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Strategic Group Analysis - Brice Plaisance.docx

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STRATEGIC GROUPS – Brice Plaisance In 1972, Hunt developed a theory based on the existence of “strategic groups” of firms within the same industry. He characterised them as “a group of firms within the industry that are highly symmetric with respect to cost structure, the degree of vertical integration, and the degree of product differentiation, formal organisation, control systems, management rewards/punishments, and the personal views and preferences for various possible outcomes” (Hunt, 1972,
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  STRATEGIC GROUPS –   Brice Plaisance In 1972, Hunt developed a theory based on the existence of “strategic groups”  of firms within the same industry. He characterised them as “a group of firms within the industry that are highly symmetric with respect to cost structure, the degree of vertical integration, and the degree of product differentiation, formal organisation, control systems, management rewards/punishments, and the personal views and preference s for various possible outcomes” (Hunt, 1972, p.8). Later on, Michael Porter summarised the definition of strategic group - which is still the definition commonly used  –  as a “ group of firms in an industry following the same or a similar strategy along the strategic dimensions” (Porter, 1980, p.129). Getting back to our case, the idea alongside this theory is to identify principal strategic variables which distinguish the best firms of the telecommunications industry in Europe. After having identified these variables, we will position the most relevant competitors to DTAG. Finally we will constitute clusters of firms which positioning is similar in order to identify what would be the strategy they have to adopt in relation to our issue: improving the network quality in Europe. The Most Relevant Dimensions As we analyse the strategy of European telecommunications providers towards the network quality improvement, we must select dimensions that are linked to this issue.    Firm size:  improving telecommunications network requires really heavy investments in infrastructures. Therefore, it can only be provided by companies that have the financial resources (cash reserves, financial stability in order to get loans from banks or private investors … ) required for such large scale investments. We considered the net sales as a good indicator of the size of companies from this industry.    Geographical Expansion:  implementing large scale investments all over Europe means that companies must already be integrated to national territories. Therefore, the number of European countries the main telecommunications operators are servicing is a good indicator of how able those operators are to set up a large investment program in Europe.    [ Technological:  indeed, the implementation of a large investment program to improve the network quality relies on how advanced the technology of the firm is to produce high quality network. However, this type of information is too sensible and we will not be able to access it. Therefore, we will not consider this dimension even if it would have been relevant to include it to our analysis.] We will then focus on the size and the geographical expansion to identify strategic groups. Actors Positioning:    Source: Xerfi Global, 2014 Based on the two above dimensions, we were able to position what Xerfi identifies as the main European competitors in the telecommunications industry. Constitution of Clusters: The above positioning of competitors helped us to identify 4 main clusters that could potentially be strategic groups. Cluster 1:   “National Outsiders”  [Telenor, Telia Sonera, KPN, Virgin Mobile, Tele2, Turkcell, Free] These operators are important on a national level. They generate more than 75% of the net sales in their historical country. They are outsiders competing with national leading operators.    Strategy: They intend to gain national market shares over the leaders. Their attractiveness is mainly linked to their ability to set up low prices or to provide really flexible offers. Neither have they had the financial structure nor the geographical scope to implement (even partially) heavy network investments in Europe. Cluster 2:   “European Outsider”  [Groupe Europe] This operator, Groupe Europe, is developing on more than one country however it is not among the leaders in any one of them. It is an outsider competing on a European level.    Strategy: It has the same strategy levers th an “National Outsiders” but it is using them on a European scale. Still, it is not able to implement heavy investments in Europe for the same reasons. Cluster 3:   “National Champions”  [Telefónica, Orange]  These operators are historical leaders in their srcinal countries (Telefónica from Spain, Orange from France) where they make at least 50% of their total net sales. The recent market opening to new operators implemented by the European Union threatens their historical base of consumers. They are increasingly jeopardised by new entrants on the national territory.    Strategy: They intent to content the market share gains of the outsiders by diversifying their offers (price, flexibility…). They are also more and more looking at geographical expansion in Europe to counter the loss of net sales on the national territory and to diversify their risks. They might not yet be able to finance heavy investments in Europe, but, above all, they are not integrated enough in Europe to do so. Cluster 4:   “European Leaders”  [DTAG, Vodafone] These operators used to be “National Champions” but they have turned to “European Leaders” by spreading their services all over Europe to counter the loss of market shares on the national territory. Today, they are both strong outsiders in some European countries and leaders in others.    Strategy: They already have the basis of their European expansion but they will continue to widespread. They are trying to reach the necessary critical size to implement the heavy network investments Europe needs. According to our analysis of strategic groups, DTAG is among the “European Leaders” and has a time advantage thanks to its early European expansion. The faster the company will get to its critical size, the easier it will be to develop new competitive advantage: better network that will allow DTAG to provide better quality services to consumers. This advantage would represent a powerful barrier to new entrants or threatening competitors such as “National Champions” or “European Outsider”.   Reference: Graham Leask & David Parker. (2006). Strategic Group Theory: Review, Examination and Application in the UK Pharmaceutical Industry. Available at: https://dspace.lib.cranfield.ac.uk/bitstream/1826/1099/1/JMD-Strategic%20Group%20Theory%20Revised.pdf . Last accessed October 29, 2014.
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