‘market segmentation positioning strategy for corporate ... · firm, marketing planning and...

‘Marketing’ has two distinct meanings. The first, and most important, is as a philosophyfor the whole business. It defines the primary goal of everyone in the organisation asmeeting the needs of customers. Marketing is the philosophy that integrates the dis-parate activities and functions which take place within the organisation. Satisfiedcustomers are seen as the only source of the firm’s profit, growth and security. Thesecond meaning of marketing is as a distinct set of activities and tasks that constitutemarketing planning and decision making.

These marketing decisions and plans centre around four areas and they are the subjectsof this chapter.

■ Market segmentation. Management have to segment the markets in which they oper-ate, research the needs of customers in these segments, and study theircharacteristics, decision-making processes and buying behaviour.

■ Selecting target markets. The attractiveness of the different segments in terms ofprofit and growth have to be analysed, and those offering the firm the best potentialneed to be chosen.

■ Market positioning. Once a segment is chosen, the firm has to seek to build a differ-ential advantage that will make its offer preferred to those of competitors. It will thendevelop a marketing mix to implement this positioning strategy.

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Chapter 3 SEGMENTATION, POSITIONING AND THE MARKETING MIX

‘Market segmentationand positioning are the keys

to building a strategyfor corporate growth.’

‘Market segmentationand positioning are the keys

to building a strategyfor corporate growth.’

Theodore Levitt

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Chapter 3 Segmenta t ion , pos i t ion ing and the market ing mix

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■ Marketing planning. Management will then develop a plan to implement the position-ing strategy and build an organisation capable of exploiting the potential of themarket.

Figure 3.1 describes the main steps in market segmentation, targeting, positioning andplanning. Whereas the philosophy of marketing refers to the whole orientation of thefirm, marketing planning and decision making take place at a more disaggregated level.Marketing decisions are about how better to satisfy customers in individual market seg-ments. These decisions and plans are therefore made by managers at the business unit,market or product planning levels of the firm.

A market consists of customers with similar needs. But customers in a market arenever homogeneous. They differ in the benefits wanted, the amount they are able orwilling to pay, the media they see and the quantities they buy. It therefore makessense for marketers to segment the market and target one or more of these segmentswith specialised, tailored offerings. A market segment is a customer group within themarket that has special characteristics which are significant for marketing strategy. Inmost markets the need for segmented offerings is obvious because a single productwill not satisfy all the customers. For example, rich people want more luxurious hotelaccommodation than poor people; engineering offices need more powerful andsophisticated computing systems than secretarial offices; acute asthma patients needdifferent drugs from mild or infrequent sufferers.

The current Nike catalogue carries over 350 separate styles of sports footware. Philipsproduces 24 different irons and 13 kettles. The retailer Tesco carries over 170 varietiesof shampoo and over 50 kinds of toothbrush, not taking into account colour varia-tions. That people have different tastes is fairly obvious. What managers often do notunderstand, however, is that it can pay to segment markets even when a single prod-uct is able to meet effectively the needs of the entire market.

In some business-to-business (B2B) markets, where a small number of large buyersdominate, suppliers will treat each of these major buyers as an individual segment.Many see this type of one-to-one marketing as becoming more important even inconsumer (B2C) markets, where the number of buyers may be in the millions. Today

1. Identify customerneeds and segmentthe market

2. Develop profiles ofresulting segments

Market segmentation

1. Evaluateattractiveness ofeach segment

2. Select targetsegments

Target marketing

1. Identify differentialadvantage for eachsegment

2. Formulatemarketing mix

Marketing positioning

1. Develop marketingplan for eachsegment

2. Develop marketingorganisation

Marketing planning

Figure 3.1 Segmentation, positioning and planning

Market segmentation

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Market segmenta t ion

information technology, especially computers and the Internet, allows suppliers tostore detailed information about individual customers. Direct marketing (telephone,direct mail and the Internet) allows companies to tailor communications individu-ally. Finally, modular design and customised manufacturing permit companies suchas Dell and Cisco to produce individually tailored products.1

However, even companies that espouse one-to-one marketing find it useful to groupor segment customers by value or need, so that they can manage them efficiently.Dell, for example, classifies its customers into five segments according to their poten-tial profitability to the company. The higher the importance category a customer fallsinto the greater the support and customisation it receives.2

Segmentation or customisation increases profit opportunities because differentgroups of customers attach different economic or psychological values to the solutionoffered. For example, some years ago a European chemical company developed a newpatented herbicide that increased the productivity of any type of farmland. However,in practice, the economic value to the customer (EVC) of this innovation dependedupon what the farmer grew. If the land was used for rough grazing, the EVC of theproductivity improvement averaged only €7.5 per acre; for cereal products the EVCwas €30 per acre; and for fruit and vegetables it was €60 per acre. Suppose the marketconsisted of 3 million acres split evenly between the three crops. If the companydecides to sell the herbicide to the market as a whole, the price must be below €7.5 togive any advantage on grazing land. If the company charged €6 and its costs were asshown in Table 3.1, then the profit from the market would be €1.5 million. An alter-native strategy would be to concentrate solely on the high-productivity fruit andvegetable farmers where it believed a price of €60 could be obtained. Even though thecompany would be focusing on only one-third of the market, this strategy wouldincrease the profit potential to €52.5 million. The strategy with the most potential,however, would be a segmentation strategy. This would involve selling different ver-sions of the product to each segment at prices to attract the separate types ofcustomer. In this case the company would have brands covering the whole market,but still tap the value surplus in the premium segments.

The company’s ability to maintain this strategy would depend first upon its buildingbarriers to competition entering the market and, in particular, the high-price segments,and second on maintaining a separation of three segments. Farmers on premium landmust continue to see the brand aimed at the low-value land as unattractive for them.In practice, the supplier would seek to do this by focusing its innovative effort to

Strategy Price (€) Acres (m) Revenue (€m) Cost* (€m) Profit (€m)

Unsegmented 6.0 3 18.0 16.5 1.5

Focus 60.0 1 60.0 7.5 52.5

SegmentedGrazing 6.0 1 6.0 5.5 0.5Cereal 22.5 1 22.5 5.5 17.0Fruit 60.0 1 60.0 5.5 54.5

––––– ––––– ––––– –––––Total 3 88.5 16.5 72.0

Table 3.1Segmentation ofagriculturalchemicals

*Variable cost per unit = €4.5 total fixed costs = €3m (affected equally across the segmented case)

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produce an even more superior product for the highest-value segment. Market segmen-tation is a spur to innovation by revealing hidden profit opportunities that can be wonby better meeting the needs of specific high-value customer groups.

To demonstrate the central role of segmentation in building growth and profitability,the strategy of a modern hotel can be shown. In the early days, individual hotels didnot segment their market. But it soon became clear that guests differ in their expecta-tions. Business travellers valued convenience, comfort and service, while leisurevisitors were more interested in low price. Table 3.2 illustrates the pricing and costoptions for a hotel with 300 rooms and anticipating an average occupancy rate of 80per cent. If it pursued an undifferentiated – one-class – hotel, then managementbelieved €80 to be the highest price chargeable to achieve 80 per cent occupancy. Inthis case the budgeted profit per day would be €4,000

However, to the marketing management it was obvious that, while a price of €80already begins to lose the business of low-budget guests, businesspeople and moreaffluent customers would be willing to pay much more for superior service and com-fort. The result was that hotels moved to a differentiated strategy whereby theyoffered three levels of service – regular, executive and suites – at very different pricelevels. As shown in Table 3.2, the first consequence is to enhance revenue and prof-itability. Profit increases 25 per cent to €5,075. Second, the differentiated servicebetter meets the needs of all customers by offering the values that the particular typeof traveller prioritises. The best hotel operators remember that people who stay asbusiness customers frequently return with their families as leisure customers andunderstand that segment membership is normally not unique.

This example of hotel guest segmentation is exactly analogous to the strategies pur-sued by most of the sophisticated marketing companies of today, as a few examplescan demonstrate.

■ Scotch whisky. Until the 1980s Scotch was an undifferentiated market. Then Diageo,which sold the brand leader Johnnie Walker Red (now priced at about €25 per litre),launched a deluxe version called Johnnie Walker Black at a 60 per cent price pre-mium (€40 per litre), selling to status-oriented customers. Later it added JohnnieWalker Swing (€37), Premier (€120), Blue (€175) and Johnnie Walker Gold (€80). Ina market that is declining in volume terms, Diageo’s profits have continued to grow.

Core segmentation: an illustration

Class Rooms Price Variable Revenue Variable Fixed Profit /(€) cost (€) (€) cost (€) cost (€) day (€)

Undifferentiated strategy 240 80 40 19,200 9,600 5,600 4,000

Differentiated strategyRegular 140 80 40 11,200 5,600Exec. 65 130 65 8,450 4,225Suite 5 250 80 1,250 400

––––––– ––––––– ––––––– –––––––Total 210 20,900 10,225 5,600 5,075

Table 3.2 Segmentation of hotel guests

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■ Credit cards. Initially, credit cards operated in a largely undifferentiated market.Then American Express launched its Gold Card with a membership fee of €150,double that of its standard Green Card. Subsequently, it added a Platinum Cardwith a €400 membership fee. Amex substantially increased its profits by trading upits more affluent customers into higher-margin products.

■ Pharmaceuticals. Pharmaceutical companies have become more adept at segment-ing their markets and targeting offers that more precisely meet patient needs andcapitalise on opportunities to add value. Glaxo, which is leader in the €8 billion ayear asthma market, now segments patients into severe, moderate and variable suf-ferers. Prices range from €14 per month’s treatment to €100 for the highlyspecialised products needed by acute patients.

■ Cars. The market for cars is highly segmented. Mercedes-Benz, for example, has 20models, from under €20,000 to over €200,000. Each model also has an extensiverange of options: different-sized engines, different gears, sports equipment, air con-ditioning, etc. Every model is aimed at a specific target segment and the companyencourages customers to trade up over time to higher-priced versions.

■ Others. The list of markets where the leading players pursue segmented strategies isvirtually limitless. It is pursued by airlines, restaurants, the railways, in marketingseats for the opera, by football clubs, in selling beer and wine, computers, educa-tional programmes, electronics, etc. It is a feature of all consumer markets andmore and more industrial and service markets. A price ratio of 1:10 from thelowest- to the highest-priced offer in a segmented market is common.

Better matching of customer needs

Because the needs of customers differ, creating separate offers for each segment pro-vides better solutions. For example, if an airline treated all passengers alike,businesspeople would be unhappy with the level of service provided for the ‘average’customer, and impecunious students would be unhappy about the average price theyhad to pay. Developing separate ‘brands’ for each segment allows a higher level ofsatisfaction for both.

Enhanced profits

Customers differ in their price sensitivities and, by segmenting the market, the mar-keter can raise average prices and substantially enhance profits. Experience showsthat in most markets it is very difficult to raise prices to all customers by 5 per cent.However, it is often very easy to raise prices to some customers by 10 per cent ormore. Price increases and profit margin enhancements are invariably best achievedvia a segmentation strategy. Many production-oriented businesses fail to see this.

Three arguments are used to resist profitable segmentation. First, managers are dis-couraged by the additional costs of producing multiple, rather than single, productofferings. Second, they perceive the volume in the additional premium segment assmall compared to their current mass-market offer. Third, they often argue that theadditional brand would cannibalise sales from their current product.

Why segment markets?

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What the managers fail to calculate is that the marginal revenue often vastly outweighsthese negative factors. For example, after Diageo launched its premium brands ofJohnnie Walker Scotch, while they represented only 20 per cent of the volume of itsmass Red Label brand, and did in fact cannibalise some of its sales, the much biggermargins on the premium brands were estimated as doubling the profits of the business.

Enhanced opportunities for growth

Segmentation can build sales growth by allowing the company to trade up customersto higher-margin products. For example, Tesco has successfully grown its sales in theUK by segmenting the market according to customer purchase needs and providing aTesco solution to each, which range from small neighbourhood stores (TescoExpress), home delivery (Tesco.com) to Tesco Extra (a hypermarket format). AmericanExpress, Mercedes-Benz and Diageo all see their low-price offers as entry-level brandsfrom which customers will be encouraged to move on to the premium ones, carryingmargins two or three times higher.

Retention of customers

As an individual’s circumstances change with age, family circumstances and income,buying patterns also change. For example, in the car market an individual’s first car isusually a small, low-priced one; then with a family, a bigger car is needed. If theperson is successful in career terms, this may be followed by an expensive, status car.Finally, in retirement the individual may downsize again. By offering products appro-priate to each family life cycle stage, the marketer can retain customers who wouldotherwise switch to competitive brands.

Targeted communications

It is difficult for a company to deliver a clear message to a broad, undifferentiatedmarket. Effective communications require a demonstration that an offer will meetthe relevant needs of the potential buyer. This is much easier to achieve if the mar-keter is targeting a homogeneous market segment.

Stimulation of innovation

Where the company pursues an undifferentiated marketing strategy, needs and pricesare reduced to the lowest common denominator. Segmentation offers a clearer under-standing of how needs and economic value to customers vary across the market. This isillustrated in Table 3.1. The profit margin of only €1.5 million in the undifferentiatedmarket is insufficient to encourage investment in innovation. When the market is seg-mented, however, new profit opportunities appear. In certain segments the potentialprofit margin rises to €54.5 million – an enormous reward for new targeted offerings.

Market segment share

Unless a brand is the biggest, or second biggest, in terms of share, it is unlikely toearn superior profits. Minor brands suffer from lack of scale economies in productionand marketing, and pressures from distributors with limited space. These factorsmean that they have higher costs and lower margins. Clearly, new or smaller compa-nies are unlikely to achieve leadership in a total market, so they need to aim forleadership in a segment or distribution channel. By focusing, they can often achieve

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competitive production and marketing costs, and become the preferred choice ofbuyers in a specific segment.

It is generally share rather than size that determines profitability. It is invariablybetter to have 50 per cent of a €1 million market segment than 1 per cent of a €100million market. The 1 per cent brand would not be the preferred choice of any cus-tomers or channels; it will have high marketing costs, lack scale economies and haveto give big trade discounts to obtain distribution. By contrast, the 50 per cent brandwill be the preferred choice of a segment of the market; it can focus its communica-tions and be a ‘must-stock’ item to selected dealers. Segmentation offers theopportunity for smaller firms to compete with major ones.

How should managers segment their markets so that tailored strategies can be devel-oped? Unfortunately, segmentation is an art rather than a science. The task is to findthe variable or variables that split the market into actionable segments. Segmentationvariables are of two types: needs and profilers. Customer needs are the basic criteriafor segmenting a market. The marketer will want to form segments made up of cus-tomers whose needs are homogeneous – who are seeking the same benefits – and soare likely to respond similarly to a particular marketing offer and strategy. The secondtype of segmentation variables are profilers. These are descriptive, measurable cus-tomer characteristics such as industry, geographic location, nationality, age andincome. In general, these variables are complementary to each other. For example, acompany marketing toothpaste divided the market into four need segments: oneseeking low price, another prioritising decay prevention, a third interested in brightteeth, and a fourth wanting a good-tasting toothpaste. The problem with this need or‘benefit segmentation’ is that, to analyse these segments and communicate to them,the marketer has to know who these people are: their profiles or customer character-istics. Table 3.3 shows the results of a market research study that linked needs toprofilers describing the demographic, behavioural and psychological characteristics ofthe customers, together with competitors in each need segment.

Consumer and industrial markets generally differ in their sets of need and profiler vari-ables. Some of the most common segmentation variables in each are described below.

Bases for segmentation

Need segments Profiles

Demographics Behaviour Psychographic Competitive brands

Economy Men Heavy Value Brands on(low price) users oriented sale

Medical Large Heavy Conservative Crest(decay families usersprevention)

Cosmetic Teenagers Smokers Active Macleans(bright teeth) Ultra Brite

Taste Children Spearmint Hedonistic Colgate (good tasting) lovers Aim

Table 3.3Needs and profilesin the toothpastemarket

Source: Adapted from Russell I. Haley, ‘Benefit segmentation: a decision-oriented research tool’, Journal of Marketing,July 1963, pp. 30–5.

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To find the needs of customers in a market, it is necessary to undertake marketresearch. This will normally consist first of informal interviews and focus groups toidentify what benefits customers seek and the extent of differences among them intheir expectations. For example, are some giving the highest priority to low price,while others are emphasising image or product performance? The next step will nor-mally be administering a formal questionnaire to a large sample of customers toquantify these differences in requirements. There are a variety of statistical tech-niques such as discriminant analysis and cluster analysis to help in choosing the bestvariables for segmenting the market.3 Often the market will be divided into segmentsoriented towards quality, service, performance and economy.

The next step will be to seek to link these differences in needs to profilers or con-sumer characteristics. The survey questionnaire should have collected data on boththe needs sought and the characteristics of respondents. The most common profilersused in consumer market segmentation are as follows:

■ Geographic– Region of the country– Urban or rural area

■ Demographic– Age, sex, family size– Income, occupation, education– Religion, race, nationality

■ Psychographic– Social class– Lifestyle type– Personality type

■ Behavioural– Product usage: light, medium, heavy user– Brand loyalty: none, medium, high– Type of user: e.g. with meals, special occasions, etc.

The process of segmentation in industrial and other organisational markets is analo-gous to that employed in consumer markets. First management has to segment themarket by benefits sought, then it has to describe the characteristics of these cus-tomers. The needs of organisational customers depend upon their strategy, theiroperating environments and the personal characteristics and relationships of theindividual buyers within the organisation. For example, a buyer in a static, commod-ity business is likely to be highly cost oriented. An organisation in a dynamic, highvalue-added segment may be geared more to the performance-enhancing features ofthe product or the seller’s speed of response.

The most common profilers in organisational markets are as follows:

■ Industry of end user (e.g. agriculture, aerospace, construction).

■ Organisational type (e.g. public or private sector).

■ Size of organisation (e.g. big or small, national or multinational).

Consumer market segmentation

Organisational market segmentation

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■ Geographical location (e.g. regional, urban, rural).

■ Application (e.g. heavy or light use).

■ Usage (e.g. heavy or light user; loyal or non-loyal).

■ Purchasing organisation (e.g. centralised or decentralised, purchasing policy andcriteria, nature of decision-making unit).

In commodity-type markets, managers often make the mistake of thinking that allcustomers are the same in their desire to get the lowest possible price. But such a viewis invariably mistaken and costly. Studies by McKinsey and others have shown thateven in these markets customers normally divide into three segments.4 The first areprice-sensitive buyers who are primarily concerned with the cost – and less so withthe quality – of their purchases. Price is crucial because the product usually represents

Segmentation is a simple concept which is often difficult to implement. One reason is that companies mustunderstand whether product differences are real (the users can distinguish the competitive brands) andwhether the segments are real (buyers can be reached in the segment).

(A) No Real Product Differences and No Segments – One brand of gasoline is indistinguishable fromanother (the car does not know which brand is in the tank). Indeed, due to the economics oftransportation, in some geographic areas it is likely that the gasoline at a specific filling station isactually sourced from a competitor’s refinery and even delivered by them. Similarly there are no clearlydefinable segments – all drivers need to fill up their cars.

(B) In a blind taste test, an average consumer would find it hard to tell the difference between a €40Johnny Walker Black Label and an €80 Gold Label, and yet there are real segments based ondistribution outlets, with the expensive brands having limited availability in specialist stores and dutyfree outlets.

(C) Anyone can tell the difference between a Mars Bar and a KitKat, the brands are different and yet theyappeal to exactly the same customers.

(D) Again, anyone can tell the difference between Corn Flakes and Frosties, but unlike confectionery thereare segments in this market based upon whether families have children and are therefore much morelikely to buy pre-sweetened breakfast cereals.

Marketing managers must understand the nature of their specific situation as it affects their ability toimplement a successful segmentation strategy.

Box 3.1 Segmentation and Differentiation

(B) Blended whiskyReal

segments(D) Breakfast cereal

No real productdifferences

Real productdifferences

(A) Unleaded petrol (C) ConfectioneryNo

segments

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a major portion of their total product costs. Next is the service segment – customerswho require the highest levels of quality and delivery performance. For them, price issecondary both to security of supply and to performance, as the product represents arelatively small, yet critical component of their total costs. Finally, commitment-focused customers value close, longstanding relationships through which superiorproduct applications can be developed for their own products and processes. Suchsegmentation offers real opportunities to increase sales, achieve better profit marginsand gradually reposition the business into more attractive markets.

Effective segmentation is not only about grouping customers according to need.Further opportunities lie in distinguishing the nature of the decision-making unitwithin any customer account. In many situations there is not a single buyer whoseneeds have to be met, but several people whose needs may differ. There are oftenopportunities for the seller to target specific persons within any decision-making unit.

In consumer markets, a family’s choices can be influenced by husband, wife or chil-dren, together with others outside the household who influence them. Eachindividual often has different buying criteria and roles in the buying decision. Forexample, in buying a new car the husband might initiate the process and be prima-rily influenced by economic factors; the children might affect the model choice andbe motivated by performance; and the wife might be the main user and consider sizeand comfort as key factors.

Companies can often gain advantage by innovative strategies to target specific mem-bers of the decision-making unit. For example, Stew Leonard created the supermarketwith the highest sales per square foot in the world. He noticed that mothers oftenhad to take young children with them on their shopping trips. He redesigned hisstore with mini-shows, exhibits and Disney characters to appeal to young childrenand take the boredom out of shopping. Shopping became a fun experience for moth-ers with young families. Mothers drove with their young children for as long as twoand a half hours to shop at Stew Leonard’s.

In industrial markets, decision-making units and buying processes are even morecomplex, offering enormous opportunities for creative marketing. Typically a mini-mum of three parties can be involved in a purchasing process – the company’sbuyers, technical department and senior management. Each of these have differentneeds and purchasing criteria – normally price is the key factor for buyers, perform-ance and specifications for technical people, and economic value (the impact onprofits) for top management.

With a new, innovative industrial product or service it is often crucial to circumventthe control of the buying department so that the system economics can be demon-strated to top management. For example, a new machine might reduce labour costs ina production process by 50 per cent, offering a massive profit improvement for thecustomer, even though the machine costs 30 per cent more than those of the competi-tors. However, the customers’ buying department would be deterred by the high priceof the new machine. Many suppliers lack the sales expertise to overcome this problem,which requires attracting the interest of top management in the impact of the innova-tion on their return on investment. (This is discussed further in Chapter 8.)

Multilevel segmentation

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Meeting customer needs and providing customer value require market segmentation.But meeting needs and providing value are not simple. They entail an understandingin depth of the customer’s decision-making unit and buying processes. The supplierhas to ask who influences the purchasing decision and what are the specific needs ofeach group. It then needs to assess the value and cost of meeting these various needs.Often this will require choices – should it focus on meeting the needs of professionalbuyers for lower costs, or on the needs of senior management for higher business per-formance? The choice will depend upon the skills of the company and thecharacteristics of its products or services. Finally, the supplier has to have the skills tocommunicate the benefits to the desired personnel within the buying centre.

To be a strategic tool, a segmentation scheme should meet five criteria:

■ Effective. The segments identified should consist of customers whose needs are rela-tively homogeneous within a segment, but significantly different from those inother segments. For example, an industrial marketer might identify the engineer-ing and aerospace industries as separate segments, but if buyers in both industriespurchase similar amounts at similar prices and have the same needs, it is not auseful segmentation scheme.

■ Identifiable. The business must be able to identify customers in the proposed seg-ment. Some variables are harder to measure. For example, if a product is aimed at‘extrovert’ customers, it would be difficult to identify and measure the size of thispotential segment. To be useful, it is necessary to find some customer characteris-tics that link to the psychological profiles, such as age, media usage or nationality.

■ Profitable. The more segments identified, the greater the opportunity to target theoffer precisely and to add value. Ultimately, each customer could be an individualsegment. However, the greater the number of segments targeted, the higher the costinvolved in separately targeting offers, and the greater the loss of economies of scalein manufacturing, marketing and distribution. Nevertheless, with the spread ofCAD/CAM flexible manufacturing and with the growth of direct marketing tech-niques, more and more businesses are finding that narrower segmentation pays off.

■ Accessible. Customers in the segment should be capable of being reached andserved effectively. For example, if it is decided to advertise a new industrial productto innovative buyers, and it is found that such buyers read the same journals aslate adopters, then a substantial part of the advertising budget would be wasted.Such a segment is not amenable to separate communications.

■ Actionable. A company must be able to take advantage of the segmentation schemethat it develops. A small petrol station might divide its customers into several seg-ments with different potential needs and spending power, but it would probablylack the staff, space and facilities to respond to these differences. By contrast, alarge petrol station might have the opportunity to pursue such a differentiatedstrategy. For example, US stations provide both ‘self-service’ economy and ‘full-service’ premium offers to customers. With the latter, the attendant fills the tankand provides a check on the car’s oil, tyres and windscreen, in return for a 20 percent premium on the price of the petrol.

Criteria for segmentation

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After segmenting the market, the business must select those segments it aims totarget. Five factors govern the attractiveness of the segment:

■ Segment size.

■ Segment growth.

■ Profitability of the segment.

■ Current and potential competition.

■ Capabilities of the business.

In developing a segmentation strategy, management has several strategic choices.

Undifferentiated marketing

Here the firm ignores actual or potential differences among segments, and targets oneoffer to the entire market (Figure 3.2). It designs a product and marketing mix thatwill appeal to the mass market. In the early days of their industries, Ford,Volkswagen, Coca-Cola, British Airways and Woolworth pursued this strategy. Coca-Cola, for example, had one drink, in one bottle size, with one taste, and sold at oneprice, which aimed to suit everyone.

Dynamic targeting strategies

Choosing target market segments

Undifferentiated marketing

Differentiated marketing

Focused marketing

Segment 1

Segment 2

Segment 3

Companymarketing mix 1

Companymarketing mix 2Companymarketing mix 3

Segment 1

Segment 2

Segment 3

Companymarketing mix 1

MarketCompanymarketing

mix

Figure 3.2Alternativemarketing strategies

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Dynamic ta rge t ing s t ra teg ies

The advantages of a single offer are economies of scale in production, distribution,advertising, marketing and inventories. However, today two factors make undifferen-tiated marketing strategies rarely optimal. First, as we have seen, customers areincreasingly heterogeneous in their needs. They differ in benefits wanted, purchasingpower, values, media and buying characteristics. For example, Coca-Cola is now soldin as many as nine varieties and six sizes of bottle and can: that is, it offers a total ofup to 54 combinations. Second, even when needs are the same across segments, thevalue that customers attach to an offer varies and so, as has been shown, the oppor-tunities for profitable product and price discrimination exist.

Differentiated marketing

As with undifferentiated marketers, differentiators seek to compete across the major-ity of the market, but here they do so with different offers. They develop differentproducts and marketing programmes for each segment of the market. They seek tofine-tune their offers to the specific needs of each customer group and to capitaliseon value differences by charging different prices. Thus an airline segments its cabininto different classes of customers; a whisky company sells higher-priced brands toJapan than it does to Spain; expensive laboratory equipment is targeted at the phar-maceutical industry rather than the jute industry.

Ultimately finer and finer segmentation leads to one-to-one marketing, whereby thecompany retains information on each customer and interacts with them individually,customising its communications and marketing mix.

Because differentiated marketing is better at satisfying disparate customers, it nor-mally leads to higher average prices and greater sales volumes. But it also leads tohigher costs of production, marketing, promotion and administration. Managementhas to choose the most profitable level of segmentation which balances the increas-ing revenue that segmentation offers against the increasing costs that it incurs.

Focused marketing

Here the company does not aim to compete in the majority of the market, but ratherspecialises in one segment, or a small number of segments. When the segment issmall, the company is often termed a niche competitor. Small companies generallyhave no alternative but to pursue this strategy, since they lack the resources to com-pete across the market.

A focused strategy permits the firm to achieve efficient production, distribution andmarketing through specialising its investments. It allows the business to build astrong reputation from its expertise in understanding the specific requirements ofbuyers in this segment. Also, by focusing it can build a strong share, making it thepreferred choice of buyers and distributors serving these customers. A well-focusedstrategy permits a competitor to achieve both low costs and high prices.

Focused strategies, however, do have dangers and limitations in the long run. First, bytying itself to the fortunes of one segment, the company incurs high risks. Jaguar’sdependence on sales to the US luxury car market led to its collapse and acquisition byFord, when this segment declined during the recession of the early 1990s. Second, ifthe segment is growing and profitable, it is likely to attract the attention of bigger com-petitors. This is a particular danger when product life cycles shorten and companies

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have to invest heavily in new product development. Larger competitors can oftenafford investments that smaller players cannot match, and they can transfer technolo-gies from other segments to obtain leverage in cost and innovation.

Market segments are not fixed. Instead continual opportunities for creating new prof-itable segments are being opened by changes in the environment and newknowledge. Environmental changes – rising incomes, demographic changes, fashionand new concerns – continually create new customer needs. New knowledge andtechnologies at the same time offer new opportunities to meet these needs. Thepotential profit and growth opportunities that these represent mean that looking fornew ways to segment markets should be a top concern of managers.

For example, the airlines have conventionally segmented their cabins into economy,business and first-class customers. The economy class is the largest and lowest-marginsegment. Virgin Atlantic noted that the economy class was in fact a very heterogeneoussegment. While the average seat price was €450 on an Atlantic crossing, some last-minute and standby passengers were paying under €150, while other passengers werepaying full-fare economy tickets costing almost €750. Yet all economy-class customerswere in similar seats, receiving the same service. As a result, Virgin decided to segmentits economy class, creating a new ‘Premium Economy’ class aimed at full-fare economypassengers. Virgin would make itself more attractive to this segment by offering a sepa-rate ‘cabin’, better food, a separate check-in and other service enhancements.

Creating new segments that add new customers or trade up current ones is a regularstrategy pursued by expert marketers. Häagen-Dazs developed a premium segment forice-cream in the UK, selling at prices triple those for the mass market. Castrol devel-oped a new segment in the US lubricant market, selling high-priced synthetic oil fordrivers of high-performance European cars. British Airports Authority has segmentedsome of its car parks into tourist (€12 per day) and executive (€75 per day).

Opportunities for segmentation tend to increase as a market evolves. Industry-widesales statistics suggest, erroneously, that a market grows or declines uniformly. Forexample, industry statistics show that mobile phone sales grew by 60 per cent perannum during the 1990s. Cigarette sales in northern Europe, on the other hand,declined by 3 per cent a year. But such broad trends are useless and even misleadingfor the firm. A market grows (or declines) in three ways (Figure 3.3). The most obviousway is by attracting new customers as they become aware of the product and areincentivised to purchase it. But more important to the long-term growth of the marketis the attraction of new market segments, through the addition of different types ofcustomer both nationally and internationally. For example, in the early years, thegrowth of the computer market was fuelled by more scientific customers beingattracted, but then sales really boomed when a second segment – large business organ-isations – started using computers. Growth was further increased by the addition of athird segment – small businesses. Later, households and then students began to beattracted to the market. Figure 3.4 shows how a market grows by the addition of new

Innovative segmentation

Segmentation over time

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Dynamic ta rge t ing s t ra teg ies

market segments. The third way markets grow is by existing customers spending moreon the product. This occurs when new uses are found for it, people become heavier ormore frequent users, or they are encouraged to trade up to higher-priced models.

Convert non-users(existing segment)

Increase awareness

Incentivise purchase

Geographical

New channels

New uses

Trading up

Heavier or morefrequent use

Create newsegments

Greater revenuefrom currentcustomers

Marketgrowth

Figure 3.3Sources of marketgrowth

Sales

Time

Total market

Marketsegments

1

2

3

4

Figure 3.4Market growththrough adding newmarket segments

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Consequently, even in growth markets the firm must change radically to grow. Itmust first shift resources out of maturing market segments into the new emergingones. This means learning about the new customers and developing new productsand distribution channels. Second, it must look to trade up existing customers, findnew uses or encourage more frequent application of the product by discovering newmeans of adding value. Unless management explore these two avenues, the firm willget trapped into declining, increasingly commodity-oriented segments. Analogously,creative marketers can still find buoyant growth segments even in mature or declin-ing total markets. In today’s highly fragmented markets, it makes more sense to talkabout growing or declining companies than about growing or declining markets.

The choice of target market segments determines where the business will compete.But other firms will also be seeking to compete in these segments, and customers willchoose whom to support. The key task of management in competitive markets is cre-ating a sustainable differential advantage to attract these choices. A sustainabledifferential advantage is a perceived difference that leads customers in the target seg-ment to prefer one company’s offer to those of others. The difference may be basedupon a product that is perceived as superior, has better service support or offers alower price. Where a firm creates a differential advantage, it achieves higher marketshare and higher profits, and has the ability to defend itself against an attack fromcompetitors.

To be a sustainable differential advantage, any difference the firm obtains must meetfour criteria:

■ Customer benefit. The difference must be seen by customers as offering some impor-tant benefit to them.

■ Unique. The benefit must be seen as not obtainable in a similar way from othercompanies.

■ Sustainable. The advantage must be difficult to copy. There must be some barriersto entry in the form of difficult-to-acquire skills, scale economies, branding orpatents, to prevent the differential being rapidly eroded.

■ Profitable. The firm must be able to offer the product or service with a price, costand volume structure that makes it profitable to produce.

Searching for a differential advantage begins with understanding what customersvalue. To customers, value is the utility or total satisfaction they perceive the productis offering, less the price to be paid for it, and less the other operating costs incurredover the life of the product. For example, a company chairman may have agreed topurchase an executive jet. In considering the options, the utility that any model isseen to offer would be influenced by the plane’s size, the luxury of the fittings, range,speed, perceived image and so on. Also taken into account would be the price of thealternatives and what the company can afford to spend. The chairman is also likelyto want to compare the other ownership and operating costs, such as maintenance,labour, insurance and depreciation. These ownership costs could easily exceed the

Creating the differential advantage

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Creat ing the d i f fe rent ia l advantage

price of the aircraft. The aircraft sales team will therefore need to research the factorsconstituting the prospect’s utility function, price elasticity, and how important oper-ating costs are rated in the buying equation.

The firm can create value for the customer by increasing the utility of the product (byoffering features that are perceived as superior), by lowering the price, or by cuttingother ownership costs. Higher ownership costs are normally a function of the prod-uct’s design and so can be treated as part of the utility of the product. Higherownership costs reduce utility; lower ownership costs act to enhance the attraction ofthe offer. The customer can then express choice in the equation:

Value = Utility – Price

Besides offering superior value to the customer, the differential advantage must alsobe profitable to the firm. For the firm, the profit on a product can be expressed in thesimple equation:

Profit = Price – Cost

These equations, expressing value to the customer and profit to the firm, show thatthere are three fundamental ways of creating a sustainable differential advantage.First, management can find ways of increasing utility without disproportionateincreases in cost. Second, they can find ways of lowering costs without disproportion-ately lowering utility. Third, they can seek a new positioning in the market withdifferent levels of both utility and price. The first two alternatives are discussed inthis section and the last in the next section.

Utility is a traditional economist’s word for the perceived satisfaction offered by con-sumption or ownership of the product or service. In much of the managementliterature it is often called ‘quality’. Utility, perceived quality or customer satisfactionis always a combination of rational, economic factors and subjective image dimen-sions. In industrial markets characterised by professional buying, economic factorstend to dominate. Buyers choose sellers that they see as offering the most economicvalue. In consumer markets, the image conveyed by the brand will commonly play amajor role. In services, the professionalism and empathy of the people representingthe supplier often determine choice.

The factors that drive up the utility of an offer can conveniently be divided into fourgroups: product, service, personnel and image.

Product drivers

First, the physical product can be differentiated by design so that it is perceived asbetter or cheaper to operate. The most important parameters for achieving a differen-tial advantage are as follows:5

■ Performance. The level of the product’s primary operating characteristics (e.g.speed, capacity, accuracy).

■ Features. The characteristics that are added to the primary function (e.g. a car canbe augmented by satellite navigation, entertainment system, climate control).

■ Reliability. The likelihood that the customer will have problems with the product.

Drivers of utility

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■ Conformance. The degree to which the product’s design and operating characteris-tics meet expected specifications.

■ Durability. The expected working life of the product.

■ Operating costs. The costs of operating the product over its life (e.g. installation,energy consumption, labour, insurance).

■ Serviceability. The facility with which a product can be repaired.

■ Aesthetics. How the product looks and feels to the buyer.

Services drivers

Services that augment the product have become increasingly important differentia-tors as competition narrows product differences. The main service differentiators areas follows:

■ Credit and finance. Grants, loans, terms and conditions can add to the product’sappeal.

■ Ordering facilities. The ease or efficiency with which customers can order the product.

■ Delivery. The speed and effectiveness with which the order is delivered to the cus-tomer. Generally people will pay more for a fast and reliable service.

■ Installation. The facility with which the product is put into working order for thecustomer.

■ Training and consulting. Additional help and support offered to the customer.

■ After-sales service. The quality of its maintenance and back-up support.

■ Guarantees. Comprehensive guarantees may eliminate perceived purchase risks.

■ Operational support. A variety of services can be offered to reduce the customer’scost structure or enhance its marketing effectiveness.

Personnel drivers

Company personnel have become a valuable source of differential advantage, espe-cially in service-oriented markets. High-quality personal service is difficult forcompetitors to copy because it is so dependent upon the hard-to-change culture ofthe company, and the skill of the management in empowering and motivating thefront-line staff. The key attributes of people who add value through personal serviceare as follows:

■ Professional. They need the training to acquire the required skills and knowledge.

■ Courtesy. Customers expect politeness and consideration.

■ Trustworthy. Staff should be honest and credible.

■ Reliable. Customers want service that is accurate and consistent.

■ Positive. People want to deal with staff who believe they can overcome most practi-cal difficulties.

■ Responsive. Staff should respond quickly to customer requests and problems.

■ Initiative. They should be capable of using their initiative to solve customer prob-lems and not have to refer small matters to superiors.

■ Communication. Personnel need to be able to understand customers and provideinformation to them effectively.

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Image drivers

The image of the company or its brand should be a major source of differentialadvantage. Numerous experiments in many different product fields have shown that,while in blind product tests customers cannot differentiate between alternatives,once a well-known company or brand name is attached, they will not only choosethis brand, but also be willing to pay more for it. A strong image gives the customerconfidence in the product. This confidence value may be in the socio-psychologicalutility of the brand or in its economic performance.

Socio-psychological confidence is created when customers perceive the brand as enablingthem to make a positive personal or social statement. For example, young people seeCoca-Cola, the Apple iPod and Nike running shoes as consistent with the lifestyles theywish to express. Older people may turn to BMW cars, Rolex watches and Hermesscarves. Economic confidence is achieved when a brand or company name creates animage of reliability, performance or value. Many customers feel reassured by the Intellabel, the General Electric name or the Mercedes logo on a product.

The main approaches to creating value through image enhancement are as follows:

■ Reality. The best way of creating confidence in a product is by the previous threefactors – superior product performance, better services and top-quality personnel.Confidence, and consequently image, are based primarily upon satisfaction withusing a company’s product and services and dealing with its people. Without thereality of value being present, it is virtually impossible to create the image of it.

■ Advertising and related media. These can articulate, clarify and reinforce the brandimage or personality that the company wishes to present. Advertising and promo-tion can speed up the recognition of a company’s real performance advantage.They can make customers aware of the offer, understand it and eventually try it.Other vehicles that help to convey and reinforce image are logos, colour, personalendorsements, exhibitions, public relations and events.

It is crucial for management to look for ways of lowering costs without lowering util-ity. Some strategic thinkers postulate two alternatives open to the firm: competitionbased upon cost and competition based upon differentiation. But this choice is artifi-cial. Today a company needs both low costs and utility-enhancing differentiation.Low costs permit the firm to create a differential advantage through either cuttingthe price to customers, or investing more in product, services, personnel or imageimprovements that offer them value, or both.

The first step is a cost analysis to determine the cost structure of the product or busi-ness unit. Most costing systems are poor at allocating costs realistically to individualbusiness units, products and customers. Traditional accounting rules-of-thumb oftengive a misleading picture of the true profitability of the different businesses. Morerecently, activity-based costing has been introduced by more progressive firms to givea better picture.6 Unless it allocates costs realistically, management lacks the informa-tion rationally to improve efficiency.

Suppose a line of machine tools has the cost structure shown in Table 3.4 and generatesa profit margin of 5 per cent. The company will want to assess the competitiveness of

Cost drivers

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its cost structure and how its costs could be brought down without sacrificing the qual-ity of its product, service and image. Whether a company’s costs are higher or lowerthan its rivals depends upon where it stands in relation to the following cost drivers:

■ Economies of scale. Larger-volume competitors have the opportunity to operate atlower costs and to amortise fixed expenses such as R & D and advertising over agreater sales level.

■ Experience. Cost can decline over time due to learning that increases the firm’s efficiency.

■ Capacity utilisation. Firms operating their activities at full capacity will have lower costs.

■ Linkages. The level of certain costs can be influenced by other costs. For example, acompany might spend more than competitors in purchasing high-quality materi-als, but this might be more than offset by lower manufacturing and service costs.Higher costs in one area therefore do not necessarily mean inefficiency.

■ Interrelationships. Where a product or a business unit shares costs (e.g. R & D,ordering processes) with sister units, costs can be reduced.

■ Integration. Vertical integration, where the firm undertakes tasks normally done byoutside contractors (e.g. transportation), may lower total costs.

■ Timing. Being first in the market may give rise to a cost advantage. It is oftencheaper to build a brand name at the start, and early experience may give subse-quent cost advantage.

■ Location. Different operating bases also affect the relative cost of labour, manage-ment and materials.

■ Institutional factors. Tax rates, trade union practices, local content rules and govern-ment regulations can all affect the relative cost advantage of the business.

■ Marketing strategy. The utility-enhancing factors that the firm employs will alsoinfluence its costs. If it is adding multiple product features and value-added serv-ices, it will have higher costs that it anticipates recouping by higher prices orgreater volume.

One of the most useful tools for analysing utility and cost drivers and the relationshipbetween both is the value chain. The value chain describes how the activities of thebusiness contribute to its tasks of designing, producing, delivering, communicating andsupporting its product. The value chain of a business (Figure 3.5) consists of two typesof activity that create value for customers. The primary value activities consist of bring-

Revenue 100

Purchased materials 25

Manufacturing 15

R & D 5

Sales and distribution 15

Marketing 15

Central overheads 20

Profit margin 5

Table 3.4Profit and coststructure of abusiness

Value chain

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ing materials into the business, transforming them into products, distributing them,marketing and servicing them. The support activities underpin the primary activities byproviding the purchased inputs, developing the technology used in the product andprocesses, hiring, developing and motivating the firm’s personnel, and producing theinfrastructure activities such as general management, finance and planning.

Each of the nine elements of the value chain can be a source of differential advantage.Management needs to compare its value chain to those of its competitors. Managerscan then analyse, first, whether costs can be reduced through cutting out non-value-adding activities. An analysis should reveal which value-added stages represent thelargest potential of total cost. Obtaining a cost advantage in a key value-added stagecan mean a significant competitive advantage, whether that advantage is used to sup-port a low price or stronger differentiation. In the example of Table 3.4, cutting centraloverhead costs by 10 per cent suggests a profit margin increase of 40 per cent.However, such crude cuts make the dangerous assumption that these costs do not addvalue. In a company such as Nike, for instance, the technical and buying skills in headoffice represent the company’s core advantage, and arbitrary cuts would threaten itslong-term competitiveness. Therefore careful analysis is necessary to judge whethercost differences are due to quality drivers or differences in relative efficiency. The valuechain may also suggest how the business might be reconfigured to boost customer sat-isfaction without adding to costs. For example, Nestlé found that its large food plantswere increasingly unable to meet the demands of supermarket groups for rapidresponse, small runs and greater product and packaging variety. By restructuring intosmaller-focused factories, it was able to achieve both lower costs and higher satisfac-tion ratings from customers for its greater flexibility and speed of response.

Inboundlogistics

Supportactivities

Firm infrastructure

Primary activities

Operations Outboundlogistics

Marketingand sales

Service

Human resource management

Technology development

Procurement

Margin

Margin

Figure 3.5The value chain

Source: Reprinted with permission of the Free Press, a division of Macmillan, Inc., from Michael E. Porter,Competitive Advantage: Creating and sustaining superior performance, p. 6 Copyright © 1985 by Michael E. Porter

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In recent years, companies have extended this analysis to the concept of supplychain management. Supply chain management aims to reduce costs and increasequality by looking not just at the company’s value chain, but at those of suppliers,distributors and ultimately customers too. Here the company seeks to create channelpartners with which it can tailor a total customer value-delivery system that guaran-tees stringent standards for quality, on-time delivery and continuous improvementin costs and performance.

It has been shown how a business can offer superior value by strategies that add valueor reduce costs. The third way to enhance its competitiveness is through positioningitself more effectively. Positioning strategy is the choice of target market segments,which determines where the business competes, and the choice of differential advan-tage, which dictates how it competes.

A product or business unit may be inadequately positioned for three reasons. First,the segment in which it is targeted might have become unattractive because it is toosmall, declining, too competitive or otherwise unprofitable. Second, positioningmight be inadequate because the quality and features that the product offers do notappeal to the segment to which it is targeted. Third, it might be wrong because theproduct’s costs are too high to allow it to be priced competitively.

Figure 3.6 illustrates the structure of a typical market made up of four segments.Product X is inadequately positioned because it is too costly for the mass market andhas insufficient perceived quality to appeal to the premium or luxury segments. Thebusiness has several repositioning options. The first two might be termed ‘real’ repo-sitioning; the remainder are ‘psychological’ repositioning strategies:

■ Introduce new brand. After the declining price of personal computers in the 1990sthreatened to oust IBM’s high-priced machines from the market, the companyintroduced its own cheap ‘clone’ under the Ambra brand name and sourced fromthe Far East. The objective was to maintain a foothold in the booming mass andeconomy markets.

■ Change existing brand. Alternatively, a company may change its cost and utilitycombination to make it more appealing. In contrast to IBM, Compaq tried to solvethe problem by cutting its prices and simplifying the features offered to hold on toa position in the mass market.

■ Alter beliefs about the brand. Chivas Regal Scotch whisky achieved some success inrepositioning itself from the mass market to the premium segment, so rationalis-ing its higher price.

■ Alter beliefs about competitive brands. The Body Shop retail group succeeded inimplying that the beauty and personal care products of competitors were not envi-ronmentally friendly.

■ Alter attribute importance weights. Volvo raised the importance of safety as anattribute in choosing a car, so enhancing the value of its differentiation.

Positioning strategy

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The market ing p lan

■ Introduce new or neglected attributes. Unilever successfully introduced Radion, anew detergent that eliminated odours – a benefit previously not considered impor-tant by consumers.

■ Find a new market segment. When Dunhill diversified away from smoking acces-sories into the men’s clothing market, rather than entering the already highlycompetitive segments, it created a new luxury segment of very expensive, high-quality ready-to-wear suits. As the only ‘typically British’ competitor in thissegment, it brought a unique brand with a strong appeal to affluent executives(especially Japanese!).

It is essential to formalise these decisions into a marketing plan. The plan communi-cates the objectives and strategy to the management team and permits a rationaldebate about the potential and chances of success. Marketing plans should be madeat several levels in the business: for the company as a whole, for the divisions, for thebusiness units, and at the product and market levels. The next chapter discusses thehigher-level plans. This section summarises the basic building blocks of marketing –the marketing plans for the individual products or target market segments. A market-ing plan consists of seven integrated components:

The marketing plan

Quality

Cost

Massmarket

Premium

Product X

Luxury

Economy

Figure 3.6Repositioning in asegmented market

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1 Background situation(a) Current performance(b) Background analysis(c) Opportunities and options

2 Marketing objectives(a) Marketing objectives(b) Financial objectives

3 Marketing strategy(a) Target market segments(b) Differential advantage

4 Marketing mix(a) Product(b) Price(c) Promotion(d) Distribution(e) Services(f) Staff

5 Action plans

6 Budget

7 Organisational implications.

The starting point of the plan assesses the health of the product or its position in asegment. It focuses on three questions. How well is it performing now? What factorshave led to the current success or failure in the market-place? Where is the businessheading – do things look likely to improve or get worse? These questions areanswered under the following headings.

The two key measures of the health of the business at this level are marketing andfinancial results. Marketing performance is revealed in the sales and market share fig-ures. Financial performance is shown by the performance of total profits, gross and netmargins, return on capital employed and cash flow. These measures should be com-pared against major competitors and over the past five years. The results should besegregated by line of product and type of customer to exhibit the winners and losersin the portfolio. This section should conclude with a clear, unambiguous statementabout whether current performance is good or bad, satisfactory or unsatisfactory.

This section falls into two parts. The first accounts for current performance – how didwe get here? The second seeks to project future performance on current assumptionsabout the environment and the policies of the business – where are we heading?

Background situation

Current performance

Background analysis

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The market ing p lan

Current performance has been determined by environmental changes affecting themarket and by the effectiveness of past decisions taken by management. The back-ground analysis should try and divide the explanation of current performance intothese two components.

Environmental changes can again be split into macro- and micro-environmentalchanges. Macro-environmental changes refer to the broad shifts in economic condi-tions, demographics, technological, cultural and environmental forces that may haveinfluenced performance either positively or negatively. For example, consumerdurables and capital goods are strongly affected by the economic cycle.

Micro-environmental changes are those shifts that are specific to the market in whichthe business operates. In this section, the product or market manager will analyse theeffects of changes in the behaviour of customers, distribution channels, competitivestrategies, new products, prices and costs.

The environmental forces are largely outside the control of the firm. They arechanges to which the business must adapt. The second set of factors that will haveshaped current performance are the results of decisions that management took in thepast. These include the objectives chosen, the strategies employed, and the product,price, promotion and distribution tactics. How appropriate were these decisions andhow effectively were they implemented? Which of them were the critical factors indetermining today’s results?

The second part of the background analysis is to project a scenario of how the macro-and micro-environment of the business is likely to change, and to consider the impli-cations. Then the appropriateness of the current goals and strategies of the businessare assessed. The objective is to come to a conclusion about how bright the future ofthe business looks.

Opportunities and options

After describing the current situation and assessing the implications of the externaland internal changes taking place, management should conduct a SWOT analysis.This requires listing and analysing the main strengths of the business, its weaknessesand the likely opportunities and threats it will be facing in the future.

The next task is to identify clearly the key issues or options available to the business.Management will want to look at avenues which exploit the strengths and pursue theopportunities that have been identified. At the same time, they may wish to takeaction to counter the threats and weaknesses that have been perceived in the business.Options to be explored might be: shifting into a new market segment, adding newproducts, boosting service and quality levels, or diversification into other markets.

There will be two sets of objectives in the marketing plan: marketing and financial.

■ Marketing goals. The plan should have a clear sales goal. In addition, it is impor-tant to specify a market share target, since in high-growth markets adequate salesgrowth can disguise declining market share performance. Sales and share are theprimary marketing objectives, but it is also useful to have intermediate goals cover-ing customer satisfaction, loyalty, communications and distribution. These might

Marketing objectives

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include achieving target satisfaction scores, repurchase rates, certain awarenesslevels, target trial levels and aims for specific penetration levels among retailersand distributors.

■ Financial goals. The primary financial objectives will be profits, return on invest-ment and cash flow. It is useful to break these down into convenient indices suchas gross margin, return on sales, stock turnover and other managerial ratios thathighlight important efficiency characteristics of the business.

It is important to set objectives because they can provide targets to stretch theendeavours of the management team and prevent complacency. They can also pro-vide the means for evaluating the performance of a business and those who run it. Toprovide these benefits, however, the objectives need to meet certain criteria. First,they must be strategically relevant and consistent. For example, it would not gener-ally make sense to have both ambitious sales growth objectives and high short-termcash generation targets for a new product. Second, the target should be reasonable.While it is important to set objectives that stretch management, they will not bemotivating unless they are seen as attainable. Third, they should be measurable andunambiguous. For example, when the objectives are to be achieved should be madeclear. Finally, they should be based upon reliable data. Many accounting systems allo-cate costs across products in ways that do not reflect their true loadings. For example,overhead costs often get allocated as a percentage of sales rather than as they areincurred. Such biases usually have the effect of undervaluing the gains made by suc-cessful products and disguising the true costs of poor ones.

The strategy to achieve the objectives is built around two cornerstones: the choice oftarget market segment or segments; and the choice of the differential advantage.These two comprise the positioning strategy of the business or the brand.

■ Target market segment. Here the plan will identify what types of customer the busi-ness is to aim for. The presentation will analyse their needs and profiles: what thecustomers expect, where they are, how and when they buy, and how they use theproduct.

■ Differential advantage. The plan will describe the competitors and their strategies,and present the company’s own core strategy that will lead target customers toprefer and purchase its offer.

A clear statement of this positioning strategy is crucial because it defines all the ensu-ing decisions that implement the plan.

The marketing mix is the set of marketing decisions that management makes toimplement its positioning strategy and achieve its objectives. These have popularlybeen termed the four Ps: product, price, promotion and place (i.e. distribution).Nowadays most managers would add two more decisions: service and staff. Each ofthese decisions is essentially a category under which a bundle of sub-decisions areneeded. The main headings are as follows.

Marketing strategy

Marketing mix

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Market -cent red o rgan isa t ions

These should specify the details of implementation. For each of the decisions, theaction plan should state who is responsible, when it will be done, and how much itwill cost. This often takes the form of a calendar that schedules the necessary activi-ties to achieve the results in the most effective manner.

The final step is to develop a budget that projects the revenues, expenditures, profitsand cash flows over the planning period. Top management can then evaluatewhether the plan is sufficiently ambitious, whether the expenditures are reasonable,and the nature of the risks involved.

To make a marketing strategy work, the business needs to put together an organisa-tion that encourages people to develop the necessary expertise and commitment. Inthe past, organisational activities have been structured around functions or division-alised around geographical or production units. However, if the focus of the business

Product decisions

■ Product variety ■ Product presentation■ Product performance ■ Product packaging■ Product features ■ Sizes■ Product design ■ Brand name

Pricing decisions

■ List price ■ Geographical pricing■ Discounts ■ Payment terms■ Allowances ■ Credit terms

Promotion

■ Sales force ■ Consumer promotion■ Advertising ■ Trade promotion■ Public relations ■ Direct marketing

Distribution

■ Channel selection ■ Distribution directness■ Market coverage ■ Density of distribution■ Channel variety ■ Dealer support

Services Staff

■ Pre-sale services ■ Support staff■ Point-of-sale services ■ Staff motivation■ Post-sale services ■ Tasks and responsibilities

Action plans

Budget

Market-centred organisations

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is on marketing – meeting customer needs, implemented by clear segmentation andpositioning strategies – a different type of organisation is called for. The most obviousway of structuring activities is around customers, markets and market segments.

The problem with functional and other types of divisionally based organisation isthat they are not oriented to building up knowledge about customers; nor do theyassign clear responsibility for meeting their needs. Building a market-centred organi-sation requires the firm first to define its key customers or target market segmentsand then to organise product development, operations, marketing, sales and distribu-tion around each of these segments. The aim is to build small, dedicatedorganisations committed to understanding and meeting target customer needs betterthan competitors.

For example, the Burton Retail Group initially had one women’s wear business.Then to boost its market position it decomposed the market into six lifestyle seg-ments. Each segment was given its own management board, and its own buyingand marketing organisation charged with developing a profitable positioning strat-egy. Each market-centred business unit developed its own shop formats, marketingplan, pricing and promotional platform. Similarly, Hewlett-Packard moved from aproduct-based division structure to one organised around market segments. It builtnew business units capable of selling any of the H-P products to specific customergroups such as health care, financial services and engineering. An organisation canbe market centred at several levels. The most complete form is the autonomousmarket-centred division, where the market segment forms the profit centre. AtBurton’s, for example, the market segment manager had total autonomy and profitresponsibility. In this type of organisation, production and R & D must becomemarket focused or they will not be given any business by their internal customers.A less radical approach adopted by H-P and many companies is to reorganise thesales force around market segments. A further step is to create a separate marketingorganisation for each of the major segments. These can research individual marketsand develop appropriate strategies. Another increasingly popular option is team-based organisations, whereby personnel from manufacturing, R & D and marketingare assigned to taskforces aimed at capitalising on opportunities presented by spe-cific markets.

Organising around customers and markets can offer several advantages. First, itfocuses managers and employees on what really counts – satisfying the needs oftarget customers. Second, the benefits increase as customers shift from buying com-modity products to wanting value-enhancing solutions made up of several productand service elements. Third, it encourages innovation and value-added offerings bycreating expertise in the understanding of the operations, problems and changingmarket environment of the buyer. Fourth, it stimulates teamwork and reduces func-tional conflict by providing a common focus through which specialised inputs canbe directed.

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Quest ions

Marketing has two meanings. First, it is a business philosophy which states that thecentral goal of the company must be to meet the needs of customers. Without this thefirm cannot survive and prosper in competitive markets. The second idea of marketing is adistinct group of activities centred around market segmentation and positioningdecisions.

Capitalising on market opportunities requires several steps. First, it requires segmentingthe heterogeneous markets open to the firm and understanding the needs of theseparate customer groups. Segmentation is the key to marketing because it offers thefirm the chance to meet customer needs more effectively and so build sales growth andprofits. Market segments are not static, but offer continual opportunities for innovationand marketing creativity.

After choosing its target market segments, the business has to create a differentialadvantage. All segments are, or become, competitive and the firm must create a reasonfor preference. A differential advantage can be based upon an offer that provides higherutility or which is lower in price. To build a differential advantage, management needs tounderstand what drives customer satisfaction and what drives the costs of meeting theirrequirements.

Finally, management must know how to put together marketing plans and market-centredorganisations that are capable of translating strategy into actions.

Summary

1. The high street banks have traditionally not segmented their markets or developeddiscrete positioning strategies for the different segments. Do you think segmented offerswould make sense for the banks? How could such a strategy be operationalised?

2. Is it possible for one petrol station to charge higher prices for petrol than its neighbouringcompetitors?

3. What are the benefits of market segmentation for the business?

4. A commercial vehicle business is seeking to ‘reposition’ its major product. What does thismean and how might it be done?

5. Show how the ‘value chain’ of a customer can be used to provide insights forsegmentation and positioning.

6. What are the major components of a marketing plan for a product or target market?

Questions

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1. Don Peppers and Martha Rogers, Enterprise One-to-One: Tools for competing in the interactive age(New York: Doubleday, 1999).

2. Dell’s segments are home, small business, medium and large business, large corporate andpublic sector. The ways they address these customer groups differs slightly by geographicmarket. A visit to www.dell.com demonstrates these differences.

3. David A. Aaker, V. Kumaran and George S. Day, Marketing Research, 7th edn (New York: Wiley,2001).

4. Louis L. Schorsch, ‘You can market steel’, McKinsey Quarterly, January 1994, pp. 111–20; V.Kasturi Rangan, Rowland T. Moriarty and Gordon S. Swartz, ‘Segmenting customers inmature industrial markets’, Journal of Marketing, October 1992, pp. 72–82.

5. David Garvin, ‘Competing on the eight dimensions of quality’, Harvard Business Review,November–December 1987, pp. 101–9.

6. Robin Cooper and Robert S. Kaplan, The Design of Cost Management Systems (EnglewoodCliffs, NJ: Prentice Hall, 1991).

Notes

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