The Role of Segmentation in Creating Marketing Advantage - Research Paper Example

Strategic Management Introduction Strategic Management needs to work out the best approach methodology to capitalise on the market and to leverage the best of the company. In any large trans-national business, the management of the firm involves both local as much as international issues. Therefore, it is important, that the company needs to take stock of the status of global customers, global suppliers and take into consideration other global dimensions. Any trans-national company has ‘to blend and balance host-country-specific advantages (CSAs) with firm-specific-advantages’ (FSAs)1. Strategic planning helps in formulating the business approach to a context. As shown in figures 1 and 2, it is seen that the strategy stems out of the context which influences the strategy and the actions that lead to a solution on the strategy and finally, provides the results which in turn leads to altering the context. The strategy should get altered based on the change in the context thus altered. Strategies are worked out using various tools. One of the oldest methods involved using the SWOT analysis for bringing out the strengths, weaknesses, opportunities and the Threats perceived by the company and the business2. The strategy would primarily enhance and capitalise on the strengths of the company for tapping the opportunities and to counter the threats perceived while at the same time would offset the weaknesses perceived. This would help the company to realise its objectives of enhancing the profitability of the company. Figure 1: Strategy Process Porter’s Five Forces helped the strategists to model the environment and the business is positioned in it to understand the effect of the environment. This was perceived to have been made up of the five forces that Porter projected. He further qualifies some of the approaches to strategy as generic. There are three types of generic strategies that are used by companies, employing the common economic forces that are in play in the market. These are: Cost Leadership by providing the best cost for a product or a service, product differentiation and thereby commanding higher prices and finally, identifying its own niche products for a specific product-segment thereby monopolising the entire business for that product or at least dominating it. While these strategies help the company to move forward, without a basic strategy the company stutters. Sector Matrix Framework It is found that the three strategies discussed earlier takes care of specific market advantages and realises the company’s targets. Figure 2: Segmentation as a strategy As can be seen from the figure 2, the markets are created by companies which fall under any one of the strategies depicted in it, either consciously or otherwise. The perfect competition would produce low returns but would also require only low skill position since there is no new factors that have been brought in by the company in that square. Typical companies are the Chinese companies that make low priced watches. They do not aim at selling their products at a premium but selling large quantities since the contribution done by each one of them is small. Whereas, companies who have higher skill levels generally a high niche market to them and are able to segment the market for them. This creates a safe market but might not really give them the returns since these may not be a high return zone and the skills will be available elsewhere too. This fits into to some of the Swiss watch makers who did not move the times and are still reliant on their skills. This is not an unknown skill position. In contrast, the monopolistic companies tend to capitalise on their products though the skills are low. But this cannot exist forever, since there will be soon burgeoning competition that would eat out the profits of the company. Companies like Intel, IBM capitalised on such things earlier on. However, they lost on their market presence as competition started eating out into their profits. Therefore, most companies try to achieve the fourth quadrant by segregating a differentiating profitable market segment which will also be focused and would produce the required and on going market for the company. This would also be a growth catalyst and will also provide enough space among other companies to operate without competing with one another. The companies that have successfully capitalised in creating a niche for themselves and in augmenting that niche to their advantage in such a way that no competition is able to step in would include, Microsoft in the software front, BMW or Mercedes Benz in the Auto sector to a great extent. Though there can be competing products, they are not in still in line with the products churned out by these vendors and they offer no competition to them. Naturally, the companies would like to be here in this quadrant rather than in any of the other three since this is stable and provides the company with a consistent growth. Situational Analysis Any company that aims at getting into fourth quadrant of the map needs to do a situational analysis. This would primarily be an analysis of the supply and demand and any other relevant environmental parameter that might affect the performance of the company based on the selected niche. This would help in identifying the right segment for the company to promote and strategically position its products. Instead of positioning a market mix that would cater to a multitude of customer requirements, it has been found that segmentation and working a segmentation matrix would provide a better marketing strategy resulting in growth of the company3. Strategic Segmentation can be done using any of the following methods4: 1. Geographic Segmentation 2. Demographic Segmentation 3. Psychographic Segmentation 4. Behavioural Segmentation The most important aspect of any segmentation exercise would be in ensuring that the segments created are measurable, accessible by communication and distribution channels, different in its response to differing products, does not change too quickly and large enough to be profitable. Most of the companies do not use any theoretical study to back their marketing decision. Instead, they tend to base them on intuitive marketing analysis to suit their urgency and to base their already made decision on statistics or research. Most of the segmentation is done using the customer’s requirements and classifying the customers in order to meet their requirements. This would enable the company to realise its own targets, thereby enabling the work to be done to meet the needs of the customers to their satisfaction. This is needed to ensure that the customer is treated the way he is expected to be. Every customer is different and this stems from the idea that there is no such thing as an average customer5. On the other hand many companies try to segment the customers either tactically or strategic. Generally, tactical segmentation in some of the companies could result in a large number of granular units or segments. On the other hand, the strategic could be just a few in place of the larger number of granular segments. Denzel Rankine says that Strategic Segmentation is all about customer due diligence6. According to him, the commercial due diligence is primarily about understanding the customer’s needs by understanding his customer’s needs, its competitive position and its market conditions. This would enable the company to satisfy the requirement of the customer without any hitch and would be the ideal strategy to adopt. The commercial due diligence comprises of his competitor information too. All this would add up to ascertaining the needs of the customer and thereby help in segmenting the market and creating the needed matrix. Thus segmenting and breaking down into sectors would help in identifying the right demand and supply in the sector and hence the market the company is catering to. Recommended Methodologies The companies need to know the reason for segmentation comprehensively if they are to reap the benefits of the segmentation exercise. In order to ensure that an appropriate strategy is worked out for marketing the products and services of a company, the following methodology is suggested. 1. The segmentation criterion should be identified. A criterion for segmentation should have or stimulate ideas that would enable specific promotional or product ideas for the segments thus created. There should be specific marketing reasons for the segments to get created. Only then the segmentation would produce appropriate results. 2. The segmentation criterion once identified should be able to clearly throw up segments. A typical set of segments should be created and then the accessibility of these segments should be checked. The segments should be reachable and the cost of such reaching should be in line with the working of the company and should not be too expensive either. 3. The segmentation should be substantial enough in order to ensure that the market created is large enough to be spent time on in each segment. These three would make up the basic segmentation criteria that would help in finalising the segmentation process. 4. Once the segments are identified, it is essential that every segment is identified with the right type of product, the right price for the product, the promotional measure using which the segment has to be reached and finally, the right distribution method. This would help in drawing out the right kind of budget and the right target of sales in the segment identified. This has to be done for every segment thus identified which would result in overall targets for the products and for the company as a whole. 5. This would help the marketing people to identify the right set of variables that really decide on the sale in a particular segment. They could be usage, demographic, lifestyle and other such options. 6. The Price discrimination is important and can be identified for every segment depending on the target customers that make up the segment. In some cases, the price discrimination could be out of direct signals and in certain others it could be indirect and has to be deduced. Some of the direct signals for price preference is normally in the form of parameters like: age, sex, occupation, location, first timers, etc., All this could lead to a specific price banding that would help in deciding on the price levels preferred by the customer. 7. The other kind of pricing preferences could happen when there are regular or knowledge customers who know about the market and who might switch loyalty if the prices could be mildly different since his requirement for a standard price might decide on his profitability. Such pricing requirements could lead to price based on quality and / or quantity. This is normally grouped under self-selects. 8. The second methodology of pricing strategy in the segments would result out of the heavy users or large volume users of the product. This could result in them getting better deals than the ones who use the product marginally. It is also possible for the company to concentrate only on heavy users and totally avoid the light users. But if the company chooses to retain both, then they could work out a clear strategy where there is limited quantity to be sold to light users and could be increased to heavy users since, this would result in larger volume take off and hence better contribution to the company’s profitability. 9. All this would essentially form the basis for identifying the demand and supply linkages for the industry or company under analysis. This segmentation would help in being clearly targeted and would result in better understanding of the demand and supply in the specific industry segment. Conclusion It is essential that there is a clear marketing strategy for a company which is looking for a steady growth. If the company aims at a targeted marketing then the best option would be to choose segmentations in marketing. This strategy would be further strengthened since it would provide more value to the company than the rest of the strategies. Three major segmentation criterion need to be established in order to identify the segments and then strategise on the marketing plan. After identifying the right reasons for segmentation, they should be reachable and ideally large enough for spending effort on every one of the segments identified or the same may also be dropped. Price bands may be identified using either direct signals or using the self-selection constraints. All these would help in identifying the right segmentation bands. It may therefore, be concluded that the analysis using the sector matrix would be helpful in deducting the supply and demand for that industry. References Read More