One way to group, I read, is that you could group using Outlook. Then it will transfer to your iphone when you sync. I never tried this myself.
There are some apps that can do grouping. I am using "GroupHug". I think this cost either .99 or 1.99. I am also using "Contact Tool". This will sort your contacts in various ways (Zip Code, City, Name, Company, etc). I think this cost 1.99. Both programs are very good.