A development of the strategic group theory- A proposal on the three strategic group categories and introducing the concept ofdistance into the analysisManami MIYAMOTO
1-6-1, Nishiwaseda, Shinjyuku-ku, Tokyo169-8050, JapanWaseda UniversityABSTRACT
In this paper, it proposes three strategic group categories that are "resource group","execution group" and "market group", and proposes the concept of distance for theanalysis. It is a critical development of the strategic group theory by M.E.Porter(1980).
A firm needs its competitive strategy, not only when determine entry to a certain industry,
but also to cope with the competitors after the entry. To formulate the latter strategy, itshould take into account the resource similarity (resource group), rivals’ strategies(execution group) and the customers’ selection viewpoints (market group) as well. And theconcept of distance can be useful to express the changing relation among the companies inthe changing situation.

Keywords: Strategic Group, Competition analysis, Group categories, Concept of distance
CONTEMPORARY SIGNIFICANCE OF THE STRATEGIC GROUP THEORY
A lot of Strategic Group studies have been examined to date; one of the most referenced
practical theories on the occasion of formulating a strategy by the strategy planner in thefirm is the Porter’s Strategic Group Theory. He defines the Strategic Group as the group offirms in an industry following the same or a similar strategy along the strategic dimensions.
He tries to explain why some firms are persistently more profitable than others and how
this relates to their strategic postures mainly through the concept of the mobility barrier1.
However, a firm needs to formulate a strategy not only to decide the entry to an industry
but also to cope with the competitive circumstance after the entry. It would be just enough
1

There are sometimes perplexities of verbiage in Porter’s writings regarding “entry barrier” and“mobility barrier”. In this paper, the factors which make firms difficult to enter in an industry arecalled “entry barrier” and the factors which make firms difficult to transfer amongst the strategicgroups in an industry are called “mobility barrier”.

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A development of the strategic group theory

to examine the ease of entry at some point in time and to seek the way to enter the industry,
if we assume that an industry is so static that once a firm succeeds in the beginning it canconsistently sustain a high performance. While in fact, the competition can be observed
inside of the industry or the member of the strategic group. And the results of theperformances differ from each other. Facing this fact, after the entry, firms generally needstrategies regarding how to cope with the situation which are against the changing rivals’
strategies and the changing customers’ selection criteria.
Porter describes the Strategic Group that it is an intermediate frame of reference between
looking at the industry as a whole and considering each firm separately, and suggests thatthe thing which makes the difference between the performance results of the firm is themobility barrier of the group. The suggestion that the existence of the plural strategicgroups in an industry means that the competitive factors which construct the industry don’taffect to all the firms equally and thus, the countervailing power to the competitive factors
are variant by the each strategic groups. In other words, in terms of Porter, formulatingcompetitive strategy is the identification and the choice of the advantageous strategicgroup for a firm to enter.
SEPARARION ABOUT RESOURCE, STRATEGY AND CUSTOMER REACTION
Porter proposes to draw a strategic group map using the concept of the strategic group inorder to figure out the major competitive issues (1980). This map is a two-dimensional
diagram which takes the major strategic dimensions as variables. The two variables are
considered as the strategic dimensions which affect the competition among the groups thatis to say the mobility barriers. However, when the firms formulate strategy of their own,
not only the resources which they possesses but also the executed strategies of their rivals
and the customers comparison and the choice at the time of the buying decision should beincluded as the referential information as well. These factors may affect each other. Inparallel, it is need to take into account that there is a possibility that the customers
acknowledge are not based on the actual resources of the firms nor the substantial
strategies formulated inside of the firms but the surface which can be seen from the outsideof the firms. That means when we examine a strategy of the firm, the resource based view,
the strategic execution point of view and the customer’s reaction point of view do notalways indicate the same perspective. Thus, it is required to add the examination about how
these viewpoints are related to each other.

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A development of the strategic group theory

K ey Strategic D im ension

BA

F
CE
GD

Target Customer Segment
Figure 1. Strategic Group Mapping and Intergroup Rivalry(Source:M.E. Porter 1980)

ISSUES OF PORTER’S STRATEGIC GROUP THEORY
During fierce competition or in an industry where there is fierce competition, somedifficulties arise when Porter’s theory is applied. First, there are too many factors within
the axis of the strategic dimension. In fact, when strategists in the firm try to draw thestrategic group map, this situation is nearly equal to be given no road map at all. In relation
to this, Porter suggests that “Strategic variables used as axes must be selected (totally) by
the analyst”, “An industry can be mapped several times”, and “There is no necessarily rightapproach”.
Secondly, the strategic dimensions which he takes as examples are not always the uniquemobility barriers of the strategic groups. This means that his argument: “different strategicgroups carry with them different levels of mobility barriers, which provide some firms withpersistent advantages over others” still leaves some ambiguity2.
Thirdly, in spite of the fact that the final decision on the result of the competition is left tothe customers’ choice of the products, Porter’s theory does not include how the customers
acknowledge firms and the executed strategies by the firms. This suggests that he has an

2

The strategic group theory has a premise that there are some sorts of firewalls between firms.
The discussion regarding whether these firewalls get higher or lower or become obscure would
require another discussion with a viewpoint of unstable situation between neighboring industries .

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A development of the strategic group theory

implicit premise that the strategy formulation is always conducted only by the supplier’s
perspective and his logic.
Finally, the biggest issue regarding Porter’s strategic group theory is the difficulty indiscussing a firm’s shift amongst the groups over time. This luck of consideration is fatal in
an industry where rivalry relations change frequently. The reason for this is that themobility barrier in his argument treats the relationships between the groups as if they arealmost static.
Therefore, his strategic group map is like a snapshot of the industry at a specific point intime, which cannot illustrate the changing state of affairs. In fact, firms shift amongst thegroups consistently, and, therefore, it is important to realize these changing patterns of thestrategic group.
THREE REFERENCE GROUPS
When a firm formulates a strategy, the factors which should be taken into account are;the ”resource group” by the similarity of the mobility barrier, “execution group” by thesimilarity of the executed strategy and “market group” by the customers’ market
comparison at the time of the buying decision.
These factors affect the rivalry and the strategy formulation. These three groups have thefollowing characteristics:
1. Some of the firms belong to each group.
2. The firms which construct each group are not always the same.
3. These groups have referential relationships that impact each other.
4. According to the change of major competitive points (the dimension of thecompetition and the appeal point to the customer), group membership and rivalry
participation also changes.
Firms which compete in the market are able to achieve their goals by successfully
belonging to or transferring amongst these reference groups.

4Execution Group【Customer’s reference point tosee what the firms do.】

The change of the strategy is
restricted by the resource.

Strategy shows up in the Market.

Resource Group

Market affects the resource
accumulation （initiates a decision)
Market GroupIndirect restriction
Customers are difficult to see.

【Resources that the firms possess..】【How the customer recognizes
and compares the firms.】

Figure2. The impact on the three groups and the strategy

INTRODUCING THE CONCEPT OF DISTANCE
This paper proposes the concept of distance in order to realize how the competing firms
belong to these groups.
In order to analyze the strategic group, the strategic group map of Porter displays enclosed
plural firms with a closed borderline according to some extent of the similarity of thestrategic dimension, such as the mobility barrier.
However, the more customer targets overlap within a market, the more difficult it is todraw the borderline which divides firms from being inside and outside of the group.
Moreover, a firm which takes a different strategy at some point in time might change theirstrategy and follow the same strategy as its rival according to the phase of rivalry, or inother cases, it might take several kinds of strategies in parallel. This means that to identify
the existence of the strategic group and decide which group the firms belong to in Porter’s
way is not practical for the strategy planner.
In contrast, since distance is the amount of space between two points, it can be measured
from a starting point. When a firm formulates its strategy, the measurement from thestarting point is not something obscure but rather its goal, its customer or its own strategy
for instance. The firm itself is like a “subject”. Therefore, it is rather suitable to formulate
more realistic and preferable strategies utilizing the concept of distance which measuresthe extent of difference of the resource, executed strategy and the customer perception of5

A development of the strategic group theory

the rivals. In this paper, these are called “resource distance”, “executed strategy distance”
and “market distance”.
CASE STUDY: JAPAN’S INTERNET SERVICE PROVIDING INDUSTRY
The industry which is able to apply the concept of distance effectively has characteristics
as follows. First, firms compete for customers so fiercely that the frequent shift of the firms
among the groups occurs continuously. Consequently, the relative relationship of the firms
in the market changes frequently, which is to say, industries with low mobility barriers.
Japan’s ISP (Internet Service Provider) industry during the five year period 1998-2003
provides the setting for this study. It looks at seven major Japanese ISPs which engaged infierce competition for customers: OCN, DION, ODN, @Nifty, BIGLOBE, Yahoo!BB,Plala. In the course of examination, OCN, provided by NTT Communications Corporation,is the starting point of the distance measurement.
(1) Resource Distance
Resource distance is able to measure through the possessed resources of firms, which arerecognized as useful in order to formulate sustainable competitive advantage and thestrategy (recognized resource). In this study, whether or not the firms possess the resourcesof the telecommunication services and the IP facilities to provide their own original
services are selected as factors to be measured. If we want to figure out the difference
between the firms more minutely, looking at other factors of the recognized resources
would makes this possible.
Table 1. Resource Distance from OCN
1998

1999

2000

2001

2002

2003

Nearest Rank 1

DION

DION

DION

DION

DION

DION

Nearest Rank 1

ODNODNODN

ODN

ODN

ODN

Nearest Rank 4

Plala

Plala

Plala

Plala

Plala

Plala

Nearest Rank 5

BIGLOBEBIGLOBEBIGLOBEBIGLOBEBIGLOBEBIGLOBE

Nearest Rank 5

Nifty

Nifty

Nifty

Nifty

Nifty

Nifty

Yahoo!BBYahoo!BB

Yahoo!BB

Nearest Rank 56

A development of the strategic group theory(2) Executed strategy Distance
The measurement of the executed strategy distance measures how the competing firms
react to their rivals. Concretely, it can be measured by the numerical conversion according
to the scoring rules on the new products and services which they released. All competitiveelements such as pricing, service menus etc. are measured from the date of theannouncement of the new service. For instance, with an ADSL service, each ISP releases
new pricing and higher-speed services as the rivalry counter actions. The score, which canbe regarded as the distance, is calculated from the date when OCN discloses the service tothe dates when the other ISPs release their counter action. The ISPs, which quickly follow
OCN, are considered in the short distance and the ISPs which don’t follow or follow slowly
are in the long distance. The closer the distance, the more the firms have greater similarity
on the executed strategy and so are competing under a strong influence.
Table 2. Executed Strategy Distance from OCN

Dial upPhone Cgarge
oncluded

Fixed Price
Dial up

ADSL

Package withIP Phone

Optical Fiber

Nearest Rank 1

DION

DION

BIGLOBE

DION

DION

Nifty

Nearest Rank 2

Plala

Plala

DION

ODN

ODN

Plala

Nearest Rank 3

BIGLOBE

ODN

Nifty

Yahoo!BB

Nifty

ODN

Nearest Rank 4

Nifty

BIGLOBE

Plala

Nifty

Plala

DION

Nearest Rank 5

ODN

Nifty

ODN

Plala

BIGLOBEBIGLOBENearest Rank 6

BIGLOBE7

A development of the strategic group theory(3) Market DistanceMarket distance shows the extent of substitution among the products and services from thecustomers’ point of view, which means the extent of awareness about the firm as thecandidate when the customers choose the products. If you ask questions such as “Whichproducts did you compare when you made the buying decision?”, or “What was the buying
determinant when you chose the firm’s products?” in the general market research, it ispossible to measure the market distance with these data. If customers are more conscious ofcomparing certain ISPs with OCN, this can be considered the shortest distance. Firms canrecognize the change of the customers’ acknowledgement by ordering the measurement
results over time, which can lead to inferences about relationship between the executedstrategies.
Table 3. Market Distance from OCN

1998

1999

2000

2001

2002

Nearest Rank 1

no comparisonno comparisonno comparison

Nearest Rank 2

nifty

nifty

ODN

ODN

other

DION

Nearest Rank 3

other

ODN

DION

otherYahooBB

YahooBB

Nearest Rank 4

BIGLOBE

DION

other

DION

ODN

ODN

Nearest Rank 5

ODN

BIGLOBE

niftynifty

DION

nifty

Nearest Rank 6

DIONotherBIGLOBEBIGLOBE

nifty

other

Nearest Rank 7

PlalaYahooBB

Plala

YahooBBBIGLOBEBIGLOBE

Nearest Rank 8

YahooBB

Plala

YahooBB

Plala

Plala

Plala

no comparison no comparison

2003
no comparison

SUMMARY
The summary of this paper is as follows.
(1) A rival analysis about a competitive industry with the precedent and the following
should be measured by the distance from the starting point in accordance with thecompetitive elements, which show the extent of difference between itself and the rival.
(2) An industry that this paper considers applicable is an industry which has a low
mobility barrier or a low imitation barrier, or one whose technology improvement isquite dynamic, e.g. Japan’s ISP industry.
(3) Through this measurement, it is possible to analyze the changed relationshipbetween the firms over time.(Fig3)(4) A firm is able to draw up a practical strategy utilizing three categories: the resource
barrier (the “Resource Group”), the “Execution Group”, which shows the difference8A development of the strategic group theory

between the executed strategy, and the “Market Group”, which shows customers’
comparison at the time of the decision.
(5) With these three categories of analysis and the cross-referencing, a firm can exploit
the strategic group concept in a practical way.
(6) If a competitive dimension changes, each distance between the firms and theeffective resources for the competition also changes.
(7) Each distance between the firms in Resource, Executed strategy and Market are notalways consistent, which means the differences in the size of the distance can change
between categories.(Fig.4)(8). It is important for a firm to enhance its strength, decide investment and initiatives
which lead to most effective results by recognizing the existence of the distance and thegap among the groups.

120.0
competingin service but little
ｒｅｌａｔｉｏｎ

Execution Group

far
100.0

ODN

ODN

BIGLOBEBIGLOBE

Yahoo!BBBIGLOBE

DION

Relative Distance(%)

80.0

60.0

40.0

Nifty
BIGLOBE

Nifty
BIGLOBE
ODN
DION
Plala

Plala
ODN

Plala
Nifty

Nifty

ODN

Plala
Nifty
Yahoo!BB
ODN

Plala

DION
DION

20.0

DION

near0.0
DupDial Up-20.0no entry

電話代込み
PhonechargeinclusivePlala
Nifty
DION
BIGLOBE
定額制DupFixedprice

ADSL
ADSL

光fiberOpticalDial up

The bunch of competition (dimension)

Figure3. Distance from OCN by Competitive Dimension

9Package
電話 withPhone

DION
ODN
BIGLOBE
Nifty
Plala
Yahoo!BBA development of the strategic group theory

Resource Group

Firm Bb

Firm A（OCN）

Firm CaFirm D

Execution groupc

Firm B d

Firm A（OCN）

Firm C
Firm D

Market Groupe

Firm A（OCN）

Firm Bfg

Firm C
Firm D

Figure4. Pattern diagram of the distance gap among the group

Future Discussion
It should be noted that some points have been left undiscussed for future study. First, it isnecessary to examine whether the framework which this paper proposes is also applicable
to a static market whose relative relation is not always changing3. Secondly, further
refinement of the metric variable quantification as distance is required. Thirdly, theclarification regarding the distances and the gaps among the three groups in relation to thefirms’ performance and organization is expected. These three discussion points willcontribute to the study of the competitive strategy at the time of dynamic competition. This
study is based from the point of view of a company inside; however, future research should
examine where these discussion points and conclusions fit amongst other competitive
strategy studies.

3The case of a market with uniform and stable customer needs and an industry which has a highimitation barrier (Negoro 2005) would not require discussions regarding the issues which areaddressed in this paper.

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A development of the strategic group theory

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