Final answer:
Firms cluster into strategic groups because they adopt similar strategies that harness their resource capabilities and closely monitor competitors within the group. Changes in market conditions or firm strategies can lead to changes in group membership, and wider availability of financial capital facilitates such strategic shifts. However, as groups expand, the risk of internal division and lack of cohesion can increase.
Step-by-step explanation:
Firms tend to cluster into strategic groups because they follow similar business models and strategies that best utilize their resources and capabilities to compete within the industry. Such grouping allows firms to compete more directly with companies that have similar characteristics, instead of competing across the entire industry. This cluster formation is driven by the firms' inclination towards certain strategic dimensions such as cost leadership, differentiation, innovation, geographic coverage, etc.
Within these groups, companies closely monitor each other's moves and performance, as shifts in strategy by one firm can impact all others within the group. This dynamic is crucial for managers, who must recognize not just their position within a strategic group but also potential movements by other firms that could alter the competitive landscape. As market conditions change or as firms evolve, some may decide to leave one strategic group and enter another, thereby changing group membership.
Factors such as the availability of financial capital and widespread information about the company's performance make it easier for established firms to execute new strategies and attempt to move to potentially more profitable strategic groups. Conversely, as groups grow larger, firms need to be aware of the increased risks for division and lack of cohesion, which can be counterproductive to achieving their strategic objectives.