STRATEGIC GROUPS IN AN INDUSTRY

Group-paper in BMGT-Management

Prepared for
Hanh Hguyen Thi Hong
hanh.nth@vgu.edu.vn

Written by
Nguyễn Hoàng Ngọc Kha (14065)
Nguyễn Trần Lê Nguyên (14073)
Lưu Nguyễn Khánh Vy (14082)
Vũ Thị Nhiệm (14083)
Lương Vũ Tuấn Lâm (14126)
Nguyễn Phạm Huệ Thanh (14149)
Michael Nordmeyer (Exchange student)
Josephine Beutin (Exchange student)

Ho Chi Minh, 24.10.2019

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Table of Content

List of Abbreviations ............................................................................... Error! Bookmark not defined.

List of Illustrations ................................................................................... Error! Bookmark not defined.

1 Introduction .......................................................................................................................... 1

2 Theoretical Background ...................................................................................................... 1

2.1 Defining strategic groups and the theoretical structure of strategic group maps.................... 1

2.2 Value of strategic group maps ................................................................................................ 3

2.3 Empirical evidence about Strategic Groups Analysis and performance measurement .......... 4

3 Practical Example of the Coffee Shop Industry in Vietnam............................................. 6

3.1 Introduction and characteristics of the chosen industry ......................................................... 6

3.2 Five Forces Analysis .............................................................................................................. 7

3.3 PEESTEL Analysis .............................................................................................................. 11

4 Discussion ............................................................................................................................ 14

4.1 Practical Implications ........................................................................................................... 14

4.2 Limitation .................................................................................... Error! Bookmark not defined.

5 Conclusion ........................................................................................................................... 16

List of References ................................................................................................................................ 18

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1 Introduction
All marketing strategies of companies should involve a clear strategic perspective in order to achieve
competitive advantage. It is obvious that companies which rival in the same industry possibly have
similar competencies and therefore formulate similar strategic perspectives. The important thing is to
find out whether these companies display a similar performance or not. Therefore, the strategic group
concept was first used by Hunt for understanding and explaining performance differences between
groups of firms within the same industry (Leask and Parker 2006). No distinction is made in which field
of business each company is conducting and identifying analytical instruments, which are simply direct
and indirect components, is the key of success. “The best technique for revealing the market position of
industry competitors is Strategic Group Mapping” (Crafting & Executing Strategy) since Strategic
Group Mapping and analysis describes specifically the competitive position that rival groups of firms
occupying in the same industry. In this paper, we explain – using the coffee shop industry as an example
– how strategic group analysis is used. The remainder of this paper is organized as follow. Our paper
starts by providing a necessary understanding of strategic group analysis with a theoretical background
by defining strategic groups, explaining the structure and value of strategic group maps and giving em-
pirical evidence about the link between strategic group analysis and performance measurement. In sec-
tion three, we provide a practical example of the coffee shop industry in Vietnam using the Five Forces
and PESTEL Analysis. Section four is a discussion about practical implications and limitations. Last
but not least, this paper ends with a conclusion.

2 Theoretical Background
2.1 Defining strategic groups and the theoretical structure of strategic group maps
A strategic group is a concept that is used in strategic management by categorizing companies within
an industry with a comparable market position or competitive approaches. More specifically, it is an
instrument of industry analysis which examine different groups of rival firms clustered around compa-
rable strategic position in the market or competitive approaches (Thomsen et al. 2016). The approach
stems from an observation by Hunt for explaining the significant performance difference between
groups of firms within the same industry that follow different strategies. A strategic group is defined
by Hunt as a group of firms within the industry with a high degree of symmetry with respect to cost
structure, degree of product differentiation and vertical integration, degree of product diversification
and formal organization (Leask and Parker 2006).
Following this exploration, a strategic group consists of a set of competitors that have at least two or
more competitive characteristics in common but differ in important ways from the members of other
groups. The definition of Hunt includes the essential strategic variables that are available to companies,
but by not linking them, they circumvent the evidence of the extent of agreement that constitutes a
strategic group the position of competitors and the differences that exist between them. The differences
reflect different approaches to the market, which are expressed in different competition strategies. The
strategies are chosen by the companies themselves. They decide to pursue a competitive strategy which,
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taking into account the structure of the industry and their own possibilities, seems to be promising, i.e.
the starting conditions with regard to capital resources, investments, products, etc., and which is not
based on the current market situation to take account of. For example, they use the same distribution
channel, eventually a comparable product-line breadth, providing comparable services and technical
assistance or identically technological approaches (Thompson et al. 2016).

Understanding the procedure of strategic groups within an industry is important for many reasons. Com-
panies are supposed to have a clear strategic perspective to accomplish competitive advantage. The
chosen strategies should be in line with competencies, objectives and competitive rules prevailing in the
market. It is obvious that a number of companies which compete within the same industry could have
similar strategic perspectives. Therefore, it should be clarified whether these companies have a similar
performance or not. When considering strategic moves and rating the firms’ performance the other
members of a group are often the best referents for executives to consider but in some instances one or
more strategic groups are irrelevant. For this reason, the aim of strategic group analysis is to ascertain
whether or not clusters of firms that have a similar strategic position exist (Dirkem, Birgonul and Bu-
dayan 2009). A primary motive for strategic group mapping is to explore the competitive positions that
rival firms take in the industry for identifying close and distant rivals. Close strategic groups have
stronger cross-group competitive rivalry that is the reason why it is important to know. Some companies
in every industry enjoy stronger market position than other companies. Therefore, it is essential to ana-
lyze the industry’s competitive structure (Porter 1979). Furthermore, it helps to analyze the level and
type of entry barriers the firm have to face with. In addition, analysis of strategic groups can also reveal
gaps in the industry which are called “white spots” that represent untapped opportunities and offers a
chance for new ideas (Harrigan 1985).

Procedure for constructing a strategic group map

One technique to reveal different competitive positions of industry rivals within an industry is gained to
a process called strategic group mapping. The procedure of constructing can be classified to four simple
steps. The First step is to identify the competitive characteristics which differentiate strategic approaches
used in an industry from each other (Thompson et al. 2016). The variables used as dimensions in iden-
tifying strategic groups should be selected on the basis of the different types of competitive strategic
options available. Variables selected as axes could be identified during the process of the industry anal-
ysis. Following Miller and Friesen the chosen strategic variables are subject to the influence of top
managers, collectively capture the strategy, reflect strategic choice more than environmental or industry
norms and allow for consistency of measurement across all the firms in the sample (Miller and Friesen
1986). Variables which could be selected as axes for the map could be also be product-line breadth
(wide, narrow), price (high, medium, low), quality (high, medium, low), geographic coverage (local,
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regional, national, global) etc. means that price/ quality range (high, medium, low) can be put on x axis
and the Menu (wide, narrow) on y axis.

Secondly, the determined strategic groups can be displayed graphically, independent of the choice of
the determination method. With these approach it is possible to draft a two-dimensional picture on the
basis of the two spanned strategic key aspects. The axes form the two most important strategic variables
that form the decisive mobility barriers. When describing the axes, there are some guidelines which
should be fulfilled but they will be explained in detail at a later stage of this paper.The formation of the
group takes place according to the positioning of the companies within the selected strategy variables,
whereby the accumulated market share is expressed by the size of the symbols. So the second step is
using the two-variable map to plot all the firms in the industry.
So the second step is using the two-variable map to plot all the firms in the industry. The third step is
that all the firms that fall in the same strategy space means that they occupying the same map location
have to be allocated to the same strategic group. Finally, sketch circles around each strategic group. The
size of the circles should be depend upon the size of the shares of the group in relation to the total
industry sales revenue (Thompson et al. 2016).

2.2 Value of strategic group maps

Close and Distant Rivals
Strategic group maps are designed to support the management in the decision-making process by provid-
ing a better understanding of the position of a company within an industry and a specific market seg-
ment. According to Evers and Gerke (2009) strategic groups enhance the understanding of the formation
of the market and its competitors around. Thereby, the most important aspect of a strategic group anal-
ysis is the identification of close and distant rivals (Thompson et al. 2016). The company should be able
to answer the following question: Whom am I competing against with, directly or indirectly. The above-
mentioned definition of strategic groups reveals this also by clustering “industry rivals that have similar
completive approaches and market positions” (Thompson et al. 2016: 68). In other words, what are my
direct competitors, and with that distinction distant rivals can be identified too.
As an example, we can look in the automobile industry. If we cluster the strategic map with the variable
pair price and product line, we see that Mercedes is not, or not directly, competing with Toyota, since
the luxury brand Mercedes offers high priced products but has a smaller product line than Toyota which
offers lower priced vehicles. However, if we compare Mercedes and Lexus, in the same map we see a
direct competition. Due to the fact that Lexus, by the way the luxury brand of Toyota, offers high priced
cars but the product line is not as broad as the one of Toyota.
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Attractiveness of Positions
Not all positions within a strategic group map are equally favorable. Two main reasons are related to
this.
Firstly, the competitive forces or pressure may vary within an industry and therefore, some positions of
strategic groups are more favorable than others, because they face weaker completive forces (Thompson
et al. 2016).
Secondly, industry driving forces might be beneficial for some positions and harmful or threatening for
others (Thompson et al. 2016). In some positions changing industry forces can boost the future business
outlook and performance. Whereas other positions might be challenged by the industry change and are
hampered by “mobility barriers” to relocate its position in the short run.

2.3 Empirical evidence about Strategic Groups Analysis and performance measurement
Performance investigation of the link between strategic groups and firm performance has been an on-
going popular research theme. However, whether there exists a direct relationship between the strategic
group membership and performance is still questionable and evidences are mixed. There are various
empirical studies carried out in different sectors to investigate this issue. Some of these studies only
investigate macro-economic forces that relate to different structural forces that influence strategic group
members whereas other studies try to incorporate structural forces with individual forces of firms.

Early studies by Hunt, 1972; Newman, 1972 and Porter, 1973 initially developed and shaped the re-
search field of strategic group analysis by demonstrating the heterogeneity of firms in particular indus-
tries. However, the first comprehensive and well-developed theoretical model of the strategic group
phenomena was developed by Caves and Perter (1977), who argued the “mobility barriers” shape groups
within an industry and prevent the existence of one joined group (Cool and Schendel 1987). These
“mobility barriers” where also meant to further explain why “…profits rates differ systematically among
the groups making up an industry...” (Caves and Porter, 1977: 251). Given that “mobility barriers” relate
to structural forces in which companies operate (Cool and Schendel 1986). So, in example the capability
of freely changing a company’s competitive position in a market. High mobility barriers prevent that
change or hamper it.

Porter (1979, 219) stated: … the structure within an industry consists of its configuration of strategic
groups, including their mobility barriers, size and composition, strategic distance, and the market inter-
dependence relative to each other. The firm will have higher profits if it is located in a group with the
best combination of high mobility barriers, insulation from intergroup rivalry and substitute products,
bargaining power with adjacent industries, the fewest other members, and suitability of the firm’s exe-
cution ability.” Compared to the structural explanation Porter redirected the focus of the literature of
different performance levels of strategic group members to individual forces on firm level (Cool and
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Schendel 1987; Porter 1977). Since Porter included individual forces and also the mobility barriers –
which were previously identified as a predominately structural force – the role of these mobility barriers
now only indicated an indirect link with the firm performance of a strategic group member (Cool and
Schendel 1987).

Before further analyzing the potential relationship of performance measurement and strategic group
members a preceding question must be answered. Do strategic groups exit? Dranove, Peteraf and Shan-
ley (1998) conducted a comprehensive empirical study to develop an economic framework for analyzing
that question. They incorporated in their model, besides other factors, the above mentioned structural
and individual forces to distinguish between firm-level effects and industry-level effects. Thereby they
tried to identify specific groups and their effects independently and attempted to address the multiple
group problem with unidentifiable interdependencies (Dranove, Peteraf and Shanley 1998). As a result,
they provided a framework to distinguish true group-level effects and thus conclude whether strategic
groups do exit. They found limited evidence that a “rigorous search for strategic groups” provide fruitful
insights Dranove, Peteraf and Shanley 1998: 1029). This is especially the case when studying strategic
groups and their performance. Therefore, analyzing studies that relate to performance of strategic groups
should be done very carefully and with caution (Dranove, Peteraf and Shanley 1998).

Short, Ketchen and Palmer (2007) took a holistic approach in analyzing firm performance. They identi-
fied different levels of analysis that shape the firm performance and stated that the strategic group level
has been mostly excluded in analyzing firm performance. By including firm-, group-, and industry-level
influences in their framework they found significant associations across all three with firm performance
(Short, Ketchen and Palmer 2007). Therefore, indication that if a “study includes only one or two of the
levels, the resulting portrayal of the interwoven systems that collectively shape firm outcomes is incom-
plete”. Short, Ketchen and Palmer (2007: 163). Meaning that that the group-level – so strategic groups
– do have a relationship with performance of a firm, but this relationship is not easily isolated from other
factors.

Therefore, it can be stated, that strategic group theory is mainly a tool to identify “plausible structure”
of an industry and thereby enhances the comprehension of social formation and relationships between
group members as well as members of an industry (Evers and Gerke 2009). A holistic approach should
be considered when measuring the performance relationship and according to Lawless, Bergh and
Wilsted (1989) individual firm capabilities play a dominant role in the future performance within a
strategic group. The assistance in understanding strategic grouping is confined by theoretical limita-
tions, which primarily include only “current social changes and medium range developments, especially
in fast developing countries” (Evers and Gerke 2009: 1).
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3 Practical Example of the Coffee Shop Industry in Vietnam

3.1 Introduction and characteristics of the chosen industry
Introduction of the Coffee Shop Industry in Vietnam
Ray Oldenburg, an urban sociologist and also the author of “The Great Good Place” (1991) once accen-
tuates in his book the important role of coffee shops, bars and general stores in establishing “the con-
nections among individuals”. This affirmation has become a steady platform for the development of the
Coffee Shop Industry worldwide in general and Vietnam in particular. No one can deny the fact that a
huge amount of coffee shops is constructed in every corner of the streets, buildings and downtown.
Hence, this builds up a highly successful Coffee Shop Industry. According to Sai Gon Business’s report
(18.08.22), the country currently has approximately larger than 20,000 coffee shops and a variety of
rooms for developing new stores. More specifically, Highlands Coffee owns about 150 stores, Starbucks
has 30, Trung Nguyen Legend and The Coffee House have 60 and 80 stores respectively.

Why does Starbucks need to use a Strategic Group Map (SGM) and Analysis to become successful in
the Coffee Shop Industry in Vietnam?
According to Trade Circle (18.08.18), Vietnam is the only country, in which Starbucks is not the most
profitable coffee house chain, due to the popularity of domestic brands such as Highlands and Trung
Nguyen Legend. It is reported that the number of Starbucks stores in Vietnam only stands at 38, while
there are more than 330 stores in Thailand, Indonesia has 320 and Malaysia owns more than 190 stores.
Therefore, in order to reduce the difficulty in approaching Vietnamese consumers, Starbucks needs a
strategic group map to identify their position in the industry, understand the market formation and know
fairly direct and indirect competitors.

Identify the competitive characteristics that delineate strategic approaches used in the Coffee Shop In-
dustry
In her qualitative study “The Coffee Shop: Social and Physical Factors Influencing Place Attachment”
(2006), Lisa Waxman determined that “the atmosphere included cleanliness, aroma, lighting, comfort-
able furniture and a view to the outside is the top characteristic of the ideal coffee shop”. The survey
participants agreed on the aroma as they are in love with the aroma “comes primarily from coffee and
baked goods”. Nowadays, not only do people gather with friends and family, but they also go to coffee
shops for reading, studying and working. Moreover, most of them go for taking photos there as well.
Hence, adequate lighting, cleanliness and the store’s view matter significantly. Apart from the atmos-
phere, “the secret to a successful coffee shop” is said to be the degree of service offered (Forbes. 2012).
“Nothing better than seeing a customer’s face lights up” when the shops offer loyalty cards and promote
multiple sales. The third competitive characteristic to be mentioned is the price and quality range. Coffee
shop customers and professionals in Team Handground and Barista Magazine survey answered that the
determinant makes people decide to visit a coffee shop is its coffee quality. Unique flavour, a body of
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mouthfeel and finish or aftertaste are what people expect when thinking about the quality of a coffee.
Hence, “offering 100% quality is the best commercial decision” (Forbes. 2012). Since the target cus-
tomers for many coffee shops vary from “a high-income bracket, an awareness of social status and
environmental consciousness” (Reference.com, Business & Finance, Starbucks) to coffee lovers “who
are not in a hurry and just want to grab a quick cup” (Espresso Guru. 2017), students and public em-
ployees, the price of a coffee is expected to be suitable for all of these targets. According to Shopkeep
Blog (Money & Profit. 2014), pricing also includes “the service, the location, the environment, the
cleanliness, the perceived quality of the product and the perceived skill of the barista”. Due to this, the
menu of a coffee shop is the last but not least competitive characteristic.

Constructing the Strategic Group Map and Analysis for Starbucks

If price/ quality range and menu are selected as two variables for the Strategic Group Map of the Coffee
Shop Industry, three clusters are defined so as to describe the different competitive positioning relation-
ships in the industry structure. The cluster at the bottom left corner represents Napoli and Milano Coffee
with a narrow menu and low price. In the middle settles Highlands Coffee, Phuc Long and The Coffee
House which offer good quality and affordable prices. Last but not least, Starbucks, The Coffee Bean
& Tea Leaf, and Trung Nguyen Legend position in the highest side of each variable. Thanks to clustering
“industry rivals that have similar completive approaches and market positions” (Journal of Applied
Ecology. Thompson. 2016), each coffee brand knows exactly which industry members are competing
directly and indirectly against them. Based on the map, The Coffee Bean & Tea Leaf and Trung Nguyen
Legend are close rivals to Starbucks and the rest remain distant rivals. Similarly, Highlands Coffee,
Phuc Long, and The Coffee House are competing directly against each other. Napoli and Milano Coffee
consider the others as indirect competitors.

3.2 Five Forces Analysis

The competitive rivalry among existing competitors
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The competitive rivalry among the existing sellers force pertains to the influence of competitors on each
other and the industry environment. The key external factors participate to the strong force of this com-
petition are a huge number of firms (strong force), moderate variety of firms (moderate force) and low
switching costs (strong force). The coffee retailer industry in Vietnam mushroom in a recent decade
with the appearance of more and more domestic and foreign brands with different sizes and different
exposures to speciality coffee. The coffee market in Vietnam is extremely fierce, however, it is also very
fertile, many brands enter but also many brands step out due to improper business strategies. Although
the global coffee chain in Vietnam creates a wave of “queuing” coffee with quite large brands, located
in the “golden land plots”, these chains focus on the middle class and the prices are relatively high
compared to the majority of people drinking coffee every day. Besides, their cost of premises is con-
stantly increasing. As a result, these global brands face limited revenue such as The Coffee Bean and
Tea Leaf, Caffe Bene or even step out this market, for example, Gloria Jean’s Coffee. On the contrary,
the domestic coffee chains are continuously expanding, even jumping into positions where foreign
brands ran away before, for example, Gloria Jean’s in Ho Con Rua Lake location was replaced by High-
lands Coffee. Appearing in most of the big buildings and shopping centres in Ha Noi and Ho Chi Minh
City, owning expensive outdoor locations, Highlands is considered as a coffee chain with a rapid selling
point growth rate and attract many customers, from office people, students to young people. Some other
domestic brands such as The Coffee House, Phuc Long, Milano, Napoli and so on also succeed when
combining the flexible business model, minimizing the cost of rental space of the takeaway business
model. While Phuc Long attracts the youth with a diverse menu of beverages, competitive prices, stores
in prime locations, The Coffee House focuses on the youthful and dynamic atmosphere with the average
price for the drinks. In general, the domestic brands are more favoured in this industry due to they make
great efforts to always understand customer needs, update new trends, change to suit the development
of a very dynamic capital market. In this Five Forces analysis, such moderate variety further strengthens
the level of competition in the industry. Additionally, due to the low switching costs, competition in this
industry is more intense.

Bargaining power of buyers or customers

The industry experiences the highly intense competitive pressures stemming from customers. This force
refers to the relative power of customers or group of customers on the business environment to exert
influence over other different parties. The following external factors contribute to the strong buyer bar-
gaining power are low switching costs (Strong force), buyer price sensitivity (Strong force) and high
substitute availability (Strong force). In Vietnam, coffee is more than a beverage but is as an integral
part of each of the Vietnamese’s daily work and life. Vietnam is in a developing economy, the popula-
tion is in the golden period, the demand for coffee consumption becomes stronger, making Vietnam a
potential and fertile market, especially for the coffee chain. In order to fulfil the demand for coffee
consumption, the growth of the variety of coffee chains offers the buyers abundant of choices. These
brands locate mainly in big cities such as Ho Chi Minh City, Hanoi with a huge number of stores.
 9

Besides, the takeaway coffee shops, which can be founded on every street and corner, offer with ex-
tremely reasonable price for a cup of coffee. These factors lead to the low switching cost for the cus-
tomers. In addition, Vietnamese people are quite price sensitive. Despite the fact that Vietnam is a de-
veloping country, the average income per capita of Vietnamese people is only about 3,000 USD per
person per year. Minister of Planning and Investment – Nguyen Chi Dung emphasized Vietnam was
still in the group of low-middle income countries. Surprisingly, the FT Confidential Research survey in
2015 pointed out that Vietnam was the only country where Starbucks was not ranked as the most fre-
quently visited chain. Instead, consumers opt for homegrown favourites like Highlands Coffee and
Trung Nguyen, which have comparable pristine and modern interiors and offer their customers a con-
siderable discount on their drinks. Domestic chains such as Highlands Coffee, The Coffee House, Phuc
Long, Milano, Napoli have entrenched their dominance by offering affordable prices and highlighting
the Vietnam characteristics of their drinks. They have boosted their competitiveness and taken ad-
vantage of the lacklustre consumer response to the global chains. Furthermore, high substitute availa-
bility steps up the bitter rivalry in the coffee shops industry in Vietnam. Alternative beverages are milk
tea, tea, energy drinks, fruit juice, bottle water, soda and so on everywhere.

The threat of substitutes or substitution

This force relates to the impact of substitute goods and services on the business and its external envi-
ronment. The external factors that intensify the negative impact to the threat of substitution are high
substitute availability (Strong force), high affordability of substitute products (Strong force), and low
switching cost (Strong force). The high supply of alternatives makes it easy for customers to turn to
these alternative goods instead of the coffee chains industry. Specifically, alternative items are ready-
to-drink beverages, instant beverage powders and purees and food and other beverages are readily avail-
able from various means, such as fast food and fine-dining restaurants, vending machines, supermarkets,
grocery stores as well as small convenience stores. Vietnam has gradually transformed into an industri-
alized country, the pace of life is faster, the time is increasingly limited, time for enjoying a cup of drip
coffee is increasingly shortened. As a result, the leading coffee manufacturing companies such as Nes-
cafe has increasingly focused on investing in the instant coffee segment in order to meet the require-
ments of fast, compact and convenient criteria for consumers. What is more, abundant creative business
models of coffee as substitutes, for example, coffee shop and book, coffee shop and animals, coffee
garden, coffee and working, coffee shop and movie or even coffee and learning. Customers can read
books like they are sitting in the library or enjoy the different types of music performed by live singles
while enjoying the coffee. These substitute forms stimulate the competition by offering affordable prices
and cost less than the branded coffee shops. Due to the diverse and attractiveness of those forms, the
switching cost for buyers is considerably lowered.

Threat of new entrants or new entry

Threat of new entrants force relates to the effect of new players or new entrants in the industry. In the
Vietnam coffee shop industry, the external factors lead to the moderate threat of new entrants are the
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high cost of doing business (Moderate force), low to moderate supply chain cost (Moderate force) and
high cost of brand development (Weak force). The high cost of doing business refers to the variability
of the actual cost of establishing and maintaining operations in the coffeehouse industry. High spending
on “golden land plots” rental space and expensive imported coffee beans have posed challenges to in-
ternational coffee shops in Vietnam. As a result, a strategic group aimed at high-class customer segment,
which comprises Starbucks, The Coffee House and Tea Leaf, Trung Nguyen Legend confront the
weaker threat of new entrants force. Nevertheless, these brands tackle financial pressures in order to
gain limited industry profitability. The most challenge to premium coffee chains is the rental costs which
are considered as being among the highest in Southeast Asia. In addition, the factor that can limit the
other new foreign competitors are the very high duties for importing coffee beans into Vietnam since
Vietnam is a net exporter of coffee beans globally. As a result, this can also raise the challenge that how
to differentiate themselves as much as possible from local and competing for international coffee brands
but still obey the system-wide franchise requirements. All of these factors above lead to the strong entry
barrier for the new entrants to enter the high-class coffee chains. Nevertheless, the lower coffee retail
prices for consumers leads to the more attractive of that segments, the lower the cost of doing business,
the less concentrated coffee shops in the premium locations and the weaker entry barriers for new en-
trants. The giant coffee chains – Highlands Coffee, The Coffee House, Phuc Long and others are suc-
cessful due to their food offerings. Traditional Vietnamese, as well as Western dishes, are often served
side-by-side. Secondly, small-scale coffee shops have lower supply needs and corresponding supply
chain costs. Raw materials are also a crucial factor with the big brands. They often select coffee growing
regions and standardize it through a unique process. Contrarily, the small-scale coffee shops buy the
raw coffee beans from partners or relatives that meet their demand and requirements to reduce the cost.
On the other hand, brand development is quite costly. For example, small-scale coffee houses do not
have enough resources to develop their brands. Additionally, brand development requires enough time
to reach the level of strength like Starbucks and Highlands Coffee. Although customers in Vietnam are
quite price sensitivity, they are also quite loyal to their favourite brands. As a result, this factor alleviates
the threat of new entrants for the existing competitors.

Bargaining power of suppliers

The only weak force that the industry faces are the bargaining power of suppliers. Porter’s Five Forces
analysis considers this force as the influence that suppliers have on the company and its industry envi-
ronment. Currently, Vietnam is the 2nd country with the largest coffee export volume in the world with
a specific figure of 1.78 million tons per year in 2016. When referring to the famous coffee growing
areas in Vietnam, Central Highlands provinces such as Cau Dat, Min Mountain, Tram Hanh (Lam Dong)
and especially Buon Ma Thuot (Dak Lak) need to be mentioned. Most of coffee bean growers in Vi-
etnam are small private farmers, which provides 95 per cent of the total production. The buying process
depends largely on the relationship and mutual trust between the growers and the collectors. Due to the
 11

large size of individual suppliers, the less each coffee brands depend on the suppliers. As a result, a
coffee brand can keep its input costs lower and enhance its profits.

Conclusion
The Five Forces analysis model points out that the coffee chain industry in Vietnam is gradually becom-
ing saturated and rather to be unattractive industry due to the low to moderate threat of new entrants,
the high threat of substitute products, the strong buyer bargaining power, the intensive rivalry competi-
tion, and the weak bargaining power of suppliers forces. The industry experiences more than one strong
force means that it has multiple competitive challenges with which to cope. Specifically, the strategic
groups, which offer low to medium prices and narrow to moderate product line breath, are more favour-
able due to their advantages for local coffee shops that they understanding the customers and their be-
haviours in the domestic market regarding both the competitive rivalry force and the buyer bargaining
power force. However, the threat of substitute products force put strong pressures on all of the clusters.
The threat of new entrants gives the favourable condition for those high-class strategic groups because
of the high rental and brand development costs. Nevertheless, these high-class cluster, especially inter-
national brands, have to bear the high duties when importing the coffee beans into Vietnam and disad-
vantages of policies offered regarding the threat of bargaining power of suppliers. In general, the most
key decisions variables for each of the coffee brands to stay in the industry are the affordable price
strategy, the suitable menu for Vietnamese taste, the differentiation in the coffee atmosphere and the
additional services accompanied with the product the customer buy such as promotions, Wifi connection
and so on.

3.3 PESTEL Analysis

Political
Vietnam is known for its political stability and few issues related to religion and ethnic conflicts which
attract foreign investment into Vietnam. Stable politics also contributes to the development of the busi-
nesses as enterprises are not under pressure of political instability to develop production and expand
market share. In recent years, the government has paid more attention to economic laws, such as con-
sumer protection laws or intellectual property laws, and creates favorable conditions on capital and
technology to help the coffee industry expand production.

Economic
According to the World Bank (WB), Vietnam achieved the average income in 2009 with GDP per capita
increased more than 10 times compared to 1986 (The World Bank Group 2019). Following 6.8 percent
growth in 2017, preliminary data indicate that GDP growth accelerated to 7.1 percent in 2018, under-
pinned by a broad-based pickup in economic activity (Vietnam Investment Review 2019). However,
when comparing VN to others countries in the world like US or China regarding GDP, GDP per capita,
and Human Development Index, Vietnam is still categorized as a developing country with low income
level. Therefore, Vietnamese people are still quite price sensitive. They can buy a coffee of The Coffee
 12

House, ignore one of Highlands if The Coffee House has a promotion. A cup of Starbucks coffee in
Vietnam costs nearly two times as much as that of their competitors. Such a price gap might have a great
effect on customers’ decision-making. As Vietnam has a much lower average wage level than other
developed countries, only its upper economic layer can actually afford Starbucks’ products. This leads
its middle and lower economic layers to seek for cheaper alternatives such as Highlands, The Coffee
House, etc. since they can manage to buy the generic products with lower prices. Starbucks will have to
drive down the cost of its products in a premium position that is competitive.

Socio-Cultural
Socio-cultural factors, such as consumer preferences or changes in lifestyles of population, have an
important impact on the profitability of any business.
Vietnam is a developing country with the population of over 90 million and ranks 13th in the world
population with a fast-growing economy (Worldometers 2019). At the same time, the proportion of
young and middle-aged people is quite high, which 65 percent of the population is young people includ-
ing students and workers, bringing a large number of customers. Thus, large population, rapid change
in urbanization and a high proportion of young and middle-aged people are huge advantages for coffee
shop development in Vietnam.
Vietnam’s milk tea market share has been growing tremendously over the last few years. It can easily
be observed that the number of milk tea franchise stores has been exploding from street corners to shop-
ping malls. Nevertheless, in terms of places where Ho Chi Minh’s consumers frequently visit for tea
and coffee drinks, the top three branded shops conquering Ho Chi Minh citizens today are The Coffee
House, Starbucks, and Highlands (Tuệ An 2019) It is interesting that, within these coffee shops, coffee-
based drinks take up 50% of drink consumption while other beverages like tea, fruit juices, and soft
drinks only account for the other half, which means coffee is still an important SKU for coffee retailers.
About the coffee drinking habits, three main factors that influence the decision to drink coffee in a coffee
shop are the taste, style and brand of coffee. In a survey, 44.7% of the clients in a coffee shop chose the
taste (most consumers specifically preferred coffee with a bitter taste) while 39.9% decided based on
the atmosphere of the coffee shop (quiet, luxurious, stylish, easy to gather friends are the characteristics
that attract drinkers) and only 15.4% of them voted for brands (Duyên Hoàng 2015). Although current
coffee market observes modern and Western-influenced coffee styles such as Cappuccino or Mocha,
Vietnam’s traditional black and brown coffee are still of the most favorite choices of Vietnamese people
as it makes up ¾ of national coffee revenue (Anjoubault 2018) Therefore, local coffee enterprises such
as Trung Nguyen Coffee, Highlands Coffee who have more experiences in catering to the Vietnamese
coffee taste, which favors strong coffee, are more well-liked than those foreign coffee chains like Star-
bucks who are still accustomed to Western light coffee flavors.
Today, the demand for cafes with nice location, beautiful space and eye-catching decor is very essential.
Understanding the needs of Vietnamese clients, coffee shop businesses have been developing the right
 13

directions to make profits. Starbucks brands itself as a beverage provider who offers a typical coffee
house dining experience by providing customers with comfortable and tranquil atmosphere, tables and
chairs which encourage customers to stay for a long duration to socialize, work, or study while enjoying
their drinks. In general, these factors are appealing to customers who seek premium experience that
enhances overall consumer experience and allows customers to sit in the cafes for longer period and to
order more beverages. On the other hand, take away and grab-and-go coffee shops or those who do not
focus on investing in spacious premises and luxurious tables and chairs are not suitable for Vietnamese
consumers.

Technology
WiFi is an extremely important resource to attract more customers. Something as simple as providing
free WiFi access to customers will provide a significant advantage over competitors who don’t. These
days, besides good food and drinks, it is also great customer service that affects the franchise reputation.
However, Starbucks in Vietnam provides each bill a code to connect to wifi and customers can only use
that code for only 60 minutes, not to mention its much higher prices comparing to other brands. In
summary, wifi limitation, light coffee flavor and expensive drinks make Starbucks less convenient and
popular in Vietnam than other local coffee chains such as The Coffee House or Highlands who offer
lower prices with free Wi-Fi for customers throughout the day.

Environmental
A plastic bag takes only 5 seconds to produce, is used only within 5 minutes and takes less than 1 second
to throw away. However, it takes them 500 to 1000 years to be disintegrated. Therefore, many busi-
nesses, especially coffee shops businesses, are implementing several green techniques to reduce plastic
waste such as bamboo straws, cloth bags or emailed receipts. For example, Starbucks are switching their
products from plastic to biodegradable material that can be easily recycled. Another effort done by Star-
bucks is that they also reward their customers, who bring their own reusable cups to buy beverages, with
a 10% discount. According to the Fortune, Starbucks are currently placed at the ninth position out of
500 in gaining renewable energy certificates (Businessteacher)
On the other hand, Highland, one of the most successful coffee shop chains in Vietnam, even though
has made some efforts for the environment like upping size for customers bringing their own cups, they
still use a lot of plastic straws, cups and spoons every single day. With 296 stores (according to the data
on the brand's official website) spreading out 14 provinces and cities in Vietnam, many people wonder-
ing how massive is the amount of Highlands Coffee plastic consumption per day. Highlands' widespread
use of plastic goes against the zero waste trend of the world and they have been strongly criticized, even
boycotted due to this. It can be seen that green companies are attractive and supported by many con-
sumers nowadays and not complying with environmental friendly regulations might lead to loss of cus-
tomer base.

Legal
 14

The first preference of the government for its nation is to keep the people healthy and hygienic. Before
the initiation of any food sector, the government makes sure that the company is using right and ethical
products for the production of the goods. Caffeine consumption levels are being strictly regulated due
to the harmful effects it can have on individuals if consumed excessively. Furthermore, as day by day
global warming is increasing, government has taken steps to reduce the amount of global warming by
making some environmental policies essential for every coffee business to be followed. One of the pol-
icies is to do recycling of the waste material which is collected in tons every day.

4 Discussion
4.1 Practical Implications
Why is strategic group analysis important?
It helps to identify who the nearest competitors and on what basis organization compete. Moreover,
strategic group analysis also helps to raises the question of how likely or possible it is for another or-
ganization to move from one to another. It might be used to identify opportunities and strategic prob-
lems. This method is a useful tool to help firms easily analyze where they actually need betterments and
with the help of this firms do well and gain well. Strategic group analysis is a widely used methodology
in the areas of organizational economics and strategic management.

Which firms can apply the strategic group analysis?

Any firms can use this for their business because it is useful for them to identify who their rivals are.
The application of strategic group analysis depends on identifying the strategically important dimen-
sions of competition. Even when firm having two or many competitors, graphs will help to have a better
view of where it and rivals stand and what are happening in market.

Why should you identify who are your rivals and what they are doing?
Understanding your rivals is the key to success in any business. It is definitely an advantage which firms
can make profit and develop the business strategies. Through strategic group map, you can get insights
into the competition while looking at your own failures and successes.
Through strategic group mapping, issues that can be brought from the graph of bubbles and information
include:
1. Getting more benefits from seeing where your firm stands in market
2. Identifying the rivals in your industry and then come up with the steps to put your business
ahead of them.
3. Identifying market barriers for entry and exit.

What can we learn from Strategic Group Analysis?

 15

From the theoretical background, we have known that the most important aspect of a strategic group
analysis is the identification of close and distant rivals. To run a successful business, it is significant to
know where our competitors stand. Strategic group mapping is liked the mind-mapping technique that
helps us to have a better look at what our rivals are doing. In the map, we can see that different sections
with different bubbles will represent the other business and what they are doing, what strategies are
being used. In the practical case, as we can see from the map, it is clearly for us to identify who are our
direct and indirect competitors. The companies which are in the same cluster will directly compete to
each other like Highlands and The Coffee House while the other who are indirect competitor, like Star-
bucks, will not care about these companies and they just focus on their group and strategies.
Moreover, the analysis of strategic group also helps firms chart the future directions of firms’ strategies.
It is possible for a firm copy idea from another firm to apply on their business if they see the potential
aspect of that idea. With a strategic group analysis, firm easily see what is working efficiency for com-
petition and what are not working. This information can be used to test what is working with their own
competitive strategy. Finally, it becomes possible to make improvement about the value statements be-
cause the organization has already seen the reaction to the work of the competition.

4.2 Limitations
Strengths of Strategic Group Analysis
The Strategic Group Analysis benefits the organizations in many ways. First of all, it helps to identify
the direct and indirect rivals of the company in an industry. There is no doubt that competitors are a big
concern of every company in the market. This analysis provides an overall perspective of strategic
groups and helps managers easy to study and select the appropriate strategy for each cluster.
The second advantage of using the Strategic Group Analysis is to measure the differences in competitive
strategy of each company in the industry. Each market is so enormous that a firm can only meet the
demands of customers in some aspects. For that reason, they are always existing opportunities for start-
ups when they want to enter a market. The Strategic Group Analysis helps senior managers and leaders
to compare the distinct characteristics between strategic groups in order to allocate the leftover parts and
create the satisfactory products.
The business arena is so severe and innovative. So there is a must for any company to keep pace with
the others and even get ahead of them. The best chance to win comes from an ability to predict what the
competition will create 2-4 moves from now. With the Strategic Group Analysis, it becomes possible to
predict the potential moves of competitors in the marketplace.

Weaknesses of Strategic Group Analysis

Besides the powerful strengths, the Strategic Group Analysis does have some unfortunate disadvantages.
This model overemphasizes the importance of industry structure as a determinant of firm performance
and pays little attention to differences between companies in the industry or strategic groups. Studies
 16

show that a company's distinct resources and capabilities are a much more important factor in determin-
ing their profitability than an industry or a strategic group. These findings do not make the models of
competitive forces and strategic groups less meaningful, but they only imply a sense of limited useful-
ness. A company is not profitable just because it is in an attractive industry.
The second disadvantage of the Strategic Group Analysis is that it cannot fully reflect what arises during
the period in which the industry environment changes rapidly. It is important to understand that during
a period of rapid growth, when industry structure is being revolutionized by innovation, value migrated
from the old to new business models. Because this method is only useful for the analysis of industry
structure in a stable period, changes can become risks if the company do not react and define the prob-
lem-solving approaches for new challenges.
The third disadvantage of the Strategic Group Analysis is the risk of uncertain competitive goals and
strategies. It is obvious that none of organizations straightforwardly reveal their own profitability goals
and strategies. The firms can partly suggest goals and strategies which are based more on assumptions
than facts. If assumptions which are given by the Strategic Group Analysis turn out to be mistaken,
everyone’s time was wasted. Wrong strategies not only lead to the lost the company’s advantages and
opportunities but also cause damages of profitability.
One of the outstanding advantages of the Strategic Group Analysis is to identify potential opportunities
which may exist in the marketplace. However, the dimensions are not making sure unless it goes through
trial and error examining process. Instead, when the analysis is finished, organizations need to do some
experimentation to evaluate how useful the variables will be for each industry. That is why you see
businesses testing strategies with a limited sample of a demographic before jumping into the entire
market.

5 Conclusion
In theory, a strategic group consist of those industry members with similar competitive approaches and
positions in the market. The best technique for revealing those is strategic group mapping. Briefly, stra-
tegic group mapping is used for displaying the different market or competitive positions that rival firms
occupy in the industry. Thus, Strategic Group Analysis has two main values, which are the close/distant
rivals and the attractiveness of positions. Furthermore, some empirical evidences that have been men-
tioned above, explain different view of performances measurement. In practical case, there are an over-
view of the coffee shop industry in Viet Nam and the reason why Starbucks should use this analysis to
enter Viet Nam coffee shop industry. By using Strategic Group Map, Starbucks can identify their posi-
tion through competitive characteristics, understand the market formation and also their direct/indirect
competitors. Moreover, this report use the five forces and PESTEL to prove how Starbucks implement
Strategic group analysis for development. Last but not least, strategic group analysis is important be-
cause it helps to identify who the closest rivals and on what basis organizations compete. Any firm can
use this for their business as understanding the rivals is the key to success. However, this analysis still
 17

have some weaknesses. It overemphasizes the value of the industry structure as a determinant of com-
pany success and pays little attention to differences between companies in the industry. Strategic Group
Analysis also cannot fully reflect the changes in the industry as it only useful in the stable period.
 18

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