DEPARTMENT OF MANAGEMENT

AFDELING FOR VIRKSOMHEDSLEDELSE

UNIVERSITY OF AARHUS C DENMARK

ISSN 1398-6228

Working Paper 2004 - 6

ARE STRATEGIC GROUPS THE GHOSTS OF YESTERDAY?A REVIEW AND CRITIQUE OF STRATEGIC GROUP THEORY AND RESEARCH

Hesham Morten Gabr

Are Strategic Groups the Ghosts of Yesterday?

-A Review and Critique of Strategic Group Theory and Research

Hesham Morten Gabr

School of Economics and Management, Department of Management

University of Aarhus, Building 323, DK-8000 Aarhus C, Denmark

Phone: +45 8942 2139

Fax: +45 8613 5132

E-mail: Hgabr@econ.au.dk

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Are Strategic Groups the Ghosts of Yesterday?

-A Review and Critique of Strategic Group Theory and Research

ABSTRACT

This paper contributes to the theory on strategic group by giving a critique of the existing

theoretical and empirical contributions within strategic management, by assessing whether these

add new insight to the initial strategic concept that managers know from Competitive Strategy

(Porter, 1980), by addressing which role strategic groups should play in future research, as well as

in general research possibly enhancing managers understanding of industries and firm performance,

and the role that strategic groups could play in this research.

Keywords: strategic groups; competitive strategy; performance; behavior; validity.

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INTRODUCTION

Managers’ understanding of industry structure and how it might affect firms

differently was supported by Porter’s (1980) Competitive Strategy: Techniques for Analyzing

Industries and Competitors. The book introduced managers to thoughts from Industrial

Organization in a simplistic manner, hereby allowing managers to get a better understanding of the

complexity of industry competition exemplified by five underlying forces. These forces that are

argued to have different impact on profitability opportunities across groups of firms within

industries following the same or similar strategies (i.e. Strategic groups) and the individual firm.

Strategic group analysis takes a prominent place in Porter’s (1980) Competitive

Strategy and helps managers to address questions concerning firm positioning (e.g. intensity of

rivalry, profit potentials). The concept was introduced in (Hunt) 1972 and has since generated a

large amount of literature. Strategic groups have commonly been defined as a set of firms with

similar strategies, or as groups of firms that are isolated by common mobility barriers (Hoskisson et

al. 1999; Porter, 1979). However, even if there is this commonality in the field of strategic

management, the picture of strategic groups over time, is very diffuse, and there is little consensus

regarding a link between strategic group membership and performance. This lack of census has led

to severe critique of: the theoretical framework (Dranove et al., 1998; Peteraf & Shanley, 1997;

Barney & Hoskisson, 1990; Cool & Schendel, 1988; Hatten & Hatten 1987; McGee & Thomas,

1986), commonly employed methodologies (Barney and Hoskisson, 1990; Thomas &

Ventrakaman, 1988), an ad hoc nature of employing key concepts (Ketchen et al., 1993; Thomas

and Venkatraman, 1988). This severe critique questions the quality of strategic group theory and

practice.

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Over time the strategic group concept, with its roots in the Industrial Organization

perspective, has been approached with multiple perspectives (i.e. IO economics, Resource-based

theory, Categorization theory, Evolutionary theory, Organizational Identity theory, and

Organizational theories). Therefore, strategic group theory has developed from a unified fundament

to a fragmented paradigm in the field of strategic management (see figure 1 inspired by Bogner et

al. (1998:67)). This development may lead to a self-reinforcing fragmentation trap, where the

exploration of new theories completely comes to dominate the exploitation of existing research

programs (Knudsen, 2002). This fragmentation together with the severe critique questions the

quality of strategic group theory and practice within academia. It calls for condensing the

knowledge structure in order to increase the absorptive capacity of the strategic group concept, and

to answer whether the research adds new insight to managers which is different from the insight in

Competitive Strategy (Porter, 1980) (i.e. did it matter at all?) and whether the strategic group

concepts should be abandoned or should play a different role in future research (i.e. does it still

matter)?

In this paper, an attempt is made to give a critique of the existing theoretical and

empirical contributions to the strategic group concept within strategic management, to assess if it

has added new insight to the initial strategic group concept that managers know from Competitive

Strategy, to answer the question as to which role strategic groups should play in future research

(Does it matter anymore?), to address what must be done now in order to add insight to managers

concerning industry analysis and firm performance. The critique is based on the idea of validity,

which provides a unifying concept for understanding the criteria for good research. The evaluation

is based on four validity concepts (construct, conclusion, internal and external validity) and

corresponding counterparts (measurement, analysis, design and sampling).

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Figure 1. The evolution and integration of strategic Group concepts.

First, a short introduction to the origins of strategic group theory is given and to

Porter’s (1980) Competitive Strategy, written for managers, where strategic group analysis plays a

prominent role.

Hereafter, an attempt is made to give a summarized critique of the development and

quality of strategic group theory and practice. To evaluate this large amount of theoretical and

empirical work concerning strategic groups, past contributions are evaluated according to each

validity type.

1950 1970’s 1980’s 1990’s 2000’s Harvard Chicago Hunt Caves & I.O. continues School School (1972) Porter (Increased emphasis I.O Response (1977) on Game Theory) I.O. Economics Emerging Strategic (The Industry) Management Branch (Strategic Groups) Strategic Group Strategic Management Perspective Paradigm (The firm and The Industry) Emerging Strategic Micro Economics Management Branch (The Firm) (Resource-Based View) Penrose (1959) Porac et al. (1989)

Reger & Huff (1993) Categorization Theory Huff (1982) Peteraf & Shanley (1997) Simon (1947) March & Simon (1958) Weick (1979) (Strategic Group Identity)

Organizational Identity Theory Albert & Whetten (1985)

Lee et al. (2003) (Evolutionary Framework) Evolutionary Theory Nelson & Winter (1982) Thomas & Carrol (1994) (Organizational Theory) Organizational Theory

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Following this, an attempt is made to assess how strategic group research has added

insights to the initial IO based group construct and Porter’s (1980) Competitive Strategy and how

this matters to managers trying to comprehend competitive positions within an industry. The large

amount of research on strategic groups is in this paper seen as responses to the IO contribution (i.e.

its underlying assumptions) to strategic group theory.

Finally, the paper ends by giving directions for future concerning strategic groups and

research that generally might enhance managers’ understanding of industries and firm performance

and which role strategic groups could play in this research.

ORIGINS OF STRATEGIC GROUP THEORY AND “COMPETITIVE STRATEGY “

Origins of Strategic Group Theory

Strategic group theory has its origin in the Structure-Conduct-Performance paradigm

(S-C-P), both originated in the Harvard School of Industrial Economics (Bain, 1956; Caves and

Porter, 1979; Hunt, 1972; Maison, 1939; Porter, 1979). The S-C-P paradigm posited a causal

relationship between industry structure and performance. In this world, an exogenous industry

structure determines firm conduct (i.e. strategy). The S-C-P model has later been refined (Scherer

and Ross, 1990). In the 1950s, the Chicago School of Industrial Organization challenged the S-C-P

paradigm by, instead of focusing on structure, focusing on firm efficiency in order to explain

performance differences (Conner, 1991). However, The Chicago School was not the only school of

thought to challenge the S-C-P paradigm, it was also challenged by a Schumpeterian school of

thought, focusing on destructive creation. Hereby, the focus was on dynamic industry structure,

contrary to the S-C-P paradigms’ static understanding of industry structure (Conner, 1991). The

initial strategic group concept may be understood as an adaptive response by Harvard School

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industrial organization economists to the challenges confronting the S-C-P paradigm (Bogner et. al.,

1998).

The first stone to the strategic group concept was laid by Hunt (1972) in his study of

the US home appliance industry. Intense rivalry observed in this highly concentrated, but

nevertheless highly competitive industry in the 1960s lead Hunt to depart from the S-C-P view. He

attributed this unexpected finding to the existence of stable structural factors, leading subsets of

firms to pursue different strategies (such as product diversification policies and distribution

arrangements), which worked against the exercise of market power. Hunt’s conclusion was that the

concept of industry structure needed to be refined to include strategic groups, referring to firms

displaying similar conduct along key strategic dimensions (Cool and Schendel, 1987). Subsequent

work on strategic groups built on this observation, focusing on whether rejecting the IO assumption

of intra-industry homogeneity was appropriate, finding that significant differences between firms in

terms of size and level of integration existed (Newman, 1978; Porter, 1976).

In 1977, Caves and Porter (1977) combined structural and strategic (behavioral) variables

and translated the concept of entry barriers (i.e. factors as economics of scale, differentiation or

capital requirements constraining entry of new firms) to the concept of mobility barriers (i.e. group-

specific “entry barriers”) in order to explain persistent performance differences within an industry.

Furthermore, they focused on dynamics in an industry explaining entry paths and sequences of

moves, a contribution that sometimes seems to have been neglected. Their focus was overall on

strategic groups and industry performance. However, Porter (1979) directed the focus towards firm

theorizing and the study of the relation between strategic group membership and firm performance.

Porter proposed that a group’s mobility barriers determines only the profit potential for firms in a

strategic group the profit potential could be eroded by rivalry within and between strategic groups

as well as by several firm-specific factors (i.e. differences in risk profiles, skills and resources,

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execution and implementation ability). Porter also emphasized that firms within a strategic group

resemble one another closely and that they are likely to respond in the same way to disturbances

because of the recognized mutual interdependence. Previous work has also focused on the relation

between strategic group membership and firm performance (Hatten and Schendel, 1977; Schendel

and Patton, 1978). However, it was primarily concerned with the question of whether strategic

variables relate differently to firm performance across strategic groups (Cool and Dierickx, 1993).

Porter (1979: 215), who theoretically directed the strategic group theory’s focus towards the

firm, defined strategic groups in the following manner: “An industry can 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”. However, as we will see, this definition has offered little guidance in

the large stream of research focusing on the strategic group concept.

“Competitive strategy”

A large amount of research has been done on strategic groups. However, this research

has been under severe criticism. Before giving a critique of this research, and hereafter an

assessment as to whether it matters for managers to try to understand their industry and firm

performance, insight concerning industry analysis and strategic group analysis from Competitive

Strategy are briefly summarized. Competitive Strategy is used as a benchmark since it became

extremely popular among managers, who ultimately are- or should be- the end users of strategic

management research.

With Competitive Strategy Porter (1980) provided a framework seeing the industry as

being influenced by five forces (barriers to entry, threat of substitutes, buyer power, supplier power,

and rivalry); forces which collective strength influence the profit potential of an industry and the

intensity of industry competition. Given its strengths and weaknesses The purpose of competitive

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strategy for a business unit within an industry is to find the position where the firm can best defend

itself against these forces, or alternatively can influence them in its favor.

The five competitive forces have unequal impact on the profitability across the

groups, or cluster of firms, following the same or similar strategies in terms of key decision

variables (i.e. strategic groups). Hence, after completion of a five forces analysis, managers are

advised to make a more fine-grained analysis by looking at groupings within the industry (i.e.

strategic group analysis); groupings formed by identifying the strategically important dimensions of

competition.

Mobility barriers (i.e. group specific entry barriers) determine the Strategic Groups

profit potential. However, this profit potential can be eroded by rivalry both within and between

groups and by specific factors (such as differences in skills and resources as well as implementation

abilities). Rivalry both within and between strategic groups can erode profit potentials. However,

the focus is strongest on the rivalry between strategic groups, since firms within groups follow each

other closely and are likely to respond in the same way to disturbances because of recognized

mutual interdependence.

Firms have many competitive/strategic variables to choose from when positioning

their firm relative to the competitive position of other firms. However, in Competitive Strategy,

Porter helps managers to bring structure into this chaos by introducing his generic strategies (low

cost, differentiation, and focus);.hereby showing how competitive positions can be defined in terms

of relative costs and relative prices.

Several researchers have criticized Porters framework. However, this paper will not

go into this criticism. The purpose is to give a critique of the strategic group research and theory, to

try and asses if it adds new insight to the framework well known to managers, and to asses what its

future role might be. Hence, after briefly outlining some of the assumptions behind the Porter

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framework, a critique of the research stream will be given. Following this, an attempt will be made

to assess which insight this stream adds to Porter’s framework. Finally, the future role of this stream

and research in general, possibly enhancing mangers’ understanding of industries and firm

performance and which role strategic groups could play in this research, will be discussed.

Assumptions behind the framework regard: competition between firms, rationality,

profit maximation, and a static industry (i.e. representing a snapshot of the industry). Hence, the

model does not consider cooperative aspects as to establish strategic linkages (i.e. linkages ranging

from distribution agreements to mergers and acquisitions), but only strategic interactions. These

strategic interactions might lead to market power effects; effects that are well known to economists.

This effect requires managers to recognize their mutual interdependence. This recognition of

interdependence can lead to implicit or explicit mechanisms (i.e. collusion) and may lead to

reducing coordination costs and increasing prices. Implicit or explicit coordination is facilitated by a

high concentration, homogenous products/services and a low degree of uncertainty (Scherer and

Ross, 1990). The existence of strategic groups will therefore complicate the way that firms in an

industry interact with each other. While this may restrain the ability of the industry as a whole to

coordinate activities, it may allow firms within strategic groups to coordinate their actions. Hence,

rivalry may tend to be lower within strategic groups as compared to between strategic groups.

Furthermore, the reliance on rationality may neglect coordination problems that could possibly arise

when managers have different knowledge structures. This may even further neglect consideration of

the creation, restructuring and dissemination of knowledge (e.g. how innovations occur) which is

dynamic in nature. Dynamic issues are not taken into account by the framework since it represents a

snapshot of an industry in a given industry.

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STRATEGIC GROUP THEORY AND PRACTICE CRITIQUE

In this section, an attempt is made to give a summarized critique of the development and quality of

strategic group theory and practice. The evaluation is based on four validity types (construct,

conclusion, internal, and external validity) and corresponding counterparts (measurement, analysis,

design, and sampling), which are used when studying causal research questions.

Construct and Measurement

Construct validity addresses the question whether, a research program can be claimed

to reflects the construct of the program appropriately and whether the measures reflect the idea of

the construct of the measure appropriately.

Strategic group theory is by no means characterized by a united paradigm, it is as the

strategic management field (Rumelt et al., 1994; Schendel, 1994; Hoskisson et al., 1999; Knudsen,

2002) in general rather characterized by being a fragmented paradigm (i.e. multi-paradigmatic).

Strategic group theory has its origin in the Structure-Conduct-Performance paradigm (S-C-P), both

originated in the Harvard School of industrial economics (Bain, 1956; Caves and Porter, 1979;

Hunt, 1972; Maison, 1939; Porter, 1979). However, strategic group researchers have applied several

different theoretical perspectives than the IO perspective. In the following the different perspectives

are briefly mentioned; Resource-based view of the firm (Barney, 1991; Penrose, 1959;Wernerfelt,

1984), and notion of isolating mechanisms (Rumelt, 1984) have been applied by strategic group

researchers (e.g. Cool and Schendel, 1988; Dierickx and Cool, 1994; Mehra and Floyd, 1998;

Bogner et al. 1998). A recent development in strategic group research is based on a cognitive

perspective (March and Simon, 1958; Simon, 1947; Weick, 1979). This cognitive perspective on

strategic groups has emerged uniquely within strategic management (Bogner et al., 1998). This

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perspective relies on perceptual data, generated from managers or top management teams, to

identify cognitive groups instead of the traditional reliance on secondary data (e.g. Porac et al.,

1994; Reger and Huff, 1993; McNamara, 2003). Recently, the concept of organizational identity

(Albert and Whetten, 1985) has been applied by Peteraf and Shanley (1997), who propose a theory

of strategic group identity, distinguishing groups with weak identities from those with strong

identities. More recently, an evolutionary perspective (Nelson and Winter, 1982) has been adapted

to explore why strategic groups sometimes exist, and sometimes not (Lee et al., 2003). Other

perspectives adopted by strategic group researchers include an organizational perspective,

emphasizing networks of interacting firms both with and among members (Thomas and Carrol,

1994) the use of social networks analysis focusing on linkages within and between strategic groups

(Duysters and Hagedoorn, 1995; Garcia-Pont and Nohria, 2002; Nohria and Garcia-Pont, 1991), to

the IO perspective. On the basis of the perspective known as the New Economics of Industrial

Organization, Dranove et al. (1998) have made an attempt to develop a framework enhancing our

understanding of true strategic group-level effects contra spurious group-level effects (i.e. firm- and

industry-level effects).

Strategic group theory is flooded with various theoretical perspectives and thereby

different explanation types and degrees of rationality (Knudsen, 1997). This complicates an

evaluation of the construct since each perspective using the “strategic group brand” may have good

construct validity, but not together since they address different research areas. However, because

researchers have followed different research areas, they have often responded individually (i.e.

without a coordinated effort) to the assumptions underlying the initial construct based on the ideas

behind IO. This lack of coordination has lead researchers to overlook problems inherent in the

initial construct. However, as will be argued overall, the construct cannot yet guide researchers and

hence the theoretical framework that could guide empirical work and provide a common thread for

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research still lacks. Overall, all these responses to the initial strategic group construct have lead to a

fragmented paradigm characterized by exploration of new theories. These explorations of new

issues have created a need to condense the knowledge structure in order to increase persistency in

the research community- and hereby the absorptive capacity of a field (Knudsen, 2002)- and avoid

ending in a self-reinforcing process in which the exploration of new theories completely dominates

the exploration of new research programs (i.e. a fragmentation trap).

The large amount of studies concerning strategic groups shows that virtually all researchers

use the same technique to identify strategic groups (will dealt with in detail in the section on

conclusion validity). However, the correspondence stops when looking in the way the strategic

group construct is operationalized. The strategic dimensions used for identifying strategic groups

reveal great differences (McGee and Thomas, 1986). There are, in fact, no uniformity in the

treatment of strategic groups in empirical research settings, and the development of groups has

primarily been data driven as opposed to theory driven (an inductive vs. an deductive approach)

(Thomas and Venkatraman, 1988). This drive for quantification seems to have overshadowed the

need to adequately specify the model and the variables and has led to haphazardly selected

measures (McGee and Thomas, 1986). The drive for quantification stems from an inadequate

theoretical framework, in which the definition of key concepts has not been specified in detail, and

therefore Barney and Hoskisson (1990) have emphasized that what is needed is a theoretical

framework that can guide researchers (Barney and Hoskisson, 1990), and Cool and Schendel

(1987:1104) have concluded that “Lacking is the attention to the theoretical definition of the

strategic group concept, which could guide empirical work and provide a common thread for

research” (Cool and Schendel, 1987:1104).

Perhaps because of the lack of a theoretical framework researchers, have blindly pursued to

verify the existence of strategic groups by trying to see if data-driven groupings of firms can explain

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performance. However, researchers have not been able to find a consistent link between strategic

group membership and performance. This lack of consensus concerning a link between group

membership and performance has led researchers to question the very existence of strategic groups

(i.e. groups of firm following similar strategies!). However, the very same strategic group literature

has failed to distinguish between: current decisions regarding the acquisition and use of assets and

the development of stocks over time (i.e. asset flows vs. assets stocks (Cool et al., 1994; Dierickx

and Cool, 1994)): as well as true group-level effects and spurious group-level effects (firm- and

industry-level (Dranove et al., 1998)). Furthermore, researchers studying behavour (possible

indirect links to performance) have found a relation between group membership and behavior (Cool

and Diericks, 1993; Garcia-Pont and Nohria, 2002; Smith et al, 1997). Further, a cognitive stream

adding cognitive structures to the strategic group literature (McNamara, 2002; McNamara et al.,

2003; Pegels et al., 2000; Reger and Huff, 1993) provides compelling evidence for the existence of

meaningful groups of firms within an industry (i.e. it matters to managers). Hence, this suggests that

strategic group researchers should work on the theoretical construct and try to see which types of

behavior these predict instead of trying to identify strategic groups on behalf of direct links to

performance.

Overall one can conclude that the operationalizations have not been good reflections

of the constructs. However, an exception is the research area investigating groupings on behalf of

managers’ knowledge structures. Even though the groupings of firms in this perspective is inferred

from managers’ or top management teams’ perceptions and cognitions rather than being data-

driven, some studies utilize techniques which does not directly provide the underlying cognitive

structure, which must be inferred by cluster analysis (Pegels et al., 2000; Reger and Huff, 1993).

Hence, some studies utilize methods that may have problems concerning the conclusion regarding

the entire cognitive group structure (reasons for this will be discussed in detail in the section

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concerning conclusion validity). In connection with the focus on a possible integrative theoretical

framework (Thomas and Carrol, 1994) covering some of the perspectives in strategic group theory

(however with a too abstract discussion, which does not provide a unified integrated model), which

could be used to explore the linkages among the three different perspectives emphasizing

similarities between: assets and positions, cognitive structures as well as interdependence and

interaction, convergence between these has been examined (Nath and Gruca, 1997, Osborne, 2001).

However, discrimant validity has not been questioned or examined. Furthermore, in contrast with

the framework proposed by Thomas and Carrol (1994), the operationalization of the groupings

based on similarities of interdependence and interaction focused only on competition and not

cooperation.

Overall one can conclude that the construct validity concerning strategic groups is more than

problematic. The theoretical construct is characterized by being a blend of various different

perspectives. The strategic groups construct initially builds on the S-C-P paradigm. However,

researchers have responded individually (i.e. without a coordinated effort) to the assumptions

underlying the initial construct. This lack of coordination has led to researchers contributing to the

construct to overlook problems inherent in the initial construct, or simply following different

research streams under the same “strategic group brand”. Overall the construct is not yet able to

guide researchers, and hence the theoretical framework that could guide empirical work and provide

a common thread for research still lacks. However, the individual contributions to the assumptions

in the initial construct together indicate the possibility for such a theoretical framework (will be

underlined in the section covering new insights). It is hoped that this paper can help other

researchers to refine the construct in a way that in the future can guide researchers in their conduct

of research.

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Conclusion Validity and Analysis

Conclusion validity deals with the possible relationship between the cause and

construct variables in a given study. So, conclusion validity is the degree to which the conclusions

found are credible or believable given the data (the possibility that other factors than the ones

focused on by the researcher, caused the outcome is addressed by internal validity).

Researchers studying relations between strategic groups and outcome variables have

almost all relied on the same approaches to identifying strategic groups. Earlier literature reviews

covering the period from 1972 until 1990 show that two alternative approaches to identify strategic

groups have been used; namely multivariate group analysis relying on cluster and factor analysis

and bivariate grouping relying on simple inspection (Barney and Hoskisson, 1990; McGee and

Thomas, 1986; Hatten and Hatten, 1987; Thomas and Venkatraman, 1988). Virtually all the studies

covering this period use multivariate statistical techniques such as cluster and factor analysis to

form strategic groups. Barney and Hoskisson have heavily criticized these approaches in 1990

because of the underlying assumptions. After this criticism, researchers have still held on to these

approaches (Cool and Diericks, 1993; Cool et al., 1994; Duysters and Hagedoorn, 1995; Fergusson

et al., 2000; Figenbaum and Thomas, 1995; Garcia and Nohria, 2002; Houthoofd and Heene 2000;

Nath and Gruca, 1997; Nohria and Garcia-Pont, 1991; Olusga et al., 1995; Osborne, 2001; Pegels et

al., 2000; Reger and Huff, 1993; Smith et al., 1997; Tang et al., 1994). However, there are few

exceptions who have responded to the criticism of cluster/factor analysis by Barney and Hoskisson

(Day et al., 1995; Jeger, 1994; Fox et al., 2003; Lee et al., 2003; McNamara et al., 2003; Nair and

Koth, 2001; Wiggins and Ruefli, 1995).

The focus on identifying and verifying the existence of strategic groups on behalf of

performance is reflected in the criticism of the most commonly used methods. The criticism has

emphasized that the methods assume that strategic groups exist since there is virtually no

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probability theory associated with these types of analyses. Hence, it has been argued that these

methods will always generate clusters, and therefore they cannot be used for the testing the

existence of strategic groups (Barney and Hoskisson, 1990). Furthermore, different clusters of the

same set of firms can all yield significant differences in firm performance by group, and thus the

existence of performance differences between groups is no assurance that the operative sets of

mobility barriers have been found. Therefore, according to Barney and Hoskisson, 1990) two

assertions in strategic group theory remain untested; the existence of strategic groups, and firm

performance dependency on strategic group membership. These two assertions demonstrate the

research streams’ focus on determining the existence and importance of strategic groups by relating

data driven groups to performance. Hence, researchers have ignored that the application of strategic

group analysis depends on the identification of the strategically important dimensions of

competition (Porter, 1980). Furthermore, researchers have been overly focused on direct links to

performance instead of trying attempts to find indirect links (i.e. behavior), hereby neglecting the

complexity surrounding firm performance (reflected by the fragmented paradigm in strategic

management).

Only a few studies that have responded to the criticism of cluster analysis by applying

other methods. Some have identified performance groups and possible stability of membership in

performance groups (Jeger, 1994; Wiggins and Ruefli, 1995). Data envelopment analysis has been

tried in order to identify strategic leaders and strategic groups to examine which is the source of the

most sustained heterogeneity in the performance in a given industry (Day et al., 1995). Random

effect models have been tried in order to see how much firm performance strategic groups can

explain when trying out all combinations of strategic group configurations (Fox et al., 1997). A

simple simulation model and the adoption of an evolutionary framework have been used to examine

when strategic groups emerge and persist and when they do not (Lee et al., 2003). A theoretical

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framework by Peteraf and Shanley (1997) explaining the micro and macro foundations of strategic

group identity has been used to identify strategic groups (Nair and Koth, 2001). Constructed

aggregate strategic group structure based on managers´ identification of industry structure and

positioning of firms has also been relied upon (McNamara et al., 2003).

While there have been some studies that have not relied on cluster analysis, some

simply following performance grouping have not helped to identify strategic groups. Some studies

have established the relevance of strategic groups (Fox et al, 1997; Lee et al., 2003). However, the

most compelling evidence for the existence of meaningful groups of firms within industries comes

from the cognitive perspective that adds cognitive structures to the strategic group literature; a

perspective that has emerged uniquely in strategic management (Bogner et al., 1998). However, this

approach does not hinge on establishment of statistical relations in order to form strategic groups,

but rather on a view assuming that the way firms see themselves and other players (Brandenburger

and Nalebuff, 1996) are expected to have consequences for firm behaviour and that the focus on

limited rationality is important given the existence of blind spots (Zajac and Bazerman, 1994).

However, even though the groupings of firms in this perspective is inferred from managers’ or top

management teams’ perceptions and cognitions instead of being data-driven, some studies utilize

techniques which do not directly provide the underlying cognitive structure, which then must be

inferred by cluster analysis (Pegels et al., 2000; Reger and Huff, 1993). Hence, some studies utilize

methods that may have problems concerning the conclusion researched regarding the entire

cognitive group structure.

Internal Validity and Design

Assuming there is a relationship internal validity addresses the question of whether it is

a causal one. To establish a cause effect (i.e. causal) relationship, three criteria must be met:

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temporal precedence, covariation of the cause and effect, and no plausible alternative explanations

(this is sometimes referred to as the “third” variable or “missing” variable problem, and this is the

heart of the issue of internal validity). The establishment of a relation is connected to the previous

“stage”; the two other issues can be dealt with by the research design of a study. When designing a

study, a longitudinal or a cross sectional approach can be chosen and alternative explanations can be

controlled for. Strategic group research in this vein suffers in relation to for example drug testing,

where a control group can be chosen and a researcher can control who is to be treated; this is not the

case for strategic group research.

The majority of studies before 1987 have been limited to the identification of strategic

groups at a given point in time (Cool and Schendel, 1987). Hereby, they do not fulfill the criteria

concerning temporal precedence. However, after this period, studies using accounting and financial

data are longitudinal studies (Cool and Diericks, 1993; Cool and Schendel, 1987; Cool et al., 1994;

Day et al., 1995; Duysters and Hagedoorn, 1995; Figenbaum and Thomas, 1995; Fox et al., 1997;

Garcia-Pont and Nohria, 2002; Hoothoofd and Heene, 1997; Jeger, 1994; Nahir and Koth, 2001;

Nohria and Garcia-Pont, 1991; Olusga et al., 1995; Smith et al., 1997; Tang et al., 1994; Wiggins

and Ruefli, 1995). An exception is a study by Fergusson et al. (2002) investigating the relation

between strategic groups, on the basis of secondary data and reputation. However, studies

constructing groups on behalf of cognitive data are only single point studies (McNamara, 2002;

McNamara et al. 2003; Nath and Gruca, 1997), or only follow a few years (Pegels et al., 2000;

Reger and Huff, 1993). An exception is a longitudinal study by Osborne (2001), who studied

cognitive strategic groups by using themes (a topical schema categorizing words into statistically

related groups reflecting strategic ideas) in annual reports (president’s letter to shareholders).

In order to use the cross-sectional approach, it is necessary that long-run deviations are not

correlated with the independent variables used in a study. However, this is seldom the case

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(Schmalensee, 1989). Kecthen et al. (1993) state that longitudinal designs are essential for

explaining relationships and making predictions, and this is also the path researchers have followed.

However, Ghemawat (1994) suggests that, although cross-sectional noise weakens the long-run

predictive ability of cross-sectional studies, such studies can be quite useful in explaining short-run

differences. This highlights the need for the cross-sectional researchers to be clear about the

equilibrium time frame of their observations; however some reason this is not taken into

consideration in later studies, which mainly have been longitudinal.

Previous research studying strategic groups is characterized by not controlling for plausible

alternative explanations (Dranove et al., 1998; Peteraf and Shanley, 1997). However, there are some

exceptions (Garcia-Pont and Nohria, 2002; Nair and Koth, 2001). It has been emphasized that the

most critical concern is whether the study of intraindustry groups provides any information that

cannot be gleaned from the study of industries and individual firms (i.e. the concept of strategic

groups is only important if there is a relationship between group conduct and firm performance)

(Dranove et al. (1998). However, even if strategic groups exist, they may have only indirect links to

performance (i.e. people can be grouped according to eye color without the implication that this will

predict their performance). Given the witch-hunt on groups of similar groups predicting

performance of previous research, it is highly problematic that these studies have not controlled for

alternative explanations. However, performance is not easily explained and therefore it would make

more sense to explain behavior. Furthermore, given that a large part of the stream of the research

has been data-driven, it would seem more worthwhile to concentrate on the definition and

theoretical construct of strategic groups. Furthermore, it seems that a large part of the research has

concentrated on the question concerning the existence of strategic groups and its possible relation to

performance, instead of refining and testing the value of positioning analysis.

21

External Validity

External validity, the possible relationship in the study between the constructs of the

cause and effect, addresses the question whether this effect can be generalized to other firms,

industries or time-periods. Strategic group research is characterized by an implicit acceptance of

prespecified boundaries of industry and selection of industries that are mainly populated by

single/dominant firms (Thomas and Venkatraman, 1988). Furthermore, most studies are

concentrated around the same countries. Each validity type addresses a question which presupposes

an answer to the previous question, and the questions therefore build on one another (i.e. are

cumulative). The previous validity type (going backwards) addressing internal validity stressed that

almost no studies have neither theoretically or empirically parted true group-level effects from

spurious effects and that the cognitive stream is limited because of short time range of available

data. Furthermore, addressing conclusion validity, it was found that most studies are limited

because of their reliance on cluster analysis. Finally, when addressing the construct and

measurements issues, it was found that the theoretical construct is characterized by non-cumulative

theoretical contributions and inconsistent measurements of the construct. Given these conclusions

and the non-cumulative nature of this research, comparison and aggregation of results across studies

cannot be performed. Hence the extent to which research results can be generalized to other firms,

industries or time-periods cannot be addressed. However, several researchers have contributed with

several eye openers, which together could enhance the quality of future research on strategic

groups.

22

NEW INSIGHTS?

The strategic group theory has its origin in the S-C-P paradigm, but has- as earlier

stated- developed from a unified foundation to becoming a fragmented paradigm in the field of

strategic management creating a confusing picture. This development might be understood as

individual rather than collective responses to the IO contribution to strategic management. The

unified foundation that strategic group theory initially was based on is characterized by a static

perspective (i.e. orientation towards equilibrium explanations), focus at the industry as the unit of

analysis and determinism (i.e. industry structure as exogenously given), assuming rationality,

assuming that all firms in an industry are identical except for size and abstracting away all forms of

cooperation that did not reflect collusive behavior (i.e. focus on competitive aspects rather than

corporative aspects) (Coyne and Subramaniam, 1996; Porter, 1981).

Researchers within strategic management has responded to this by moving away from a

static understanding to a dynamic understanding of industry structure, by taking the focus away

from the industry as the unit of analysis to the firm as the unit of analysis, by incorporating the

resource-based view focusing on endogenously explanations, by moving away from low degree of

uncertainty, by emphasizing cognitive limitations instead of assuming rationality, by moving away

from a homogenous understanding of firms within strategic groups (i.e. focusing on both

differences within and between strategic groups), by not only focusing on competitive aspects but

also cooperative aspects by including strategic linkages.

These responses and the move away from the focus on the industry to the focus on firm have

lead to a theoretical construct based on a blend of two important contributors to strategic group

theory (i.e. IO focusing on the industry-level and micro economics/the strategic management

perspective focusing on the firm-level). Recent theoretical contributions have made an attempt to

23

separate these two important contributors by developing a framework enhancing our understanding

concerning true group-level effects contra spurious group-level effects (i.e. firm- and industry-level

effects).

Overall, these responses to the initial strategic group construct have lead to a fragmented

paradigm characterized by exploration of new theories. These explorations of new issues have

created a need to ask whether the effort has mattered, and if yes how does this effort add insight to

the framework that most managers know. Furthermore, this is important to make an assessment of

the future role of strategic group theory and research, and possible research venues for researchers

making frameworks for managers to enhance their understanding of industries and firm

performance.

In the next sections, the individual responses of strategic management researchers to

the initial fundaments’ simplistic understanding of industry structure are presented in order to

address the questions.

Static vs. Dynamic Industry

Competitive dynamics or stable industry structure? Mobility barriers are argued to

constrain movements from one group to another. Hereby the implication is the existence of stable

substructures (i.e. strategic groups) within an industry. However, several researchers have made

contributions theoretically and empirically underlining that several considerations are to be taken

regarding competitive dynamics in an industry.

Competitive dynamics has been explained by entry paths and sequences of moves

(Caves and Porter, 1977). Hence, a firm must choose an initial entry strategy in the light of potential

performance ability to move subsequently (Tang et al., 1994). The ideas of sequential entry can be

distilled into four elements: the gateway to entry, the initial entry point, the mode of entry and the

24

expansion path (McGee and Thomas, 1994). Furthermore, when considering entering a strategic

group, it is also important to consider the importance of timing, since the effects of new

technologies and switching costs should also be considered. Furthermore, changes can come from

both the demand and the supply side, implying that maturity does not guarantee stability (Baden-

Fuller, 1994). More recent a contribution tries to shift the focus of attention from structure to

process by adapting an evolutionary framework in an attempt to explain when strategic groups will

and will not exist.

Empirically a stream of research with different theoretical starting points, respectively

stability and dynamics, have been studied by testing the variances of covariance matrices of

strategic variables for a given firm over time (Cool and Schendel, 1987; Olusgo et al, 1995), testing

the existence and stability of performance groups (Jeger, 1994; Wiggins and Ruefli, 1995), using a

Markow model to study the dynamic mobility of strategic groups (Tang et al, 1994), using a partial

adjustment model of strategic mobility (Figenbaum and Thomas, 1995) and using a random effects

model simulating numerous candidate group structures in order to find the group structure that

accounts for the highest percent of the variance in firm return (Fox et al., 1997). Even though the

methodologies vary, all the studies-except from Cool and Schendel’s (1987),- provide support for

seeing strategic groups in a dynamic perspective.

Theoretically and empirically, this stream of research has made several contributions

underlining that an industry is not to be seen as static, but that several considerations are to be taken

regarding competitive dynamics in a industry. Compared to the more static view of industry

structure in Competitive Strategy this stream of research stresses that it is important that managers

incorporate short- and long-term consequences into their analysis. Managers need to consider the

impact of sequential entry, the importance of timing and possible changes from the supply or

25

demand side. Hence, managers using industry and strategic group analysis need to picture how the

snapshot they contain by analysis might look in the future.

Homogenous Groups vs. Heterogeneous Groups

The initial strategic group construct (Hunt, 1972) assume that all the firms within

strategic groups are alike. However, with the incorporation of the resource-based view and a

cognitive perspective into the strategic group “brand” or concept, it allows some strategically

important variance among firms.

The resource-based view focuses on competitive advantages stemming from the firm

level (Barney, 1991). The focus on the firm is not different from strategic group theory since Porter

(1979) already directed the focus from strategic groups and industry performance towards the firm.

Furthermore, Porter (1979) stressed that firm performance is influenced by several firm-specific

factors and market specific factors. However, these firm specific factors were merely in the

background in Porter’s arguments, which relied on the importance of structure and positioning.

Noting that prior studies focusing on firms following similar strategies had excluded

either scope or resource commitment decisions in their operationalization of the strategic group

concept, Cool and Schendel (1987:1106) defined strategic groups as: “A set of firms competing

within an industry on the basis of similar combinations of scope and resource commitments”.

Hence, they directed the focus towards resources, which is the main focus of resource-based

theories. Dierickx and Cool (1994) suggested to look at the sustainability of competitive positions

from a resource-based view of the firm, by evaluating the degree of tradability of employed assets

to establish a given market position (i.e. distinguishing between returns to product-market positions

and returns to scarce assets) and the degree of imitability of assets. Imitability of assets is studied by

analyzing the characteristics of the resource accumulation process by making the logical distinction

26

between current decision regarding the acquisitions and use of assets and the development of stocks

over time (i.e. flows vs. assets stocks). This distinction stresses that a direct link between group

membership and performance is not expected to be found when strategic groups are defined on the

basis of assets stocks and flows (Cool et al., 1994). Others using resource-based theory have tried to

explain this lack of direct link by arguing that the problem with the previous strategic group

research is that product market heterogeneity and degree of resource imitability have not been

evaluated. However, this does not explain how these concepts should be operationalized. The

change of focus towards the firms and the use of concepts from research based theory indicate that

the two streams have underlying parallels. When reviewing a large amount of the strategic group

literature, Bogner et al. (1998) in fact demonstrate that the strategic group concepts have underlying

parallels with the resource-based concepts of the firm as a collection of resources. In particular, they

find that a correspondence between the two concepts in terms of origin, evolution, and function.

Hence, one might wonder how the two theories relate to each other. Cool et al. (1994) agues against

an extreme version of the resource-based view of the firm where firm’s assets bundles are the only

determinant of performance, when claiming that the two views are complementary since group

configurations explain more than does a narrow view of firms assets, (because the rivalry firm face

is a function of location in the resource space of other firms). Furthermore, when recognizing that

intra-industry heterogeneity is a necessary, but not a sufficient condition (i.e. strategic group

analysis is reduced to a model of idiosyncratic firms), strategic group theorists developed methods

for discovering sets of firms in an industry which were similar to each other, but different from

other sets of firms in terms of the pursued (Barney and Hoskisson, 1990).

This stream of research has contributed by focusing on similarity of scope and

resource commitments and by suggesting a way in which to assess the sustainability of competitive

position by degree of tradability and imitability. Hereby, a distinction between assets stock and

27

assets flows is made. Compared to Competitive Strategy this stresses once again the importance for

managers of incorporating time into their analysis of industries and positions. Furthermore, this

emphasizes the need for managers not only to direct their focus on the forces in the industry

affecting its position, but also to direct attention towards their own resources. However, the

theoretical framework applied in the resource-based explanations in relation to sustainability of

positions rests on equilibrium explanations; hence further contributions might be achieved by

considering a process perspective, which also characterizes the ideas behind asset stocks and flows.

The cognitive perspective has emerged uniquely in strategic management (Bogner et

al., 1998). This perspective has added cognitive structures to the strategic group literature, a

perspective that, providing compelling evidence for the existence of meaningful groups of firms

within industries. According to this view, the way firms see themselves and other players is

expected to have consequences for firm behavior and the focus on limited rationality is important

given the existence of blind spots (Zajec and Bazerman, 1994). Blind spots arise as a consequence

when firms do not sufficiently consider the contingent decisions of competitive others. The

perspective was introduced in strategic group theory by Huff (1982). In this cognitive perspective,

strategic groups can be viewed as cognitive communities in which members learn and develop

knowledge, or as knowledge structures, which serve to define expected relationships and behavior

(Bogner et al., 1998).

Cognitive communities constituting firms with a shared belief make up a recipe for

doing business. A shared belief evolves from socially constructed cognitive models which have

remained stable for a sufficient period of time (Porac et al., 1994). Hence, these groups need not

necessarily consist of only firms with similar strategies or assets. Hereby, it may seem that a

perspective that has evolved as a result of the use of the strategic group brand, and the related ideas

of positioning. Peteraf and Shanely (1997) have proposed a theory of group identity in a response a

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literature of cognitive strategic groups that does not tell us about the origins of cognitive groups, the

conditions that affect their emergence, or their dynamics in terms of how they grow, change and

decline. Their theory, using micro-level factors (social learning theory and social identification

theory) and macro-level factors (economic, historical and institutional forces), distinguishes

between groups with strong identities from those with weak identities. They argue that groups with

weak identities does not exist in a meaningful way and that only those with strong identities elicit

true group-level effects which are not reducible to either firm-level or industry level effects. They

further argue that prior strategic group research has failed to distinguish between these levels.

However, in contrast to traditional strategic group theory, their definition of strategic groups does

neither define strategic groups on the basis of similar strategies nor does it distinguish them on this

basis. They use the term “strategic groups” to denote “a meaningful substructure of firms within an

industry, one that is acknowledged by industry participants and has significance for them”. Event

though they seem to merely use the strategic group brand, hereby they emphasize that it would be

more relevant to focus on the intermediate type of outcomes effects and the possibility future

research for constructing a framework that distinguishing between industry-, group-, and firm-level

effects.

The introduction of knowledge structures to strategic group theory suggests that

managers think in terms of clusters of competitors to cognitively simplify a complex environment

(Reger and Huff, 1993). In this view, strategic groups are the result of perception and cognition and

can hereby be defined in a way which allows some strategically important variance among firms

within a group, emphasizing that group membership is a matter of degree. Hereby, this emphasizes

a strategic group structure composed of the following kinds of firms: 1) core firms that are tightly

associated with and define the basic “recipe” of a strategic group, 2) secondary group members that

implement the strategic group recipe more consistently than core firms and 3) transient firms whose

29

strategies are changing from one strategic position to another, but along dimensions common to the

firms in the industry. Furthermore, two kinds of firms are left out of this scheme; misfit firms which

strategies are inconsistent over time and idiosyncratic firms which strategies cannot be easily

expressed (in terms of the key strategic dimensions used) to define the competitive position of most

of the firms in the industry (Reger and Huff, 1993). Several studies support the existence of a

strategic group structure and the idea that group membership is a matter of degree (McNamara,

2002; McNamara et al., 2003; Reger and Huff, 1993).

The cognitive perspective on strategic groups provides compelling evidence for the

existence of meaningful groups of firms within industries. In addition, it together with the resource-

based perspective on strategic groups, it allows some strategically important variance. Hereby, in

comparison to Competitive Strategy, it even more clearly emphasizes the importance and

complexity connected with identification of the important dimensions of strategy. Furthermore, this

stream of research emphasizes possible coordination problems between firms because of

uncertainty and bounded rationality. Hereby, in comparison to Competitive Strategy, it stresses the

coordination problems that might arise when managers have different knowledge structures.

Besides, the focus on knowledge structures underlines considerations that are left out in Porters

model: considerations of the creation, restructuring and dissemination of knowledge (e.g. how

innovations occur). The view on strategic groups as cognitive communities or as groups with

strong identities emphasizes how groups of similar and dissimilar firms can gain coordination and

informational advantages. Hence, in comparison to Competitive Strategy, it once again emphasizes

the importance of incorporation time into analysis since coordination between firms that are not in

the same strategic group may evolve when ongoing interactions take place. Furthermore, this stream

has contributed with thoughts concerning the distinction between true group-level effects vs.

spurious group-level effects. Hereby, twisting the focus from positioning analysis to the

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understanding of what level factors contribute to firm performance. It may not seem so strange after

all that firm performance rather than behaviour has been the main focus for strategic group

researchers. However, compared to Competitive Strategy it underlines the importance for managers

to be aware of the unit of analysis as well at the level at which advantages affects firm performance.

Differences within and between strategic groups

IO theory implicitly assumes that all firms are similar in an economic sense, and early

strategic group theory is grounded on the idea that firms within strategic groups are identical.

However, research results show the opposite with regard to performance.

Researchers studying direct links between strategic groups and performance have

found no differences in terms of performance and risk adjusted performance (Cool and Schendel,

1987; Hoothoofd and Heene, 1997). Within groups, Cool and Schendel (1988) found that the null-

hypothesis of equality of returns for members of the same strategic groups was rejected in most

cases. In opposition to other studies relying on accounting data and drawing on various theoretical

perspectives (i.e. categorization theory, Organizational Identity, Resource-based view, and IO

economic) as well as making hypotheses concerning core, secondary and solitary firms (Reger and

Huff, 1993), one study identifying strategic groups based on perceptions of industry managers

found that performance differences within strategic groups where larger than across groups and that

secondary firms within strategic groups outperformed both the core within the strategic groups and

solitary firms. This is a rather interesting result, although suffering from being a single study and

relying on cross sectional data. However, the result is supported by another empirical study

addressing the consequences of firm-level strategic similarity and arguing that firms by reduce

competition by differentiating demonstrate their legitimacy by conforming, hereby implying that

firms should be as different as legitimately possible (Deephouse, 1999).

31

Researchers studying indirect links between strategic groups and performance have

had more “luck”. When arguing that strategic groups may have an indirect link to performance

insofar as it affects the conditions of rivalry, by assessing rivalry inferentially by drawing on the

well known S-C-P paradigm Cool and Diericks (1993) found that a substantial decline in industry

performance is not explained by structural change. However, they found that it could be explained

by increased rivalry. Since rivalry is associated with changes in strategic group structures and shifts

from within group rivalry to between group rivalries. Another study looking at rivalry (Smith et al.,

1997) found that competitive responses cannot be predicted by strategic group membership.

However, they found that strategic group membership is a predictor of the manner by which firms

compete with each other, or the frequency with which they undertake competitive actions, cut prices

or instigate warfare and imitate rivals. A study focusing on strategic interactions, dealing with

dynamics of alliance formation in the global automobile industry, addressed the question

concerning towards whom firms especially orient their behavior when identifying alliances. This

study found that firms most closely observe and imitate the strategic behaviour of firms occupying

the same strategic niche rather than the behaviour of firms in the industry defined more broadly

(Garcia-Pont and Nohria, 2002).

This research suggests that while strategic groups do not have direct links to

performance, they can explain behaviours that might indirectly link to performance. This suggests

that researchers may attempting to identify or verify the existence of strategic groups by trying to

explain performance is meaningless, especially when considering the many alternative explanations

found within strategic management. In addition, the research suggests that in some contexts

secondary firms opposed to core firm in a strategic group, performs better than both core, and

idiosyncratic firms. In comparison to Competitive Strategy, this stresses that even though it might

help managers to understand how they are affected differently according to their position in an

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industry, this is simply not enough (i.e. the book offers just one out of many explanations). Hence,

it stresses that what managers need is a theory or framework that trying to condense the

explanations concerning factors that might affect firm performance within their industry.

Strategic Interactions vs. Strategic Linkages

The traditional S-C-P paradigm assumes interaction at arm’s length. Strategic group

theory and research building on this framework have largely neglected to consider the importance

of cooperation. However, a couple of researchers have stressed the need for incorporating relations

between firms in an industry (Ketchen et al., 1993; Thomas and Carrol, 1994). Not many

researchers have taken this research opportunity theoretically or empirically; exceptions are Nohria

and Garcia-Pont (1991), and Duysters and Hagedoorn (1995). Nohria and Garcia-Pont argued that

global industry structure should be understood in terms of firm membership in strategic groups and

strategic blocks, defining strategic groups with respect to similarities in the strategic capabilities of

the firms, and strategic blocks with respect similarities in their strategic linkages. Duysters and

Hagedoorn (1995) focused on the question as whether firms from particular strategic groups

establish links with each other, or whether intra-group rivalry leads to inter-firm cooperation across

strategic groups. Both studies, relying on networks analysis, found that both strategic linkages

within and between strategic groups are relevant phenomena. Hence, this stresses that managers

relying on competitive strategy miss out an important aspect of the industry picture.

Their studies on industry structure are only descriptive. Hence, a relation between

membership and performance is not established, and the studies do not control for alternative

explanations. A recent contribution has made an attempt to couple strategic interactions with the

existence of strategic group (Dranove et al., 1998). On the basis of Peteraf and Shanley`s (1997)

strategic group identity framework Dranove et al. (1998) have made an attempt to contribute with a

framework and methodology based on the ”New Economics of Industrial Organization” for

33

resolving the questions regarding the existence of strategic groups. Offering a working definition of

strategic group existence: “A strategic group exists if the performance of a firm in the group is a

function of group characteristics, controlling for firm and industry characteristics” (Dranove et al.,

1998:1030)), they argue that the concept of strategic groups is only important if a relationship

between group conduct and performance exists. Furthermore, they argue that the key to group-level

effects is strategic interactions, and that mobility barriers does not have a direct group-level effect

even if they are an important part of their theory explaining persistence in performance. Strategic

interactions are claimed to lead to true group-level effects when firms coordinate their actions

(market power effect), establish a strategic alliance or make an agreement -e.g. visit each others’

facilities and share best practice (efficiency effect)- or arrange jointly sponsored advertising or

concurrent advertising (differentiation effect). Even though their framework enhances our

understanding concerning true-group-level effects contra spurious group-level effects, their

restricted focus within a strategic group has several implications.

First, they avoid defining what constitutes a strategic group by limiting their focus to within

a strategic group. This is rather interesting since researchers have found a relation between group

membership and behaviour, but not between group membership and performance. Furthermore, this

reflects academics’ attempt to identify or verify the existence of strategic groups by blindly looking

at performance. Hence, the focus has been altered from understanding how different forces might

affect firms differently, to linking the importance of mobility barriers to performance. In relation to

this, one question remains unanswered: do groups with behavioural implications, but no

performance implications exist?

Second, they do not consider the effects attached to firms gaining access to resources and

capabilities that they could not with out cooperating with other firms because of impediments to

imitation and entry. Inclusion of these considerations reduces the importance attached to mobility

34

barriers. Interestingly the framework that this framework was build on did not define strategic

group on behalf of similarities in assets or strategies and consequently neglected consideration of

gaining access to resources protected by impediments to imitation and entry.

Third, in their identification of group-level effects, they in fact confuse so-called true group-

level effects with context or network effects. This flaw is another consequence of their limited focus

on group-level effects within strategic groups. Hereby, they fail to distinguish between true group-

level effects and effects influencing the specific firms differently according to position in a given

network or context (i.e. the effect is on the firm and not on the whole group). This mistake is a

consequence of building upon Peteraf and Shanely´s (1997) strategic identity theory, were groups

where characterised by having strong identities, meaning that they could be characterised by having

different assets or strategies (i.e. not necessarily identical with strategic groups).

The studies on strategic linkages enhance our understanding of industry structure and

emphasize the importance and possible consequences of including strategic linkages when linking

the analysis of strategic groups to networks analysis together with the theoretical contributions

trying verifying the existence of strategic groups by focusing on “strategic interactions”, this insight

emphasizes the need for a more thoroughly understanding of how firm performance is affected at

different levels. Compared to Competitive Strategy, it calls for a more encompassing framework

that may help managers get a better understanding of how different factors at different levels might

affect firm performance within an industry.

DID IT MATTER AND IMPLICATIONS

Strategic groups introduced by Hunt (1972), made popular among managers by Porter

(1980) and has been the obstacle for a large amount of research within strategic management.

However, a critique of the existing theoretical and empirical contributions within strategic

35

management shows that 1) the theoretical construct is characterized by being a blend of various

different perspectives using the same “brand” (i.e. a fragmented paradigm), 2) different perspectives

can be seen as individual responses (non-coordinated) to the initial strategic group construct

building on ideas from IO, 3) the theoretical construct has not been able to guide empirical work

and provide a common thread for researchers, 4) the development of strategic groups has primarily

been data driven as opposed to theory driven and has made use of methods assuming the existence

of groupings, 5) researchers’ main focus has been the verification of the existence of strategic

groups by relating data-driven groupings with performance instead of behaviour (with only a few

exceptions) without controlling for alternative explanations, and also shows that it is not meaningful

to compare and aggregate results across different studies. Overall, given that a large part of the

research stream has been data-driven, it would in the future seem worthwhile to concentrate on the

definition and theoretical construct of strategic groups. Furthermore, attempts to relate data-driven

groupings with performance in order to find out if strategic groups do exist, have not been

successful, Studies relating groups with behaviour have been more successful, and it would in the

future would seem worthwhile to focus on explaining behaviour instead of direct links to

performance.

This study attempting to assess if the large research stream has added new insight to

the initial strategic group concept that managers know from Competitive Strategy revealed several

conclusions;

First, some stressed the importance for managers of incorporating time into industry

and strategic group analysis since research findings support the idea that industries are characterized

by competitive dynamics. Hereby, managers need to consider the impact of sequential entry, the

importance of timing as well as possible changes from the supply or demand side.

36

Second, a research stream incorporating explanations from the resource-based view

once again stressed the importance for managers of incorporating time into analysis of industries

and positions. Furthermore, this emphasizes the need for managers to not only direct focus on the

forces in the industry affecting firms according to position, but also to direct attention towards own

resources in order to sustain sustainability of competitive positions.

Third, a research stream incorporating a cognitive perspective together with the

resource-based view emphasizes the complexity connected with identifying the important

dimensions of strategy. This stream stresses the coordination problems that might arise when

managers have different knowledge structures. Furthermore, compared to Competitive Strategy, the

importance of incorporating time into the managers’ analysis is once again emphasized since the

focus on cognitive communities stresses that coordination between firms that are not in the same

strategic group may evolve over time when ongoing interactions take place. This also underlines the

importance to managers of being clear of the unit of analysis, and knowing the level and origins of

factors influencing firm performance.

Fourth, a research stream studying differences within and between strategic groups

underlie that even though Competitive Strategy might help managers to understand how the

positions of firms are affected in an industry, this is simply not enough. Hence, what managers need

is a theory, or framework, condensing explanations concerning factors that might affect firm

performance within their industry.

Fifth, a research stream focusing on strategic linkages and strategic interactions

emphasizes the importance and need for managers to include strategic linkages in their analysis.

Furthermore, it stresses the need for a more encompassing framework that can help managers to get

a better understanding of how different factors at different levels might affect firm performance.

Overall, all the responses to the initial framework have created a fragmented paradigm

37

consisting of different perspectives, regarding the use of the “strategic group brand”. It may not be

possible to incorporate the insight offered by the different perspectives within strategic group

research into the initial strategic group construct (because of the different underlying assumptions).

The insight, however stresses that Managers’ need a holistic picture of the factors affecting firm

performance, and knowledge of the levels at which these advantages can be attributed. Hence,

future research should create such a framework. Managers using Competitive Strategy properly has

already gained an understanding of how the forces in an industry might affect, the whole industry

equally, groups of firms equally, or only a single firm. However, the main focus has been on value

capturing instead of value creation. Mangers need to know how potential value creation can be

attributed to different levels and in the end how to capture this value.

The focus of a holistic network framework could generally be on resources,

coordination, understanding of how these support value creation, as well as knowledge of level (i.e.

firm, dyadic, group or industry-level). The framework should represent an attempt to condense the

knowledge structure within strategic management in order to help managers gain a holistic picture

and to understanding of the complexity of factors affecting firm performance. A possible structure

could be going from the firm level to the industry-level.

At the firm level, the framework should condense the knowledge structure on resource

characteristics adhering to the firm level; at this level coordination is not an issue.

At the dyadic level, the framework should focus on the coordination advantages and

potential resource access characterizing different types of interactions, contingent on whether they

are strategic or social by nature. Strategic interactions could be characterized according to

coordination (i.e. implicit or explicit collusion) to alliances. Social interactions could be

characterized by distinguishing between weak and strong relations and the advantages that they can

contribute with respectively, for example novel information and control opportunities (Burt, 1990),

38

and by promotion of the development of social norms facilitating collective action (Coleman,

1988). Hence, the dyadic and the group-level value creation can be stipulated by sharing of

resources, by gaining access to resources that the other firms have, by generating new resources by

interacting, by coordinating actions, and by the context (Porter, 1900).

At the group-level, the framework should focus on coordination of advantages and

potential resource access characterizing different types of network structures. Furthermore, the

framework should attempt to incorporate thoughts of the strength of the interactions. Thoughts

concerning advantages in relation to network structure could to start with be incorporated by

condensing knowledge of the advantages connected to extreme network types since network

structures generate values that are captured differently by participating firms through their

coordination (Kogut, 2000). At one end of the extreme the network type, the structure is star-shaped

(i.e. one firm is connected to other firm, other firms only connected through the one firm); at the

other extreme end, the network is shaped as a wheel (i.e. everybody is connected to each other).

In the first network structure, rent accrues to the broker, who increases the overall

efficiency of the network by capturing the added value or by simply redistributing the value. This

type of rent is called a ‘Burt rent’ after Burt (1992), who argued that entities with multiple unique

ties to other entities which are not connected occupy powerful brokerage positions called “structural

holes”. When there is more than one brokerage position, the power comes from exclusive relations

with powerful players (i.e. brokers) rather than from exclusive relations with weak players (Schøtt,

1991). This structure is beneficial to the broker, who obtains information of varying depth and

quality with the different firms (dependent on the strength of the relationship). However the

information and possible learning is not generated collectively. Hence, possible development of

trust, exchange of fine-grained information and problem solving is unlikely to develop on a shared

group basis (Uzzi, 1997). Hence, joint performance may improve by development of principles for

39

coordination. However, at the group-level in this type of network structure, these principles are

most likely to rest upon non-social mechanisms of exchange.

In the second network structure, rent accrues to the members of a closed group. The

actual allocation is determined by rules of decision and relative bargaining power (Kogut, 2000).

This type of rent is called a ‘Coleman rent’ after Coleman (1988), who emphasized that closed

(fully connected) groups promote trust and development of social norms facilitating collective

actions and thereby mutual benefits by solving collective action problems for the whole group.

Embedded networks support the development of trust, problem solving and exchange of fine-

grained information (Uzzi, 1997). These exchange forms may lead to reduction of monitoring costs,

faster decision making, and enhancement of organizational learning and adaptation, creating

benefits that not only accrues to the individual firm of a network, but to the whole network (Uzzi,

1997). Hence, this structure supports the development of principles for coordination on the basis of

social mechanisms of exchange. However, this structure also supports the development of principles

for coordination on the basis of non-social mechanisms of exchange since monitoring and control of

group members is enhanced. Hence, this structure can benefit the whole group by improving their

joint performance by supporting the development of principles for coordination. Rent generated by

this structure is not due to informational efficiency, but rather to the matching of incentives with

contributions from the whole group. The matching might be guided by both non-social and social

mechanisms of exchange. The embedded network structure can benefit from the joint performance

of the members of the fully connected group. However, Uzzi (1997) has argued that overly

embedded networks may suffer from a lack of new innovative information. Hence, the optimal

network structure may be composed of a mixture of these two diverse network structures, i.e. a

structure which on the one hand achieves the possible advantages from embeddedness (trust, fine-

grained information and problem solving, coordination enhancement and resource sharing), and on

40

the other hand the benefits adhering from an information efficient network structure (access to new

information). Hence, the optimal network structure improving joint performance for a fully

connected group might be a network structure in which the connected group acts as a broker in an

otherwise efficient network structure. Alternatively, a broker position might have the highest impact

when the broker connects members of fully connected groups.

Finally, at the industry-level, the framework should focus on the coordination and

potential resource access characterizing different types of industry networks. Furthermore, the

framework must consider the fact that networks may also have a dark side and may lock firms into

unproductive relationships or prelude partnering with other viable firms (Gulati, 2000). Hence,

mobility barriers can be connected to attributes, but also to relations.

The role of strategic groups in this general holistic framework, should be to

understand how competitive forces affect the value that the firm can appropriate according to it

position within the industry. Until researchers have made attempts to work on a general holistic

framework in order to help managers’ understanding of firm performance, researchers conducting

strategic group research should assemble evidence that strategic groups predict important firm

behaviours.

ACKNOWLEDGEMENTS

I am grateful for the comments of Carlos Garcia-Pont.

41

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