Map of strategic groups: how they work and what they are for

To explain what strategic groups are, we think the best way is to do it with Michael Porter's definition: “the set of companies in an industry that follow the same or a similar strategy in all strategic dimensions”. For Porter, a strategic group is a subset of companies, within the set that makes up an industry, with a strongly similar “profile” of all strategic dimensions.

A map of strategic groups is a beneficial technique for analyzing and making decisions in sectors with a lot of competition. It takes two dimensions that are not directly related to each other (linearly independent), uses them to construct two Cartesian axes, and includes the “subset of companies” in this graph. Its location will be according to where they score according to the chosen dimensions, and they are graphed in the form of circles, in a size that reflects the size of the company.

Example of a Map of strategic groups in a Cartesian axes system

So, what is the purpose of these groups? Well, it is very useful to analyze the industry to which our company belongs, especially when it has many competitors. Let's start at the beginning. Strategic groups arise because the companies that are part of them have similar:

• Objectives: They want to dominate the market and be innovation leaders, for example.
• Capabilities: They know about marketing and similar technologies, for example.
• Assumptions about the functioning of the market: For example, consumers are loyal to the brands they know.
• Experiences: They operate in roughly the same countries and have had similar experiences in the business.

For all these reasons, the strategy of all the companies within the group is similar in some respects. Examining these companies that function within the same strategic group is called strategic group analysis.

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This type of analysis is often discussed in conjunction with the market focus. In the market approach, the consumer population is divided into market segments that share common characteristics such as level of education, income, age, and gender. Research companies study the general preferences of market segments and then use those preferences to gear products and services toward specific market segments that are served by strategic groups.

The objectives of strategic group analysis vary depending on various characteristics of the strategic groups, including the size of the market, the diversity of products offered, the geographic proximity of competing companies, and where the products are sold. Keep in mind that branding, marketing, quality, and price are also factors that must be considered and taken into account. For example, a company could use this analytical tool to identify competitors and determine how companies within that group's competition perform. In other words, an organization that is going to launch a new product on the market could carry out an analysis to determine how to compete when entering it.

Creating a map of the companies that make up each market segment helps entrepreneurs uncover any markets that are underserved or useless by the strategic groups it contains. For all these reasons, an in-depth analysis is a fundamental step for any company that wants to compete with its opponents in the business niche on which it focuses.

It is important to mention that you can (and probably should) do more than one strategic group map. This allows us to analyze different aspects of the competition and the positioning of our company concerning it, and even identify different empty spaces in the market.

In conclusion, we can say that companies that sell products or offer similar services to the same segment of the population are in a strategic group and their analysis will help you to distinguish who your competitors are. Indeed, being aware of who your competition is will allow you to know:

• Industry sectors: Where are competitors moving?
• Scenarios: Where are the different groups in an environment located and what path must they travel to reach that position?
• Differences in profitability: Companies in the same strategic group, in general, have similar profitability. The differences in the strategy that are revealed through the analysis of the strategic groups can allow us to understand why one company in the group has different profitability from the others.