Strategic groupings of companies

Generally speaking, in a particular market, the more companies are alike, the more they will have a tendency to compete against each other. This observation leads to the definition of strategic groups—a collection of companies that have performed similar strategic choices. Usually a strategic group acts as a reference point for group members in formulating competitive strategy. The number and size of strategic groups, as well as the "strategic distance" that separates them should be correctly identified. Groups that are larger, more significant, and more recent will experience fiercer competition.

The concept works well for the analysis of various high-tech industries [15], where technology may have a significant impact on the formation of strategic groups [16]. For instance, in the semiconductor industry Intel and AMD belong to the same strategic group. Actually AMD started its business as a licensee of Intel chip design technology. In 1996, when the contract was terminated, each company went into its own way but on a very parallel path. AMD made the decision to emulate the leader by providing chips of similar design and performance at a discounted price. In 1997, it took 17 months for AMD to release a chip similar to Intel. In 1999, the lag time had been reduced to less than 1 month. In 2003, AMD even managed to launch a new type of 64-bit chip before that of Intel. This is a very different move that other semiconductor companies made, like Texas Instruments or Ericsson, which focused on application-specific integrated circuits (ASICs), which are microchips designed for a special application.

Another example is the CRM software market where, as illustrated in Figure 4.3, we observe a clear division between large, mission-critical database software products and small, easy-to-use packages. The former are designed for large firms and are marketed by companies such as Siebel, Oracle, PeopleSoft, Nortel, or Remedy. In 2002, an average deal for those CRM software companies ran from $300,000 to $400,000 (not including the cost of additional services provided by complementors, which can reach or exceed $100,000). In the later category, companies such as Interact Commerce, FrontRange Solutions, Epicor Software, Oncontact Software, and Multiactive Software have carved niches with more basic solutions at $30,000 or less. Small firms may also rent the applications from an application service provider (ASP) for a monthly fee of about $2,800. Interestingly Microsoft, which has many agreements with companies from the first group, entered the second market when, in May 2001, it purchased Great Plains, a European company specialized in CRM software solutions for small businesses.

The boundaries of strategic groups are open and susceptible to change, especially in a sector where markets are formed and disbanded very quickly.

Harley Davidson Strategic Group Analysis
Complexity/price of the solution Figure 4.3 Main strategic groups in the CRM software industry.

Changes in strategic group structure and increasing rivalry between groups usually translate into the declining profitability of the entire industry [17]. The PC industry is a case in point where most of the traditional computer makers, such as IBM and HP, have lost ground to direct marketing specialists, such as Dell and Gateway.

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