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AN EXAMINATION OF STRATEGIC GROUPS IN THE U.S. TIRE INDUSTRY
USING A MULTIMETHOD APPROACH

By

Aditya Kumar Singh

A DISSERTATION
Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Marketing and Logistics

1 996

ABSTRACT

AN EXAMINATION OF STRATEGIC GROUPS IN THE U.S. TIRE INDUSTRY:
A MULTIMETHOD APPROACH

By

Aditya Kumar Singh

This study addresses several theoretical and methodological research
issues surrounding strategic group theory. From the theoretical perspective, this
study examines (1) the persistence of mobility barriers in the U.S. tire industry
and identifies the kinds of strategic capabilities that may cause them; and (2) the
mixed findings from previous studies about the group membership and
performance linkage, that sometimes there is a greater variance in performance
within a group than between groups. From a methodological perspective, this
study employs a multimethod approach to seeking a convergence in group
definitions using the two major methodologies of strategic group research: one
based on archival data and multivariate techniques, and the other using
managerial perceptions.

To address these issues, this study focuses on the U.S. tire industry. It
uses primary, secondary, and archival data. In addition to perceptions of high-
level managers of tire firms, this study also includes perceptions of industry
experts who have been involved in following this industry for at least ten years.
The methods used to analyze these data employ cluster analysis as well as case

study methods.

This study makes several theoretical, methodological, and managerial
contributions. First it makes a theoretical contribution by examining the important
role that mobility barriers have played in shielding some firms in the U.S. tire
industry from competition outside their strategic groups. Another theoretical
contribution is in finding an explanation for differences in performance of
member firms of a strategic group in the differences in their strategic capabilities.

Second, this study makes a methodological contribution by bridging two
different approaches of defining strategic groups, one using archival data and
the other managerial perceptions.

Finally, this study makes a managerial contribution by giving managers
additional insights into how executives view their competitive environment, how
this may affect the strategies they select to compete with their major rivals, and

the resulting performance of their firms.

Copyright by
ADITYA KUMAR SINGH
1996

Dedicated to my mother’s memory

ACKNOWLEDGMENTS

I wish to acknowledge the contributions of many individuals who helped
me in the completion of my dissertation.

I am deeply grateful to my dissertation committee for its professionalism,
dedication, integrity, inestimable help and encouragement throughout the
research, writing and completion phases of my dissertation. My committee
consisted of Dr. M. Bixby Cooper (chairman), Dr. Forrest S. Carter, Dr. George
D. Wagenheim (all of the Department of Marketing and Logistics) and Dr. J.
Lawrence Stimpert (the Department of Management).

As my chairman, Dr. Cooper helped keep me honest and on track even
through periods when progress seemed elusive. He made a promise that I will
finish successfully, and, with his determination, help and unflagging
encouragement throughout the dissertation process, I did!

Dr. Cooper and Dr. Wagenheim gave me my exposure to field research
on the Kellogg project. Their outstanding example and assistance on that project
continued with my dissertation. I am deeply grateful to both of these individuals

for their generosity and friendship.

vi

Dr. Stimpert’s help was critical to the progress and eventual completion of
my dissertation. He helped shape the overall direction of my dissertation and
helped me avoid many pitfalls along the way. His expertise in the field of
strategic management, his thorough knowledge of the literature, and his
extraordinary willingness to help, all proved to be decisive to the final form of
the dissertation and its completion.

Dr. Carter, who joined my committee in 1995 when my data gathering had
reached an impasse, guided me, with the agreement of other committee
members, in a new methodological direction. Before he would agree to join my
committee, Dr. Carter insisted on becoming acquainted with not only my
dissertation proposal and data gathering activities, but also the strategic group
theory and the major research. With this knowledge base, Dr. Carter was able to
help me move forward effectively. To me, this demonstrates, above all, Dr.
Carter’s integrity as a human being, an academic, and a first-rate methodologist.

I also want to acknowledge the generous help given to me by Dr. Robert
Nason, the department chairman (without whose encouragement i would not
have come to Michigan State University for my Ph.D. education); Dr. Tamer
Cavusgil (Director, ClBER), and Drs. Henry Rennie and William Wickham (my
bosses at Heidelberg College). I also want to express my deep gratitude to Mr.
Harry Millis and other participants and experts.

I also want to thank my family and friends for their encouragement and

their faith in me. I shall be forever grateful.

vii

TABLE OF CONTENTS

LIST OF TABLES
LIST OF FIGURES

CHAPTER 1
INTRODUCTION
Objectives and Research Questions
The Model
Approach and Method
Significance of the Study

CHAPTER 2
LITERATURE REVIEW AND CONCEPTUAL DEVELOPMENT
Strategic Group Theory
What is a Strategic Group?
Why do Strategic Groups Form?
Mobility Barriers
Strategic Group Research
Stream A: Studies Using Archival Data
Stream B: Studies Using the Cognitive Approach
Summary of Shortcomings
The Cognitive Approach
Cognitive Categorization
Prototypes
Applicability to the Study
Strategic Capabilities
Performance
Summary
Summary of Issues to be Studied

CHAPTER 3
PROCEDURES AND METHODS OF INVESTIGATION
THE TIRE INDUSTRY
The Model and Research Questions
Research Question 1

viii

xi

(DmV-b-F

12
13
14
17
18
19
24
28
33
38
40
43

50

55

56
56
57

Research Question 2
Research Question 3
Research Question 4
The Multimethod Approach
The Case Study
Definition of Constructs and Measurement
The Sample
Data Gathering
Techniques of Data Analysis
Conclusion

CHAPTER 4
THE U.S. TIRE INDUSTRY
History of the Tire Industry
The Structure of the U.S. Tire Industry

CHAPTER 5
FINDINGS
Research Question 1
The Industry Experts
Execufives
All Participants’ Responses
Research Question 2
Research Question 3
Research Question 4
Conclusion

CHAPTER 6
DISCUSSION AND CONCLUSIONS
Discussion
Strategic Groups and Method Convergence
Strategic Groups and Mobility Barriers
Strategic Groups and Asymmetric Profit Rates
Methodological Contributions
Theoretical Contributions
Managerial Contributions
Study Limitations and Future Directions
Conclusion

58
59
59
60
63
65
67
69
71
72

73
73
82

88
90
90
93

103
109
112
118

120
120
121
129
135
138
139
140
141
142

APPENDIX A - Telephone Questions for Managers 144
APPENDIX B - Telephone Questions for Industry Experts 145

LIST OF REFERENCES 146

LIST OF TABLES

1116.8.

2.1 Basis for Group Definition

3.1 Summary of Operationalizations

5.1 Identification Scheme for Participants
5.2 Perceived Strategic Groupings

5.3 Top Five Strategic Dimensions

5.4

5.5 Passenger OE Market Shares

5.6 Clusters Using All Major Dimensions

5.7 Strategic Groups Using Two Approaches
5.8 Return on Sales (1994)

5.9 1994 OE & Replacement Segment Market Shares
5.10 Brand Values of Major Brands ($Million)
6.1 Summary of Findings

xi

21
67
89
92
97
105
107
110
111
113
115
115
121

LIST OF FIGURES

Figures

1.1 The Model

2.1 The Model

2.2 Framework for Knowledge Structure Research
2.3 Schema of Scottish Knitwear Industry

2.4

3.1 The Model

4.1 The Evolution of the Tire Industry

4.2 The Structure of the U.S. Tire Market (Part 1)
4.3 The Structure of the U.S. Tire Market (Part 2)
4.4 Major Tire Companies in the U.S. Market

5.1 Alternative Views of Groups

6.1 Competitive Space Occupied by Tire Companies
6.2 Strategic Groups wnthin the Tire Competitive Space

xii

1 1
35
39
41
57
77
83

86
98
1 24
1 26

CHAPTER 1

INTRODUCTION

Strategic group theory has emerged as a major paradigm in the field of
strategic management and has received considerable attention from
researchers. Departing from traditional industrial organization economics, which
viewed industries as composed of homogeneous sets of firms (Bain 1954), this
theory views an industry as being composed of heterogeneous firms that fall into
clusters of strategic groupings or groups.

While some scholars have labeled this view as a researcher's "invention"
and "an analytical convenience" (e.g., Hatten and Hatten 1987), the concept has
some intuitive appeal. One need take only a casual look at firms within such
highly visible industries as soft drinks or automobiles to see that some firms
behave differently from other firms within the same industry. In the U.S. soft-
drink industry, the Coca-Cola Company and PepsiCo seem to be more
aggressively competitive with each other than with other firms as they match
each others moves (Guyon 1992). Likewise in the automobile industry, the big
three domestic firms (General Motors, Ford, and Chrysler) act as a group with

similar strategies (Levin 1992).

The greatest uses of strategic group theory to date have been to identify
strategic groups and, more importantly, to link group membership to firm
performance (e.g., Cool and Dierickx 1993; Thomas and Venkatraman 1988).
The existence of groups has been shown in a diversity of industries (e.g. Hunt
1972; Newman 1978; Porter 1979; Oster 1982; Hergert 1987; Fiegenbaum et al.
1987a, 1987b). Many, but not all, of these studies have also shown a positive
link between group membership and firm performance.

There have been, however, several criticisms made about this research.
One criticism is that the methodology for determining group membership, which
relies on the use of factor and cluster analyses, rests on “untested assertions”
(Hatten and Schendel 1977, p. 101) about the existence of groups. As Barney

and Hoskisson (1990, p. 189) note:

The development of clusters, per se, cannot be used as a test of the
existence of strategic groups. In this analytic approach, strategic group
theorists are left in the uncomfortable position of assuming that strategic
groups exist, applying algorithms that are guaranteed to generate clusters,
and then concluding that the obtained clusters demonstrate that strategic
groups exist. The tautology here is obvious.

Another criticism surrounds the theoretical linkage between a firm’s
membership in a strategic group and its performance. Research findings in this
area have been ambiguous. While some studies have been able to establish a
positive link between performance and group membership (e.g. Dess and Davis
1984; Oster 1982; Newman 1974; and Hunt 1972), others have found only weak

or contradictory evidence (e.g. Cool and Dierickx 1993; Lawless et al. 1989).

Still another criticism of this stream of research has been its over-reliance
on archival data (McGee and Thomas 1986). At best, archival data (such as
historical financial data on companies available through Standard & Poor’s
Compustat dataset) can only address the "realized" strategies of firms
(Mintzberg 1978) and only indirectly impute managerial intentions to them. How
the firms’ managers decide on those strategies and what actions they take to
implement them are ignored by such studies, leaving the implication that just by
selecting a particular strategy, a firm can achieve some associated performance
goals.

These and other criticisms of empirical research into strategic groups
have been reviewed by Cool and Schendel (1988) and Thomas and
Venkatraman (1988) as a way to influence the direction of future strategic group
research. But in their review, Barney and Hoskisson (1990) have even
suggested abandonment of this theory if these criticisms are not addressed and
assertions properly tested.

A methodological approach that seems to overcome many of the
weaknesses highlighted by these criticisms uses managerial cognitions to define
strategic groups. With this approach, researchers ask decision makers
themselves on how they view their industry and who their relevant competitors
are (e.g. Reger and Huff 1993; Porac and Thomas 1990). Use of managerial
cognitions as a basis for studying strategic groups offers a different, yet

complementary, and perhaps richer, methodology for capturing nuances of firm

behavior and outcomes. It also can identify the presence of strategic groups in a
more credible manner (using managers’ perceptions) than simply as an artifact
of a statistical algorithm such as cluster analysis.

The undeniable central role that firms' executives play in strategy
formation has been amply demonstrated by another stream of related research
about a firm's upper echelons or top management team (TMT) (Hambrick and
Mason 1984, Hambrick 1981). The TMTs’ perceptions of their firms’
environments, of which competition is a key component, help shape the
strategic decisions they make and influence how their firms implement those

decisions (Hambrick and Mason 1984).

OBJECTIVES AND RESEARCH QUESTIONS

This study focuses on the criticisms that have been made about strategic
group theory. It also explores issues that have been understudied or ignored. In
doing so, this study has two major objectives: (1) to make a methodological
contribution to strategic group research, and (2) to advance strategic group
theory.

As part of the first objective, this study attempts to provide a bridge
between the two major approaches used to research strategic groups. The
study uses two approaches in defining strategic groups by (1) studying
managerial cognition about industry structure and competitive strategies, and (2)

using a cluster analysis technique with archival data for the same industry. The

purpose behind this is to seek method convergence between the two
approaches: do the two approaches result in comparable groupings?

The following research questions address the first objective of this study:

Research Question 1

Do managers and industry experts view their industry in terms of strategic

groups? Do member firms follow similar strategies?

Research @estion 2

Is there a convergence in defining strategic groups using the method of

measuring perceptions of managers and industry experts and the method

using archival data?

The second objective concerns theoretical contributions. Specifically, this
study is interested in two aspects of strategic groups. One deals with what
constitutes mobility barriers, especially those that are sustainable? For this, the
study examines some of the key capabilities (e.g. marketing and technology) that
may help build sustainable mobility barriers around certain groups and make
them resistant to entry (or threats of entry) from new or established firms. The
second aspect is to determine probable causes of intra-group performance
differences. Specifically, what causes high variances in performance among
member firms?

The second objective of this study is addressed by the following two
research questions:

Research Qgestion 3

Are there mobility barriers surrounding the strategic groups identified by

the two methods (by managers and archival data)?

Research Question 4

Do certain strategic capabilities help explain variance in profitability of
member firms of a strategic group?

For the purposes of this study, the U.S. rubber tire industry was selected.
The reasons for this selection were several. This industry has not been studied
by strategic group researchers, even though it has some characteristics that
would make it an ideal subject for strategic group research. The industry is
highly visible and a major one and has recently undergone globalization. The
major firms that participate in the U.S. market are also major global players, and
represent North America, Europe, and Asia. It has been fairly stable industry,
except for the turbulence due to changes in ownership in the 19805; this activity
has now subsided. This characteristic makes it an easier subject for study than
if it were a moving target. Some of the dynamics in this industry—such as, the
persistence of stable market shares (indicating hard-to-overcome mobility
barriers); presence of divergent performance levels in certain groups--make it an
interesting and relevant industry to study in order to address the research
questions. Another selection criterion was the relatively small number of firms
involved, and thus it was felt that a high proportion of them could be included in
the study.

To address these issues, this dissertation uses a multimethod approach--
using both qualitative and quantitative methods and sources—to study the

application of strategic group theory to this industry.

THE MODEL

This section briefly describes the model (Figure 1.1) used in this study. It
modifies the basic strategic group model (that strategic group membership
affects firm performance) by adding the firms' strategic capabilities as a
moderating variable. In this model, group membership affects firm performance
both directly and indirectly via strategic capabilities. The model (described
below, but in more detail in Chapter 2 and Chapter 3) focuses attention on
several key strategic capabilities rather than an all-encompassing "strategy"
(e.g. Porter 1980). This usage is close to a "holistic" view of strategy as
recommended by several researchers (e.g. McGee and Thomas 1986).

The model consists of three components. The first component of the
model (labeled strategic group) defines the strategic groups using (1) the
managers' perceptions of their major competitors and (2) the perceived
strategies of the firm relative to its competitors.

The strategic capabilities component plays two major roles in the model:
in an aggregated and a disaggregated manner. In aggregate (taking all the firms

in a group together), some or all of these strategic capabilities constitute mobility

barriers, which not only help define a strategic group but prevent it from

encroachment from outside firms (Caves and Porter 1977; Mascarenhas and

Aaker 1989). Thus, the sustainability of mobility barriers is, at least partly,
derived from the sustainability of these aggregate strategic capabilities of

member firms.

 

 

STRATEGIC
GROUP PERFORMANCE

(1) T

STRATEGIC (2)
CAPABILITIES
(mobility barriers)

 

 

 

 

 

 

 

 

 

 

FIGURE 1.1 The Model

In a disaggregated form (that is, each member firm’s strategic capabilities
considered individually), the differences among some or all of the strategic
capabilities of different group members moderates member firm performance
levels. (The aggregate relationship is labeled with a ‘1’ and the disaggregated
relationship is labeled with a ‘2’ in Figure 1.1.)

Finally, the performance component includes profitability measures (eg.
return on sales), which were used in some previous studies (eg. Harrigan 1985).
The performance results from, or is strongly influenced by, the member firms’

strategic capabilities.

APPROACH AND METHOD

This study uses a multimethod approach to strategic groups, strategic
capabilities, and performance. The study combines constructs borrowed from
strategic group theory, categorization research, organization and management

theory, and marketing.

This study uses both perceptions of managers and those of industry
experts for identification of groups and the key strategic capabilities (as sources
of mobility barriers). In addition, the study uses archival data to define groups.
This approach to bridge the two major streams in strategic research has not
been done before. If it could be shown that the definitions using these two
different approaches converge, it would not only provide a strong justification to
use such an approach in future research into other industries, but, at the same
time, allay some of the concerns about the archival data-clustering approach of
previous studies.

The open-ended and structured questions used in this study to administer
to managers in telephone interviews, were designed after an extensive research
of secondary sources followed by interviews with industry experts. As part of a
multimethod research strategy, the methods for both qualitative research (eg.
case study) and quantitative research (eg. cluster analysis) research are

employed.

SIGNIFICANCE OF THE STUDY

This study is significant for several reasons. First, it makes a
methodological contribution by combining two separate methodologies-using
archival data and managerial cognitions--to seek convergence on group
definition. Second, to advance strategic group theory, it explores two important
areas which have interested strategic group scholars. One concerns the

persistence of certain strategic groups and how this is related to underlying

10

mobility barriers. The other concerns the mixed findings of some studies (e.g.
Dierickx and Cool 1993) which showed that sometimes the performance
variance within a group was higher than performance variance between groups.
Finally, the study offers some implications for managers. It further
advances managers' understanding of the behavior of their industry competitors
and could help them during strategy formation. For example, by helping the
managers understand the industry structure better and how the competitors are
arrayed in competitive space, they will be able to effectively focus their firm to
compete against their main competitors, rather than do battle with all members of
the industry, which wastes precious resources. As more industries face global
competition, managers will have to decide which firms will prove to be the

relevant competitors to their own firms.

LITERATURE REVIEW AND CONCEPTUAL DEVELOPMENT

The following model provides the framework for discussion in this chapter

including literature review and conceptual development, in this chapter. The

 

STRATEGIC
GROUP

 

 

 

(1)

 

 

STRATEGIC
CAPABILITIES
(mobility barriers)

 

 

 

CHAPTER 2

(2)

FIGURE 2.1 The Model

 

 

PERFORMANCE

 

 

 

model is an adaptation of the structure-conduct-performance paradigm of

industrial organization (IO) economics: which theorizes that the structure of an

industry affects firms’ conduct (or strategy) which in turn affects the firms’

performance. In this model, the industry is further segmented

into strategic

groups. Also, in this model, strategic capabilities can be seen to play two roles.

When considered in aggregate (the relationship is labeled as ‘1’ in the figure),

some or all of the strategic capabilities of a group’s member firms help create

11

12

mobility barriers, which in turn lead to strategic group formation. When
considered in a disaggregated form (labeled ‘2’ in the figure), that is, each
member firm’s set of capabilities seen individually, then some or all of these
capabilities moderate the effects of strategic group membership on performance.
Thus, differences in intra-group performance will result if these capabilities are
not evenly spread across the firms within a group. As Caves and Porter (1977),
and particularly Porter(1979), have argued, intra-group differences in
performance can result from differences in firm’s endowments or the way they
implement their strategies.

This chapter will begin with a background of strategic group theory and
the concept of mobility barriers, and a related discussion of strategic
capabilities. Published research and reviews of this research are discussed.
Because this study uses managerial perceptions, in addition to archival data, in
defining groups, this chapter will review the literature on the managerial and

organizational cognition.

STRATEGIC GROUP THEORY

The term "strategic group" was first used by Hunt (1972) in his study of
the major appliance industry. Hunt found that the firms in this industry were not
a homogeneous set but clustered into groups of firms with similar strategic
attributes, which he labeled strategic groups. This finding contradicted the
industrial organization (IO) economics view of an industry consisting of a

homogeneous set of firms that differed only in size (Porter 1979). Since Hunt's

13

study, this theory has been further developed and refined (Porter 1979; Caves
and Porter 1977) and tested empirically by scores of researchers (reviewed by

Thomas and Venkatraman 1988; McGee and Thomas 1986).

What is a Strategic Group?

Caves and Porter (1977) and Porter (1979) developed the basic axioms of
the strategic group theory. Starting with the industrial organization (IO)
economics’ theory of entry barriers (Bain 1956), these authors expanded it to
include both new entrants into the industry and the movements of established
firms from one group into another. They hypothesized that “sellers within an
industry are likely to differ systematically in traits other than size, so that the
industry contains subgroups of firms with differing structural characteristics” (p.
250). Furthermore, the firms within a subgroup “resemble one another closely
and recognize their mutual dependence most sensitively” (p. 250).

Central to the strategic group theory is the concept of mobility barriers,
which according to Caves and Porter (1977), is a more generalized concept than
exit and entry barriers in Bain‘s (1956) work. According to Bain, entry barriers,
such as a base of loyal customers, brand names, and switch costs, impede entry
into the industry of new firms, and exit barriers, such as long-term commitments
and contracts with suppliers and customers, or investments in specialized assets

that have no alternative uses, prevent an incumbent from exiting the industry.

14

Unlike barriers to entry, mobility barriers are not general to the industry
protecting all firms equally from new entrants; rather these barriers are specific
to the groups and could make entry (whether by incumbents or new entrants)
into different groups difficult or easy. But the structural characteristics upon
which the mobility barriers rest are similar to entry barriers (Caves and Porter
1977,p.250)

Finally, in a key passage in the exposition of their theory, Caves and
Porter (1977) write:

Because of their structural similarity, group members are likely to respond in
the same way to disturbances from inside or outside the group, recognizing
their interdependence closely and anticipating their reactions to one another’s
moves quite accurately. Profit rates may differ systematically among the
groups making up an industry, the differences stemming from competitive
advantages that a group may possess against others. The industry‘s profits
and (perforce) the average level of its groups’ profits depend on the general
structural traits of the industry and also the heterogeneities that demarcate its
groups (pp. 251-252)

This passage summarizes the crux of the theory that has preoccupied the

researchers of strategic groups.

Why Do Strategic Groups Form?

Viewing an industry as composed of strategic groups has a certain
intuitive appeal and face validity. The examples of organizational clusterings
from all spheres around us, whether for-profit and nonprofit, seem legion,
ranging from the college and professional sports leagues to corporations. In the
U.S. automotive industry, one can observe at least three groups of firms: the
U.S. firms (General Motors, Ford and Chrysler); the Japanese firms (Toyota,

Nissan, and Honda, and to a lesser extent Mitsubishi), and the German firms

15

(Daimler Benz and BMW). Certainly all these firms compete against everyone
else, but each group differs in product-markets and behavior. As an example,
the U.S. firms-General Motors and Ford, and to a lesser degree Chrysler--
behave differently than non-U.S. firms (Guyon 1992). Similarly, the German
companies behave differently by avoiding direct competition with others by
aiming at the premium and of the luxury segment.

This example illustrates that strategic groups are not merely an analytic
convenience, as several researchers have maintained (e.g. Hatten and Hatten,
1987; Porter, 1980); but that there is increasing evidence that they do exist. Just
two perspectives will be briefly discussed here that support this view.

From an institutional theory perspective, organizations are open systems,
influenced by their environments, but "many of the most fateful forces are the
results not of rational pressures for more effective performance but of social and
cultural pressures to conform to conventional beliefs" (Scott 1987, p. 115). Thus
organizations are not only technical systems involved in transformation of
resources into goods and services, but also institutional systems, whose
success depends on factors other than efficient coordination and control of
productive activities. According to Meyer and Rowan (1977), organizations that
exist, independent of their productive efficiency, "in highly elaborated
institutional environments and succeed in becoming isomorphic with these
environments gain the legitimacy and resources needed to survive."
lsomorphism, or structural and process homogeneity, can be imposed by the

environment in three forms: coercive, when formal or informal pressures are

16

applied by one organization on another as a condition for its support; mimetic or
imitative, when organizations adopt features of more "successful" organizations;
and normative, when professionals, based on their specialized knowledge and
skills, try to impose their standards and ways of doing things (DiMaggio and
Powell 1983).

The sudden expansion in the 19805 and 19905 of strategic alliances is
perhaps an example of mimetic isomorphism (e.g. firms entering into alliances
when they see other firms do so), which is usually present when the environment
ls uncertain, and firms model themselves on other firms (DiMaggio and Powell
1983). Like strategic group theory, the institutional theory looks at the causes of
similarities among organizations.

The second perspective, to be discussed in greater detail below, is
borrowed from cognitive science and has found proponents among strategic
group researchers (Reger and Huff 1993; Porac and Thomas 1990). Implicit
here is what Simon (1952) called "bounded rationality": that people have
cognitive limits when faced with complex decisions. Schwenk (1984, 1981) has
shown that executives group their competitors to simplify the othenlvise complex
competitive structure in their industries. Using this approach, Reger and Huff
(1993) found the presence of strategic groups in the banking industry. As will be
discussed below, the model to be tested in this study will use this cognitive

simplification approach to defining strategic groups.

17

Mobility Barriers

Mobility barriers as stated earlier represent a key component of strategic
groups. In relation to the U.S. tire industry, this study will attempt to identify
those strategic capabilities that constitute mobility barriers, and those that do
not.

Caves and Ghemawat (1992) have concluded that “sustained
intraindustry profit differentials necessarily rest on ‘fixed factors’--
precommitments to durable, specialized, sticky resources” (p. 2), which are
mobility barriers. In Porter's (1979) elaboration of the strategic group theory,
mobility barriers play an important role but with an important difference that his
focus shifts from factors specific to a strategic group to factors that are firm
specific, such as asset endowments, risk profiles of group members, and
different abilities to implement a strategy. While mobility barriers could still
determine potential profitability of a group, the firm-specific factors could erode
that potential and result in group members with varying performance levels
(Porter 1979, pp. 218-219; Cool and Schendel 1988, p. 208). While there is a
shift of the unit of analysis, from the industry and group level in Caves and
Porter (1977) to the firm level in Porter (1977), both levels of analysis—the group
level and the firm level—are important to this study, just as they were to previous
studies.

There are several implications of using mobility barriers for studying
strategic groups (Mascarenhas and Aaker 1989). First, since mobility barriers
are driven by a firm’s assets and skills, they should be the main consideration

when defining groups. Second, some skills and assets that exist only in the

18

“context of particular strategies” (p. 476) are relevant, while others are not in
defining groups. For example, a differentiation strategy may involve investments
in research and development, distribution and in other skills and assets that act
as mobility barriers, while investments to improve the efficiency of factories may
not be if all competitors make such an investment.

Third, some skills and assets used for defining groups may be
idiosyncratic to a particular industry, which will require an in-depth knowledge of
the industry. Fourth, strategic groups should be checked for stability of
membership as high mobility rates would bring into question the presence of
mobility barriers, and thus of the groupings themselves.

Finally, the height of the mobility barriers, like the height of entry barriers
of the earlier theory (Bain 1956), may hold a clue to understanding the

relationship of group profitability and strategic groups.

STRATEGIC GROUP RESEARCH

This section summarizes the two major streams of research in strategic
groups: the earlier, and much larger, body of research using secondary
(overwhelmingly financial) data and the emerging body of research using
managerial perceptions. The first stream has been amply reviewed in three
previous published reviews by McGee and Thomas (1986), Thomas and
Venkatraman (1988), and Barney and Hoskisson (1990). The second stream is
comparatively new and without the critical mass for a separate review. These

and other selected studies (relevant to this dissertation) published since 1990

19

will then be discussed. Finally, the shortcomings and research issues that have

been identified will be discussed.

Stream A: Studies Using Archival Data

There has been a steady accumulation of research studies ever since the
concept of “strategic group” was coined by Hunt (1972). The research has
stayed faithful to the outline provided by Caves and Porter (1977). Many of the
earlier studies concentrated on defining strategic groups in different industries
using different kinds of variables for clustering purposes. For example, the
number of strategic groups have varied from industry to industry but the typical
numbers seem to be three or four (Fiegenbaum and Thomas 1990). In a
fragmented industry, each firm could be a strategic group by itself, in another all
the firms may belong to just one strategic group, as might be the case of the
U.S. breakfast cereal industry.

The variables used by successive studies have become more complex.
Generally, with exceptions, the earlier studies used fewer and, perhaps,
simpler variables to define strategic groups. Bases for group definition were
product line (including degree of vertical integration and product diversification)
by Hunt (1972); degree of vertical integration by Newman (1978); relative firm
size by Porter (1973) and Caves and Pugel (1980); and advertising-to-sales
ratio by Oster (1982).

More complex sets of variables were employed in other studies. Hatten,

Schendel and Cooper (1978) used manufacturing, marketing, and financial

20

variables in their study of the brewing industry, following Hatten’s 1974 and
Hatten and Schendel’s 1977 examination of that industry. Baird and Sudarshan
(1983) used a set of financial variables to study the office equipment and
computer industries. Hergert (1987) used several variables (such as advertising
to sales ratio, R&D to sales ratio , and market shares) to study 2,540 strategic
business units within 50 U.S. manufacturing industries.

Following McGee and Thomas (1986), Thomas and Venkatraman (1988)
develop a framework for strategic group literature using the classification
scheme shown in Table 2.1.

According to this scheme, the strategic group research can be classified
by (1) the operationalization of strategy (whether the basis for defining strategic
groups was narrow or unidimensional, or broad or multi-dimensional, or more
"holistic") and (2) whether the basis for group definition was selected a priori or a
posteriori.

To make this classification more complete, however, some other
dimensions can be added, although difficult to depict graphically. In addition to
the above two dimensions, these are: (3) whether the study used secondary data
or primary data; (4) whether the study was static or dynamic (or cross-sectional
versus longitudinal); (5) whether the study used secondary or archival data, or
whether the study used different kinds of data including perceptual. Furthermore,
a classification scheme based on perceptual data versus archival data might

also be considered. This dimension separates "realized" strategies from

21

Table 2.1 Basis for Group Definition

 

 

OPERATIONALIZATION A priori A posten'on'
OF STRATEGY
I ll
Narrow
Broad III IV

 

Source: Thomas and Venkatraman (1988)

"intended" strategies (Mintzberg 1978). Using financial variables as surrogate
measures of strategic decisions already taken by managers are examples of
"realized" strategies; while probing the managers intentions via interviews or
surveys about various strategic decisions would be examples of "intended"
strategies. Therefore most of the studies, with the exceptions to be discussed
later, have defined groups based on their "realized" strategies.

Mapping the research in the 2 x 2 scheme (above figure), most studies
are of Type II: these use multivariate statistical analyses, including cluster and
factor analyses to discover underlying groups in different industries, such as
petroleum (Newman 1978), brewing (Hatten 1974; Hatten and Hatten 1985),
banking (Hayes, Spence and Marks 1983), retailing (Hawes and Crittenden
1984), office equipment (Baird and Kumar 1983), pharmaceutical (Cool and
Schendel 1987) and insurance (Fiegenbaum 1990). The purpose of these
studies is to demonstrate that industries are not homogeneous (as the classical
IO economics model posited) but are segmented into groupings. But as Thomas
and Venkatraman (1988) point out, this is no longer an issue and strategic group

literature must move forward.

22

and Venkatraman (1988) point out, this is no longer an issue and strategic group
literature must move forward.

In Type II group, the bases for group definitions varies. Oster (1981) used
advertising-to-sales ratio; Hatten and Hatten (1987) and Hawes and Crittenden
(1984) used various marketing strategy variables; Ramsler (1982) used
product-market differentiation and size variables.

In the Type I group, the basis for strategic group definition is selected a
priori. Thus, Hunt (1972) found four groups in the home appliances industry
using vertical integration as the criterion; Newman (1978) also using this
criterion found six strategic groups in producer goods industries. Firm size was
used as a basis by Porter (1979), Lahti (1983) and Primeaux (1985).

In the Type III studies, multidimensional a priori bases were used by
Hatten and Schendel (1977) (used marketing, financial and manufacturing
variables); Harrigan (1985) (used various strategic posture variables); and Dess
and Davis (1984) (developed a multidimensional construct for each of Porter‘s
generic strategies). Variables reflecting economies of scope and resources
deployed were used by Fiegenbaum (1986) and Cool ( 1985) in their studies.

Type IV category is represented by Frazier and Howell (1983) and
Hergert (1987). Hergert employed multiple variables to define strategic groups
among several different U.S. manufacturing industries, and found two to six
groups across industries, but there were no clear patterns in the group-

performance link. Similarly, Frazier and Howell studied medical supply and

23

equipment firms and found three different groups based on multidimensional
strategic attributes.

Most of the studies have also attempted to show that strategic groups
have performance implications, but these results have been mixed. Among the
studies demonstrating performance differences across groups are studies by
Hunt (1972), Newman (1978), Porter (1979), Lahti (1983), Hawes and Crittenden
(1983), and Primeaux (1985). Partial support for the strategic group and
performance link is found in Cool (1983) and Fiegenbaum (1986). No clear
patterns emerge in studies by Dess and Davis (1984), Hergert (1987), Frazier
and Howell (1983), Lawless, Bergh and Wilsted (1989), Mascarenhas and Aaker
(1989), and Fiegenbaum and Thomas (1990). The most recently published
study by Cool and Dierickx (1993) shows that support for a direct group
membership and performance linkage is inconclusive. Thomas and Venkatraman
( 1988) note that "rejection of performance differences across groups implies that
attention should be focused on 'within-group' differences in performance and the
differential skills and assets of different players" (p. 548).

These studies used “similar” or “common” strategies as a basis for
defining groups. Mascarenhas and Aaker (1989) have criticized this approach as
being idiosyncratic and ad hoc, They instead make a case for using mobility
barriers to define groups for two reasons. First, these authors argue, mobility
barriers in Caves and Porter's (1977) conceptual development is "the theoretical
core of the concept" (p. 475). Second, the strategic group concept has a

potential utility in helping make strategic judgments about the attractiveness of

24

the various groups and the distinctive competencies, including assets, needed to
compete in each group. In their definition, strategic group is "a grouping of
businesses within an industry that is separated from other groupings of
businesses by mobility barriers" (p. 475).

According to Mascarenhas and Aaker (1989), mobility barriers are more
related to "who you are" (or resource dependent) than to "what you are" (or
action dependent, as implied by "common strategy"). The concern that these
authors have is that "common strategy", unlike mobility barriers, may not identify
stable groups, (for whom mobility barriers are low or nonexistent, or in other
words, member firms have assets and skills easily imitable by other firms). In
addition to Mascarenhas and Aaker’s own 1989 study, other studies which have
used the mobility barriers approach are Fiegenbaum and Primeaux, Jr. (1987),

and Cool and Dierickx (1993).

Stream B: Studies Using The Cognitive Approach

As indicated earlier in the discussion of strategic group literature, while
the vast majority of the studies have employed archival data, there have been a
few researchers, starting with Dess and Davis (1984), who have begun to survey
managers about strategic groups. Among the several new directions for strategic
group research that have been suggested by Thomas and Venkatraman (1988)

is the exploration of managerial perceptions about group behavior. Porac and

25

Thomas (1990) have made the following argument:

Because decision makers play a role in an organization's responses to
rivalry, it is necessary to inquire about social psychological factors
influencing how decision makers frame competitive environments and
understand the nature of competitive threats (p. 224)

In this section, five published studies which address the perceptions of
managers concerning their competitive environment are discussed first, followed
by a brief review of the cognitive approach.

Dess and Davis (1984) conducted semi-structured interviews with chief
executives to ascertain competitive methods used by their firms that would help
identify the strategic orientation of the firm's decision makers. After these
competitive dimensions were identified, the researchers cluster analyzed them
and found that that the three clusters identified corresponded with Porter's
(1980) three generic strategies of differentiation, low cost and focus strategies.
Though this study elicited manager perceptions, it fell short of Porac and
Thomas' (1990) suggestions. Neither were the chief executives asked about
their perceptions of their competitors' strategies, nor were they asked about their
views of their industry's structure.

Gripsrud and Gronhaug's (1985) study of grocery retailing in a small
Norwegian town used a "sociometric" approach to study market structure
perceived by individual retailers and to examine the impact of these perceptions
on the retailers' strategies. The study found that retailers perceived only a small
fraction of all stores (total 51) in the area as their competitors (average number

of competitors reported was 3.2, and the range was from zero to seven).

26

Regarding strategy, they found that if the most important competitor was the
nearest store, then a retailer followed "differential" strategy was followed; if
however the major competitor was not the nearest store, then a retailer felt safe
to follow the same strategy. The nearest store was likely to be regarded as the
most important competitor if the profiles of the stores were very similar.

Gronhaug and Falkenberg (1989) explored perceptions of strategy and
strategic changes held by firms and their competitors. The researchers mapped
the perceptions of the same firms about two different periods, one defined as
"boom", the other "bust". They found that the firms did not report a change in
their own strategies but saw changes in their competitors' strategies. This points
to perceptual biases of firms as actors and firms as observers. Another inference
that the authors draw from this study is that firms only include a fraction of the
competitors in their evoked sets.

Porac et al. (1989) delved deeper into the mental processes ("the
cognitive underpinnings") of managers within a strategic group, such as the
Scottish knitwear manufacturers who see themselves as a group different from
non-Scottish knitwear firms. Using extensive semi-structured interviews with
various owners and managers, the authors mapped the transactional network in
Which the firms were embedded from the beginning to the end of the value chain.
Within the boundaries of the competitive space, the Scottish managers defined
their business in a way to distinguish from non-Scottish firms, and this definition
was seen to be reinforced by beliefs about the marketplace. This definition, the

authors found, was the first distinction discussed by the Scottish managers, and

27

in their minds had both a demand-side element (who the buyers of their
sweaters were) and a supply-side element (which firms in the world could make
such sweaters). In their minds, there was no other producer in the world who
could make what they did. And only saw each other as being the competitor.

Finally, Reger and Huff (1993), demonstrated that cognitive data can be
used to study strategic groups. They studied 18 Chicago-area bank holding
companies to address the questions whether managers view competition in
terms of strategic groups and if the perceptions of groupings are widely shared
or not. Via semi-structured interviews (using the repertory grid technique), they
asked each of the key informants to rate their competitors using their own
dimensions. They observed some clearly defined strategic groups, while others
were fuzzy (if the firms shared some secondary attributes with firms in other
groups or had idiosyncratic characteristics).

Even researchers who continue to use the earlier methods and archival
data, are beginning to recognize the usefulness of a cognitive perspective. For
example, Fiegenbaum and Thomas (1995) study uses a “cognitive" perspective
proposing and testing the hypothesis that a strategic group acts as reference
group, a concept developed in psychology by Kelly (1955). Their discussion
also notes that Stigler’s (1984) oligopoly theory and Porter’s (1979, 1980)
elaboration of strategic groups, suggest the “consensual group-based
coordinating mechanisms" in industry level competition (p. 463). They conclude
that the reason for this behavioral congruence is “that firms in the same strategic

goup have similar assumptions about the future potential of the industry and

28

tend to have similar strategic skills and capabilities, i.e. the group acts as a
reference point” (p. 463).

In summary, these studies demonstrate to varying degrees that a firm’s
manager-strategists do tend to focus on subsets of competitors, while ignoring or
paying less attention to the rest. In other words, "strategic groups are readily

perceived" by managers (Reger and Huff 1993).

Summary of Shortcomings

This section summarizes the various shortcomings of previous research
and will identify those that this study addresses. In their review of strategic group
research, McGee and Thomas (1986) made several points: (1) only a minority of
studies emphasized a detailed knowledge of industry as a necessary condition
for variable specification; (2) the basis for group definition were unidimensional
and idiosyncratic; (3) most studies were snapshots in time; (4) relatively few
studies addressed issues of competition and rivalry "except as intervening
variables 'solved out' in the reduced form of the relationship between group
structures and performance" (p.149); (5) most studies used archival data; and
(6) most studies assumed or ignored if the variables being used for definition of
groups were "purposively manipulated" by the organization. Some of the same
observations are valid for many studies conducted since 1986 (see Thomas and
Venkatraman 1988; Barney and Hoskisson 1990). Both McGee and Thomas

(1986) and Thomas and Venkatraman (1988) recommend that future research

29

explore managerial perceptions of strategic groups, which some researchers
(e.g. Porac et al. 1989, Reger and Huff 1993) have begun to do.

Barney and Hoskisson (1990) find that the two key assertions of the
theory-that groups exist and that they, at least to some extent, influence firm
performance-have “yet to be demonstrated” (p. 187). Speaking to the first
assertion, that the existence of groups has not been demonstrated, these
authors argue that the mere existence of intra-industry firm heterogeneity as
demonstrated by Hunt (1972), Porter (1976), and others, is a necessary but not

sufficient condition:

Strategic group theory requires that not only are there differences between firms
in an industry, but also that sets of firms in an industry implement similar strategies
(p.189)

They find that much of the published work since 1977 has been focused
on the finding the existence of groups of similar firms in an industry by using
some form of cluster or factor analysis (eg. Hatten 1974; Harrigan 1985; Hergert
1983). This approach, these authors maintain, has severe limitations. The
application of the clustering algorithm (or factor analysis) to discovering strategic
groups rests on the “untested assertion” (p. 189) that these groups actually exist
(eg. Hatten and Schendel 1977, p. 101). But, the authors maintain that this is
tautological: to start with an assumption that groups exist, then use a method
that is guaranteed to generate groups or clusters, and then use these clusters to
demonstrate the existence of groups (p. 189—190). As they point out, these

techniques resulted in finding groups in all industries studied. In summary, the

30

authors’ point is that regardless of whether an industry has the strategic group
structure, these techniques will “find “ some groups.

A second assertion of the authors concerns the relationship of firm
performance and group membership. This assumption depends on the concept
of mobility barriers. They state that Caves and Porter (1977) did not give the
researcher any clue on how to specify mobility barriers apart from a few
examples. In this, these authors concur with McGee and Thomas (1986)’s
criticism that “the existing literature appears to justify the existence of group
structure by their contribution to explaining differences in profit rates” (p. 101).
Thus, the observed relationship between group membership and firm
performance is taken as evidence of the existence of mobility barriers (p. 192).

The authors use their clustering example with the food processing
industry data to illustrate that different clusters of the same set of firm can yield
significant differences in firm performance by group. Using two sets of variables,
the authors are able to generate two sets of clusters with mostly different
member firms. The question they ask is which set of variables represent the
mobility barriers? They state, “the existence of performance differences between
groups does not necessarily mean that mobility barriers among groups in an
industry have been identified” (p. 194). In fact, there might be other variables
that affect firm performance and may be more important mobility barriers in an
industry (p. 194).

Barney and Hoskisson offer the following suggestions in order to address

these limitations of strategic group research:

31

1. The preferred solution: Develop a probability theory associated
with cluster and factor analysis which will give the researcher the
ability to reject a null hypothesis that for any given data the
strategic groups do not exist.

2. Develop a theory, probably grounded in IO economics, to predict
the existence and nonexistence of groups in different industries.

Because they are not optimistic that these significant challenges posed by their
proposals can be met, they suggest that strategic group theory be rejected for a
better theory that will be able to explain above—normal profits based on
idiosyncratic (i.e. nonimitable) attributes of individual firms (see Barney 1990;
Conner 1990).

While far from advocating an abandonment of the theory, Thomas and
Venkatraman (1988) assert that strategic group research has to move beyond
showing the “mere existence of some grouping within an industry [as it] is not a
significant research result within strategic management” (p. 546). Further, the
definitions of industry used in these studies, according to these authors, have
traditionally used SIC codes and have been in “terms of classical industry
categories, largely limited to national boundaries” (p. 546). They consider it more
appropriate to adopt a more comprehensive definition of competition and
industry (including input, process and output) within a global perspective.

Another observation made by these authors is that there is a lack of
clarity in the description of groups. They describe three generally accepted
criteria for groups: (1) each group’s member firms follow similar strategies; (b)
member firms resemble each other more closely than nonmember firms; and (c)

the responses to external threats and opportunities of member firms are going to

32

be similar. The authors state that cluster analysis may provide support for the
first two criteria, the third criterion is usually not tested. No study to date has
developed groupings based on all three criteria.

In relation to the third criterion concerning strategic behavior of member
firms, Thomas and Venkatraman stress the need to develop criterion variables,
such as use of multidimensional performance measures, to discern differences
across groups. Another criterion variable could be future strategic behavior that
could be predicted from the group composition. In short, according to these
authors, strategic groups should not be an end of strategic management
research, but a starting point (pp. 552-553).

The cognitive stream of strategic group research also has its own
limitations. One of them is that researchers have restricted their choice of
industries to local firms (e.g. retailing, banking, knitwear). Another limitation has
been their lack of attempt to bridge the two different methodologies (that is,
those using secondary and primary information).

On the one hand, these studies perhaps use the most appropriate method
to define strategic groups by using the perceptions of executives who, unlike
scholars, as participants have a enormous stake in their firm’s performance and
must grapple with issues about their industry. But, at the same time, these
studies have to move forward to a consideration of other aspects of strategic
group theory, such as mobility barriers. As McGee and Thomas (1986) and
Thomas and Venkatraman (1988) have suggested an immersion in an industry

might yield more insights and move the research forward in this field.

33

By attempting such an immersion in a single industry (the U.S. tire
industry), this study attempts to address several of these issues. It seeks to
combine the approaches of these two diverging streams of research. Using a
largely interpretive approach, the study also addresses other understudied
aspects of strategic group theory, such as performance asymmetries and

mobility barriers that have yet to be addressed by the cognitive research stream.

THE COGNITIVE APPROACH

As background, this section summarizes the cognitive approaches to
studying organizations. This includes a review of literature concerning
managerial characteristics, including cognition, as a way of providing a raison
de’tre for such an approach in the study of strategic groups.

Walsh’s (1995) general framework for classifying research on managerial
and organizational cognition is discussed. A related stream of research focusing
on the top management team (Hambrick and Mason 1984) is briefly presented
to further justify the use of perceptions of top managers in this study. Finally, the
categorization process underlying schemas or knowledge structures is
explained.

There is an increasing advocacy for and use of the cognitive approach in
management research (eg. Reger and Huff 1993; LangfieId-Smith 1992; Brown
1992; Fiol and Huff 1992; Reger 1990; Stubbart 1989; Dutton, Walton and
Abrahamson 1989; Ginsberg 1989; Dutton and Jackson 1987; Fombrun and

Zajac 1987). It is argued that this approach, "with its different emphasis on what

34

is important, can enrich and expand the theory, research, and practice of
strategic management" (Smircich and Stubbart 1985).

Walsh (1995) has reviewed the development in the field of managerial
and organizational cognition over the past decade. He contrasts the growing
interest in this field with the antecedent theories, such as population ecology
(Hannan and Freeman 1977), resource dependence (Pfeffer and Salancik 1978)
and transaction cost economics (Williamson 1975) in which managers are
peripheral to the issue of firm performance, at least as some writers have seen it
(p. 280).

From the cognitive perspective, managers are assumed to be information
workers who “spend their time absorbing, processing, and disseminating
information about issues, opportunities and problems” (Walsh 1995). These
information worlds within which managers operate are extremely complex and
ambiguous. In order to facilitate information processing, decision-making, and
solution-finding, the managers, like all individuals, use knowledge structures (or
mental maps or schemas ) to simplify, thus make tractable, their environments.

Two reasons cited by Reger and Huff (1993) for the use of the cognitive
framework are cognitive simplification (e.g. Schwenk 1984; Simon 1952) and
elaboration. The two processes-pf simplification and elaboration-ere opposites.
The first is involved in what Simon (1952) called "bounded rationality", in
contrast to the classical "hyperrational" economic man. Human beings have
finite cognitive skills and cannot attend to all the alternatives and be able to

know all the outcomes associated with those alternatives. In fact, according to

35

Simon, decision makers can only cycle through the alternatives sequentially and
they stop looking for alternatives when they find one which "satisfices" them.

The elaboration process, on the other hand, helps fill gaps in information
for the decision makers so they can make sense of their environment. These
gaps are often filled in with information consistent with a person's beliefs (Reger
and Huff 1993; Barnes 1984).

Walsh has developed the framework in Figure 2.3 to examine the
managerial and organizational cognition literature. While, demonstrating the
richness of this literature, Walsh’s framework also reveals the understudied

areas.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INFORMATION
ENVIRONMENT
Development KNOWLEDGE Use
ORIGINS '———" STRUCTURE CONSEQUENCES
Walsh (1995)

FIGURE 2.2 Framework for Knowledge Structure Research

In the above framework, the “information environment” (shaped like a
rectangle) represents the complex environment in which a manager operates
and make decisions. The “knowledge structure” (shaped like an ellipse)

represents the manager’s (imperfect) representation, or schema, of the

36

information environment: “a mental template consisting of organized knowledge
about an information environment that enables interpretation and action in that
environment” (Walsh 1995, p. 286). The “origins” shows how the knowledge
structure develops and “consequences” are the result of the manager using the
knowledge structure to make decisions. The recursive relationship between
consequences and origins is supposed to suggest the fluid nature between them
(Walsh 1995, p. 282): consequences helping reshape the knowledge structure.

While this stream of research has its origin in psychology, the major
contributions of the psychologists have been (1) to establish the construct
validity of knowledge structures, and (2) that these structures “affect information
processing in predictable ways” (Walsh 1995, p.283). The management
researchers have built on the foundations laid by the psychological researchers
and have broadened the examination to all the relationships in the Figure 2.2.

As Walsh points out, the theoretical musings of the importance of
individual-level representation of information environment can be traced to
“frames of reference” and “screens” (Cyert and March 1963; March and Simon
1958), to more recent usage such as “managerial thought structures” (Reger
1990), “core causal beliefs” (Porac, et al., 1989), and “selective perception“
(Hambrick and Mason 1984). This research has studied both the content (for
example the information environment represented) and the structure of the
knowledge structure (for example, how schemas are structured).

One stream of research examining the utility of knowledge structures has

been in the field of strategic management where the “positioning of an

37

organization within its environment is considered to be the result of purposeful
choice” (Walsh 1995; Child 1972). Research has been conducted at the
individual (e.g. Dutton and Jackson 1987; Porac and Thomas 1990; Smircich
and Stubbart 1984), group levels (e.g. Klimoski and Mohammed 1994, Levine et
al. 1993, Prahalad and Bettis 1990), organizational level (Lyles and Schwenk
1992, Poole et al. 1990), and industry level (Porac and Thomas 1990,
Fiegenbaum and Thomas 1995).

The group-level representation is similar to an individual-level
representation of the information environment, except that it develops when a
group of individuals (such as top managers in a firm) is brought together (Levine
et al. 1993). A group makes a decision within the boundaries of such a group-
Ievel knowledge structure (Walsh 1995, p. 292).

Similarly, the organization-level representation is at another aggregative
level, that of the “organizational mind”, and is stored in the information sharing
among an organization’s members, it records and routines, and in the
organizational structure itself (Walsh 1995).

The fourth level of representation, that of industry, is of particular interest
to the present study. At this level, Huff (1982) and Spender (1989) maintain that
the operation of a strategic frame or industry recipe, that develops through a
socialization process in the industry, accounts for why the perceptions, and even
strategic actions, of people in different firms come to resemble. The studies at
the industry-level representation, discussed earlier, have dealt with the

perceived group structure of grocery store managers (Gripsrud and Grenhaug

38

1985), Scottish knitwear industry (Porac et al. 1989) and banking industry
(Reger and Huff 1993).

A closely related stream of research at the group level has been
Hambrick and Mason’s (1984) “upper echelon” theory (also referred to as “top
management team or TMT theory) on how TMT characteristics-such as age,
education, socioeconomic background, functional experience, corporate
influences, and group heterogeneitynhelp explain organizational performance.
While not all research in this area has been about managerial cognitions, some
studies (eg. Shanley and Correa 1992) have attempted to do so. But this

research reinforces the importance of managers in strategy formation processes.

Cognitive Categorization

The mechanism underlying cognitive simplification at the industry level
(as well as other levels discussed by Walsh, 1995) can be explained by the
cognitive categorization model, which has been suggested for studies involving
strategic groups (Reger and Huff 1993; Fiol and Huff 1992; and Shaw 1990,
among others). According to cognitive categorization theory, people suffer from
information overload and the only way they can cope with it is to develop
cognitive structures that help them organize and process this information and
make sense of it (Rosch 1975). These structures are based on schemas or
categories that accumulate over time as the person experiences his or her
environment. These categories include similarly perceived attributes and reflect

the structure of the object in the environment (Dutton and Jackson 1987).

39

Therefore, to the Scottish knitwear manufacturers (Porac et al. 1989) the

schema of the product category "knitwear" may look something like the following

 

 

 

 

Figure 2.3.
“Textiles”
//’ l \
“Hosiery” “Knitwear” “Lace”
/ \
“Fully Fashioned” “Fashion Classic”
“High Quality“ “The Rest” “Fully Fashioned” “Cut and SeW’

Figure 2.3 Schema of Scottish Knitwear Industry

The Scottish manufacturers see themselves as makers of "high quality"
"fully fashioned" "knitwear" from the "textiles" product category. Using this kind
of category processing, these managers are able to quickly and efficiently able
to define their competitors (those with the same characteristics) from the "rest"
who are ignored.

According to Rosch and Lloyd (1978), there are two general principles
involved in the formation of categories: cognitive economy and perceived world
structure. According to the first principle, an individual (e.g. manager) wishes to
gain from one’s categories “a great deal of information about the environment

while conserving finite resources as much as possible” (Rosch and Lloyd 1978,

40

p. 28). This leads to the individual to economizing on the number of categories
he or she creates: a different category is created only if that differentiation is
relevant to the purpose at hand. According to the second principle, the world is
not “an unstructured total set of equiprobable co-occurring attributes. Rather,
the material objects of the world are perceived to possess... high correlational
structure” (p. 29). Therefore, combinations of what individuals perceive as
“attributes of real objects do not occur uniformly” (Rosch 1978). Thus, among
such real attributes as fur, feathers, and wings, based on experience one knows
that wings co-occur more often with feathers than with fur.

Category systems also have vertical and horizontal dimensions. The
vertical dimension concerns the levels of inclusiveness of the category and
includes superordinate, basic, and subordinate levels. Figure 2.4 shows the
vertical dimensions for two categories: furniture and tree. The horizontal
dimension is present in the demarcation between chair and table or oak and
maple at the basic level, or in the demarcation between furniture and tree at the
superordinate level.

Prototypes

According to Rosch (1978), most categories do not have clear-cut
boundaries. For example, in the above example, while furniture and tree can be
easily separated, the distinction between oak and maple (or chair and table) is
not as clear cut. In such cases of what are continuous categories (e.g. oak,

maple, and other kinds of trees), separateness of each category (e.g. oak) is

41

 

 

 

vertical horizontal _
dinension dimension

Superordinate Level: F umiture Tree

/ /
/ \\ /./ \\

Basic Level: Chair Table Oak \Maple
y Subordinate Level: Kitchen Living-room Kitchen Living-room White Red Silver Sugar
‘ chair chair table table oak oak maple maple

 

 

 

Adapted from Rosch (1978)

Figure 2.4

achieved in terms of “clear cases” or prototypes rather than exact boundaries.
Prototypes of categories are those that distill the essential features of the
schema members (Crocker, F iske, and Taylor 1984).

Thus, prototypes are a central component of the categorization process

(Walton 1986). According to Walton,

jljndividuals categorize organizations according to similarities between organizations“
features and prototypical attributes of organizational categories. An organizational
category consists of organizations that an individual considers equivalent for some
purpose. Attributes labeling features shared by organizations in a category capture
this sense of equivalence. Each organization exhibits some attributes captured in
the category, has several attributes in common with some other organizations in the
category, but few attributes in common with all organizations. Furthermore, an
abstract representation of most typical attributes of organizations in a category
defines that category prototype. Whether organizations are categorized auto-
matically or deliberately, prototypical attributes of categories are used subse-
quently when searching for Information about organizations and when recalling
their features. (p. 682)

In the Scottish knitwear example, the path from root of the tree ("Textiles")

to the lowest branch ("High Quality") is a prototype. For some members of the

42

Scottish knitwear manufacturers, there may be additional details that might also
be important, but are not part of the prototype because they are not shared. In
essence, prototypes are people’s perception of “goodness of membership” in the
category (Rosch & Lloyd 1978, p. 36), and more prototypical a member is of a
category, then it has more attributes in common with other members of that
category and fewer with nonmembers (Rosch and Mervis 1975, Walton 1986).

Walton’s (1986) demonstrated the presence of prototypical thinking
among organizational members. He studied the categorization processes of
managers from the financial services industry. His approach elicited
descriptions of the managers’ own firms as well as competing firms. In
commercial banking, for example, the analysis revealed two clusters of banks:
one consisting of retail banks (specializing in similar services for individuals) and
the other of diversified banks (following a broader strategy by providing a full
range of services to all markets).

Thus, categories are useful for information processing by an individual as
well as for communicating with others in daily interactions (Dutton and Jackson
1987). Organizational decision makers employ cognitive categories for similar
purposes, enabling them to communicate and cope with vast amounts of
information.

Categorization research shows that category-consistent information is
recalled much more readily than category-inconsistent information, especially
over long periods (Dutton and Jackson 1987). When there are gaps in

information about a stimulus, category-consistent is likely to fill those gaps.

43

Thus, people may infer the presence of certain attributes based on their
category membership, for example in stereotyping.

Dutton and Jackson (1987) also point out that while gap filling may occur
in the absence of information, distortion may occur if the information is

ambiguous, which is the norm for strategic issues.

Applicability to this Study

The applicability of cognitive categorization to this study is logical. This
study is focused on human actors (managers), who face a complex information
environment about which they have to make some sense in order to make
correct choices. Normally, in their role as decision makers, managers are
confronted by vast amounts of information pertaining to their business:
information that is internal to their organization and its processes, and
information about the external environment, such as technology, competition,
customers, and distributors. The managers need to process all this information
and make sense of it and then be able to communicate it with others (Dutton and
Jackson 1987).

Theory-making, too, like other human activities, is a cognitive
simplification process akin to categorization. A parsimonious set of constructs
are identified and a set of relations specified among them. This study is based
on a theory which utilizes three constructs-strategic group, strategic

capabilities, and performance-and the linkages among them (Figure 2.1).

44

One of the two methods used in this study, that of managerial cognition,
seeks to identify categories that are used by managers in partitioning their
competitors. These categories consist of groups of firms in their industry. To
make sense of, hence render manageable, a large number of competitors that
constitute their industry, these managers use some firm characteristics that are
meaningful to them (just as managers were reported to have done in studies by
Reger and Huff 1993, and Porac et al. 1990), In this study, it is hypothesized
that the managers will use “strategic capabilities” as a way of defining
categories or groups of competitors. Because of the longevity and the relative
stability of the U.S. tire industry, one can also expect that the schemas of the
industry held by the various participants will not be too idiosyncratic, but will
have many common elements (eg. number of groups, group membership, and

group characteristics).

STRATEGIC CAPABILITIES

One of the main objectives of this study is to examine why sometimes
there are large intra—group differences (e.g. Cool and Dierickx 1993). The focus
here is on the role of strategic capabilities in explaining such differences. Porter
(1979) has pointed out that firm-specific differences in endowments, strategy
implementation, or risk profiles could result performance differences among
group members.

Lawless et al. (1989) suggest that the influence of strategic group

membership on performance “should be weighed against each member’s unique

45

Lawless et al. (1989) suggest that the influence of strategic group
membership on performance “should be weighed against each member’s unique
resource position, which we call its ‘capabilities’” (p. 250). They go on to
recommend that if individual capabilities confound the membership-performance
linkage, then by adding them to the model may explain the equivocal intra-group
performance variance. found in some strategic group studies (258).

As Lawless et al. (1989) contend, individual firm capabilities in the context
of strategic groups has been understudied. This study proposes to study these
strategic capabilities and whether these might explain, at least partially, any
performance differences that are found within a group.

This section briefly discusses the role of strategic capabilities in general
and briefly describe those that are relevant to the U.S. tire industry (identified
through a combination of literature review and opinions of managers and
industry experts).

The term “strategic capabilities” in this study applies to the various
demonstrated and potential abilities of the firm “to accomplish, against the
opposition of circumstances or competition, whatever it sets out to do“ (Andrews
1987). A strategic capability is also a firm’s strength or distinctive competence
which is “more than what it can do; it is what it can do particularly well”
(Andrews 1987). It can be financial, managerial, functional (e.g. marketing), or
organizational; it may even derive from a company’s history or reputation (Porter

1 980; Andrews 1 987).

46

Also Implicit in the a strategic capability is the concept of core
competence (Prahalad and Hamel 1990). As such it is a “a bundle of skills and
technologies that enables a company to provide a particular benefit to
customers”. Thus strategic capabilities includes tangible and intangible assets
as well as skills and processes.

The strategic capabilities used in this study were developed through
interviews with U.S. tire industry managers and industry experts, as well as
through industry literature. These are (1) marketing (including marketing
orientation; advertising and brand equity); (2) long-term customer relationships
(involving organizational customers and consumers); (3) innovation (including
technology, and research and development [R&D]); (4) quality (especially
product quality); and (5) efficiency.

1. Marketing. Animating the marketing function is the notion of the
marketing concept (e.g., Kotler 1984). It implies a focus on customer needs as
well as the on the firm’s pursuit and achievement of its organizational objectives
by serving those needs (McCarthy and Perrault 1996).

But marketing functions (eg. advertising, sales promotion, distribution
channels) have being frequently studied, the marketing concept itself, until
recently, was not. With the rise of global competition and the growing emphasis
on marketing in firms, perhaps, the scholars have turned their attention to the
marketing orientation (e.g. Shapiro 1988; Deshpande and Webster 1989; Narver

and Slater 1990; and Kohli and Jaworski 1990, 1992; and Deshpande et al.,

47

1991 ). The term "marketing orientation" is the implementation of the marketing
concept (Kohli and Jaworski 1990; McCarthy and Perreault 1996).

Kohli and Jaworski (1990) operationalize market orientation in terms of
three processes: intelligence gathering, intelligence dissemination throughout
the organization, and the organization‘s responsiveness to the information. This
study will use this operationalization.

Additionally, as part of a firm’s marketing activities, this study will also
include a firm’s efforts to build and maintain (1) brand equity (including
promotional activities to support this) and (2) to build and maintain relationships
with various customers (e.g. automobile manufacturers, distributors, and final
consumers).

Brand equity is a “set of brand assets and liabilities linked to a brand, its
name and symbol, that add or subtract from the value provided by a product or
service to a firm and/or to that firm’s customers” (Aaker 1991). Underlying brand
equity are such assets (or liabilities) as brand loyalty, name awareness,
perceived quality, and proprietary brand assets as patents, trademarks and
channel relationships (Keller 1995; Aaker 1991). According to Aaker, brand
equity has an important impact on a firm’s profitability as, among effects, it
enables a firm to charge a premium price, retain customers (through brand
loyalty), and gain new customers. Advertising and promotion expenditures are a
major determinant of name awareness, a brand equity component (Aaker 1991).

Another important component of the components of brand equity is brand

loyalty, which determines the firm’s customer, or buyer-seller, relationships. In

48

the case of the tire industry, these can include both relationships with the
distributors as well as with the end users. Buyer-seller relationships that a firm
builds and maintains not only contribute to its future revenues but may constitute
real or imagined “switch costs” that its competitors have to overcome, thus giving
it a competitive advantage (Porter 1980).

2. Lang-term Customer Relationshigs. Long-term relationships of buyers
and sellers are a function of mutual dependence and the extent to which they
trust one another (Ganesan 1994). The mutual dependence and trust In a buyer-
seller relationship, such as involving a tire company and an automobile firm, is a
function of transaction-specific investments, reputation, and satisfaction (Kalwani
and Narayandas 1995, Ganesan 1994, Helper 1991).

3 & 4. Innovation (including technology and R&D) and Product Quality.

Both Innovation and product quality are highly related and affect a firm’s market

 

share and its profitability (for example, Buzzell and Gale 1987), hence are
treated here together. Technology consists of product, process, and
management technology, but of these, product technology receives most of the
attention (Capon and Glazer 1987). An example of process technology is the
manufacturing process a tire firm uses to make tires. Manufacturing technology
involves both organizational (such as marketing, manufacturing, and logistics)
and managerial (planning, controlling) functions (Capon and Glazer 1987).
According to the Schumpeterian hypothesis (Schumpeter 1952, Dorfman
1987), rapid industrial innovation requires large scale firms with considerable

market power (market share!) and rests on the premises that large firms have

49

market power (market share!) and rests on the premises that large firms have
greater incentive to innovate, have greater financial resources to do so, have the
ability exploit the economies of scale in R&D and to spread the risk of R&D
(Dorfman 1987).

While a mature and slow growth (less than 5 percent growth rate), the
U.S. tire industry as a whole is characterized surprisingly by a high degree of
innovation, with the largest firms in the vanguard of R&D expenditures (Walters
1995). This innovation manifests itself in new products: degree of new product
development, and quality of products.

5. Efficiency. In Porter’s (1980) strategy framework, the three generic
strategies are differentiation, overall cost leadership, and focus (the latter could
have either a differentiation or low-cost emphasis). Thus a differentiation
strategy, in which marketing and innovation would play a major role, is distinct
from the low-cost strategy where the emphasis is on building a competitive
advantage efficiency and cost-cutting in everything the company does. But, as
Porter states, even a firm that follows a differentiation strategy (as many tire
firms do), may still also include efficiency as an objective. As part of a mature
industry, the major tire firms, while building strong brand franchises, also put
great emphasis on efficiency to maintain or increase profitability.

In summary, these capabilities are highly interrelated with each other.
For example, marketing in all its forms is related to market share, product
quality, and innovation. Efficiency and quality are related to the use of

technology and R&D. This study will examine the role of these capabilities in

50

strategic group formation as well as in causing differences in intra-group profit

rates.

PERFORMANCE

The final construct in the model deals with performance. Both marketing
and strategy literatures are replete with studies that attempt to link various
aspects of the marketing and business strategy to one or more measures of firm
"performance". The point is why study strategy if it has no performance
implications whatsoever? This obsession is not limited to the field of strategic
management. It can be found in marketing, in segmentation studies or modeling
various marketing mix variables. How do advertising expenditures impact firm
sales (or market share or profits) is a common concern in advertising research.
As seen above, impact of market orientation on performance is similarly one of
the expected goals.

The topic of organizational effectiveness was usually neglected by the
theorists as it represented, at least in part, a practical, not a theoretical concern
(Scott 1987). But with time, organizational analysts have begun to perceive a
theoretical justification in examining the consequences of different structures or
processes. Further impetus to the study of organizational performance or
effectiveness was given by the contingency theorists (e.g. Woodward 1965,
Lawrence and Lorsch 1967) who contended that some structures were better

suited to certain environmental conditions than others.

51

Performance, however, is neither a unidimensional nor even a simple
construct, though it may appear so. In many cases, it is not even easily
measurable or even publicly available. Market shares or returns on investment
figures are zealously guarded by companies. But performance measures need
not be of a financial nature. Customer or employee satisfaction measures may
also indicate an organization's performance. Longer a firm survives indicates to
a great extent its performance, especially in the light of the liability of newness
phenomenon.

The truth is that there are different types of performance measures.
Campbell (1977) has identified at least thirty different criteria, including
productivity, profits, growth, turnover, and stability.

One reason for the diversity of measures is directly attributed to the
diverse conceptions of organizations held by different scholars: each conception
will have its own distinctive criteria for evaluating organizational effectiveness
(Scott 1987, p. 320).

There are naturally innumerable problems that attend this diversity, and
reflect the fact that the different measures in evaluating organizational
performance are products of different arbitrary models of organizations, that they
reflect individual preferences and values and therefore "the best criteria for
assessing effectiveness cannot be identified" (Cameron 1986, p. 88).

One might also detect some problems in the performance measures used

in the three marketing orientation studies. Narver and Slater (1990) used

52

profitability as the performance measure that is affected by market orientation.
One can rightfully argue that there are so many other factors that affect
profitability. Kohli and Jaworski (1990) used multiple measures of performance,
both objective and subjective. They included business performance (market
share and return on equity), espn't de corps of the firm's employees, and
organizational commitment. Here again, there is some arbitrariness, though
perhaps less than with Narver and Slater (1990), in any of these measures, as
multiple factors contribute to all of them. Likewise, Deshpande and Farley (1990)
used market share and profitability, but also used changes in market share and
sales. The last two measures are perhaps more appropriate for a study involving
marketing orientation: if a company is more market oriented than its competitors,
then it follows that it will attract customers away from them.

To be fair to these authors, they are not claiming that marketing
orientation is the sole cause of performance, but is strongly correlated with it.
After all it has been an article of faith that a firm's incorporation of the marketing
concept leads to superior performance for the firm, otherwise what is the fuss all
about?

Attempts at parsimony have been made by some researchers. For
example, Walker and Ruekert (1987) identify three performance dimensions that
may be of interest to top corporate or business unit managers, and especially

marketing managers:

53

1. Effectiveness: Measures firm's performance against those of the

competitors.
Examples: sales growth; market share changes;

2. Productivity: Measures outcomes of a business' programs in to the
resources employed in implementing them.

Examples: return on investment, profitability as a percentage of sales.

3. Adaptability: Measures a business's success in responding over time to
environmental changes.

Examples: number of new successful product introductions, percentage of
sales represented by new products, longevity.

This study will use both “holistic” (and traditional) performance measures,
such as net margin. as well those that are more specific to a strategic capability
like marketing orientation or product innovation, such as market share changes
or new product introductions.

The responsiveness of an organization to both customer needs and
competitive actions can be measured using outcomes such as new products in
the portfolio.

Changes in market share and sales (especially relative to competitors),
measures used by Deshpande and Farley (1990), provide a reasonable choice
for a performance measure of a firm's responsiveness.

Likewise, adaptability measures, such as sales (in units or dollars) of new
products as a percentage of total sales, or new products as a ratio of total
products in the business unit's portfolio, may be appropriate for use in a market
orientation study as they reflect a firm's responsiveness to customer needs.

Interestingly, in their long-term PIMS work, Buzzell and Gale (1987) have found

54

a negative impact of new product (as % of sales) on both return on investment
(ROI) and return on sales (ROS). Perhaps the explanation of this might be that
there is a lagged effect of new products on profitability and a times series
analysis could show this better. They also found a negative impact on ROI and
ROS of another measure that could be associated with marketing orientation:
marketing expense (as % of sales). However, product and service quality (also
possible market orientation performance measures) were positively related to

both ROI and ROS.

SUMMARY

This chapter has explored the literature pertinent to the various constructs
in the model. It started out by exploring the strategic group literature and found
some shortcomings to the archival approach, especially when it came to finding
finer grained explanations for conflicting membership-performance links. Next, a
case was built on why it would be profitable to study managers' perceptions as
basis for strategic group formation: because evidence from theory and research
(eg. TMT theory) suggested positively the influence of managers on strategy-
making in firms. Next, this chapter discussed some promising work using the
cognitive approach in strategic group area, and the method of categorization
was briefly presented to show its usefulness in a study of managers'

perceptions.

55

Discussion of marketing orientation and other strategic capabilities was
presented. Finally, a discussion of performance issues concluded the discussion

of all the elements that are part of the proposed model.

SUMMARY OF ISSUES TO BE STUDIED

Strategic group researchers (Porter, 1979; McGee and Thomas 1986;
Venkatraman and Thomas 1988; Barney and Hoskisson 1990; and Reger and

Huff 1993) have identified several issues as well as shortcomings of previous

studies.
This dissertation focuses on the following:

1. Using both managerial perceptions and archival data, this study tries
to overcome the problems identified by both McGee and Thomas (1986)
and Barney and Hoskisson (1990): that is, the existence of groups
and of mobility barriers. Need for statistical testing is obviated by
including most of the major firms in an industry. Though the problems of
generalizability remain.

2. The observation by Caves and Porter (1977) and others of the
persistence of mobility barriers in certain industries will be examined in
relation to the U.S. tire industry where this has been true for several
decades. And as Mascarenhas and Aaker (1988) have stated, the stability
of strategic group membership would indicate the presence of mobility
barriers.

3. The study examines intra-group performance difference in the U.S. tire
industry by evaluating differences in strategic capabilities of member
firms.

In summary, since this study uses both major methods for identifying

groups, it will help establish a potential for method convergence, hence suggest

a more robust approach to studying groups.

CHAPTER 3

PROCEDURES AND METHODS OF INVESTIGATION

In this chapter, the underlying model and research questions of this study
are discussed first. Next, a brief rationale for using the multimethod approach is
presented. Then, the constructs of the model are developed and the issues
relating to their measurement using multiple methods are described. And finally,

the data sources, the sample, and analytical techniques are discussed.

THE MODEL AND RESEARCH QUESTIONS
The basis for discussion in this section is the model shown in Figure 3.1.
This study will address the following research questions:

1. Do managers and industry experts view their industry in terms of
strategic groups? Do the member firms follow similar strategies?

2 Is there a convergence in defining strategic groups using the
method of measuring perceptions of managers and industry
experts and the method using archival data?

2. Are there mobility barriers surrounding the groups identified by
the two methods (by managers and archival data)?

4. Do certain strategic capabilities help explain the variance in
profitability of member firms of a strategic group?

56

57

 

STRATEGIC
GROUP

 

 

 

V

 

I (1) PERFORMANCE

 

 

 

STRATEGIC (2)
CAPABILITIES
(mobility barriers)

 

 

 

 

FIGURE 3.1 The Model

Research Qgestion 1:

This research question asks:

Do managers and industry experts view their industry in terms of
strategic groups? Do the member firms follow similar strategies?

This research question proceeds directly from the comment made by
McGee and Thomas (1986) about the validity of imputing managerial intention to
groups defined through secondary data.

There are several implications here. First, managers, like most
individuals, use some way of simplifying their information environments to make
everyday decisions. This simplification extends to competitors and customers.
Thus, while the industry may be composed of many firms making close
substitutes (e.g. rubber tires), the managers in these firms choose only to focus

on those rival firms with whom they compete most directly and most often.

58

But as Porac et al. (1993) have pointed out, managerially perceived
grouping of rivals is not sufficient by itself. There must be two other conditions:
strategies of group members must be similar (Caves and Porter 1977) and a
group must be surrounded by mobility barriers (Barney and Hoskisson 1990;
Mascarenhas and Aaker 1989).

The first condition for a strategic group leads directly to the second half of
Research Question 1. For the managerial defined groupings to be valid, the
strategies followed by the members should be similar. Both aspects of this
question will be examined by asking managers specific questions. In addition,
industry experts and secondary sources

will be used to provide supplementary support.

Research Qaestion _2_

The second research question is:
Is there a convergence in defining strategic groups using the
method of measuring perceptions of managers and industry
experts and the method using archival data?
The purpose of this question is to provide a bridge between the two major
research methods used in strategic group research. If there is an agreement
between strategic group definitions derived from these two major methods, the

validity of strategic groups is advanced considerably. This study will use cluster

analysis against available archival data to determine strategic groupings, then it

59

will compare these groups with those the managers and industry experts

defined.

Research Qaestion 3:

The third research question asks:

Are there mobility barriers surrounding the groups defined by the
managers and the industry experts?

The question of mobility barriers will be addressed by first identifying core
strategic capabilities of the major tire firms as a whole and then, through primary
and secondary sources, examining those capabilities that may constitute mobility
barriers.

The presence of mobility barriers can also be deduced through the
existence of stable industry concentration as well as sustainable market shares

of member firms. This study looks at the historical record for this.

Resaarch Qgestion 4:

This research question asks:
Do certain strategic capabilities help explain the high variation in
profitability of member firms in certain strategic groups?
This study will investigate the equivocal results of the strategic group -
performance link of past research (eg. Thomas and Venkatraman 1988; Cool

and Dierickx 1993). Porter (1979) himself suggested that certain factor

60

endowments, capabilities, or manner of implementation of strategies could cause
differences in profitability rates within a strategic group. This study will examine
whether differences in strategic capabilities of tire firms holds a clue to such

variances in profitability rates.

THE MULTIMETHOD APPROACH

This study uses the multimethod approach to studying strategic groups In
the U.S. tire industry. This has been necessitated in part by the shortcomings
(see Chapter 2) of past studies. To advance strategic group research further,
McGee and Thomas (1986) and Thomas and Venkatraman (1988) have
advocated a new direction using more in-depth knowledge of the industry and
the use of different approaches, such as case studies and managerial cognition,
in addition to the “traditional” multivariate statistical analyses of archival data.

As noted in Chapter 2, there are several shortcomings to using
multivariate techniques, especially cluster and factor analysis, with archival data.
As Barney and Hoskisson (1990) pointed out, cluster analysis yields groups
regardless of whether there are any strategic groups in a particular industry.
Also, cluster analysis might yield different group configurations using different
sets of variables: firms, placed in one group using one set of variables, would no
longer share membership when a different set of variables are used for

clustering.

61

Another shortcoming of using archival data is that managerial intention is
imputed to managers rather than actually measured (McGee and Thomas 1986),
as would be in the cognitive approach. Further, the predominant number of past
studies defined groups without taking into account for mobility barriers, a key
reason for strategic groups (Mascarenhas and Aaker 1989).

With regard to the cognitive approach, there is at least one major
shortcoming also. Does the identification of a group of direct competitors by
managers necessarily constitute a group? The identification may be a necessary
condition, but not a sufficient condition without also considering mobility
barriers. The presence of mobility barriers gives stability to a strategic group. An
absence of mobility barriers would prevent the formation of strategic groups
(Caves and Porter 1977).

A multimethod approach, then, recommends itself strongly to a research
domain, such as strategic group research, where there are proponents of
different methods, or styles, of research. The premise behind a multimethod
approach is that no method is perfect. As discussed in Chapter 2, while each
method can, and has, provided valuable insights into the strategic group
phenomena, the methods differ in the kinds of information they can provide and
the types of errors they are subject to.

The multimethod approach, according to Brewer and Hunter (1989), “is a
strategy for overcoming each method’s weaknesses and limitations by

deliberately combining different types of methods within the same investigations”

62

(p. 11). While the methods used in a multimethod approach are not new, it is the
“planned, systematic synthesis of these different research styles, purposely
aimed at improving social science knowledge” which is new (Brewer and Hunter
1989)

A familiar application of the multimethod approach is triangulation, or
multiple measurement. A triangulated measurement views a phenomenon from
different methodological perspectives with the purpose of getting consistent
results and measuring the phenomenon it seeks to measure. If two methods
yield conflicting results, then validity of both is cast in doubt; but when they
agree, the researcher is more confident (Brewer and Hunter 1989).

However, measurement is just one phase of a research project and must
follow the formulation of research questions (and the theory guiding them).
These then guide what is to be measured and help select methods that are
appropriate. Then, the actual measurements of appropriate variables,
individuals, and phenomena must be made and then analyzed using appropriate
techniques. Finally, the results must be reported with the conclusions supported
by the data. The multimethod approach guides all these phases of the research
project (Brewer and Hunter 1989).

This study will combine the method of case study (using telephone
interviews, secondary data, and historical analysis) and analysis of archival
financial data. This proceeds from the acknowledged shortcomings of using a

single method and the interest in seeking method convergence between the

63

methods defining the two streams of strategic groups research (see Chapter 2).
Each of the methods is discussed below.

An investigation of managerial cognitions (e.g. Reger and Huff 1993;
Porac and Thomas 1990) has the potential to yield insights into areas, such as
organizational capabilities involved In strategy formation that dry financial
numbers cannot reveal. In addition, industry experts, who follow the industry as
investment advisers or consultants, can be a source of objectivity and a
competing viewpoint, about important aspects of the industry.

In addition to studying perceptions of managers and industry experts, this
study apply of cluster analysis to financial data to yield strategic groups, as
many studies in the past have done. The purpose here is to compare these

groups with those defined by managers and industry experts.

The Case Study

Of the five major strategies available to the organizational researcher 1,
the case study is very well suited for the kind of exploratory purposes of the
present study. When the type of the research question is in the form of “how”
and “why", when the researcher has no control over behavioral events being
studied, and the focus is on contemporary events, the case study is an

appropriate research strategy (Yin 1989).

 

I The five strategies are: experiment, survey, archival analysis, history, and case study (Yin 1989).

64

In this study, for example one research question deals with mobility
barriers as evidenced in the stability of market shares of certain firms. In this
case the question, seeking an explanation for this phenomenon, deals with
operational links that need to be traced across many years. For this purpose, the
survey and the experiment will not be able to provide the needed evidence.
Some sort of historical analysis or case study will be needed.

Many of the same techniques used by the historical method are employed
in the case study with the addition of two sources of evidence which are usually
not included in the former method: direct observation and systematic
interviewing. The strength of the case study is the variety of sources that can be
used for it: documents, interviews, artifacts, and observations (Yin 1989). When
the data is idiosyncratic and perceptual, as in this study, the case study is
particularly appropriate.

There have been three criticisms made about case studies (Yin 1989):

1. They lack rigor.

2. They provide little basis for scientific generalization.
3. They take too long and result in massive, unreadable
reports.

Addressing the first point, Yin (1989) suggests a systematic program
covering all phases of the research project; this study will incorporate many of
these suggestions. In addressing the second point, Yin makes a distinction
between analytic and statistical generalization. Results of research strategies,

such as the case study and the experiment, are “generalizable to theoretical

65

propositions and not to populations or universes” (p. 21). In other words, in
using the case study, the researcher’s goal is to “expand and generalize theories
(analytic generalization) and not enumerate frequencies (statistical
generalization)” (p. 21 ).

To address the third criticism against case studies, Yin offers several
reporting structures that can be employed to organize the material and reduce

unnecessary verbiage. This study will follow some of these prescriptions also.

Definitions of Constructs and Measurement

The variables used in this study are described below under the these
constructs: (1) the strategic group construct, (2) the strategic capabilities
construct; and (3) the performance construct.
_S_t_r_aie_gic Grogp Constrtg

The strategic groups is defined using both methodologies. First,
using the cognitive approach, strategic groups are identified using a combination
of managers and industry experts’ perceptions of (a) number (and names) of
direct competitors and (b) strategic capabilities possessed by the managers’
firms.

Cluster analysis is then used with available secondary data, using
surrogate variables for strategic capabilities identified earlier by the managers

and industry experts.

66

Strategic Cagabilities I MotLlitv Barriers Construct

Strategic capabilities are identified using three main sources: the
managers, the industry experts, and secondary information (eg. trade journals).
The attempt will be made to identify only the major capabilities that give firms
competitive advantage. To identify mobility barriers, the study will first
investigate whether and if there are stable groups in this industry. Then, the
study analyzes certain capabilities that may give rise to, and help maintain,
these barriers.

Performance

While this study examines several performance variables, the main one
is return on sales, as it has been used in several previous studies (Harrigan
1985, Hatten 1974). It will be used in cluster analysis of strategic groups
(Research Question 3) as well as for examining variation in intragroup
performance variances (Research Question 4).

Other performance measures included are market share, new product
introductions, customer retention, and, for certain companies, brand equity.
These measures can be seen as “effects” of “causes” that lie within the firms’
strategic capabilities. For example, if the firm has strong technological
foundation it may be revealed in new products. A firm’s marketing orientation,
relative to its rivals, will lead to customer retention as well as market share (and

growth of market shares). As another aspect of a firm’s marketing orientation, a

67

firm’s advertising expenditures should result in greater sales, maybe profits, and
in building brand equity.

The operationalization of the these three constructs is summarized in
Table 3.1.

Table 3.1

Summary of Operationalization

 

Perceptions of Managers

 

Attributes and Industry Experts Archival Data
Strategic Groups (1) Perceptions of number of Cluster analysis of key
industry groups or “tiers” ; variables (see below under

(member firms in each group) “strategic capabilities') plus
return on sales

 

Strategic Capabilities Identified by Managers and

Industry Experts:

Marketing -advertising expenditures;
(advertising, brand equity, SG&A expenses
customer relationships)

 

-Market Share -market shares
-Innovation -R&D & capital expenditures
-Product Quality
Efficiency
Performance -Retum on Sales -Retum on Sales

-New product introductions
-Customer retention
Distributor relationships

 

 

 

 

 

The Sample

As Yin (1989) has argued, research using the case study method does

not technically deal with a “sample”, since that refers to studies of statistical

68

generalization (Yin 1989, p. 21). The term “sample” here is used in a general
way to describe companies to be included in the case study. This study will
concentrate on the major firms in the U.S. tire industry. The top ten firms
together account for 80 to 90 percent of sales in the tire market in the U.S.
(Modern Tire Dealer 1994a). Attempt to include at least one top-level manager
from each major firm was made. The criteria for selecting the manager was his or
her familiarity with the corporate strategy formation process.

There are several reasons for selecting the tire industry. First, the tire
industry is a major global industry that has not been examined in any previous
strategic group study. It is an important and visible industry in its own right, but
especially when seen through Its close association with the global automotive
industry. The U.S. market is the major tire market and accounts for over half the
global tire industry’s unit sales. Second, the major firms of the global tire industry
are also the major firms in the U.S. market. This makes the study of the U.S. tire
industry generalizable to the global industry. As Thomas and Venkatraman
(1988) and other have noted, the next stage in strategic group research must
include industries within a global context.

Another reason for selecting the tire industry is that after a hectic
consolidation of the 19805 and 1990, the U.S. tire industry is in a settled state
and another round of consolidation may be years into the future. The research
questions can be addressed without the presence of confounding variables. For

example, it is reasonable to expect that managerial perceptions about groups

69

would be more stable today than five or more years ago when some major

American firms (e.g. Uniroyal Goodrich, General Tire, Firestone) got acquired.

Data Gathering

The multimethod approach used in this case study very logically suggests
the use of multiple sources of evidence. There are several reasons for using
multiple data sources.

Brewer and Hunter (1989) write that the multimethod approach tests the
validity of measurements and theories by means of multiple datasets which
address the same research question from different viewpoints. The use of
multiple sources permits the development of “converging lines of inquiry” (Yin
1989) or a process of triangulation. Agreement between the data sets leads the
research to infer validity, while disagreement leads to an inference of invalidity.
To support such inferences, the data must be collected with truly different
methods that, while used independently of each other, are focused tightly on the
same research question (Brewer and Hunter 1989).

Another rationale for using multiple sources of information is that it allows
an investigator to address a “broader rage of historical, attitudinal, and
observational issues” (Yin 1989) that usually are not possible in a single-method
approach, such as an experiment or survey.

This study uses data gathering methods which are appropriate for the

methods employed. Secondary sources, including trade journals, books, and

70

reference matter were searched for relevant information about the U.S. and
global tire industry and the major firms. The perceptions of managers and
industry experts were gathered in a series of telephone interviews using
unstructured questionnaires. First, the industry experts were interviewed about
the tire industry and specific firms concerning such topics as competition, major
strategic dimensions, and trends. Some of this information, combined with
information developed from secondary data sources was used to design the
questionnaire for the managers. (Appendices A, and B, respectively, include the
questions addressed to the managers and the industry experts.)

Access to industry experts was gained through personal contacts with
people who worked in or had connections to the investment community (such as
investment banks or firms). While some of the managers too were selected
through such contacts, the vast majority were selected from Modern Tire
Dealer’s 1995 annual directory of tire manufacturers and marketers. This source
is considered one of the most comprehensive and up-to-date directories of this
industry.

Because of the nature of responses to open-ended questions, additional
important aspects identified by a participant necessitated, in some cases,
contacting the some managers again for additional responses.

For archival data analysis (using clustering techniques), data is drawn

from several databases-Standard & Poor’s Compustat and MarketScope

71

databases and lnfotrac’s lnvesText database. One reason is that Compustat
includes only publicly traded American firms: of the top ten or twelve tire firms,
only two are American. Data was also augmented by other sources, such as

trade journals.

Techniques for Data Analysis

There are several data analysis strategies employed in case studies,
including pattern-matching and explanation building (Yin 1989). In the
pattern-matching approach, an empirically based pattern is matched with one or
more predicted ones. The patterns may be related to both the dependent or
independent variables under study, or either one of them. In this study the
patterns to be matched are (1) groupings or clusters of firms using managerial
cognition and cluster analysis, (2) similarity of member firms’ strategies within
each grouping, and (3) outcomes (e.g. market share and net income).

There are no precise comparisons or statistical tests that can be made on
patterns developed using the data from the qualitative sources in this study (Yin
1978). For these a careful interpretation is done instead.

In parallel, quantitative surrogate measures of the qualitative variables
(such as clusters, strategic capabilities) are identified from archival sources
(such as Compustat tapes and trade journals). These then are used as criteria
for cluster analysis. The results of cluster analysis help validate the groups

perceived by the managers and industry experts interviewed for this study.

72

In addition to pattern matching, the second data analysis strategy
employed in this study is that of explanation building (Yin 1978). To explain the
phenomena under investigation, the researcher has to specify certain causal
links (such as those depicted in the model depicted in Figure 3.1). To
accomplish the explanation, this study like most case studies uses the relatively
imprecise narrative form to explain its theoretical propositions. But as Yin (1978)
asserts “the better case studies are the ones in which explanations have

reflected some theoretically significant propositions” (p. 113).

CONCLUSION

This chapter has described the model and the four research questions
that will be addressed by this study. Next, the chapter described the
operationalization of the constructs including how they will be measured. Finally,
data collection methods, including the use of multiple sources, and data analysis
methods were briefly discussed. The next chapter describes the background and

evolution of the U.S. tire industry.

CHAPTER 4

THE U.S. TIRE INDUSTRY

This chapter provides a historical overview the industry and profiles of
the major firms in the U.S. market. This information is based on industry
information from secondary sources, such as trade publications (ElU Rubber
Trends, Modern Tire Dealer, Rubber & Plastics News, 77re Business, and fire
Review), and studies by French (1991) and West (1984). French’s (1991) is the

only comprehensive history on the U.S. tire industry.

History of the Tire Industry

The origins of the tire industry lie in the last half of the nineteenth century.
It evolved into a major industry by this century. As an economic historian has

noted:

In it its own right, the tire industry can be taken as an embodiment of
industrial enterprise in the twentieth century and, in particular, of the
changing character and fortunes of the U.S. economy (French, 1991,

p. iii).

The transportation revolution that helped transform and rapidly urbanize
America also had a major impact on the tire manufacturers. The rise of the cities
and suburbs, and the spread of automobiles, buses, taxis, and trucks, helped
expand the tire industry dramatically, both in terms of output and new entrants

(French, 1991).

73

74

expand the tire industry dramatically, both in terms of output and new entrants
(French, 1991).

While in the modern consciousness the tire industry seems inextricably
linked to the automobile industry, this industry actually predates the automobile
industry by several decades. Some of the industry's basic technologies were
developed several decades before anyone contemplated using rubber for
wheels. The first key invention was in 1839 when “hot” vulcanization (using heat)
was discovered by Charles Goodyear, who patented the process in 1844. This
was followed in 1846 by the invention of “cold” vulcanization (using chemical
treatment) by an Englishman, Alexander Parkes. These two processes
constituted the basic technical developments of the rubber and, later, the tire
industries. Initially, rubber was used primarily in the manufacture of footwear, but
also for transmission belts, and brake hoses (French, 1991).

The first use of rubber for wheels, involved tying pieces of its around
carriage wheels to enable a smoother ride than before. But incentives for
inventors did not arise until the onset of the bicycle era of the 18705. At first, the
bicycle wheels were made of wood, and then iron. Seeing an opportunity to
provide a more comfortable ride, the rubber manufacturers added bicycle tires
as a new line. In the beginning the tires were solid rubber strips cemented onto
the wheel channels around the wheel rim. Then came the invention (or more
correctly, a re-invention) in 1888 of the pneumatic tire by John Boyd Dunlop.

This was followed by rapid design changes in the 18905 as inventors

sought to solve problems surrounding bicycling. Another important innovation,

75

the clincher rim, was patented in 1890 by William Bartlett. By 1893, the
pneumatic tire was standard (French 1991).

At this stage, the rubber industry was made of two kinds of manufacturers:
footwear manufacturers who continued to Ignore tires, and general rubber goods
and new firms which expanded into tires. Before the advent of the bicycle era,
there were only 27 factories in the United States manufacturing rubber goods;
after it began in earnest, there were 167 factories (French 1991).

The rubber industry was located in the northeast, particularly in
Massachusetts and Connecticut. In 1871, the first rubber tire factory on Akron,
Ohio was established. This city was to become the center for the U.S. tire
industry. With the help of eager backers in Akron, which then was a center for
grain milling, Dr. Benjamin Franklin Goodrich decided to move his rubber factory
from Melrose, New York, to Akron to move away from competition. The company
was reorganized in 1874 as the BF. Goodrich and Company. Goodrich also
started the Summit Rubber Company to manufacture hard rubber goods, but
absorbed it into the BF. Goodrich Hard Rubber Company in 1888.

The American Dunlop Tire Company, a branch of the British firm, was
established in New York in 1893, but was sold in 1898 to finance the expansion
of the parent firm from being a manufacturer of tire parts to a full-line
manufacturer in Britain. Dunlop did not return to the U.S. market until after World

War I.

76

Among the host of new bicycle tire companies that sprang up in the 18905
were: U.S. Rubber Company (1892) which would (much) later be renamed as
Uniroyal; Rubber Tire Wheel Company (1894), which would evolve into the
Kelly-Springfield Rubber Tire Company; Goodyear Tire & Rubber Company
(1898); the Rubber Goods Manufacturing (RGM) (1899), a trust, which was one
of the leading tire producers (French 1991).

The 18805-18905 period was one of transition for the rubber tire industry
as it moved from the bicycle to the automobile. Michelin, founded in France in
1832, pioneered pneumatic tires for automobiles for a Paris-to—Bordeaux race in
1895 [Goodrich was the first American company to produce pneumatic tires for
automobiles in 1896]. Goodyear started automobile tire production a year later,
and Diamond Rubber expanded into automobile tire in 1899. (French, 1991).
Figure 4.1 charts the evolution of the major tire companies and major
consolidations along the way.

The growth of the tire industry was obviously fueled by the automobile
Industry. The automobile industry from its earliest days has been the cause of
the bifurcation of the modern tire market . Today, the tire market can be bisected
by the nature of the customer. If the customer is the automobile manufacturer,
then to the tire manufacturer It is the original equipment (or OE) market; if the

final consumer is the customer, then it is the replacement market. Those

77

 

The FoundingsI 1832-1931 Latest Wave of Consoligation: 1980-1 990

1832: Michelin (France)
1930: Michelin withdrew from US market; re—entered in 19605 (1990: Michelin bought UGTC)

 

 

1870: BF Goodrich (US) '
1892: U.S. Rubber [Later Uniroyal] (US) I (1986: Goodrich & Uniroyal combined tire operations as UGTC)

1899: Fisk Rubber [Acquired by Uniroyal during the recession]]

 

187?: Continental AG (Germany)

 

(198 7: Continental bought General)

 

1915: General Tire (US)

 

1872: Pirelli (Italy) i (1933 Pirelr'boughtAnmtmn )
.' r 9

 

1912: Armstrong Rubber (US)

 

1909: Sumitomo (founded as Dunlop's Japanese subsidiary) (Japan) I
1889: Dunlop (UK) (1988: Sumitomo bought Dunlap)
1898: Dunlop's sells. (Came back to US in 1923)

 

(19305: Goodyear bought Kelly)
1898: Goodyear (US) i

1894: Rubber Tire Wheel [Later Consolidated Rubber, and since 1912, Kelly-Springfield] (US)

 

 

1931: Bridgestone I
1900: Firestone (US) l (1987: Bridgestone acquired
Firestone)

 

1900?: Dayton [Later acquired by Firestone] (US)

1918?: Master fire 8. Rubber [Later Cooper Tire] (US)

 

 

1941: Hankook
19 : Yokohama J
19 : Mohawk (1989: Yokohama acquired
Mohawk)
NOTE:
1. Dunlop and Pirelli combined operations between 1971 and 1981; before their American acquisitions, Pirelli and Continental
irted bnefly , but merger talks failed (industry analysts still expect a merger of the two companies in the near future).
Before Pirelli acquired Armstrong, it launched a bid for F irestone, which It lost to Bridgestone.
2. The above figure doesn't not include the consolidation activities involving scores of small and medium companies (as well

as many of the above companies ).

 

Sources: M. F. French (1991); Peter J. West (1984)

Figure 4.1 The Evolution of the Tire Industry

78

companies which participate in the OE market also participate in the
replacement market; but not the other way around. The vast majority of
manufacturers and private-brand tire marketers do not participate in the OE
market. The economics of the two markets-eg. including cost structures, nature
of demand, price elasticities--are vastly different. The barriers to entry, while
generally high as would be expected of a mature and capital intensive industry,
are even higher for the OE segment than for the replacement segment. (Other
factors that help raise barriers include (1) the fact tires do not have substitutes;
and (2) OE participation requires long-term commitments on the part of the
automobile firms and their suppliers. More discussion of such factors will follow
later.)

By the first decade of this century, U.S. Rubber (forerunner of Uniroyal),
Goodrich, and Diamond Rubber were the leading producers, followed by
Goodyear and Firestone. The big three producers also produced OE tires for
Winton, Packard, and Pierce Arrow and others, the major car firms of the early
19005. These firms produced expensive cars, and while the goal of keeping OE
tire prices low was important, it was not as important to them as to the firms that
followed (Ford and General Motors). Between 1908 and 1917, the automobile
industry changed in fundamental ways through mass production introduced by
Henry Ford. As Ford and General Motors superseded Winton, Packard and the
other expensive car companies, Goodyear and Firestone were well positioned to
take advantage of their contacts with these producers of low- to medium-priced

cars and challenge the big three tire companies of the day (French 1991).

79

cars and challenge the big three tire companies of the day (French 1991).
Goodyear and Firestone grew with General Motors and Ford, respectively. But
because the automobile producers preferred to use several suppliers to keep
good supplies and maintain pressure on prices, the big three tire firms, BF.
Goodrich, Diamond Rubber, and U.S. Rubber remained significant rivals.
However, only the large firms were able to participate in the OE segment. This
pattern continues to this day and helps explain the structure of the tire industry
to a major extent.

The automobile industry also impacted the structure of the tire industry in
another way. After a period of explosive growth in automobiles, the growth
became subjected to demand fluctuations after 1920 and the car manufacturers
responded by introducing annual model changes to promote consumption. The
changing car designs led to changing tire designs. This placed pressure on
small firms to keep up. Changing tire designs led to improvements in quality and
altered the relationship between car use and tire demand (French 1991). For
example, by 1920 the average tire life had doubled to 5,000 miles in 15 years.
By 1925, the average tire life had risen to 10,000 miles, and by 1930 to 15,000
miles. By comparison, 65 years later, Hankook tire offers an 85,000 mile car tire
today, by far the most durable in the industry and in history (Modern “lire Dealer
1995c).

Between 1909 and 1919, the tire industry had the highest productivity (as

measured in output per man-hour) growth of any manufacturing industry, and

80

was a result of a combination of mechanical, chemical, and organizational
innovations (French 1991).

By the 19205, a combination of factors put pressure on OE margins of the
tire companies (French 1991). First, by early 19205 there was excess capacity
resulting from the sharp expansion by the tire companies in the face of
increasing demand. Second, the automobile industry had become very
concentrated with Ford, General Motors and Chrysler accounting for 72 percent
of new car sales by 1929. Third, in order to keep OE tire prices low, the major
car companies also offered contracts to medium-sized companies such as
Mason, Miller, and Kelly-Springfield. With reduced bargaining power vis-a-vis
the car companies, and increased competition, the tire companies had to accept
the risk of fixed-price contracts with these corporate customers.

To compensate for these narrowing margins, the tire companies had to
depend on the final consumers, for profit and volume objectives. In this so-
called replacement market, which was the larger and the more profitable market
segment than the OE segment, the big tire companies generally concentrated on
the high end of the price spectrum (generally sidewall tires), the small firms at
the cheapest end, and the medium-sized firms occupied various intermediate
positions, with some exceptions (e.g. two medium-sized firms, General Tire and
Seiberling Rubber, concentrated on expensive tires). The larger firms also had
subsidiaries (either developed or acquired) which concentrated on second-line,

lower-priced tires (French 1991).

81

The major tire companies also controlled most of their wholesaling
operations while the retailing of the tire was through Independent tire dealers,
either selling many competing brands or owning franchises of a tire
manufacturer.

Also, since 1915, when Western Auto Supply began offering tires through
its branches in major cities, large distributors also began to offer tires. Sears and
Montgomery Ward, the largest mail-order houses of the day, began offering tires
by the 19205 as they moved into retailing stores. These companies sold different
brands from companies like Goodyear, Gillette, Kenyon, and Mansfield, along
with their own private brands (e.g. Sears’ Allstate brand of tires). Later, the major
tire companies developed their own retailing outlets.

The patterns set in these early days of the tire industry have continued.
The importance of marketing, relationships with distribution channels, and
technology have remained important to the major companies in the decades
(New York Times 1996, Modern Tire Dealer 1995c, French 1991). The
consolidation that characterized the industry from before the turn of the century,
occurs periodically, with the latest round of acquisitions abating in the early
19905 (Modern Tire Dealer 1995c). While the U.S. market has always had
participants from abroad, the more recent entries have been from Asia, as the
tire industry becomes more global.

As the U.S. market matured, the major tire companies sought more

intensive distribution for their tires, including larger mass distributors such as

82

Wal—Mart and its Sam’s Wholesale Clubs (Modern Tire Dealer 1994d). This
created several problems, especially for the largest firms. One was the
increasing competition for their independent distributors, who collectively
distribute the majority of the tires, and ensuing increasing conflict with the tire
manufacturers. Another problem was the erosion of differentiation between the
flagship brands, distributed selectively, and cheaper but similar looking brands
targeted for mass distribution (Modern Tire Dealer 1994d).

The firms have started to seriously confront these problems. To various
degrees of success, they have tried to make peace with the independents. Some
firms have even signaled that they will scale back (or eliminate) competition from
their own company-owned distributors (interview with an industry expert). As for
products, they have made several accommodations. For example, one firm made
the commitment of releasing new first products through the independents for a

period of time before expanding to mass distributors.

THE STRUCTURE OF THE U.S. TIRE MARKET

According to the U.S. Department of Commerce,

The tire industry includes companies whose main line of business
consists of the production of pneumatic casings, inner tubes, and

solid and cushion tires for a variety of vehicles (passenger cars, buses,
trucks, bicycles, farm equipment, and airplanes). Also included are
tiring, camelback, tire repair, and retreading materials. The primary
production elements are natural and synthetic rubber materials and
carbon black. (U.S. Industrial Outlook 1994, U.S. Department of
Commerce, January 1994, p. 12-4)

The U.S. tire market is classified into the OE (Figure 4.2) and the

83

replacement tire segments (Figure 4.3). The OE segment consists of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

several
I TIRE INDUSTRY I
I ,
I l I
ORIGINAL EQUIPMENT REPLACEMENT RET READ
MARKET MARKET MARKET
J
I l I I
Passenger Car Light Truck Medium & Heavy Truck Qher:
(Radla tires) (Radial tires) (Racial & Bias plus) Agriculture,
Mdao/cle,
Golf, do.
I
E j I 7
Performance-rated Regular tires Perfomiaiceraed Regular tires
tires lites

 

 

 

 

 

 

 

 

 

Figure 4.2 The Structure of the U.S. Tire Market (Part 1)

subsegments defined by the individual applications, such as passenger cars,

light trucks (such as pickup truck and sports utility vehicles), medium and heavy

trucks, and others (such as motorcycles, aircraft, earthmovers, farm vehicles,

and golf carts). The customers in the OE segments are the manufacturers of the

various types of vehicles, such as car and truck manufacturers.

The replacement segment mirrors the OE segment in terms of

applications but differs in terms of the final customer. For replacement tires, the

customers are the final consumer, whether individuals or organizational

consumers.

 

84

The retread segment applies predominantly to the medium and heavy

truck subsegment of the replacement market. Retreading of old or worn out tires

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RBJLACEIIENT
MARKET
7
l I I j
Pase‘gerCa LigtTmck Medun& l-bavyTruds Qher.
(Racial, Bis dis) (Rania, bias dis) (Ibda, Ba pits) Pgiojlua, Matte/dc,
collect
l I
Prem'un Regla Econorry
(Peformace rated) &Vauepiced

 

 

 

 

 

 

 

Figure 4.3 The Structure of the U.S. Tire Market (Part 2)

is a low cost alternative to replacing truck tires which tend to be more expensive
and are in constant use. This part of the tire business is a different business by
the industry. Therefore, only the OE and replacement segments will be used in
this study.

To appreciate the complexity of the products of this industry, one need
only look at the different constructions, materials, and sizes (West 1984, Modern
“lire Dealer 1994b). There are three basic tire construction types: bias, bias-
belted (or bias-plus), and radial. Passenger tires are also made up of several
plies and reinforced with rubber coated belts of nylon, polyester, fiber glass,
steel, and aramid. Each of the tire types may have different profiles with different
height-to-width ratios. Passenger cars are made in rim sizes of 12 inches to 15

inches. A consumer may choose from black sidewalls to white sidewalls in a

85

variety of widths and lettering. There are also specialty (or niche) tires such as
all-season, all-terrain, snow, and performance tires (West 1984). The last
category of performance tires has been growing very fast as the popularity of
4x4 sports utility vehicles and others grows (Modern lire Dealer 1995a).

The tire industry has seen about 600 companies since its inception
(Walsh 1982), and of the 131 manufacturers that operated in 1919, only about
14 remain today (Modern Tire Dealer1994b). The industry today is a global one
and the major companies participate in all the major industrialized regions of the
world:

The U.S. tire industry has also changed in terms of ownership. Until the
19805, most of the tire volume was handled by American-owned companies.
Today, the foreign owned companies account for the major share of the market
(Moderen Tire Dealer 1995c).

Figure 4.4 shows the major tire companies (with their subsidiaries
indicated by a dotted line) by the major segments they participate in. The six
major firms and their subsidiaries--Goodyear and Kelly-Springfield; Michelin and
Uniroyal-Goodrich; Bridgestone and Firestone (also Dayton): Sumitomo and
Dunlop: Pirelli and Armstrong; and Continental and General Tire—are not only
the major rivals in the U.S. market. They also compete against each other
globally. Firms like Yokohama, Ohtsu, Toyo and Hankook have a small, but

growing presence in the U.S., but they are major firms in their home markets in

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ORIGINAL EQUIPMENT 8.
REPLACEMENT MARKETS REPLACEMENT MARKET
—
Kelly-Springfield
Goodyear ..........................................
(Goodyear subsidiary)
Michelin
Uniroyal Goodrich
(Michelin subsidiary)
Bridgestone / .......................................... Dayton
Firestone (BPS) (an subsidiary)
Continental
General Tire
(Continental AG subsidiary)
Pirelli Armstrong
Sumitomo Dunlop
Yokohama
Cooper
Hankook
Toyo
Ohtsu

 

 

 

FIGURE 4.4 Major Tire Companies in the U.S. Market

87

Asia. Cooper, considered the most profitable company among the major tire
firms in the U.S., gets most of its revenues from the U.S. replacement market.
The six global firms participate in all major areas of the world, but with
different degrees of participation. For example, Continental is number two in
Europe (to Michelin’s number one position), Goodyear and Pirelli are about
equal, and Bridgestone is a distant fourth. In Japan, it is Bridgestone that
commands half the tire market, while Sumitomo, Yokohama and Toyo follow. In
Asia, Goodyear’s position is behind Michelin’s weak presence, and Continental

and Pirelli are further behind (Rubber Trends 3d Quarter, 1995).

CHAPTER 5

FINDINGS

This chapter describes the findings from the U.S. tire industry as they
address each of the four research questions. The next chapter will discuss these
findings and their implications. The findings in this section are based on several
sources of information, including industry experts and managers of firms, as well
as secondary sources. The discussion will involve strategic groups and the
strategic capabilities and their relationship to firm performance.

To protect the names of the participants and the firms they represent, a
scheme described in Table 5.1 will be used. For purpose of analysis, it Is not
important to identify specific individuals or firms; it is important to address the
research questions by examining similarities and differences between and within
groups.

The four research questions that this study has addressed are listed

below:

1. Do managers view their industry in terms of strategic groups? Do
member firms follow similar strategies?

2. Is there a convergence in defining strategic groups using the

method of measuring perceptions of managers and the method
using archival data?

88

89

Table 5.1
Identification Scheme for Participants

COMPANY MANAGER

 

X
Y
Z
L
M
N
O
p
Q
R
s
T
U
A
B
C

90

3. Are there mobility barriers surrounding the groups identified by the
two methods (by managers and archival data)?

4. Do certain strategic capabilities help explain the variance in
profitability of member firms of a strategic group?

RESEARCH QUESTION 1:

Do managers view their industry in terms of strategic groups? Do member
firms follow similar strategies?

This research question seeks participant information on two aspects:
strategic groups and strategies. For addressing both these issues, two types of
participants were used: tire industry experts and top managers of tire firms. In
total three industry experts and nine managers (representing eight companies),
for a total of 12 individuals, agreed to participate in this study. Essentially, the
population of firms from which the managers were drawn are the major rivals in
the U.S. marketplace. The top 12 firms, from which these eight were drawn,
together account for the over 90 percent of unit and dollar sales in the United
States (Modern Tire Dealer 1995s).

While the areas about which industry experts and managers were
interviewed were similar, some of the questions were different (see Appendices
A, B and C for the letter of introduction, and questions asked of the industry
experts and managers). The questions were open-ended to permit exploration or
clarification of issues brought up by individual participants.

The range of experience with the industry for the industry experts was

from 10 years to 35 years. The managers had from 10 to 25 years of

91

experience in the industry and are involved in marketing and/or strategy areas in
their current positions. Their titles within their respective organizations ranged

from director to divisional president

A. Perceptions of Strategic Groups

The Industry Experts

The three industry experts followed the industry globally, with particular
attention to the U.S. market. Two experts followed the tire industry from an
investment perspective and, therefore, were more knowledgeable about the
large, investable U.S. and international firms than about other firms. The third
expert's main interest in the industry was as an academic and consultant. (Table
5.2 summarizes how each of the 12 participants grouped the firms.)

The first two experts followed the industry as analysts and saw the
industry similarly as made up of three or four tiers. Their grouping criteria
were market share, size, market and geographic scope of the firms. The third
expert (academic) viewed the industry similarly except for minor differences in
group membership. At first, during the telephone interview, he stated that the
industry was made up of homogeneous firms ("they all do the same basic thing"),
but during the conversation, without prompting, started using the terms "tier" and
"group" to segregate the different firms. This expert felt that there were four
groups, with one group made up of only one firm.

Expert 1 and 2 represent investment banks and view firms from an

92

Table 5.2
Perceived Strategic Groupings

 

FIRM GROUP 1 GROUP 2 GROUP 3 GROUP 4 GROUP 5

EXPERT 1 n.a. LMN OQR XYZP Rest n.a.
EXPERT 2 n.a. LMN OQR XYZP Rest n.a.
EXPERT 3 n.a. LMN O XYZP Rest n.a.
MANAGER 1 X LMN OP XYZ Rest n.a.
MANAGER 2 X LMN OP XYZ Rest n.a.
MANAGER 3 Q LMN OP XYZ QR Rest
MANAGER 4 R LMN OP XYZ QR Rest
MANAGER 5 P LMN OP XYZ Rest n.a.
MANAGER 6 O LMN OP XYZ Rest n.a.
MANAGER 7 N LM OPN XYZ Rest n.a.
MANAGER 8 M n.a. O XYZLMN Rest n.a.
MANAGER 9 Z n.a. O XYZLMNP Rest n.a.

 

n.a. not applicable

Notes: (1) Manager 9 included the flnns L, M, and N with his group with the comment that they were
“further awaY' from the other firms of the group.
(2) The number groups are in no particular order.

(3) The 'Firm' column refers to the manager's firm.

93

investment perspective. They agree on the number of groups and their
memberships. Expert 3’s view, while from an academic perspective, is quite
similar to the first two experts with two difference: (1) he placed firm 0 in a group
by itself because, he felt, “It is an anomaly" in the tire industry; (2) he included

firms Q and R in the catchall category labeled “rest” in Table 5.2.

The Executives

Like the experts, the executives who were interviewed for this study were
very clear not only about the existence of groups (the word “tier” was the
preferred term), but about their rationale for viewing the industry in this manner.
The managers grouped the firms into three to five groups (Table 5.2). In all
cases, after the major firms were accounted for, the managers placed the
remaining firms, mostly small, in the “rest” category. Six of the managers
(labeled 1 through 6 in Table 5.2) had three identical clusters of firms (XYZ,
LMN, and OP) and differed only in what was classified as the “rest” category.
Managers 3 and 4, representing firms Q and R, respectively, put their firms, Q
and R, in a separate group, while Managers 1, 2, 5 and 6 did not.

It should be noted that Managers 3 and 4 represent firms that one day
hope to join the groups composed of larger, more successful firms. In this sense,
these firms see those groups as aspirational groups. When describing their
firms’ competitive activities, these managers pointed only to the most successful

of the firms as their object for emulation. One Manager said his firm tries to copy

 

94

the best practices in advertising and product development only of the “best”
firms, not all the firms.

Manager 7’s groups were slightly different in terms of the composition of
firms. This manager preferred to align his own firm with firms 0 and P than with
firms L and M, as the others had done.

The description of groups by Manager 8 and Manager 9 was similar and
quite different from the other seven managers. Both these managers included
firms X, Y, Z, L, M, and N in one group as they maintained that these firms
shared more characteristics among themselves than with other firms in the
industry. Manager 8 placed firm P and O together in a separate group, while
Manager 9 placed firm P with the larger group. Since firm P was a subsidiary of
one of the firms in the larger group, he reasoned, it belonged there, despite the
fact it has a narrower market scope than its parent firm.

Another comment needs to be made about Manager 9’s grouping. While
he placed seven firms in one group (Group 3 in Table 5.2), he felt that some of
these firms were closer to each other in competitive space-for example in terms
of size and market share--than others. But, he maintained, that the weaker
members could one day become stronger, and, thus, move closer to the others.
Overall, he was indifferent between placing all seven in one group or in two
separate groups.

As with the experts, main criteria used by the managers were size,

95

market share, and market (OE/replacement versus replacement only) and
geographic scope. In addition they also used strategic capabilities as well as
level of globalization.

All the respondents--the experts and the managers—mentioned only the
top firms in the industry and grouped only these. The respondents were more
vague about smaller or specialty firms which they placed in the “rest” category
(Table 5.1). It is likely that if the managers of these smaller firms were asked,
their responses might reveal quite different numbers and configurations of
groups. All of these smaller, more specialized types of firms, most of them

privately owned, declined to participate in this study.

B. Perceptions of Strategies

From the literature review and initial conversations with the industry
experts, it was determined that strategic capabilities in aggregate were seen
as constituting a firm’s strategy. Or, in other words, strategic capabilities were
simply constituent parts of a strategy. In order to see whether firms in a group
followed similar strategies, it seemed clear that by identifying strategic
capabilities (or strategic dimensions), one could evaluate how similar to each
other the strategies were of member firms.

Toward this end, open-ended questions were asked of both industry
experts and managers: what are the five most important strategic dimensions for

your (a) firm and (b) your industry? Then the participants were asked to rank

 

96

these attributes for their firms. When the responses are seen collectively, it
seems clear that many of the same dimensions were identified as being
important, although the participants differed on the individual rankings and
content (Table 5.3).

First, the responses of all the participants will be considered together.

Next, only the responses of managers of member firms will be compared.

All Participants” Responses

All participants mentioned efficiency and quality. Distribution, marketing
(in one form or another) and technology were mentioned by a majority of the
participants. There were also some unique mentions. For example, when
referring to products, innovation and quality were the most often mentioned
attributes, but Manager 8 voiced his firm’s intention to participate in a full range
of products, (which it currently was not doing 50). Manager 7 spoke of the
importance of his firm’s long-term commitment to participation in the U.S. market,
in which his company has been losing share. To this manager, the company’s
high priority to responding to customers also reflected past difficulties in this
area, including loss of sales. Manager 1 spoke of the quality of the people his
firm hired, and Manager 6 specifically cited pricing as one of the important
dimensions.

As can be seen from the results, there is a high degree of agreement

among all participants on various dimensions. For example, this group of

 

Top Five Strategic Dimensions

97

Table 5.3

 

 

RANKS
1 2 3 4 5
EXPERT 1 Marketing Technology New Products Efficiency Distribution
EXPERT 2 Efficiency Technology Distribution Product Marketing
Quality
EXPERT 3 Efficiency Technology Distribution New Products Marketing
MANAGER 1 (X) Brand Equity Product Quality of Efficiency Technology
quality People
MANAGER 2 (X) Promotion/ Product Distribution Efficiency Marketing
Marketing quality
MANAGER 3 (Q) Distribution Product Product Marketing Technology
Quality Innovation
MANAGER 4 (R) Technology Marketing Product Quality Distribution
lnnovafion
MANAGER 5 (P) Quality Efficiency New Products Distribution Marketing
MANAGER 6 (O) Merchandising/ Efficiency Quality Technology Pricing
Distribution Products
MANAGER 7 (N) Responsiveness Product Technology Long-term Efficiency
to customers quality Player
MANAGER 8 (M) Distribution Efficiency Quality Full range of Marketing
products
MANAGER 9 (2) Quality Image Market Share Efficiency New Products Technology

 

Notes: (1)
(2)

Letters in parentheses by the managers Identify their firms.
The ranks are in declining order, with 1 being most important.

98

managers are unanimous on at least two dimensions: efficiency and quality
(including product quality). And many also agree on technology, marketing, and
distribution.

Next, this discussion will focus on three of the groups: Groups 1, 2, and

3 (Table 5.2) and their similarity or dissimilarity of their strategic dimensions.

Group 1 and Group 3

As was noted earlier, ten of the participants placed Firms X, Y, Z, L, M,
and N in two separate groups; while two did placed them in one group (Table

5.2). These two views are depicted in the figure below.

View 1 (n - 10)

Viewz (n - 2)
Group 1
L, M, N, X, Y, Z

Figure 5.1 Alternative Views of Groups

 

These six firms are similar in market and geographic scope. For example,

 

 

99

they participate in all of U.S. as well as abroad. They participate in many
segments of the tire market, including OE and replacement segments (see
Figures 4.2 and 4.3).

The dimensions of promotion and image building (Table 5.3), mentioned
by three of the managers from this group, is a key important difference between
these six firms and other rivals. Accordingly these firms devote more resources
on marketing and promotional activities, both in absolute and relative terms,
than the rest of the industry (Badenhausen 1995; LNAIMedia Watch 1995, EIU
Rubber Trends 1994b).

According to one industry expert, one of these firms is recognized in the
industry for revolutionizing it, from changing its long-held focus from a
production and technology orientation to a marketing orientation. This was
done by expanding the marketing and advertising departments with increased
outlays on various activities, including market research, consumer and trade
advertising, narrower and narrower segmentation to meet customer needs better
(Slavens 1994b, EIU Rubber Trends 1993b).

The other firms have followed the example of this firm, but in terms of
marketing, this firm has been able to stay one step ahead, according the industry
expert. When the participants were asked to rank the firms on their marketing
orientation, often mentioned this firm, one mentioned a firm outside this group of
six, and another mentioned his own firm (with this firm rating a second place).

While two of these six firms did not participate in this study, it appears

from various sources (including the industry experts and managers representing

 

 

100

the four firms), that in terms of promotion and image building activities, the group
could be placed in two separate categories (View 1 in Figure 5.1). As the
responses of firms X and 2 shows, while brand image is very important to them,
responses from firms M and N other attributes are more important. As the
Manager 8 (of Firm M) stated during the interview, “We do not engage in image
building. While his firm is one of the oldest tire firms in the world and was an
early competitor in the U.S. market, it has not done well in recent years against
more agile and stronger rivals. As the manager explained, that his firm is now in
the process of building for the future so it can offer a “full-range of products.”

While all these six firms spend large sums on research and development
(Walters 1995), this does not necessarily translate into comparable number of
new product introductions or even technological breakthroughs ahead of their
rivals (Stoyer1995e, 1994b; Ulrich 1995b; Tire Review 1993).

Here again Firms X,Y,Z differ from L,M, and N, with the first group leading
in new technologies and new products, and the latter lagging far behind (Stoyer
1995b, Stoyer 1995d, Ulrich 1995, Walters 1995). For example, Firm L
introduced three new products in 1994 after not doing so for three years (Stoyer
1995b)

To Firms M and N, responsiveness to customers (that is, distributors) or
distribution ranks ahead of all the strategic dimensions. Unlike the larger rivals,
these firms have fewer options to distribute their products. Therefore, building

strong relationships with their distributors, especially the independent

 

 

101

distributors, is very important (Phillips 1995c; EIU Rubber Trends 1994a,
1994b)..

In summary, the four of the six global firms that participated in this study,
represented basically two groups (or two clusters within the same group). There
are several criteria that separates these two sets of firms. The larger firms are,
much larger in terms of sales, market shares, and engage in more national
advertising and product differentiation than others. Finally, the larger firms differ
from the smaller firms in terms of new product introductions, in the levels of
market diversification, and level of intensity of distribution. The identification of
strategic dimensions among the various participants reflects some similarity (e.g.
efficiency and quality) but also some differences (e.g. building image versus

focus on reaching their distributors).

GROUP 2

For the second group, there is unanimity among all the participants on
one company (labeled ‘0’ in Figure 5.2). The next firm that seven out of the 12
participants place in this group is labeled ‘P’. Like 0, Firm P participates only in
the replacement market. The two firms are also of very similar size and
strategies. The only difference is that P is a subsidiary of a larger firm.
Therefore, it is likely that if the participants had treated the subsidiary as distinct
from its parent, it is likely they would have placed firm P in the same group as 0.

What is remarkable is that managers of both firms 0 and P identified

each other as “direct competitors,” and did not mention any other firm

 

 

102

(independent or subsidiary) until prompted. Manager 5 and Manager 6 agreed
on the strategic dimensions of efficiency, quality, and distribution. While
Manager 6 cited “pricing” (a specific marketing dimension), as being important to
his company, Manager 5 listed marketing as being important. Manager 7, who
represented one of the three smaller global companies, placed his firm in this
group. He too cited quality, efficiency, and distribution as being very important to
his firm. While Manager 7’s firm does participate in the replacement segment
with firms 0 and P, it also has a presence in the OE segment, where its market
share has been eroded in recent years.

In his interview, Manager 5 kept on speaking about the strong focus on
quality at his firm; Manager 6 similarly emphasized the strong focus at his firm
on efficiency at his firm (though quality was also very important).

As with Groups 1 and 3, the member firms in this group agree on some
key strategic dimensions, but not necessarily in exactly the same way. While
efficiency at firm P is achieved through upgrading its production machinery with
the latest and most modern, at firm 0, an industry expert explained, they keep
their costs low by searching for and buying used (but good) machinery. Also
Manager 6 explained his firm keeps costs down and quality up by locating in
smaller communities “where the work ethic is high” among the workers. Both
these firms also keep up with the latest trends in technology and design without
spending as much as on research and technology as other firms (about 1
percent relative to sales versus 2.5 to 5 per cent for some of their larger rivals).

Manager 5 described his firm as a “quick follower of trends". (For example, his

 

103

firm was one of the first ones in the industry to introduce an “aquachannel” type
of tire.)

In summary, the research question asked whether managers saw the
industry in terms of strategic groups and if they perceived similar strategies. The
perceptions of managers were definitely in terms of groups. Further, the industry
experts also saw the industry in terms of groups. Similarly, there was much
similarity in the dimensions identified by all the participants but there were also
subtle differences too. This section did not address the relationship of strategic
capabilities to mobility barriers, which will be addressed by the next research

quesfion.

RESEARCH QUESTION 2:

Are there mobility barriers surrounding the groups identified by the
managers?

Perhaps the place to look for mobility barriers among the key strategic
dimensions is where there are differences in perception. For example, in Group
3, two firms saw promotion, image, and brand equity as being foremost in
importance, while other group members saw other attributes. As a matter of fact,
this was among the three major factors two of the industry experts felt separated
the Firms X, Y, and Z from rest of the tire firms. The other two attributes were (a)
size (market share and capacity), and (b) research and development efforts.

Historically, all three of these factors have played a role in the

stratification of the industry (French 1991, 1986; Modern lire Dealer 1994b).

104

The tire industry has to some extent mirrored the U.S. automobile industry
(French 1991, Helper 1991). Automobile firms like General Motors, Ford, and
Chrysler have remained major players American firms for decades, enjoying
stable distribution of shares in the 19505 and 19605. But despite the declines in
their share of the domestic market since the growth of foreign firms since the
19805, the big three have enjoyed substantial market share (Modern Tire Dealer
1995d, 1995e, 1994b).

As Figure 5.2 intimates, some of the major rivals in the U.S. (and the
global) market are firms that have enjoyed success for long sustained periods.
Harry Millis, a veteran observer of the industry since 1959, recalls that the
concentration ratios in the U.S. tire industry have remained fairly constant with
the almost the same groups of firms in dominants positions. Certainly the
periodic consolidations have helped change ownership, and hide old identities in
a few cases, but the relative stability of market shares has persisted. In no year,
Millis observed as a participant in this study, did any firm’s share by more than a
point ; the changes have been gradual.

According to Millis’ recollection Table 5.4 lists the (approximate) shares of
the major firms in the early 19605. Overall, these firms accounted for 93% of the
total tire market. Table 5.4 shows a compilation of the available figures since the
early 19005. The relative stability in the top ranks in terms of market shares
indicates the presence of mobility barriers. As was briefly mentioned in the

history section, the “causes" of these barriers are likely to be several.

 

105

 

 

Table 5.4
COMPANY REPLACEMENT OE
X 27% 30%
A 27 30
B 12-15 25
C 10-15 15
N 5 6
L n.a. 4
O 3. n.a.

 

First, the participation in the OE segment allows large firms to participate,
but not the smaller ones. There are several reasons for this. The large firms
offer adequate supplies of tires, engineering expertise (such as development of
new tire designs to keep pace with new car models), financial stability, ability to
open factories wherever the auto factories are to serve them better, and lower
prices. As the major car companies found the inefficiencies in their vertically
integrated structures, they sought to develop long-term relationships with
outside suppliers (Helper 1991).

For participating in the OE market, the major firms have to spend more
money on research and development to be able to keep up with demand for new
types and designs of tires (Modern Tire Dealer 1995d; Rubber & Plastics News
1994b; French 1991). To spread this cost, these tire companies have to sell
more tires in the replacement market than a company that simply sells in the
replacement market (e.g. Cooper Rubber & Tire Company, 1993b). This explains
why the major companies have to spend more money on marketing and

advertising to the end consumer, instead of just promoting to their dealers. The

 

 

106

R&D and the advertising expenditures have the effect of barring smaller firms
from effectively competing with the majors (French 1991). The result is a
creation of mobility barriers for the major firms since the dawn of the automobile
industry (Slavens 1994c; French 1991)..

Two of industry experts spoke to this issue of movement between tiers
and within tiers. Industry Expert 1 separated the six firms (Table 5.2 and Table
5.5) into two groups for the following reason: Firms X, Y, and Z were strong in
the largest tire market (the U.S.), but they were also strong in at least one other
major world market (e.g. X and Y in Europe, 2 in Japan). Additionally the big
three participate in all the three major areas of the world: North America, Europe,
and the Far East. Firms L, M, and N are also major players on the world stage,
but they occupy strong positions (but not number one) in only one of these major
regions, and do not participate in as many market segments as the other three
(e.g. Continental Aktiengesellschaft 1995; Tire Business 1995a; Ulrich 19950;
EIU Rubber Trends 19949; Stoyer 1993).

Industry Expert 1 said, however, that the firms could join the group with X,
Y, and Z if they concentrated on getting larger shares in both OE and
replacement segments. This expert felt that it was next to impossible for tier
three (or any other firm) to enter either Group 3 or Group 1 because it would
entail a drastic change in strategy and resource commitment at this late, mature

stage. Industry Expert 2, likewise, expressed similar sentiments. With

 

107

Table 5.5
Passenger Car OE Market Share

 

COMPANIES 1921 1926 1 929 1933 19605 1984 1994

 

 

X 16.1 21.8 29.2 30.1 28.0 30.5 40.0

Y 8.5 17.4 13.8 26.6 26.0 26.6 29.5

2 8.2 14.1 19.0 15.4 28.0 17.8 17.4

L n.a. n.a. n.a. n.a. 4.0 4.1 n.a.

M n.a. 0.8 0.9 1.4 n.a. 3.5 2.5

N n.a. 1.1 1.8 2.7 6.0 7.8 9.7
Sources: French (1990); Modern Tire Dealer (195, 1995),

Hany Millis (telephone interview, October 1995)

market shares in the U.S. languishing in single digits, he did not expect the small
three global firms to do very well unless two of them merged. He feels that a
firms needs market share in the double digits to compete effectively with

Firms X,Y, and Z.

This industry expert also felt that, like Group 3, Group 2 was also fortified
by high barriers since its two member firms were strong competitors in their
replacement niches, they had strong long-term relationships with their dealers,
and had good, quality, “value” products. The third industry expert, while
declining to comment on mobility barriers, felt that one of the Group 2 firm’s
strengths was its value pricing of its products (in addition to efficiency and strong
dealer relationships) that made it a formidable competitor.

While the barriers to entry in the U.S. market are labeled high by the
three industry experts, they are not unassailable. After all, foreign firms, such
the Sumitomo, Bridgestone, and Hankook easily piggybacked on their domestic

automobile firms when they entered the U.S. market and then grew with them.

 

 

 

108

Furthermore, these firms acquired major, but troubled, tire firms, thus fortifying
their presence in the U.S. market (Modern Tire Dealer 1994b; French 1991).

i In summary, the managers and industry experts believe that the tire
industry is made up of strategic groups. There is some consensus on group
membership of certain firms (Groups 2 and 3) but not on Groups 1 and other
groups.

There is also some consensus on some major strategic dimensions of this
Industry. But not all of these strategic dimensions contribute to generating and
maintaining mobility barriers. Part of the existence of mobility barriers is due to
natural, structural faults in the industry’s landscape: it all depends on whether or
not a company participates in the OE segment (French 1991). At the same time,
such dimensions as dealer networks (or distribution), promotion/image building,
and R&D/technology could, and do, create barriers to mobility in this industry.
Lastly, even though the barriers in the U.S. tire industry may be very high, they
can be overcome using a variation of the Trojan Horse stratagem, as discussed
above.

The question remains: what are the implications of membership in the
various groups? Does membership in “the big three” group confer on them a
potential to earn higher profits than other groups as Caves and Porter 1977
would indicate? Do group members earn similar profits? All these questions will

be addressed in the next section.

 

 

109

RESEARCH QUESTION 3:

Is there a convergence in defining strategic groups using the method of
measuring perceptions of manager and industry experts and the method
using archival data.

To address this research question, data was assembled for as many firms
as possible through various secondary sources (Standard & Poor’s Compustat
and MarketScope databases, lnfotrac’s lnvesText and trade journals). Since the
perceptual data for managers was from this year, the data used for this section
is from 1993 and 1994.

Key financial variables that reflected the strategic dimensions identified
by the managers and the experts were identified. These included R&D;
advertising (both consumer and dealer); capital expenditures; selling,
administrative and general expenses (SG&A). Additionally, passenger car OEM
and replacement market shares, and revenues were also selected.

The Quick Cluster procedure of SPSSX/PC 6.1 was used to do cluster
analysis against this data. Several runs were made against different variables
independently and in combination. Number of clusters was set at five the
procedure as it reflected the combined thinking of all the participating managers
and industry experts. This procedure of setting number of clusters to those
defined by the managers was used by Reger and Huff (1993). The Quick Cluster
solution for all the runs, including one with all the major variables, resulted in the

same groupings (shown in Table 5.6). (A check of the correlation matrix

revealed that the major criteria are highly correlated with each other.)

 

110

The results of the cluster procedure are remarkably close to the
perceptions of managers as earlier noted. Three of the companies (Firms T, S
and U) were not among the companies mentioned by any of the participants.
They were added for the purpose of this procedure as they participate in the tire

industry in the U.S. and current data were available for them.

-
‘I

Table 5.6
Clusters Using All Major Dimensions

12“

 

Company Cluster

 

cm—iDZTJOJUZI-N-<><
mmmmeeewwwNN—s

 

The Table 5.7 combines Table 5.6 and Table 5.2 so that the results of the
two methods can be seen side-by-side. Several comments must be made. While
Firm X is the number one tire company in the U.S. market, both in terms of
revenues and performance, against its rivals, on a global scale it is number

three in market share (Tire Business 1995c; Modern lire Dealer 1995c).. As

 

111

managers d experts acknowledged it, and as trade journals often write about
(e.g. Tire Business 1995a, Rubber & Plastics News 1995a), Firms X, Y, and Z
are major players of the tire industry in the U.S. and globally, and account for 50
percent of the global tire market (e.g. EIU Rubber Trends 1994c). Because the
cluster analysis procedure looks at mean distances between the data points to
cluster, Firm X is grouped in a separate group from other firms, if U.S. data is

used.

 

Table 5.7
Strategic Groups Using Two Approaches

 

 

GROUPS DEFINED BY GROUPS DEFINED BY
MANAGERS CLUSTER ANALYSIS
Group 1: x, v, 2 Group 1 x 3

Group 25....Y..Z...5
Group 2: L, M, N Group 3: L, M, R
Group 3: O, P Group 4: O, P, N
Group 4: Q, R
Group 5: “The Rest” Group 5: “The Rest"

 

Comparing Managers’ Group 2 with Group 3 (cluster analysis),
two of the three members are the same. In the latter, instead of Firm N, Firm R is
substituted, and Firm N is grouped with Firms 0 and P in Group 4, which are

the firms managers grouped together in their Group 3. (As was noted earlier,

 

112

the participant from N actually placed his firm in the same group as O and P.)
The two methods show a high degree of convergence: grouping of Firms
0 and P together, Firms Y and 2 together, and Firms L and M together. The
differences are not all that startling considering the algorithm involved.
Furthermore, there were no differences in clusters when sales, R&D, SG&A,
advertising, and capital expenditure variables were used individually, as would
be expected since all these variables were found to be highly correlated with

each other.

RESEARCH QUESTION 4:

In the case of high variance in profitability of member firms of a strategic
group, do certain strategic capabilities help explain this?

One of the observations of several studies, as discussed in Chapter 2,
has been the large intra-group variances in comparison to between-group
variances in several cases (eg. Cool and Dierickx 1993). To address this
research question, several steps were taken. From the secondary data, it was
clear that there was a great variance among the tire companies in terms of net
incomes (Table 5.8)

Caves and Porter (1977) and others have speculated that how firms
implement their strategies can cause performance variance within a strategic
group. This notion will be explored further by focusing on the major firms, but
especially the group that includes Firms X, Y an d 2. The question is how do

certain group members outperform others?

 

 

113

 

 

Table 5.8
Return on Sales (1994)
Net

Company Margin
x 4.60
Y 2.0
2 2.0
N 0.70
L -0.60
M 0.20
O 9.20
P 7.60

 

sources: lnfotrac (lnvestext)
Modern Tire Dealer (1995)
Tire Business (1995)

The Performa_r_1_c_e Differences among Firms X. Y. M

Several sources of performance differences in this group of CE firms
can be found in interviews with this study’s participants as well as secondary
sources, including trade publications.

The most obvious source which many of the participants mentioned is
size of the firm. In an interview for this study, In an interview, the analyst Harry
Millis contended that as a rule of thumb to succeed in the OE segment, the
company must have market share in the double digits. Firms X, Y, and Z

currently have shares in the double digits.

 

 

114

The double-digit OE participation, however, by itself does not guarantee
big profits. On the contrary, OE participation requires extra capital expenditures
and research and development costs. This requires the OE companies to
produce a great number of units to spread these costs across. The bigger firms
have to sell more replacement tires as a result. To sell more replacement tires
than companies that only market replacement tires, the OE companies have to
use both a “push” and a “pull” strategy. Manufacturers and marketers of
replacement tires only (e.g. Firms 0 and Pd), simply use a “push” strategy aimed
at their dealers. The OE firms have to combine this with a “pull” strategy by
building demand for their products with the final consumers. These larger firms
generally outspend all the other firms in the industry on image-building
advertising. Smaller companies (e.g. Firms L and M)are at a distinct
disadvantage with respect to their larger competitors in size and in advertising
expenditures. Table 5.9 shows OE participation of these firms. Table 5.10 lists
the brand values (or brand equity) for the major tire brands.

Managers 1 , 2, and 9 (Table 5.1) selected promotion and/or branding
(whether as brand equity, promotion, or a quality image) as the most important
of the top five attributes they identified.

According to Harry Millis, Firm X, which spends less on R&D than main
rivals, nevertheless is viewed as an innovative and technologically advanced
company because of its advertising prowess and participation in such high-
visibility promotions as being the sole sponsor of famous tire-related sporting

event. While historically another close rival’s products have been viewed as

 

 

115

TABLE 5.9

1994 OE & Replacement Segment Market Shares

 

 

 

Passenger Passenger

Cars Cars Light Trucks Light Trucks
COMPANY OEM Replacement OEM Replacement
X 40.0 20.00 40.00 18.50
Y 39.5 14.50 30.00 18.50
2 13.0 11.00 18.20 10.50
L 9.70 4.50 9.70 5.00
N * 2.00 * 3.00
M 2.50 2.00 2.50 3.00
* = less than 1 per cent

TABLE 5.10

Brand Values of Major Brands ($Million)

 

 

COMPANY 1 994 1 993 1992
X 4,660 2,866 2,002
Y 2,656 negative 2,363
2 3,762 1 ,1 84 na

 

Sources: Financial World (1993, 1994, 1995)

 

 

116

being the most technologically advanced and for breakthrough inventions, that
rival has not always succeeded in its marketing efforts (EIU Rubber Trends
1993a; Modern Tire Dealer 1972)..

Firm X is also given credit by an industry expert for transforming itself and
the entire U.S. tire industry from a production orientation to a marketing
orientation. If anything, it is marketing at Firm X that differentiates it from its
other major rivals (Stoyer 1995d, 1994a). One of the industry expert spoke of the
importance of market segmentation to future success. And it is here that Firm X
again outdistances not only its major rivals but also smaller ones. It outspends.
all its competitors on marketing-related activities (including research,
advertising, and promotions). And it is perhaps this that can, at least partly,
explain differences in net margins.

Most, if not all, of the attributes listed in Table 5.3 are extremely important
to all the firms in this mature industry. Everyone (dealers, consumers) expect
high quality products from all tire marketers, whether it is top firm or some firm
like Gillette (a private marketer) (Ulrich 1995b). Similarly, while technology is
surprisingly very important to this industry, and firms spend different amounts on
it, according to two industry experts this gives very little advantage to a firm. As
one industry expert said that the major technological breakthroughs in tires are
available to all. For example, the aqua-channel performance tire has been
introduced by both major and minor firms. In fact majors like firms Y and 2 have
held back since there are already too many competing brands, according to one

of the industry expert.

 

 

117

To illustrate this point further, Firm P’s manager-participant said that while
his firm doesn’t spend very much on research and development, his company is
a “quick follower of trends.” But, this firm has been in the forefront of introducing
some major innovations. Likewise, Firm O’s manager also indicated that such
was the case with his firm.

Efficiency is another attribute that every firm in this industry has to pursue
in order to make any profits. It is, however, unlikely the source of profit
differences among the firms (Stoyer 1995e, 1994h, 1993; Modern Tire Dealer
Tire Business 1995c) .

Distribution is extremely important to the tire firms, and the major firms,
like X, Y, and 2 have badly stumbled in the past few years, according to the first
industry expert. Most of the firms distributed the tires through a variety of
channels: their corporate retail stores, through independent tire dealers
(accounting for the major share of tire sales), major tire distribution chains (e.g.
TBC, Western Auto), and mass merchandisers (e.g. Sears, K-Mart, Wal-Mart)
(McCarron 1995a, 1995b; Mikolajcyk 1995a; EIU Rubber Trends 1994e; Kokish
1994). According to this industry expert, vertical integration into the distribution
channel is very costly and some firms, such as Firm Y, are finally divesting
these. Firms X, Y and Z, and others are, or have been among the largest owners
of such retails stores. According to an industry expert, Firm 2 is among the major
firms the farthest from solving its distribution problems. A major problem that
alienated many of the independent dealers was the practice of distributing the

same product through different channels. A Sam’s wholesale club could severely

 

118

undercut an independent dealer on the same tire brand. Some firms, like Firms
X and Y, have begun to solve this problem by promising either unique products
for the independents or delayed distribution (such as by two years) through the
mass merchandisers.

The problems of distribution could create differences in profit rates. But
the impression left by the experts and managers is that in this group most
companies have had these problems. In contrast, Firms 0 and P are renowned
for their strong and enduring dealer relationships. For example, 80 percent of
Firm O’s sales are derived from just eight large customers. While Firm P’s
customer base is quite diverse, it has strong, and sometimes, exclusive
relationships with large tire distribution chains (Modern Tire Dealer 1994).
Another advantage these two firms have is that they, in contrast to their larger
rivals, do not have divided loyalties from their own corporate retail stores.
(According to it’s manager, Firm O has only one corporate owned retail outlet

which it uses for test marketing.)

CONCLUSION

In summary, not all the strategic capabilities cause differential
performance among firms. However, the two major sources of differential profits
among the firms (and including differences among Firms X, Y, and Z) seem to be
marketing and related activities (such as promotion and branding) and market

share, which is a consequence of marketing and other strategic capabilities.

 

 

119

This chapter described the findings in each of the four areas addressed
by the research questions and found support for all of them. The next chapter
will provide further elaboration of these findings and discuss their implications

for strategic group theory

 

 

CHAPTER 6

DISCUSSION AND CONCLUSIONS

This chapter includes a discussion of findings of this study as they relate
to the strategic group theory. Following this, the study’s methodological,
theoretical and managerial contributions are presented. Next, limitations and

future directions are discussed, and, finally, some conclusions are drawn.

DISCUSSION

This study investigated four research questions about strategic groups

in the U.S. tire industry. The underlying model, which was developed in Chapter
2 (see Figure 2.1), represented (1) the direct relationship between strategic
group membership and performance, and (2) the relationship between these two
constructs moderated by strategic capabilities. In that earlier chapter, the
different components of the model were used to explicate the model and the
study’s research questions. This discussion is organized around the central
issues involved dealt with in the research question, specifically (a) strategic
groups and method convergence, (b) strategic groups and mobility barriers, and

(c) strategic groups and asymmetric profit rates.

120

 

121

Table 6.1
Summary of Findings

 

RESEARCH QUESTION SUMMARY OF FINDINGS

 

Do managers and industry experts view their Yes. But number and membership varied
industry in terms of strategic groups? among respondents.

Do the member firms follow similar strategies. Yes, to some extent.

 

Is there a convergence in defining strategic Yes, to some extent. There were some groups
groups using the method of measuring defined by the two methods that had common
perceptions of mangers and industry experts members.

and the method of using archival data?

 

 

 

 

Are there mobility barn'ers surrounding the Yes. But not all “strategic dimensions”
groups defined by the managers and the identified constituted mobility barriers.
industry experts?

D0 certain strategic group capabilities help Yes, to some extent. In the large OE firm
explain the variance in profitability of member group, there was variation in return on sales
firms in certain strategic groups? among member firms. There seemed to be

some relationship between brand equity,
market share, and marketing activities
and ROS.

 

 

 

Strategic Groups and Method Convergence

The major focus of this study was to examine strategic groups in

 

the U.S. rubber tire industry from two different methodological perspectives. The
first methodology involved a study of perceptions of industry managers as well
as those of industry experts. Unlike previous studies, experts were added to this
study to provide an independent and credible source of industry— and firm-level
information, and thus to help validate managerial perceptions. The second

methodology, used by the vast majority of strategic group studies (discussed

122

under “stream A” in Chapter 2), approached strategic group definition from a
different perspective: using archival data and cluster analysis.

The three industry experts, two investment analysts and one academic-
consultant, had a great deal of agreement amongst themselves, particularly in
defining two of the groups (or “tiers”) consisting of major OE firms. They also
agreed on one of the firms in a third group.

Likewise, there was much agreement among the managers, too. Six out of
nine (or 64.9%) agreed on the first and third groups, and seven of the nine
managers (or 77.8%) agreed on the two of the firms in the third group, and all of
them (100%) agreed on one of the firms in this group (Table 5.2).

All 12 participants were unanimous on some things. First, they all agreed
on the “catchall” group which contained all the firms that the participants did not
follow closely. Second, they also shared a few group defining criteria, such as
firm size (as measured by aggregate tire sales or unit and/or dollar market
shares) and market scope (such as, whether firms participated in OE,
replacement, cars, trucks, or other segments). One expert also used firms’
degree of globalization as a criterion for grouping.

The basic underlying scheme for grouping firms used by all the
participants can best be explained by the notion of prototypes, in this case
prototypical firm(s). These firms are “the clearest cases of category
membership”, who share more attributes with other members of the category or
group and have fewer attributes in common with contrasting categories (Rosch

1978).

Am ’
L

 

123

Thus Firms X, Y and Z are the prototypical firms as they share with each
other participation in all (or most) major segments of the U.S. tire industry,
including OE and replacement segments (Figure 6.1). They are also major
suppliers to the U.S. and foreign car firms that operate in the U.S. Also, they
engaged in building a national brand image (Badenhausen 1995; Modern Tire
Dealer 1995d).

Likewise, Firms 0 and P are prototypical firms, sharing with each other
many attributes, such as equivalent participation in the replacement segment,
with almost equal levels of annual revenues and profits. Additionally, The two
companies were by their manager-participants as each others “main”
competitors.

Firms L, M and N could also be considered prototypical firms
in that they are weaker participants in the U.S., each with single digit market
shares, and negative or minuscule profits (lnvesText). As shown in Figure 6.1,
these firms are farther away from Firms X, Y and Z in the competitive space.

Firm size (in revenues and unit sales) is the single, most important
criterion used for grouping the firms used by both the managers and industry
experts in this study. The second most important criterion is whether the firm
participates in passenger car and truck OE m replacement segments or

replacement segment alone.

 

 

 

 

 

 

 

 

124
I MANUFACTURING I
M A R K E T l N (3
ORIGINAL EQUIPMENT R E P L A c E M E N T
8. REPLACEMENT ONLY
GREAT : §
(many 4» X 0 3
segments) Y P
Z i
N 2
M i
FIRM 2
SIZE L g
R
0
s s
T
(few U
segments) V
v
THE REST
SMALL

 

 

Figure 6.1 Competitive Space Occupied by Tire
Companies in the U.S. Market

 

125

Figure 6.2 shows overlays of group boundaries. The seven largest firms
which participate in both OE and replacement segments can be grouped
together in one group or can be broken up into as many as three groups. The
firms that are closest to each other across various attributes (size, strategies)
were clustered together by the participants. Thus, everyone saw Firms X, Y, and
A as belonging to the same group.

The differences started to emerge when considering the remaining four
companies. Everyone, except one participant, put Firms L, M, and N together,
whether as a separate group or with the big three. The exception was the
manager who grouped Firm with Firms 0 and P, seeing its similarity with the
other two firms in terms of size and of not pursuing a strategy of branding (or
consumer advertising), even though Firm N does participate in the OE segment
also (which Firms 0 and P don’t).

There was a greater disagreement in categorizing Firm R. Only two
industry experts and two managers (of Firms R and Q) even acknowledged the
presence of R the U.S. Market, even though it is one of the largest tire
companies on a global level. The experts placed R (along with Q) with O and P,
while the managers themselves placed the two firms in a separate group.

Firm R, which is very strong in the performance subsegment of the
replacement, but not in OE, is therefore the farthest from the OE prototypes, X,
Y, and 2. One reason could be that these companies acquired significant long-

term domestic and foreign tire companies (French 1991). While R, too, acquired

 

 

126

 

MANUFACTURING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

M A R K E TE I N G
ORIGINAL EQUIPMENT ' ' R E ;P' L‘ A CE M E N T
g REPLACEMENT . . ONLY *
GREAT
(many 41
segments)
FIRM
SIZE
(few
segments)
$
' ....... omega”
SMALL

Figure 6.2 Strategic Groups within the U.S. Tire Competitive
Space

 

 

127

a large U.S. firm, in 1989 (French 1991), it wasn’t a major acquisition
comparatively.

Everyone categorized Firm 0 in a separate group. Firm 0 is consistently
the most profitable of the large tire firms'. Firm 0 is a manufacturer and marketer
of replacement tires and is consistently lauded in trade journals (e.g. Tire
Business 1993a, Modern Tire Dealer 1994) and by analysts (including the
industry experts used in this study). Many participants, including those of the
two companies, also placed Firm P in the same group as O because it
concentrates on replacement tires. The two firms are roughly the same size in
revenues. But because P is also a subsidiary of a large firm, some participants
saw these two as one firm.

Q, a major Korean firm with a small presence in the U.S., was the only
other firm some of the participants mentioned specifically and were willing to
categorize separately from the remaining firms (identified as “the rest” in Figure
Table 4.6).

The categorization of tire firms, it seems, used the principal of prototypes
(Walton 1987): firms in a group were more alike than with firms outside the
group. There was, however, also a fuzziness in the way people grouped firms,
including the major firms. Certainly, the big three were unanimously grouped

together, but the next three in size were not. Similarly, there was near unanimity

 

1 Bandag and Titan Wheel are even more profitable than Cooper in terms of net and operating income,
and return on equity (Investext data base, lnfotrac). But there are also more diversified into other
businesses—Bandag is a major supplier of retreading material for truck tires, and Titan Wheel is the
dominant supplier of wheels, and tires, for agricultural vehicles.

 

 

128

on Firms 0 and P, but not about Q and R and others. The “rest” category was
composed of firms which were prototypical in the sense that this study’s
participants were not particularly interested in or knowledgeable about, so they
merged into one indistinguishable group.

This is certainly understandable. All the participants in this study either
represented the major tire firms (the managers) or followed them (industry
experts). Because of the high concentration in the industry, these major firms
can account for 90 percent of the tire sales (Modern Tire Dealer 1995e). If the
smaller firms were also represented in the study, the “rest” group might have
been further fine-grained segmentation, and perhaps an emergence of a third or
fourth prototypical firm.

In the final analysis, fuzziness results from participants’ cognitive
limitations and associated mental schemas, using categorization principles.
They only need (and can only manage?) to handle a small set of firms to be
effective in their respective domains. The managers are most clear about firms
they directly compete with, and less so with the remaining. As the firms recede
further from their own firm within the competitive space, they are less clear about
where these firms belong. Likewise, the industry experts follow the major,
investable firms. Therefore, they are very clear on relative positions of these
firms. The smaller firms, which are either privately held (therefore not investable)
or whose focus and presence is limited in the tire industry, are outside their ken.
Similarly, for the third expert, as a consultant he only follows the major firms

because they account for most of the revenues.

 

129

The results of cluster analysis show that there was some but not perfect
agreement in the groupings as seen by the managers. When the number of
groups selected was five, the clustering procedure placed Firm X in a group by
itself, while Firms Y and 2 were placed in a second group, L and M in a third

group, N, O, and P in a fourth group, and others in a fifth group.

Strategic Groups and Mobility Barriers

Mobility barriers are considered a major construct of strategic groups
(Caves and Porter 1977; Mascarenhas and Aaker 1988). Like entry barriers,
they represent barriers that shield groups from entry from firms from other
groups or from outside the industry (new entrants). This study investigated
possible mobility barriers in the perceptions of the participants about strategic
dimensions that were important to the firms in this industry. The managers and
industry experts settled on a few key dimensions that were viewed as key
strategic attributes by them. Some or all of these strategic attributes could be
the basis for mobility barriers; on the other hand, none may be.

Several observations can be made here (see Table 5.2). Some of these
dimensions, like efficiency, were important across all managerial participants,
and not unique to a single firm or a group of firms. If we can assume that all
major firms are equally efficient (and the manager-participants were not merely
expressing a future goal for their firms), then efficiency may represent important
entry barriers to the industry as a whole to new entrants, but not mobility barriers

that prevent the movement of firms from one group to another within the industry.

 

 

130

Further, even if a group’s efficiency’s is derived from scale economies,
then efficiency might be considered a mobility barrier (and an entry barrier) as it
prevents both the incumbents from other groups and new entrants to enter this
group. But more likely, in this case the barrier to mobility is not efficiency itself
but based on other factors associated with larger production volumes (and
market shares) of this group’s members.

Of the major firms considered, the size of the firm appears to be a
function of the number and types (such as OE and replacement) of segments
participate in. Participation in the OE segment , based as it is on long-term
relationships with automobile companies, locks out new entrants as well as
incumbents who wish to extend their reach into this segment (French 1991). As
one industry expert remarked, it is easier for firms like L and N to join the big
three (“they have to increase their market shares”), than for a firm like 0 or P,
which will require a change in strategy and new investments.

Table 5.1 suggests that among the major firms, like X, A, B, and C, (A, B,
C are subsidiaries of larger firms now), the markets shares were relatively high,
and stable, for long periods. Only Firm Y (without counting its subsidiaries) has
gained substantially since the 19703 (interview with an industry expert). As Harry
Millis remarked in a telephone interview, if there are any changes in market
share among the major firms, they are only in the one to two percent range in
any given year. The major changes seem to be in the ranks of the smaller firms

(lire Business 1995a).

 

 

131

The relative stability of shares among the major companies (especially, X,
Y, and 2) indicates the presence of mobility barriers. These certainly derive from
the major presence these companies have in the OE and the replacement
segments.

In the OE segment, the barriers to mobility are primarily associated with
the long-term relationships with the automobile manufacturers (French 1991). In
order to meet the changing and evolving demands of the automobile firms, the
firms in this segment also have to invest in capital improvements (including
capacity) and R&D (interview with an industry expert). Because of this OE
participation according to all industry experts is not very profitable. However,
there are direct and indirect benefits of these investments in other segments of
the tire market, especially the consumer replacement market. Most, but not all,
consumers, according to one the industry expert, prefer to replace their OE tires
with the same name brand replacement tire. Presence of name brand tires as
original equipment on cars is an explicit endorsement by the car firms along with
an implied warranty of quality. This also enables the OE firms to charge 15%-
20% premium for the price of their tires (interview with Harry Millis).

Because these firms have higher fixed costs, compared to replacement-
tire firms like O and P, they have to sell more units to spread these costs. To do
this, these larger firms spend large sums on consumer advertising (to build
brand image and demand) than other firms, such as O and P. Thus, Firms X, Y,
and Z (in that order) have higher brand equity than firms like L, M, and N

(Badenhausen 1995, Ourusoff et al., 1994). The other firms, which spend most

 

132

of their advertising dollars in the form of co-op advertising with their distributors,
cannot charge the premium prices. It should be noted that to the participants
representing two of the larger firms, the quality image building, promotion, or
maintaining brand equity were ranked the most important attributes.

Quality, whether associated with product or as a holistic concept, and, to
a lesser extent, technology/innovation, were also cited by the participants. Can
these too be mobility barriers? According to one of the dealers (Modern 77re
Review 1994b, 1994c), every company in the tire industry has to (and does)
offer high quality products since the dealers and the consumers demand it. Two
of the industry experts also said the same thing about quality. Because it is
important to all firms, it is less likely to be a mobility barrier than an entry barrier
to new entrants.

However, there are small but significant percentage of the consumers
who are willing to pay a premium price for a Michelin or a Goodyear tire on the
assumption that they are of higher quality and/or innovation. This image results
from actual (e.g. result of capital and R&D expenditures) and perceived (e.g.
result of consumer advertising) causes. To the extent quality is coupled with
image and larger outlays, it is acts as a barrier.

Technology may result in quality products, new products, and overall
efficiency of production. As a cause of efficiency, technology is not necessarily a
mobility barrier for the same reasons efficiency is not. If technology results in
quality products which, when combined with image building, lead to charging of

premium prices by the firm, then technology may also be a mobility barrier.

 

 

133

When technology results in new products that customers want, then too
technology is a mobility barrier to the extent all firms cannot innovate to the
same degree. A company that cannot deliver new products demanded its
dealers, it will lose that business. For example, T80 and Big Wheel, two of the
largest independent distribution chains, switched firms (Tire Review 1995).
Marketing and distribution are the remaining strategic attributes cited by
most the participants. This is no surprise, and is probably true for any industry.
Marketing at its broadest encompasses the terms used by the study’s
participants: such as “distribution”, “merchandising”, “pricing”, “promotion”,
“responsiveness to customers”, “brand equity”, “quality image”, and products
(new and/or quality). But when the term “marketing” was used, the connotation
was particularly of promotion to the tire firm’s customers (whether dealers or
consumers). In this sense, there is an overlap of meanings between distribution
and marketing. By marketing to the distributors, most participants meant
promoting (including personal selling and trade promotions, including “co-op”
advertising) their products to the dealers. By distribution, they meant securing
new dealers, maintaining and expanding satisfying relationships with their
existing dealers, and correcting any problems leading to any dissatisfaction
among the dealers. Of course, all these efforts involve a great deal of marketing!
Marketing and/or distribution would act as mobility barriers if certain
channels were less accessible to some firms or certain methods of finding and

maintaining relationships with distributors were not available to everyone.

“in.

 

134

Accessibility to dealers varies in this industry. For example, it would be
impossible for non-X tires to find access to Firm X-owned stores; likewise for
other brands seeking distribution through major competitor-owned channels. But
the numbers of these stores is relatively small when compared to independent
dealers, who account for over 60 percent of tire sales, big chains (like Western
Auto) and mass merchandisers (Sears, Wal-Mart) (Modern Tire Dealer 1995a,
1995d). Accessibility to these distribution channels is enhanced by products,
support, and dealer margins that a particular tire manufacturer (or marketer) can
offer. However, well-known name brands, like those from Firms X and Y, can
also attract dealer participation if the final consumers demand that brand-name
tire, even if the margins are not as good as on some other tires (interview with
industry expert).

Accessibility to dealers” and tire marketers’ private brands is a different
matter. The links between tire manufacturers and the marketers of private
brands (both dealers and marketers) mimic the linkages that are so important in
the OE segment (Helper 1991). For these long-term relationships count. These
can provide the mobility preventing barriers to some firms. One can assume that
there is a spillover effect of participating in the OE segment on the private brand
business. But there are exceptions: Firms O and P, among the largest private
brand suppliers, do not participate in the OE segment.

Marketing as a mobility barrier is most effective when it accompanies
image-building activities of major OE firms and their flagship brands, particularly

those of Firms X, Y and Z.

 

135

To sum it up, not all the strategic attributes can be said to constitute, or
even undergird, mobility barriers. Some attributes, taken for granted by most
participants, like market share and whether the firm participated in many
segments or a few segments are probably the most significant mobility barriers
in this industry. As Harry Millis, one of the industry participant maintains, to be
considered a success in DE, the firm must have market shares in the double
digits. However, to support OE participation, other strategic attributes come into
play. A tire firm must invest in technology (R&D), capital improvements, and a
close supplier-manufacturer relationship with their automotive customers.

Expenditures on building a brand image also gives certain firms (X, Y and
2) an advantage over other firms who don’t engage in such a practice (e.g. O
and P) or those that do not invest as much (e.g. L, M and N). 80 this too is a
mobility barrier. Firms L, M, and N cannot compete with their larger rivals on an
equal footing, according to one industry expert, unless they can match them in

advertising and marketing.

STRATEGIC GROUPS AND ASYMMETRIC PROFIT RATES

Strategic groups theorists (Caves and Porter 1977; Porter 1979; Aaker
and Mascarenhas 1989) have asserted that strategic group membership affects
firm profitability. The theoretical model of this study includes this view.
Everything being equal, it was assumed all firms within a group should be similar

in performance. Also, it was implied that the more attractive—in terms of

 

 

 

136

resources and markets— (and stable) strategic groups would as rule have higher
profits than less attractive (and less stable) groups.

The findings of this study are mixed. First, the group with the biggest firms
(presumably the most attractive), is not the most profitable. For this, the group
made up of O and P represents the firms with the highest profits. This supports
Woo’s (1983) findings that in some industries, low market share firms are more
profitable than high-market share firms. It may be, as an industry expert
explained, that the large R&D budgets of the big three may be a reason for lower
profits.

If we consider Firms X, Y, Z, L, M and N together (see Figure 6.2), we see
larger variation in ROS numbers. One reason for the variance is the differences
in OE and replacement market shares. Firm X’s net margin is higher than either
than of Y or Z, but far exceeds those of Firms L, M, and N. And these differences
have persisted over time (see Table 5.1).

These large shares are derived from maintaining long-term relationships
with the customers (automobile companies and distributors). OE requires R&D
and capital expenditures in addition to marketing efforts; replacement requires
relationships with dealers and marketing efforts aimed at them as well as the
final consumers. The big three spend more on marketing in general and
consumer and dealer advertising in particular (LNNMedia Watch 1995). This
means that their brands are better known, thus sell better, than those of the

smaller three. Also, because of their larger promotion expenditures, the big three

 

5.

 

137

brands can command a slightly larger premium for their flagship brands than
other brands.

As an industry expert remarked, and as was noted earlier, the smaller
three firms can challenge the big three firms if they start spending more on
marketing to try and get a bigger market share.

In addition to these research findings, this study also found fuzziness in
the perceptions of managers and industry experts when defining strategic
groups. This fuzziness has been reported in previous studies (e.g. Reger and
Huff 1993).

As can be seen in Table 5.1, after classifying what they considered major
competitors, all the participants included the remaining firms in the tire industry
in a catchall category called “rest.” The response of one of the managers
seemed typical. He explained his view of the industry’s competitive space with
firms arrayed across it. The firms that resemble his (in size, target markets,
strategies)
are closer in competitive space than those who differ in these attributes. Thus in
his view, the global firms that had a smaller presence in the U.S. were farther
away from the global firms that had a major presence in the U.S. But, other firms
were even farther away, such as the firms that focused on only a few markets
(e.g. replacement only firms). While this manager was aware of many smaller
“tire marketers” and other niche firms, he felt they were too small or too narrow
in their focus to merit his and his firm’s attention. Other participants expressed

similar views of their industry.

138

To the industry experts, the basic criteria for grouping firms into tiers were
size, participation in OE and/or replacement market, whether they were global,
and whether their stock was traded publicly (“investable” firms). Thus, they
followed only 10 to 12 firms regularly, and remaining forty or sixty firms remained
fuzzy.

The prototyping involved in the categorization process, discussed in

Chapter 3, can help explain the fuzziness of some groups in the tire industry.

METHODOLOGICAL CONTRIBUTIONS

This study has made a methodological contribution in combining the two
dominant methods used in strategic group research. Specifically, it sought and
found some degree of convergence in defining strategic groups using the two
major methods: using managerial cognition and archival data I cluster analysis.
This has not been done in any previous published study, and is an important first
step to bridging the two main streams of research in this field. This is important
for the development of strategic group theory for it helps in closing some serious
gaps in methodology as was discussed in Chapter 2.

In this study, there was some convergence with respect to certain firms
and groups, but not a perfect match between the two methods. And this should
be expected. The precision of a mathematical algorithm is something managers
do not have, or even want to have, given the infinite contingencies and
complexity of the real world they inhabit. Perhaps, the “best” method for

grouping would be to use a combination of the two methods and, with much

139

background material, construct the most plausible and useful groups. Industries
change all the time, evolving new structures, however subtly. It is perfectly
reasonable for managers to define groups that “satisfice.” There will be a degree
of fuzziness in both methods, one of human cognition on the one hand and on
the other, in the choice of algorithms and parameters.

Another contribution this dissertation made was by focusing on a major
industry, the tire industry, which has not been done previously in a strategic
group study.. The tire industry, with its long history, is an ideal industry for

strategic group research, as was demonstrated in this study.

THEORETICAL CONTRIBUTIONS

This study also made two theoretical contributions. First, it found some
reasons why certain firms in a group may perform quite differently from other
firms. All the reasons were of a strategic nature. Some of these reasons were
structural (decision at some point in time past on product/market choices, such
as OE versus replacement, with accompanying first-mover benefits). Others had
to do with strategic capabilities in terms of marketing and promotion.

Second, this study showed that it is not necessary for the biggest
strategic group to be the most profitable. In this study, the group of Kelly and
Cooper is the most profitable one, even though the two firms may be called
“focus” strategists. They do not invest heavily in the obvious strategic
capabilities such as branding or R&D, but that does not mean they are less

marketing oriented than the big three firms. They serve their customer

140

constituencies—the dealers-in a most focused and effective manner possible,
and both have very loyal dealers, according to two of the experts, and the

company managers.

MANAGERIAL CONTRIBUTIONS

As previous studies and this study have shown, the strategic group
paradigm is theoretically very useful. But what about managerial usefulness? To
the extent strategic group theory helps one understand competitive behavior,
this is also a managerial contribution as it gives managers another perspective
to try to understand their major competitors. With an awareness of the existence
of strategic groups and knowing their characteristics (such as which are the
attractive groups, which are not), a manager can devise a successful strategy to
compete effectively in that group.

Because managers make investment decisions with view to their
competition, strategic group analysis can help them understand and pinpoint
areas where they may be vulnerable or exposed to possible actions by
competitors. They may discover attractive groups to compete in, where their
companies can have a competitive advantage, and avoid groups where they will
be at a disadvantage. They can also “predict” how the groups are going to
evolve so they can position their own firms advantageously for the future. As a
result, their investment decisions may be quite different and perhaps more
effective, than if they had not considered their competitions in a strategic group

framework.

141

STUDY LIMITATIONS AND FUTURE DIRECTIONS

This study has several limitations. First, it concentrated on only one,
albeit a global industry. Hence the results may or may not be extended to other
industries. Additionally, the sample size was small and data for the industry
were incomplete. While participation was sought from all the top 50 firms, and
most of the top twelve firms agreed to participate, there were a few major firms
who declined.

Also, no significance tests per se could be conducted, as none are
available for either cluster analysis or studying cognition. Part of this limitation
was made up through the use of multiple sources of information and multiple
methods.

An obvious extension would to replicate this study to similar auto-supplier
industries. It might also be useful to study industries which have an OE/after
market split to if they share similar characteristics with the tire industry.

Another extension of this study would be to study the global tire industry
along with focus on major tire markets of the world, such as Europe, Latin
America, and Asia.

The study also took a cross-sectional look at the industry when studying
perceptions, even though it had a longitudinal historic perspective. It might be
worthwhile to study perceptions of managers over time as it can provide how

managers perceptions change with the changing industry. With the U.S. tire

 

142

industry, it would have been interesting to see if and how managerial
perceptions changed from the 19708 to this day, and how the turbulence of the
late 1980s and early 19905 affected these perceptions. Some of the fuzziness in
perceptions of participants may be due to the recent changing structure of the
industry. When the industry was more stable (in terms of number of firms), say
briefly in the 19605, would there have been less disagreement on group

membership?

CONCLUSION

This study had several objectives in studying strategic groups. It sought to
method convergence between managerially defined groups and those defined
using cluster analysis. This was achieved partially, but given the nature of the
approaches there could never be a perfect match. The study also sought to
investigate the existence of mobility barriers in the tire industry: there were and
still are, as seen in the slow changing market shares of the larger firms. Then,
the study investigated the nature of these mobility barriers and whether they
could help explain asymmetric performances within a strategic group. It was
found that these barriers resulted from strategic choices made by the firm’s past
and current managers. The pattern of participation in DE had to be made, for the
most part, at the beginning of the automobile industry. Only one major company
gained any significant share of this segment since the 1970s. Japanese and

European firms found entry into this segment through acquisitions of American

143

firms which already had a presence in OE. However, even in replacement
segment, mobility barriers owed to the/choices of current managers to invest in
marketing and branding, technology and) R&D. This resulted in brand name
recognition and new products. These investments also help explain why
profitability varies among the big six firms.

The study adds support to the previous studies using managerial
cognitions to define groups. Groups do existand are definitely not a mere
“analytical convenience” (Hatten and Hatten 1978).

However, this study by using multiple methods overcame the weakness of
relying on just one approach or the other, rather it exploited the synergy between
the two methods. Perhaps to building a predictive model from strategic group
theory as Barney and Hoskisson (1988) suggest, a syncretic approach using

multiple perspectives might be the way.

APPENDICES

APPENDIX A

TELEPHONE QUESTIONS FOR MANAGERS

Each of the following question included probing and clarifying questions.

Q1.

QZ.
Q3.

Q4.

Q5.

Q6.

Q7.

Q8.
09.

Q10.

ln how many ways is information gathered about customers and competitors
in your company? Please give examples. Who else is involved in information
gathering throughout your organization?

Is this information distributed throughout your organization? Who gets it?

Who within you company uses this information? Which groups? How is this
information used?

If you were to pick five attributes that are extremely important to your company’s
success, what will they be? (Describe each briefly in terms of activities and
fucnfions

What are the five most important attributes for the tire iondustry? Which of
these attributes are more important to your competitors than your company?
Could you elaborate (exp[lain, give examples)?

How important to your company is segmenting your markets and targeting
specific products to specific segments? What crieria do you use for
segmenting?

What is the extent of your new product development activities? How do you
decide which products to develop? Are your customers (dealers, consumers) ?
What is the mix of new versus old products (> 3years) in terms of revenue
contribution?

How do you distribute your products? Kinds of channels used?

What kinds of promotional activities do you use for your distributors?
Consumers?

Who are you major competitors? What crietria do you use to define your

competitors? In what ways are you significantly different from them? How do
you view other competitors in the tire industry?

144

APPENDIX B

TELEPHONE QUESTIONS FOR INDUSTRY EXPERTS

Each of the following question included probing and clarifying questions.

Q1.
Q2.
Q3.
Q4.
Q5.
Q6.

Q7.

QB.

What are the top five major strategic attributes of the U.S. tire industry?
What are some major trends affecting the tire industry?

How do you view the structure of the U.S. tire industry?

What criteria do you use to group the competitors?

Do groups differ by their profitability?

How would you rate each of the competitors on the attributes you identified
above?

In your estimation how do you rank the major competitors on marketing
orientation?

What are major barriers that prevent firms from other groups to move to the next
higher group?

(Asked only of Harry Millis)

Q9.

What has the trend been in company market shares over the last two or three
decades?

145

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