other criteria to define strategic groups. For instance, Mascarenhas and Aaker (1989), use mobility barriers as the theoretical background for the definition of strategic groups. As proposed by Porter (1979), and others, mobility barriers are nothing more than conditions that are necessary for the existence of strategic groups. There should be mobility (entry) barriers between strategic groups, i.e., it should not be easy for a company in one strategic group to easily enter another strategic group by replicating the strategy of companies in the other group. Movement from one strategic group into another group may not be very easy, and barriers to entry may differ among strategic groups (Porter, 1979). The following example may help explain this phenomenon.

When Toyota and Nissan had wanted to penetrate the luxury segment of the auto industry that was dominated by European imports like Mercedes Benz and BMW, their mobility from their predominantly cost leadership group was hampered not by their ability to produce a luxury car, but by the image of their brands in the minds of consumers. American consumers associated Japanese auto manufacturers with quality cars at reasonable prices, but did not associate Japanese cars with luxury and prestige. Thus, the only option Toyota and Nissan had been was to start a new strategic business unit, and market its new line of luxury cars under an entirely different brand name--Lexus, and Infiniti respectively. In this case, the mobility barrier for Toyota and Nissan was the negative attitude of consumers, not toward their ability to manufacture a quality product, but toward the perception of luxury and prestige associated with the company's name.

Another problem with studies in the area of strategic groups is that scholars seem to have misunderstood and are still confused about the concept of market segments, which this author thinks is integral to the understanding of the concept of strategic groups. The arguments put forth by Caves and Porter (1977) and others give the impression that different strategic groups target the same set of customers. Porter (1979) also makes mixed and confusing statements linking market segments and strategic groups. Porter states, "... when strategic groups are targeting for very different segments, their effect on each other is much less severe. ... A particular strategic group will be most exposed to rivalry from other strategic groups if it competes for the same market segments" (page 218). This author thinks that these are very confusing statements since different strategic groups do not target the same segment. Different strategic groups target different groups (segments) of customers who are attracted by a different set of offerings. Only companies within a particular strategic group target the same group (segment) of customers.

To clarify the above argument, one needs to understand what the concept of market segments. A segment is defined as a group of people (consumers, buyers) who have similar wants, needs, and desires. Consumers in different segments have different needs. For instance, in the hotel/motel industry, there are different types of consumers and there are different types of motels/hotels targeting these different consumers. The price conscious customers in the hotel/motel industry are typically targeted by Motel 6, Super 8, Sleep Inn, Days Inn, etc., while people who want more services, etc., and are willing to pay a higher price, are targeted by The Holiday Inn, Quality Inn, Best Western, etc., and finally, the hotels that target the up-scale segment include hotels like the Four Seasons, Ritz Carlton, Helmsley's, etc.

Similarly, in the auto industry, consumers who buy a Kia (low cost strategy), Hyundai, etc., buy it because it is inexpensive, while those who buy a Toyota Camry, Honda Accord, etc., (differentiation strategy) are willing to pay a higher price for a car that is bigger, has more features/options, is more reliable, etc. Finally, people who buy a Rolls Royce (focus strategy) are willing to pay a fortune for something that is very unique and prestigious. Thus, the argument that two strategic groups who are using different strategies, let's say of cost leadership and niche, are going after the same types of customers is not correct. The strategic group that is using the low cost strategy is trying to attract customers who value low price, the strategic group that is using the differentiation strategy is going after consumers who want something different and are willing to pay a higher price, while the strategic group that is using the focus/niche strategy is going after consumers who are willing to pay a very high price for the prestige associated with that brand.

2.1 The Proposed Definition of Strategic Groups Based on Markets Segments Based on the above discussion, it is quite clear that the definitions of strategic groups used by different scholars are very broad, and one can very easily get confused. This author thinks that the definition of strategic groups should be based on market strategies used by firms (in the strategic groups) in their market segment, and not on any other factor. However, scholars have typically defined strategic groups based on resources, and mobility barrier. This author proposes that for a strategic group to exist and be successful, it must offer consumers something that is different than another strategic group. In the same vein, Galbraith, Merrill, and Morgan (1994) propose: "Customer preferences, beliefs, and prejudices all assist in the formation of viable strategic groupings" (page 615). The author proposes the following definition of strategic group and hopes that it clarifies the concept of strategic groups.

A strategic group is a group of strategic business units, or brands operating within an industry where the SBUs or brands within a group compete for the same group of customers, using similar market related strategies.

Strategic Business Units (or brands) in other strategic groups compete for a different group of customers using strategies that are different than other strategic groups. Different strategic groups do not compete with each other, since they are pursuing different groups of customers.

This author thinks that this definition is supported by the findings of Nohria and Garcia-Pont (1991) that use cluster analysis to analyze strategic groups in the automobile industry. Even though the authors use variables like relative size relative market share, breadth of product line, relative technological sophistication, relative organizational capability, and relative labor cost, the resulting clusters show that the clusters could also just as easily be defined in terms of market segments that were being served by the different automobile manufacturers. The cluster analysis shows eight clusters (eight strategic groups of automobile manufacturers). The first cluster consists of General Motors and Ford, and even though these two companies are the largest in the world, they compete with each other in very similar market segments. The second cluster consists of AMC and Chrysler. The third cluster consists of, Fiat, VW, PSA, and Renault. The fourth cluster had the South Korean auto manufacturers of Hyundai, KIA, and Daewoo, with a sub-cluster that consisted of Seat, Alfa Romeo, and Rover. The fifth cluster has the European auto manufacturers: Volvo, Daimler-Benz, Saab, and BMW. The sixth cluster has Fuji, Suzuki, Daihatsu and Isuzu, the seventh cluster has and Honda, Mazda, Mitsubishi, while the last cluster has Nissan and Toyota. There are other clusters that are not part of the cluster analysis: Jaguar and Porsche, and some new Taiwanese entrants. It is apparent from the resulting clusters that the strategic groups can easily be identified based on the market segments they are serving. This author thinks that a strategic group is nothing more than a group of companies who serve the same market segment and compete against each other using similar market related strategies. These companies are very different from companies in another strategic group who are serve a different segment using different marketing strategies to attract a different group of customers.

Every industry has a number of strategic groups, and each group competes for a different group of customers using different strategies. The above definition of strategic groups is different from those proposed by scholars in the past. This paper proposes that the theory base for strategic groups could be in terms of the generic strategies proposed by Porter (1985), or the strategies proposed by Miles and Snow (1978). This paper, however, is based on Porter's generic strategies, and so the discussion will be focused only on the three generic strategies proposed by Porter.

Firms within the strategic group using the strategy of cost leadership typically aim to reduce the cost of doing business and pass the cost saving to customers. The strategic group of firms who rely on differentiation does not try to attract customers on the basis of low price, but on the basis of a different or slightly superior product/service for which the customers are willing to pay a higher price. Finally, firms relying on the focus (niche) strategy attempt to provide a very exclusive product/service to its customers and charge a very high premium for its offerings. Figure 1 shows a strategic group map.

[FIGURE 1 OMITTED]

Proposition 1: A strategic group is a group of firms that compete against each other using similar strategies to attract the same group of customers. There will be different strategic groups following strategies similar to Porter's generic strategies of low cost, differentiation, and focus/niche.

Proposition 2: There are a number of strategic groups within an industry, each using a different strategy to pursue a different group of customers, with different needs and different customer profile.

Figure 1 is a graphical representation of strategic groups in an industry. The horizontal axis measures differentiation and it has three categories--low, medium, and high. The vertical axis measures cost. Three categories exist here also--low, medium, and high. Firms using the strategy of cost leadership (low cost) will be grouped in the lower left hand corner--similar to circle A. Firms following the strategy of differentiation will find themselves somewhere in the middle--similar to circle B. Finally, firms that are following the strategy of focus/niche will find themselves grouped in the upper right hand corner, similar to C. The strategic group map may look different for an emerging or mature industry.

The strategic groups will have a tendency to form along a diagonal band, as shown by the figure. However, the shape and size of the circles may be different depending on the stage of the product life cycle of the industry. For instance, if the industry is in maturity, the circles may be more oval and stretched out in both directions, rather than circular since there may be a tendency by the strategic groups to emulate the strategy of the group closest to it. Or there may be more than the three strategic groups. As can be seen in the figure, there are no strategic groups outside the diagonal band. Consumers may perceive strategies of companies that lie outside the diagonal band to be contradictory, and inconsistent. Firms may also not be able to deliver such strategies. For instance, if a firm tried to pursue a strategy of high differentiation and low cost, then this may not be feasible from a business point of view and also may be perceived as contradictory by consumers.

These examples may help understand this concept. In the retail industry, firms like Wal-Mart, K-Mart, etc., will comprise the low cost strategic group. Retailers like Sears, JC Penney, Mervyn's, Target, etc., will fall somewhere in the middle signifying the strategy of differentiation, and finally, stores like Neiman Marcus, Nordstrom, etc., would be in the upper right hand corner using the niche strategy. Similarly, if one were to look at the auto industry, cars like Bentley, Lamborghini, Ferrad, etc., will comprise the niche group, while cars like Honda Accord, Toyota Camry, Ford Taurus, etc., make up the differentiation group, and cars like Mercedes Benz, BMW, Jaguar, Cadillac, Infiniti, Lexus, etc., will make the upper differentiation strategic group, while cars like Kia, Hyndai, Geo, etc., comprise the low cost group.

3. COMPETITION WITHIN AND BETWEEN STRATEGIC GROUPS

This author disagrees with Caves and Porter (1977) who believe that there is greater rivalry between firms from different strategic groups in comparison to firms within the same group. This author agrees with Smith et al., (1997), who make the opposite argument, and thinks that only firms operating within a strategic group compete against each other. Firms in different strategic groups do not compete against each other since their offerings to their customers are different from each other. This is because firms within one strategic group are trying to attract a particular type of consumers while firms within another strategic group are trying to attract a different type of consumers. And thus, the offerings of firms in different strategic groups will be different from each other. These offerings are based on the different needs of the customers of the different groups.

There may be a number of strategic groups within an industry, and each strategic group may have a number of firms in it. An industry will have a large number of strategic groups if the industry is very mature and the product/service is perceived by consumers to be commodity like. The more mature the industry, the more crowded the strategic map will be with strategic groups. It is very likely that one will see varying degrees of the above three generic strategies. For instance, one could see a strategy like low cost with differentiation (differentiation with low cost). On the other hand, the less mature (emerging) the industry, the fewer the number of strategic groups since consumer needs are still evolving and the products/services are not yet perceived by consumers as commodities.

Figure 2 shows the strategic group map for a mature industry. In a mature industry, when consumers treat product/service offerings of firms as commodities, then there may be some more shades of the three different strategies, and the strategic map may be very crowded. One could see groups of firms using a strategy of low cost with differentiation, something akin to circle B, while others may follow an upper differentiation strategy which comes closer to a niche strategy--circle D. The closer the strategic groups are to each other, the stronger the rivalry among groups. However, in an emerging industry, when products/services are still evolving, there may be distinct strategies of low cost, differentiation and niche, and the strategic map may not be as crowded, and competition among groups will not be as strong. Also, the width of the diagonal may change with the stage of the industry. In a mature industry where products and services are perceived as commodities, the diagonal will be much wider due to the fact that strategic groups may try to offer low price, but with some differentiation.

[FIGURE 2 OMITTED]

This author disagrees with Porter (1973, 1979), who thinks that competition increases with increasing strategic distance (defined as the difference between different strategic groups in terms of the key strategic decision variables). Porter goes on to add that, "... diversity of strategies will enhance rivalry among groups" (page 218), and competition between groups is much stronger than competition within groups. This author couldn't disagree more.

If the arguments put forth by Porter are correct, then Kia's brand of cars, which basically uses a low cost strategy, should be a very strong competitor of Rolls Royce, which uses a focus strategy. It seems very clear that Kia's cars compete very strongly with the likes of Honda's Civic, Hyundai's Elantra, Toyota's Tercel, Chrysler's Neon, etc., and not with Rolls Royce, not even with Honda's Accord and Toyota's Camry. If one were to calculate the price elasticity of demand, one would easily be able to find out which brands compete against each other. This author agrees with Cool and Dierickx (1993) who state that competition (rivalry) will increase with decreasing strategic distance, i.e., firms within a strategic group compete with each other much more strongly than with firms in another strategic group. It is also worth pointing out that firms do not compete against each other, it is the brands of the firms in the different market segments that compete with each other.

Proposition 3: Because different strategic groups target different groups of customers with different needs, there will be no (or very little) competition between the different strategic groups.

Proposition 4: The more mature the industry (and hence the more commodity like the product/service), the larger the number of strategic groups within that industry, and subsequently, the greater the competition between strategic groups.

4. RELATIONSHIP BETWEEN GROUP MEMBERSHIP AND PERFORMANCE

Here again, there is disagreement as to whether group membership affects performance. There are those who think that firms in different strategic groups have different profitability, while others think that group membership has no effect on performance, and are merely firm effects. Those who report significant relationship between group membership and firm performance include Cool and Dierickx (1993), Dess and Davis (1984), Fiegenbaum and Thomas (1990), Lewis and Thomas (1990), Nair and Kotha (2001), Oster (1982), Porter (1979), i.e., different strategic groups have different profitability. However, findings by Nair and Kotha (2001) are also not conclusive since their findings show one strategic group to outperform the second group in one time period while the second group outperformed the first one in the subsequent period. There are others like Cool and Schendel (1987, 1988), Howell Frazier (1983), and Petraf and Shanlery (1997), who doubt the existence of any relationship between group membership and performance and conclude that the so-called relationship is nothing more than improper identification of mobility barriers, and firm effects.

The author of this paper thinks that logic dictates that there cannot be any relationship between group membership and performance. If one were to use Porter's three generic strategies of low cost, differentiation, and focus/niche, as the theoretical foundation for the existence of strategic groups, then one has to realize that Porter never asserts that either one of the strategies (groups) will be more profitable than the other. Why should they be? Each type of generic strategy, if implemented correctly, should yield equally successful performance results. There is no reason to believe that firms following the strategy of low cost will be more profitable than those following the strategy of niche or differentiation. If this were the case, then why would any firm consciously follow a strategy that yields low performance results? It is likely that in the short run, one strategic group, and hence firms within that group, can be more profitable than others within an industry. However, in the long run, this is not sustainable. Firms from the lower profit groups will definitely adopt the strategy that yields the most returns.

This author thinks that it is very likely that the performance differences among strategic groups exist because of the mobility barriers that have been erected by those using strategies that yield higher performance. Again, this may be true only for the short run. In the long run, firms will definitely try to overcome these mobility barriers if the profits (returns) from breaking down these mobility barriers are greater than the costs associated with attempting to break down these barriers. One has to also understand that firms in strategic groups that have erected high mobility barriers spend a lot of resources in erecting and maintaining those mobility barriers through advertising, R&D, differentiated products, etc. However, if other firms see that the benefits associated from spending resources to overcome those mobility barriers far exceed the costs associated with them, then, they will definitely do that. A very simple recent example is the case of Toyota's Lexus division and Nissan's Infiniti division that overcame the mobility barrier associated with prestige that was created by Mercedes Benz and BMW because it saw that the profitability margin in the luxury segment was much higher than the low and medium price segment.

This author thinks that the performance of strategic groups will differ based on market characteristics, i.e., a particular strategy (strategic group) will perform better under one market condition, but may not perform as well in a different market condition. For instance, an industry that is in growth will favor one strategy (maybe differentiation) while an industry in a mature stage will favor another strategy (maybe low cost).

Scholars who report and believe that there is a relationship between performance and strategic groups have failed to explain why firms who are part of a lower performing strategic group would not be vying to be part of the more profitable strategic group, be it low cost, differentiation, or focus. Wouldn't everyone want to penetrate the high profit group? Why would a new firm knowingly want to enter and be part of an industry and deliberately adopt a strategy that would yield lower profits than firms in another group? Shouldn't profits in the long run be more or less similar between strategic groups, and a function of the mobility barriers and the returns associated with overcoming those mobility barriers? Thus, the conclusion by Cool and Dierickxs (1993, page 57) that, "group membership has proven to be a poor predictor of firm performance," seems to be on the mark. It has been argued that the reason there are these differences is because strategies (and their distinct advantages) cannot be easily imitated, and these have been called mobility barriers. According to Porter (1979), not all strategies are equally successful, and this inequality in profits between strategic groups is maintained through the existence of mobility barriers, and the height of the mobility barriers will determine a strategic group's profitability. Mascarenhas and Aaker's (1989) study of the oil-drilling industry show just the reverse, i.e., the more protected the groups the lower their profitability.

Even though there are a number of studies that have investigated the relationship between strategic groups and performance, there is no conclusive evidence that belonging to one strategic group is more lucrative and profitable than belonging to another strategic group. This author thinks that this should have been expected anyway. This author disagrees with Caves & Porter (1977), Caves (1984), and Porter (1979), who link profitability to strategic groups. Their assertion is that some strategic groups are persistently more profitable than others. This is due to the fact that firms outside the group may have to overcome mobility barriers of the more profitable strategic group. However, this author thinks that this could be true only in the short run, but not in the long run. So far, studies have shown mixed results with respect to the relation between strategic groups and profitability. Intuitively, it is difficult to rationalize why there would be any relationship between strategic groups and profitability, even if there are mobility barriers. If one group is more profitable than other groups, then in the long run, firms would try to enter the group with higher profitability, and ultimately neutralize the profitability gap, which would then lead to strategic groups which are more or less equally profitable.

This author thinks that studies that establish a relationship between strategic groups and profitability may have been due to efficient firms in the more profitable group and less efficient ones in the less profitable groups. This author agrees with Nayyar (1989), that firms following different strategies may be able to achieve the same performance, which is also supported by Karnani (1984), who reports that firms using Porter's generic strategies show the same profitability.

Proposition 5: There are mobility barriers between strategic groups. However, these mobility barriers will be overcome if the benefits (profits) are grater than the costs of overcoming these barriers.

Proposition 6: There is no relationship between strategic groups and their performance, i.e., profitability does not depend on group membership. All groups may be more or less equally profitable in the long run.

This author also disagrees with Cool and Dierickx (1993) who liken mobility barriers to 'walled medieval cities' that protected the cities from hostile invaders by their walls. "Cities that have higher and thicker walls than others are more successful in protecting themselves, those strategic groups which are protected by higher mobility barriers can be expected to be more profitable" (page 57). It is true that higher and thicker wall may discourage invaders from invading the city. However, this author thinks that Cool and Dierickx (1993) do not evaluate the other side of this issue. In particular, the mobility barriers that are erected by firms within a strategic group are not cost free. Just as it costs to build higher and thicker walls, it costs money to erect mobility barriers. For instance, Mercedes Benz, Lexus, Infiniti, BMW, Cadillac, etc., spend an enormous amount of money in building and maintaining the prestige associated with the luxury element of their cars through the features of their products, services, and their advertising. And firms within a strategic group will erect mobility barriers only to the extent that the returns they expect from erecting those mobility barriers exceed the expense of erecting these mobility barriers.

Just like outsiders who have penetrated the thickest and the highest of all walls if they perceive there to be wealth inside a city, the mobility barriers of strategic groups can also be overcome by competitors. Mobility barriers may discourage, but may not completely prevent firms from entering a strategic group. Any firm wanting to enter a strategic group will look at these mobility barriers and will analyze the cost and benefit of entering that strategic group. If the benefit/profits exceed the cost of entry, then the firm may decide to penetrate that strategic group, no matter how great the mobility barriers.

5. CONCLUSION

This paper attempts to clear the confusion surrounding the concept of strategic group, especially the definition of the term, the rationale for the existence of strategic groups, competition within and among strategic groups, and finally, the relationship between group membership and performance of the different strategic groups.

In the view of this author, the area of strategic groups is still unexplored in marketing and the author encourages researchers to study this area in depth from the perspective of strategic marketing, especially strategic groups based on market related strategies. For instance, researchers may want to study how easy or difficult it is for companies to jump from one strategic group to another. Are some barriers easier to overcome than others? Are the mobility barriers in some industries based on perceptions of consumers? Or are barriers based on technical capability, resources, etc. This type of evaluation will help firms if they are trying to invade another strategic group. Before invading any strategic group, firms should try to find out what mobility barriers they will be confronted with, and what they should do in order to overcome those barriers. In some instances it may be virtually impossible to invade a strategic group, while in some cases it may be relatively easy. For instance, in some consumer goods industries the mobility barriers may be consumer perceptions while in the high technology industrial product industries it may be technical expertise. It all depends on the nature of the industry. A thorough analysis of the mobility barriers in their respective industries will prevent firms from making such mistakes, which might end up costing them enormous resources in terms of time and money, and maybe humility in the marketplace.

Scholars can also study the relationship between group membership and profitability under different market conditions. For instance, is the relationship between performance and strategic group membership affected by different market conditions? Will a strategic group following a low cost strategy be more profitable and successful in a mature market while the strategic group following a differentiation strategy will be more profitable if the market is in growth?

Another area related to strategic groups that researchers may want to explore is the issue of market leadership within the industry versus leadership with a strategic group. This author believes that the words market leader has been used loosely in business. As far as marketing goes, the concept of market leader in a strategic group is more relevant than the concept of industry market leader. Thus, even though General Motors may be the market leader in the auto industry, it is not the market leader in each strategic group. Researchers may want to explore whether the industry leader will be the leader in each strategic group. This author believes that the industry leader will not be the leader in each strategic group. For instance, if the industry leader wants to invade and enter a strategic group, will it be able to become the leader in that new strategic group? Can Wal-Mart (which is the industry leader) be the market leader in the upscale fashion apparel industry? What determines who will be the market leader? Resources? Good strategy? The evidence seems to be mixed here. In the early years, Netscape was the market leader for inter-net browsers. However, Microsoft overwhelmed Netscape simply due to its vast resources. On the other hand, in the auto industry, Toyota, with less resource than Daimler-Chrysler overtook Mercedes Benz as the market leader in the luxury segment in the U.S.

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Abhay Shah, Colorado State University-Pueblo, Colorado, USA

Dr. Abhay Shah earned his Ph.D. from Oklahoma State University in 1991. Currently he is Professor of Marketing at Colorado State University, Pueblo, USA.