Industry analysis and strategic groups: A theoretical and empirical review

Transcription

1 December, Industry analysis and strategic groups: A theoretical and empirical review Adam Marszk Faculty of Management and Economics Gdańsk University of Technology Gdańsk, Poland [email protected] Abstract Industry analysis has the last decades become one of the major topics management sciences. First widely used approach was Porter s 5 forces model troduced Sce then, the number of approaches suggested by researchers has creased substantially. In this paper, a review of selected most important books and articles on this subject is presented. Firstly discussed are the itial Porter s model, its extensions, analogical models and approaches to analysis of particular factors. In addition to the theoretical works on the subject, this review cludes chosen empirical research results. The topic of the next section of review is another crucial issue dustry analysis, i.e. strategic groups (SGs). In this part of the paper, most important issues reviewed are defitions of SGs and their place dustry s structure, methods of identification of SGs as well as resourcegradient and cognitive approaches to analysis of SGs. Moreover, one of approaches similar to SGs, namely strategic alliances, is presented. Other reviewed elements of studies on SGs are ownership type and dynamic analysis (used to model SGs various time periods). Fally, the results of an empirical study concerng the significance of SG membership are described, dicatg that participation such groups affects company s fancial standg. Industry analysis, Industry segmentation, Strategic groups, Resourcegradient theory I. INTRODUCTION The aim of this literature review is to present selected academic books and articles as a discussion of dustry analysis management sciences. In the first part of the review, evolution of basic approaches to conductg dustry analysis will be described, cludg the criticism of the popular models and general importance of dustry effects. The ma part of the text will focus on research on strategic groups, one of the most significant components of managerial analysis and also one of the ways to analyze firm and dustry situation. This review will clude the most terestg articles on the strategic groups, presentg various theories, tools and controversies. II. INDSUTRY ANALYSIS EVOLUTION AND SIGNIFICANCE Probably the paper with the greatest impact on the shape of dustry analysis and the role it plays makg or evaluatg managerial decisions was Porter s article [1] from 1979 on 5 forces shapg dustry s structure and company s competitive position ([2] is updated version of earlier work). Accordg to this model, the most important forces that should be analyzed were rivalry among existg competitors, threat of new entrants, threat of substitutes, bargag power of suppliers and bargag power of buyers. The profitability of the particular dustry depends the long run on these factors. However, with a given dustry companies may adopt different strategies, tryg to crease their competitiveness by reshapg dustry structure, positiong or exploitg changes. Accordgly, addition to understandg 5 forces, it is necessary to analyze their changes and identify market participants which fluence them most. Porter s model is the most widely used tool to fill the gap between narrowly focused firmspecific analysis (maly with Strengths, Weaknesses, Opportunities, Threats SWOT) and wide Political, Economic, Social and Technological (PEST) factors model. The Porter s 5 forces model is still the centre of attention of strategy management literature. Grundy states that it has not, however, gaed high popularity among managers, maly because of beg too abstract and flexible [3]. In the context of dustry analysis, this author claims that, apart from some clearly valuable elements (realistic approach to dustry s profitability, combg putoutput analysis with dustry boundaries), there are also some limitations to Porter s framework, such as oversimplified dustry value chas, defition of dustry as an entity with ongog boundaries (whereas fact they are now more fluid) and too static perspective. The suggested ways to improve the Porter s model are to prioritize the model with field analysis format, breakg down dividual forces at micro level, troducg more dynamic approach, examg the subforces and terrelations and combg the basic model with other tools, cludg PEST factors. Similar approach to Porter s dustry analysis is described [4]. Suggested model is divided to stages. First one is positiong the specific dustry with its life cycle (pioneer, growth, mature or decle) and characterizg its reaction to the general busess cycle. Growth dustries achieve abovenormal rate of expansion dependent of the busess cycle. The performance of defensive dustries is stable both durg expansion and recession. The movement of earngs cyclical dustry is exaggerated by upturns and downturns national economy. Second stage of the analysis is to exame the 117

2 December, external factors fluencg dustry s profitability. These factors consist of five categories: technology, government, social changes, demographics and foreign fluences. Next step suggested by the author is demand analysis, e.g. assessment of future demand for the dustry s products. Basg on numerical forecasts, the demand s trend analysis can be performed three different ways: topdown economic analysis (lookg for macroeconomic variables affectg the dustry), dustry life cycle analysis (usg previously defed life cycle position or busess cycle sensitivity as a framework for demand forecast) and external factors assessment (sales forecast based on external variables, requirg judgment and some qualitative predictions). After forecastg the trend, the second phase demand analysis is customer study where two possible approaches may be utilized (defg demand segments by productrelated or customer characteristics). After reviewg the demand, it is recommended to study the supply side and project the supply availability different scenarios. The fal and most vital step is the detailed analysis of pricg factors (product segmentation, degree of dustry concentration, ease of dustry entry and price changes key supply puts) havg impact on the dustry s profit outlook. In the abovementioned approach, the fluences of Porter s work are clearly visible; it may be described as its extension. Apart from the general dustry analysis, there have been suggested many different ways to identify and analyze more detail the key elements of the described models. Below, some of them will be outled. Porter stresses the importance of segmentg the dustry durg strategy formulation [5]. Structural differences may alter the five competitive forces. The same issue might be caused by value cha differences. In order to segment a given dustry, each product type should be examed to identify segmentation variables: product variety, end buyers types, alternative distribution channels and geographic buyer location. The tool for translatg these variables to a complex segmentation description is the dustry segmentation matrix. More than one matrices (when there are multiple segmentation variables) can be combed to combed segmentation matrix. Other economists have conducted studies on the impact of one or more of Porter s five forces on the dustry, showg how to analyze decomposed elements of the model. A significant part of the research is lked with the topic of barriers to entry. McAfee, Mialon and Williams focus on legal aspects of barriers and possible antitrust litigations as one of the factors shapg the profitability and timg of new competitors entry [6]. Two kds of barriers are specified: primary (costs constitutg a barrier on their own) and ancillary (reforcg other barriers if they are present). Some researchers analyzed the sources of entry barriers and their significance usg empirical evidence from chosen dustries. Lieberman after examg data from chemical firms claimed that excessive capacity, theory one of such sources, is reality quite rare and effective [7]. Its effectiveness is undercut dustries with high market growth, low producer concentration and low capital requirements. Another factor mentioned the literature is technological change. Patterns observed the research by Klepper and Simmons dicate that dustry shakeouts are usually not triggered by particular novations, confirmg their role from the Porter s model [8]. Accordg to this research, dustry analysis should concentrate on contual improvements and their fluence, stead of breakthroughs, as the development of the dustry is more evolutionary, with new successful concepts stemmg usually from earlier successful ones (spiralg R&D advantage). In earlier paper on this subject, by Anderson and Tushman, authors suggested that the usual dustry s technology development is gradual [9]. However, some cases it is punctuated by technological breakthroughs or discontuities that enhance or destroy the competence of firms that branch. Strategy analyst should focus on product or process novations that are most relevant. Moreover, it is crucial to distguish between advances destroyg and creasg competence. First ones are usually itiated by new firms and second by existg ones. Among many other articles concerng Porter s five forces, one of the most frequent topics is the analysis of the bargag power of suppliers. The research this field is usually lked with the issue of supply cha management. Couss states that the supply structure should be viewed as a network [10]. Interrelationships should be examed across the entire dustry because buyer and suppliers roles may reverse several times throughout the network structure. What is more, it is more correct to view suppliers as partners of their contractors, havg some impact on the design and development of products and services provided. The importance of dustry analysis was evaluated over the last years by various researchers aimg to decompose the sources of firm s profitability. Rumelt was among one of the first economists to deal with this issue [11]. In his study, total variance of busessunit returns was partitioned to dustry, time, corporate parent and busessspecific factors. The results imply that the most important source of profits were market position and resources disposal of particular units, whereas corporate parent and dustry effects were nearly negligible, meang that dustry analysis is of less concern for strategist than the analysis at busessunit level. McGahan and Porter used mathematical tools similar to Rumelt s to exame the fluence of various factors: year effects, dustry effects, corporateparent membership and segmentspecific effects [12]. Usg ANOVA, they found out that nearly 19% of aggregate (and 36% of explaed) variation analyzed companies profits is associated with stable dustry effects. Only segmentspecific effects account for more of the variance (32% of aggregate). Furthermore, dustry effects are more persistent than other components, meang that the overall situation of the dustry changes slowly (because of rather stable structure) and has strong impact on its longterm growth prospects. Industry effects also differ substantially various dustries. Consequently, they should be studied the context of the dustry s structure. Results of the two cited studies on dustry effects importance vary quire substantially. McGahan and Porter criticized some of Rumelt s research assumptions and decided to modify them. Another reason for greater importance of the dustry more recent studies is changed focus Rumelt analyzed data mostly from manufacturg sector and it was the basis for his conclusions, 118

3 December, whereas McGahan and Porter claim that this sector is an outlier and cannot be used generalizations for the whole economy. III. STRATEGIC GROUPS As mentioned before, one of the possible methods of analyzg particular dustry s structure is to identify segments with it. In this part of the review, yet another approach to dustry analysis, strategic groups (SGs) studies, will be presented. Peteraf and Shanley defe SG (usg Porter s defition) as sets or collections of firms with similar strategies or groups of companies isolated by common mobility barriers [13]. They focus on the concept of identity of such groups, statg that SG identity is a set of mutual understandg of its members concerng SG s ma characteristics. Social learng theory is used to analyze and describe the development of SG identity at micro level and at macro level the processes are examed by studyg the fluences of historical, economic and stitutional forces. Important issue described this paper is suggestions regardg identifyg SGs with two methods. First one is based on opions of managers who are asked to divide the firms their dustry to separate groups and usg that formation to identify SGs. Second method is similar and cludes askg managers to identify their own groups and aggregatg such data afterwards. Another defition of SG can be found [14]. Accordg to Oster, SGs are part of dustry s substructure and they are groups of firms owng similar specific assets and followg similar strategies most vital busess decisions. Similar decisions relate to longterm busess activity and mean persistg profit differences between SGs which are magnified by possible entry and mobility barriers. Oster claims that analysis of SG is a lk between evaluation of a sgle firm and whole dustry. He also pots out that even though the subject of SGs is significant part of strategic research, some dustries it is of lesser importance. There are multiple reasons for the development of clusters with dustry. First cause is connected with the decisions the early stages of the dustry s life cycle. Initial firms vestments can have impact on the latter structure of the dustry, with many groups sharg common characteristics, distguishable from others operatg at the same time. Another suggested source has also historical background. Companies react a different way to changg external environment and decisions of their competitors which troduces new variations the dustry. Last but not least, ideology, understood as a set of common organization members beliefs, may also have impact on the dustry s structure, conditiong the strategic choices of companies. Moreover, Oster deals with the topic of the role played by membership SGs for the strategies of firms. He suggests that companies various SGs react different ways to changes the environment, beg more or less able to use new opportunities and avoid threats. As a result, this leads to changg competitive positions of particular SGs with the dustry they belong to. Miyamoto modifies the concept of SG and suggest that a company can be a part of more than one SG [15]. In his article, SGs to which a given company belongs are divided to three groups: resource groups (with similar owned resources and mobility barriers), execution groups (with similarity of executed strategy) and market groups (identified by customers market similarities, e.g. similar recognition). Some companies may belong to all groups. As far as practical use of SG theory is concerned, Miyamoto recommends that the proper way is not to identify different SGs the dustry and firm s participation them, but to measure what is called the SG distances the resource barriers, differences between executed strategies and customers comparisons at the time of buy decisions. Such variations can be measured accurately usg formation about the whole branch and the dustry analyst or strategist can draw conclusions on teractions between firms and their dynamics. Cho and McKelvey propose a very different approach to the analysis of SGs, havg its roots evolutionary biology, namely a resourcegradient theory [16]. They criticize the traditional approach toward SGs, stemmg from dustrial organization (IO) economics. Accordg to the IO view, SG can be identified by searchg for the existence of causal factors creatg logic corporate strategy cha that can be measured usg adequate tools: mobility barriers, small group teraction and collusive oligopoly. The arguments agast such view are followg: collusion may be not feasible to measure (even governmental stitutions face many problems tryg to do so), even the existence of any of the three mentioned factors does not automatically mean that all features of SG are present and, fally, there are examples of dustries where the only factor markg possible participation SG is entry barriers and the economists have already proved that it is quite possible for the dustry to have both such barriers and high level of tradustry competition. Another approach is a resourcebased (RB) theory of SGs. SGs RB approach are groups of companies with similar resources, cludg all of more permanent tangible and tangible assets tied to them. A resourcegradient theory is based on common features of both IO and RB approach, aimg to remove their weak spots. Cho and McKelvey suggest that the first stage evaluation of strategic groups should be identifyg competition groups which are smaller or bigger clusters of firms with similarly effective survival capabilities. Competition groups are next analyzed usg resource gradient branchg effect and the later use of either IO or RB approach depends on the shape of resource gradient. In contrast with previously mentioned economists, these authors propose advanced tools to perform the analysis. The model used to identify competition groups is stock return approach (focusg on nichelevel common variance of stock returns) with the assumption of weaker or stronger form of fancial market efficiency. Another development the SG studies is the cognitive approach. Prior and Surroca defe it as an approach accordg to which managers have cognitive or perceptual maps of the dustry s structure and SGs belongg to it [17]. Even though such theory has its benefits (managers are most responsible for strategic decisions and their actions shape to a high degree the situation each branch), the ma difficulty is nearly impossible observation of mental processes of managers. As a result, only approximations can be used, cludg ownership structure (paper concerng this topic is described later this review) or production function approach, focusg on specific 119

4 December, key variables such as margal puts and outputs rates. SG identified usg this method is a group of companies with similar managers attitude toward key decision variables. Model used to determe such rates may be crosssectional Data Envelopment Analysis which concentrates on efficiency dicators over specific time periods. Prior and Surroca conducted research usg data from Spanish savg banks and it confirmed that SGs identified by longterm efficiency differences expla a higher percentage of variation profitability than based on other criteria. SGs are not the only concept of termediate level of strategic analysis used to expla the dustry s structure. Some researchers argue that SG approach does not acknowledge the role of strategic alliances (SAs). GarciaPont states that examation of SAs should be an tegral part of dustry analysis, particularly dustries with a dense network of alliances, such as automotive dustry [18]. Suggested approach towards this issue is studyg the existence of strategic blocks groups of firms lked more to each other than to the rest of a given dustry. Analysis of strategic blocks is proposed as a tool to expla the dustry structure by studyg the distribution of strategic assets between various groups. One of possible tools to analyze the alliance network is by checkg the composition and promence with the block. In the dynamic analysis, any existg lkages should be viewed as changg, meang that companies may extend existg alliances, create new ones or decide to abandon the old ones. In the last few decades, the world economy is shaped to a growg extent by emergg economies. Theories and tools used SG research are often suited to the competitive environment of firms developed countries and do not take to account different features of less economically advanced countries. Peng, Tan and Wong propose cludg one variable that could partially dimish these problems ownership type [19]. Accordg to these researchers, this factor is practically not present most developedcountries SG analysis, as private ownership is domant their dustries. However, emergg economies, stateowned enterprises also play a significant role. Usg data from the leadg emergg market, i.e. Cha, they found out that ownership type as sgle predictor variable is very useful identifyg Chese SGs. What is more, SGs grouped by this variable differ substantially economic performance. In contrast with many theories, stateowned companies seem to achieve better results. Important element SG analysis accordg to the ownership type criterion, is takg to account the fact that due to various processes companies may change their ownership which adds new uncertaty aspect to the research. Further analysis should also volve fdg SGs with each ownership group and assessg rivalry between ownership groups, fluencg the structure of the dustry. Despite a large number of papers published on SG analysis, changes of SGs over time rema one of the relatively less studied topics. To study the dynamics of SG and its changes, one of possible approaches, proposed by DeSarbo, Ebbes, Grewal is to use the Markov model and simultaneously model hidden states (identify the existence of SGs) and firms movg among SGs over time [20]. The aim of such modelg is to expla how SGs ma features and firms participation them vary different time periods. Means and variances of key strategic variables of one SG are contrasted with others order to provide valuable sight to domatg strategic decisions. This model may also be used to estimate transitional probabilities, an dicator of the process of switchg between groups, beg a possible tool to study the evolution of SGs. The significance of SG analysis is supported by results of empirical research. Hult, Ketchen, Palmer and Short used mathematical modelg to assess the impact of SG effects on firm s profitability [21]. The assumption underlyg their research was that varyg performance of SGs results from mobility barriers. Despite often clearly visible differences available opportunities between SGs, shiftg from one group to another is impeded by obstacles such as necessary expensive longterm vestments developg new skills. Because of that, the hypothesis to be verified was that performance with dustries systematically varies based on differences characteristics of SGs. Accordg to the results of the conducted research (cludg data on over 7000 US companies), 14.95% of the variance ROA, 2.44% Tob s Q and 2.59% Altman s Z was explaed at the SG level of analysis. These outcomes supported the hypothesis concerng the significance of relations between SG participation and firm s economic performance, especially profits. IV. CONCLUSIONS Over the last thirty years the studies on dustry analysis have become one of the ma topics managerial sciences. Despite a sizeable sum of newer publications, Porter s five forces model from 1979 is still the ma pot of terest. on dustrylevel analysis has shown that effects at this level fluence the profitability of a company. SG analysis is the extension of such research (and to some extent also of firmlevel type) and is used to better recognize the structure of the dustry. SGs are divided accordg to various criteria. Moreover, there are multiple publications showg different causes of their existence and various approaches to identifyg them or measurg the strength of the lkages. In contrast with general dustry analysis, SG research there is no widely accepted model similar to Porter s, even though some economists attempt to combe the most relevant ones and construct it. However, the discussion on correctness and usefulness of each model described this review remas unsettled and may be the topic of further research. REFERENCES [1] M.E. Porter, How competitive forces shape strategy, Harvard Busess Review, no. 34, [2] M.E. Porter, The five competitive forces that shape strategy, Harvard Busess Review, no. 1, pp. 7993, [3] T. Grundy, Rethkg and reventg Michael Porter s five forces model, Strategic Change, vol. 15, pp , [4] J. Hooke, Security analysis on Wall Street, John Wiley & Sons, New York, [5] M.E. Porter, Competitive advantage: Creatg and sustag superior performance, The Free Press, New York,

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