From Market Segments to Strategic SegmentsNirmalya Kumar

Marketing’s basic mission: create a differencebetween a company’s offering and that of its competitors on an attribute important to customers.

To create differentiation, marketers usesegmentation, targeting, positioning (STP).

Segmentation: process of dividing the market intohomogeneous groups of customers who respond

similarly to a particular marketing mix of the four Ps

Problem: inability to create perceived differentiation

...too much reliance on mkt.g mix / 4Ps (tactical tool)

Differentiation is achieved by building the firm’s source of competitive advantage into the value network (=value chain) that serves a particular strategic segment.

Differentiation beyond marketing…to encompass- R&D- operations- service

MOVE FROM MARKET TO STRATEGIC SEGMENTSIN TERMS OF

VALUED CUSTOMER

VALUE PROPOSITION

VALUE NETWORK

3 Vs

1. How does a firm create sustainable differentiation?2. What are the cross-functional implicationsof serving a particular segment?3. What positive or negative synergies exist in serving combinations of different segments?4. Where should the value network be sliced to serve different segments?5. How unique is our marketing concept?6. What are sources of our differential advantage in terms of competences, processes and assets?

Segment C

Segment A Segment

B

Segmentation process: identify variables that will

TRADITIONAL PROCESS- identify market segments- select the appropriate segment(s) to target- position the company’s offer within the targeted segment(s)

using the four Ps

maximize differences between segments AND

minimize differences within each segment

Creative segmentation can help a company get closer to its customers

Mass customization:each customer is a distinct segment.

MOST COMPANIES

must TRADE OFF

COMPANYLOGIC CUSTOME

R LOGICEc. of scale = larger segments

Unique needs

Goal: ACTIONABLE SEGMENTS(1) distinctiveness i.e. different segments respond differentially to the marketing mix

(2) identity that is, the ability to reasonably profile which customers fall within which segment

(3) adequate size, so that the development of tailored marketing programs for individual segments is economically viable for the firm.

a priori segmentation:large medium small post hoc segmentation

XeroxXerox

TARGETINGdeciding which segments to actively pursue to generate sales

UNDIFFERENTIATEDOK if it lowers the cost of delivering the value proposition and opens up the industry to large numbers of new customers

DIFFERENTIATEDsimultaneously targets several market segments, each with a unique marketing mix.(Ford: Aston Martin, Ford, Jaguar, Land Rover, Lincoln, Volvo)

CONCENTRATED (one segment): PORSCHESubsegments (Psychographics):Top Guns - Elitists - Fantasists - Proud Patrons - Bon Vivants

Power - ctrl

Power - ctrl

Old money

Old money

Escape n feel guilty

Escape n feel guilty

Ownership - trophy

Ownership - trophy

Jet setters - thrill - excitement

Jet setters - thrill - excitement

Positioning is developing a USP for the target segment

A well articulated USP should be capable of being briefly communicated by completing the sentence: “You should buy my product or service because . . .”

EXPRESSED WITH BENEFITSNOT FEATURES OR ADVANTAGES

inability to do so results in either a price negotiation with the customer or a loss of

the sale.

younger, more educated, more affluent demographic, adventurous, confidentpsychographic of customers who enjoy driving and even disobey speed limits

U.S.

A) Positioned rationally

“affordable and German engineered,”

B) Positioned emotionally

a “different driving experience more connected to the road and world.”

customers perceive VW to be more drivable, more substantial, more individual, and more spirited.

Compared to

VW is more approachable, more likeable,a better value, and more human.

Be very specific in terms of the intended positioning or unique

selling proposition

MIDAS(1) age of the car: (older car, more likely will need Midas(2) size of the car: bigger car = higher value of the sale / margin(3) sex of the driver:women more likely to buy additional services

4) car lovers - 5) utilitarianssame basic value propositionfast, reliable, one-time repair

- Additional services

- phone call after 6 mnths

- smalltalk- newspaper- videogame- guarantee

Market and service segments as the abv onlyrequire changes in the marketing mix

Strategic segments require distinct value networks

A) “fast mechanical repair”

B) “guaranteed repair” (factory-authorized dlr)

C) “specialty repair” (independent workshops)

D) “heavy-duty accidental repair” (body shops)

E) “do-it-yourself repair”

unique

KSF

develop two unique value networks

three Vsvalued customer - value proposition - value network

London - Glasgow 29£

I. valued customer: who to serve? Leisure, small bsnss, entrepr.

II. value proposition: what to offer?

- bsnss travel: seat comfort + selection - bsnss class, newspaper, freq. flyer, travel agency, flexible schedule

- leisure travel: ABV IS OK BUT LOW PRICE IS BETTER

-

-

-

III. value network

Southwest airlinesSouthwest airlines

four key questions to four key questions to chalchallenge an lenge an industry's strategic logic and business industry's strategic logic and business model:model:

EliminateEliminateWhich of the Which of the

factorsfactorsthat the that the industryindustrytakes for takes for grantedgranted

should be should be eliminated?eliminated?

NEWNEWVALUE CURVEVALUE CURVE

ReduceReduceWhich factors shouldWhich factors should

be reduced wellbe reduced wellbelow the industry'sbelow the industry's

standard? standard?

RaiseRaiseWhich factors shouldWhich factors should

be raised wellbe raised wellabove the industry'sabove the industry's

standard?standard?

CreateCreateWhich factors Which factors

shouldshouldbe created be created

thatthatthe industry the industry

hashasnever never

offered?offered?

CXL: free meals (sell snacks) - travel agents (95% tickets thru the Internet or call center 5%)(attributes really create value?)

REDUCE: flexibility in flight changes (all fares non-refundable - switchable with penalty) - seat selection (first-come/first-served and group boarding)(factors overdesigned by industry)

RAISE: lower prices, greater punctuality, younger fleet of planes(understand the compromises that the industry currently forcesits customers to make)

CREATE: one-way fares, refunds for delays abv 4 hrs, ticketless travel.(new sources of value creation)

EASYJET STRATEGY CANVASS

0

0.5

1

1.5

2

2.5

3

3.5

traditional carriers

easyjet

EasyJet strategy canvass (modified)

0

0.5

1

1.5

2

2.5

3

3.5

worldwide netw

ork

wide choice in distri

bution

seat selectio

n

availabilit

y of bsnss class

frequent fl

yer meals

refund fo

r missed fli

ghts

seat spacing

in flight m

eals

flexibilit

y to change fli

ght

punctuality

refunds fo

r late planes

price attr

activeness

new planes

traditional carriers

easyjet

Intangible benefit

Tangible benefit

Refunds abv 4 hrs: unlikely for short hauls

Perceived benefit

VALUE PROPOSITION STRIPPED TO THE BONE

III. value network - How to deliver

20 to 25% savings - 10% bgt mkt.g

Reinventing the Value Network.5 cost principles to build easyJet’s value network:

1. Avoid fixed costs whenever possible: no secretaries!2. Make fixed costs work harder than the rest of the industry: EasyJet planes fligh 11 hrs/day, VS 6.5-hr avg3. Eliminate generally accepted variable costs as travel agents.4. Keep variable costs to a min., such as airport fees.5. Convert variable costs associated with services into revenue generators, as selling snacks on the plane.

British airways

IS IT GOOD TO LOOK FOR SYNERGIES?

different strategic segments require divergent value networks

synergies = shared portions of the value network

NOT OPTIMIZED FOR

FULL SERVICE - LOW COST

OPTIMIZING THE VALUE NETWORK

(1) To what extent does our marketing concept differ from others in the industry?(2) To what extent do elements of our marketing conceptmutually reinforce each other?

‘82 - ‘90 UK grocery sales of branded products: 52% to 33%PRIVATE LABELS: 33% TO 46%EATING OUT: 15% TO 21%

private labels and branded businesses are strategic segments?

Share logistics, marketing, sales forcePRIVATE LABEL COPYCAT

CHEAPERRAW MAT. FEW SKUs KAM Σ

REVERSEENGINEER BIDDING

LONGERLEADTIME

COPYPACKAGE

OP.PROFIT

RESELLERGPM

AVG.PRICE

0 12 9.5 6 4.5 32.5 65

BRANDED PRODUCT

NEW PRODUCTS

JOINT DEVELOPMENT

OF PROPRIETARY

MATERIALS

WIDE RANGE

OF SKUs

EXTENSIVEBRAND

INVESTMENT

NEW FUNCTIONALITY

QUICK RESPONSE

LARGE SALESFORCE

2 15 14 20 9 40 100

ABS. $ 4.5/32.5=13.8 9/40= 22.5

Ret margin 32.5/65 vs 40/100

In continuous process industries such as toilet paper or aluminum foil, value network separation at the level of purchasing and manufacturing would severely compromise productionefficiencies.

1. Concentrate exclusively on being either a branded or aprivate label player.2. Become primarily a branded player, but accept privatelabel manufacturing only under very strict criteria: meeta hurdle rate of return on sales, use only excess plantcapacity, and do not “borrow” packaging or recentlyintroduced innovative features of the company’s brandedproduct.3. Completely separate the private label business fromthe branded business and let each optimize its ownvalue network.

Drive Marketing Innovation Using the Three Vs

1. Are there customers who are either unhappy with all of the industry’s offerings or are not being served at all?

E.G. cheap HIV drugs mfrs

2. Can we offer a value proposition that delivers dramaticallyhigher benefits or lower prices, compared with others in the industry?

3.Can we radically redefine the value network for theindustry with much lower costs?

Exploit the Three Vs–Related Growth Opportunities

Understanding where customers are not being served helps determine which markets and industries thefirm should operate in or “who to serve.”

Clarity in the winning formula and economic logic create the potential to offer dramatically different value propositions and help determine “what to offer.”

The value network, or “how to deliver,” explicates the timing (when to move into which markets) and vehicles(how to get there)

Checklist for Marketers on the Three Vs

Valued Customer• Who are our valued customers?• Are there customers who are unhappy with all the currentofferings of the industry?• Are there customers who have a need but are not being currentlyserved by the industry?• Are we trying to reach customers who are unaware that theyneed our product? If so, how are we going to create the need?• Who is the user? The buyer? The influencer? The payer? What are the preferred criteria of each and their power in the buying decision?• Is the target segment large enough to meet our salesobjectives?• What is the growth rate of the target segment?

Value Proposition• What are the core needs we are trying to address with our valueproposition?• Does the value proposition fit the needs of our valuedcustomers?

• What benefits are we actually delivering to the customers?• Is our value proposition differentiated from the competitors or are we positioning in a crowded space?• Are our value proposition claims reinforced by underlying product and service features?• Are we positioning on attributes that we can defend against competitive attacks?• Are we positioning on too many benefits to be credible?

Value Network• Can we serve the valued customers with the value proposition at a profit?• Do we have the necessary capabilities to deliver the value proposition? If not, could we acquire or partner with them?• Would serving the valued customers have negative consequences on our existing customers or businesses? If so, how are we going to control for this?• Which high-cost or low-value-added activities could be eliminated, reduced, or outsourced in our value network?• Where are the advantages of scale in our value network? Can we maintain scale while not losing flexibility?• How different is our value network from the rest of the industry?• What is our break-even point? Could we lower it by slightly varying the value network?

CONCLUSIONAs companies enter and operate in related segments of businesses, are they facing strategic segments or market segments?

How far back in the value network should they separate the two businesses?

Is it enough to separate marketing, or should marketing and distribution be segregated?

Or does one need a completely distinct value network for the newsegment?

How can marketing be used to generate innovation and growth in the industry?

Using the three Vs lens to answer these questions, a companycan find new strategic segments, build deep differentiation,

and drive innovation and growth