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9.0 Introductory Case Studies

9.1 Why do market segmentation makes sense

9.2 How Are Market Segments Best Defined?




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References

  1. ^ companies no longer aim a single product and marketing programme at the mass market
  2. ^ break that market into homogeneous segments
  3. ^ companies tailor products and marketing programmes to the particular desires and idiosyncrasies of each segment.
  4. ^ not all segments represent equally attractive opportunities
  5. ^ prioritise target segments by their potential
  6. ^ One useful analytical framework managers or entrepreneurs can use for this purpose is themarket-attractiveness/competitive-position matrix
  7. ^ Targeting consumers may be influenced to make decisions thought by some to be not in their best interest, because of their inclusion in the targeted group
  8. ^ Exclusion issues are raised because the firm’s marketing efforts do not include a particular group
  9. ^ For exclusion issues, the concern is not only that certain groups are deprived of products and services but also that they may pay more for those they do receive.
  10. ^ assessing the attractiveness of markets or market segments

  11. ^ is the degree to which unmet customer needs, or needs that are currently not being well served, can be identified

  12. ^ is the degree to which the firm’s proposed product entry into the new market or segment will be sufficiently differentiated from competitors
  13. ^ how the market’s attractiveness is likely to change over the next three to five years.
  14. ^ possible shifts in customer needs and behaviour,
    the entry or exit of competitors, and
    changes in their strategies.

  15. ^ such as possible
    a)changes in product or
    b)process technology,
    c) shifts in the economic climate,
    d) the impact of social or political trends, and
    e) shifts in the bargaining power or
    f) vertical integration of customers.

  16. ^ The expected changes in both market attractiveness and competitive position can then be plotted on the matrix
  17. ^ A business may decide to enter a market that currently falls into one of the middle cells under these conditions:

    (1) managers believe that the market’s attractiveness or their competitive strength is likely to improve over the next few years;
    (2) they see such markets as stepping-stones to entering larger, more attractive markets in the future; or
    (3) shared costs are present, thereby benefiting another entry.





9.3 Choosing Attractive Market Segments: A Five-Step Process


Most firms [1] no longer aim a single product and marketing programme at the mass market.

Instead, they [2] break that market into homogeneous segments on the basis of meaningful differences in the benefits sought by different groups of customers.

Then they [3] tailor products and marketing programmes to the particular desires and idiosyncrasies of each segment.

But [4] not all segments represent equally attractive opportunities for the firm.

To [5] prioritise target segments by their potential, marketers must evaluate:
  • their future attractiveness and
  • their firm’s strengths and capabilities relative to the segments’ needs and
  • competitive situations.

Within an established firm, rather than allowing each business unit or product manager to develop an approach to evaluate the potential of alternative market segments, it is often better to apply a common analytical framework across segments.

With this approach, managers can compare the future potential of different segments using the same set of criteria and then prioritise them to decide which segments to target and how resources and marketing efforts should be allocated.[6] One useful analytical framework managers or entrepreneurs can use for this purpose is the market-attractiveness/competitive-position matrix. As we saw in Module 2, managers use such models at the corporate level to allocate resources across businesses, or at the business-unit level to assign resources across product-markets. We are concerned with the second application here.




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Ethical Issues in Target Marketing
Over the years, marketing managers have confronted a number of ethical problems relating to the selection of target markets.
[7]
Problems can arise from targeting consumers who because of their inclusion in the targeted group may be influenced to make decisions thought by some to be not in their best interest.

Some would argue that advertising $150 sneakers to inner-city teenagers is ethically dubious, others that the advertising of snack foods and soft drinks to children is questionable.

[8] In other cases, exclusion issues are raised because the firm’s marketing efforts do not include a particular group.

In the area of inclusion issues, advertisers often resort to undesirable stereotypes in an effort to simplify advertising messages. These include sex-role, race, or age stereotypes. Thus, the portrayal of women as sex objects (bikini-clad models in beer ads) or, in general, subordinate to male authority figures is thought by many to be dehumanising and offensive. Reverse sexism with men shown as sex objects has also been on the increase to the dismay of some groups.
[9] For exclusion issues, the concern is not only that certain groups are deprived of products and services but also that they may pay more for those they do receive.

There is considerable evidence to support the latter claim. A survey in New York City found that food prices are highest in neighborhoods that can least afford them. Low-income shoppers (family of four) paid 8.8 per cent more for their groceries – $350 per year. Further, inner-city stores were on average poorly stocked, had inferior foodstuffs, and offered poorer service.
Companies often face the ethical problem of whether they may exclude certain groups they would rather not serve.

For example, insurance companies want only low-risk policyholders, credit-card companies only low-risk cardholders, and hospitals only patients with insurance.
Source: N. Craig Smith and John A. Quelch, Ethics in Marketing (Burr Ridge, IL: Richard D. Irwin, 1993), pp. 183–95; and Felix M. Freedman, ‘The Poor Pay More for Food in New York, Survey Finds,’ The Wall Street Journal, April 15, 1991.



9.3.1 Step 1: Select Market-Attractiveness and Competitive-Position Factors


An evaluation of the attractiveness of a particular market or market segment and of the strength of the firm’s current or potential competitive position in it builds naturally on the kind of opportunity analysis developed in Module 4 through Module 8.

Managers can assess both dimensions on the basis of information obtained from analyses of the environment, industry and competitive situation, market potential estimates, and customer needs. To make these assessments, they need to establish criteria, such as those shown in Exhibit 9.6, against which prospective markets or market segments can be evaluated.

Both market and competitive perspectives are necessary.

Exhibit 9.6 Factors underlying market attractiveness and competitive
position

Market attractiveness factors

Competitive position factors
Customer needs and behaviour

Opportunity for competitive advantage
  • Are there unmet or underserved needs we can satisfy?

  • Can we differentiate?
  • Can we perform against critical success factors?
  • Stage of competing products in product life cycle: is the timing right?



Market or market segment size and growth rate

Firm and competitor capabilities and resources
  • Market potential in units, revenue, number of prospective customers
  • Growth rate in units, revenue, number of prospective customers
  • Might the target segment constitute a platform for later expansion into related segments in the market as a whole?

  • Management strength and depth
  • Financial and functional resources: marketing, distribution, manufacturing, R&D, etc.
  • Brand image
  • Relative market share



Macro trends: are they favourable, on balance?

Attractiveness of industry in which we would compete
  • Demographic
  • Sociocultural
  • Economic
  • Political/legal
  • Technological
  • Physical

  • Threat of new entrants
  • Threat of substitutes
  • Buyer power
  • Supplier power
  • Competitive rivalry
  • Industry capacity
  • Driving forces: are they favourable, on balance?


9.3.1.1 Market-Attractiveness Factors


  • As we showed in Module 4, [10] assessing the attractiveness of markets or market segments involves determining the
    • market’s size and
    • growth rate and
    • assessing various trends – demographic, sociocultural, economic, political/legal, technological, and physical – that influence demand in that market.

  • [11] An even more critical factor in determining whether to enter a new market or market segment, however, is the degree to which unmet customer needs, or needs that are currently not being well served, can be identified.


In the absence of unmet or underserved needs, it is likely to be difficult to win customer loyalty, regardless of how large the market or how fast it is growing. ‘Me-too’ products often face difficult going in today’s highly competitive markets.


9.3.1.2 Competitive-Position Factors


As we showed in Module 5, understanding the attractiveness of the industry in which one competes is also important.

Entering a segment that would place the firm in an unattractive industry or increase its exposure in an unattractive industry in which it already competes may not be wise.

Of more immediate and salient concern, however, [12] is the degree to which the firm’s proposed product entry into the new market or segment will be sufficiently differentiated from competitors, given the critical success factors and product life-cycle conditions already prevalent in the category.

Similarly, decision makers need to know whether their firm has or will be able to acquire the resources it will take – human, financial, and otherwise – to effectively compete in the new segment.

Simply put, most new goods or services need to be either better from a consumer point of view or cheaper than those they hope to replace.

Entering a new market or market segment without a source of competitive advantage is a trap.



9.3.2 Step 2: Weight Each Factor


Next, a numerical weight is assigned to each factor to indicate its relative importance in the overall assessment.

Weights that Phil Knight and Bill Bowerman might have assigned to the major factors in Exhibit 9.6 are shown in Exhibit 9.7.

Some users would rate each bullet point in Exhibit 9.6 independently, assigning a weight to each one.

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9.3.3 Step 3: Rate Segments on Each Factor, Plot Results on Matrices


This step requires that evidence – typically both qualitative and quantitative data – be collected to objectively assess each of the criteria identified in Step 1.

For Blue Ribbon Sports in 1964, the assessment of the various factors might have looked such as those shown in Exhibit 9.7.

While more detailed evidence than we discuss here should have been, and no doubt was, gathered, Knight and Bowerman might have reached the following conclusions:

Market-attractiveness factors
  • Unmet customer needs for lateral stability, cushioning, and lightweight shoe have been identified. Score: 10.
  • The distance runner segment is quite small, though growing, but it might lead to other segments in the future. Score: 7.
  • Macro trends are largely favourable: fitness is ‘in,’ number of people in demographic groups likely to run is growing, global trade is increasing. Score 8.

Competitive-position factors
  • Opportunity for competitive advantage is somewhat favourable; proposed shoes will be differentiated, but shoe category seems mature, and Blue Ribbon Sports, as a new firm, has no track record. Score: 7.
  • Resources are extremely limited, though management knows runners and distance running; Bowerman has strong reputation. Score: 5.
  • Five forces are largely favourable (low buyer and supplier power, little threat of substitutes, low rivalry among existing firms), driving forces attractive. Score: 7.

Exhibit 9.7 Assessing the distance runner market segment in 1964


Weight
Rating (0–10 scale)
Total
Market attractiveness factors



Customer needs and behaviour: unmet needs?
0.5
10
5.0
Segment size and growth rate
0.3
7
2.1
Macro trends
0.2
8
1.6
Total: market attractiveness
1.0

8.7




Competitive position factors



Opportunity for competitive advantage
0.6
7
4.2
Capabilities and resources
0.2
5
1.0
Industry attractiveness
0.2
7
1.4
Total: competitive position
1.0

6.6

Mere armchair judgements about each criterion are not very credible and run the risk of taking the manager or entrepreneur into a market segment that may turn out not to be viable.

It is especially important to undertake a detailed analysis of key competitors, especially with regard to their objectives, strategy, resources, and marketing programmes, as was discussed inModule 5 and Module 8.

Similarly, compelling evidence that a proposed entry into a new segment will satisfy some previously unmet needs, and do so in a way that can bring about sustainable competitive advantage, is called for.

Both qualitative and quantitative marketing research results, as described in Module 8, are typically used for this purpose. Once these assessments have been made, the weighted results can be plotted on a market-attractiveness/competitive-position matrix like the one shown in Exhibit 9.8.

Exhibit 9.8 Matrix showing the attractiveness of a Blue Ribbon Sport’s target segment based on a matching of market attractiveness and competitive positionexternal image ebs-ma-bkmae0907.gif


9.3.4 Step 4: Project Future Position for Each Segment


Forecasting a market’s future is more difficult than assessing its current state.

Managers or entrepreneurs should first determine [13] how the market’s attractiveness is likely to change over the next three to five years.

The starting point for this assessment is to consider [14] possible shifts in customer needs and behaviour, the entry or exit of competitors, and changes in their strategies.

Managers must also address several broader issues, [15] such as possible changes in product or process technology, shifts in the economic climate, the impact of social or political trends, and shifts in the bargaining power or vertical integration of customers.

Managers must next determine how the business’s competitive position in the market is likely to change, assuming that it responds effectively to projected environmental changes but the firm does not undertake any initiatives requiring a change in basic strategy.

[16] The expected changes in both market attractiveness and competitive position can then be plotted on the matrix in the form of a vector (arrow) that reflects the direction and magnitude of the expected changes. Anticipating such changes may be critically important in today’s Internet age.



9.3.5 Step 5: Choose Segments to Target, Allocate Resources


Managers should consider a market to be a desirable target only if it is strongly positive on at least one of the two dimensions of market attractiveness and potential competitive position and at least moderately positive on the other.

In Exhibit 9.8 this includes markets positioned in any of the three cells in the upper right-hand corner of the matrix.

[17] However, a business may decide to enter a market that currently falls into one of the middle cells under these conditions:

(1) managers believe that the market’s attractiveness or their competitive strength is likely to improve over the next few years;
(2) they see such markets as stepping-stones to entering larger, more attractive markets in the future; or
(3) shared costs are present, thereby benefiting another entry.

The market-attractiveness/competitive position matrix offers general guidance for strategic objectives and allocation of resources for segments currently targeted and suggests which new segments to enter.

Thus, it can also be useful, especially under changing market conditions, for assessing markets or market segments from which to withdraw or to which allocations of resources, financial and otherwise, might be reduced. Exhibit 9.9 summarises generic guidelines for strategic objectives and resource allocations for markets in each of the matrix cells.

Exhibit 9.9 Implications of alternative positions within the market-attractiveness/ competitive-position matrix for target market selection, strategic objectives and resource allocationexternal image ebs-ma-bkmae0908.gif






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