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Bridging Industrial Segmentation Theory and PracticeAnn Højbjerg Clarke a

a Department of Entrepreneurship and Relationship Management, University of Southern Denmark,Kolding, Denmark

Online publication date: 09 December 2009

To cite this Article Clarke, Ann Højbjerg(2009) 'Bridging Industrial Segmentation Theory and Practice', Journal ofBusiness To Business Marketing, 16: 4, 343 — 373To link to this Article: DOI: 10.1080/10517120902762427URL: http://dx.doi.org/10.1080/10517120902762427

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Journal of Business-to-Business Marketing, 16:343–373, 2009Copyright © Taylor & Francis Group, LLC ISSN: 1051-712X print/1547-0628 onlineDOI: 10.1080/10517120902762427

WBBM1051-712X1547-0628Journal of Business-to-Business Marketing, Vol. 16, No. 4, Oct 2009: pp. 0–0Journal of Business-to-Business Marketing

Bridging Industrial Segmentation Theory and Practice

Bridging Industrial Segmentation Theory and PracticeA. H. Clarke

ANN HØJBJERG CLARKEUniversity of Southern Denmark, Department of Entrepreneurship

and Relationship Management, Kolding, Denmark

Purpose: Segmentation is seen today as a core concept withinmainstream marketing. While industrial segmentation hasreceived considerable attention within academic literature, therehave been many reports on companies having problems using,applying, and implementing the principles of segmentation.Authors criticize the literature on segmentation for giving too littleattention to implementation, providing marketers little help andguidance on how to make segmentation work in a practicalenvironment. This article addresses some of these problems.

Methodology/Approach: The objective of this article is to design aprocess with methods and activities for segmentation by buildingon action research case study data from a large Danish industrialcompany.

Findings: Along with important considerations, this articlepresents the process of segmentation using a build-up approachbased on qualitative market data. The process is practical andeasily approachable for companies. The purpose behind segmenta-tion is strategic—identify target segments and facilitate theplanning of future product offers. It is argued that segmentationshould be dedicated to the purpose and context of the company.This case illustrates how the company adapted segmentationtheory to their particular needs.

KEYWORDS Industrial segmentation, product development,action research, segmentation process

I would like to thank Lyle Bruce Clarke and Per Vagn Freytag for their valuablecomments and suggestions for improvements.

Address correspondence to Ann Højbjerg Clarke, Associate Professor, University ofSouthern Denmark, Department of Entrepreneurship and Relationship Management, Engstien1 DK-6000 Kolding, Denmark. E-mail: [email protected]

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344 A. H. Clarke

Segmentation is currently one of the core concepts within mainstreammarketing (Dibb and Stern 1995; Söllner and Rese 2001), and it is said to bea central concept for successfully managing the marketing strategies andprograms within industrial settings (Albert 2003). However, the literatureincludes reports on problems with segmentation both in relation to acompany using and applying it and for companies implementing differentmarketing strategies for different segments (Abratt 1993; Kalfatis andCheston 1997; Mitchell and Wilson 1998; Palmer and Millier 2004). A gapseems to exist between theory and practice (Dibb and Simkin 2001; Millier2000; Sausen, Tomczak, and Hermann 2005). Authors criticize the segmen-tation literature for not giving much attention to implementation, and fornot providing marketers with guidance on how to make segmentation work(Dibb and Simkin 2001; Hlavacek and Reddy 1986; Plank 1985; Wind andThomas 1994). Dibb and Simkin (1994, 56) add that “academic segments aremeaningless, however, unless they are capable of application in real worldsituations.” Another criticism of the segmentation literature has been that ittakes no account of the company’s structure, culture, activities, resources,and so on (Jenkins and McDonald 1997; Piercy and Morgan 1993), whichcan result in the company having problems when the proposed models andbases are applied.

Constructing a market segmentation process and methodology that ispractical in nature, easily approachable for companies, operational withinthe company, and that considers the eventual implementation ramificationsthroughout the segmentation process is the central aim of this research. Theresearch builds on action research that took place over a two-year period ina Danish industrial company. Close cooperation with the company and afoundation based on what is actually possible formed the basis of the seg-mentation process. The specific purpose of the segmentation is to identifysegments that can support strategic decisions and help plan future productsand product lines for platform-based products. This article describes thesegmentation process and the methods used within the different stagesalong with various important considerations. It presents an alternative to thebreak-down approach in the form of a more build-up based method. Addi-tionally, the research includes implementation considerations since theexecution of the segmentation process is an important part of successfulimplementation. A well-planned process can plant the seeds of understand-ing and commitment and help get the support of both key decision makersand the employees that should use the segments (Miller and Jangwoo2001).

This article covers the progression from the start of the segmentationprocess to the final internal communication of the identified segments. Itdoes not include how to use the identified segments when designing andimplementing marketing strategies, allocating resources among thesegments, or structuring sales-force assignments and actions.


Bridging Industrial Segmentation Theory and Practice 345

LITERATURE AND PRACTICE

Segmentation builds on the widely accepted assumption of heterogeneouscustomers and markets (Crittenden, Crittenden, and Muzyka 2002; Windand Bell 2008). Market segmentation is a way of structuring customers intohomogenous groups that are similar in a way that is beneficial to thecompany (Wind 1978). This is normally followed by a selection of one ormore segments (targeting) and tailoring a marketing program to each targetgroup, also known as marketing mix development (Danneels 1996; Dibband Simkin 2001; Montoya-Weiss 1995).

Recently, authors have emphasized that segmentation is both purposeand context dependent (Clarke and Freytag 2008; Goller, Hogg, and Kalafatis2002; Wind and Bell 2008; Wyner 2002; Yankelovich and Meer 2006). Thepurpose has a considerable effect on how the segmentation process isplanned, conducted, and implemented. Different purposes raise differentquestions, answers, and decisions (Clarke and Freytag 2008). Companies,therefore, need to adapt the theory of segmentation to their particular pur-pose, context, and offer. It is critical to clearly define the purpose of thesegmentation when selecting the segmentation model and bases, as well aswhen implementing the segments. The purpose of segmenting a marketvaries from operational to strategic orientations (Clarke and Freytag 2008;Jenkins and McDonald 1997; Piercy and Morgan 1993). Today, the strategicimportance of market segmentation is emphasized in the marketing litera-ture (Sausen, Tomczak, and Hermann 2005). Strategic segmentation ensuresa fit between segmentation objectives and a company’s core competencies,facilitating a successful implementation of market segmentation. However,there tends to be a lack of research into strategic market segmentation,especially with regard to normative segmentation approaches (Sausen,Tomczak, and Hermann 2005).

A core aspect in segmenting a market is the selection of models andsegmentation bases; both areas have gained considerable attention withinacademia. Various authors have proposed new types or uses of segmenta-tion bases such as need-based or microsegmentation processes (Albert2003), psychographics (File and Prince 1996), use of relationships (Freytagand Clarke 2001), demographic data (Griffith and Pol 1994), how willingcustomers change suppliers (Gensch 1984), and various unobservablecharacteristics (Verhallen, Frambach, and Prabhu 1998). The variety ofproposed variables reflects the many attempts to segment industrial marketsin different industries. They also reflect a change in the understanding ofthe nature of the industrial market and a different understanding of whatsegmentation means and the role it plays within companies.

Accordingly, different approaches to segmentation methods can beidentified ranging from statistically based methods (e.g., cluster analysis,factor, conjoint, and multivariable) (De Kluyver and Whitlark 1986; Green,


346 A. H. Clarke

Krieger, and Vavra 1997; Montoya-Weiss and Calatone 1999) to judgmentalmodels and more intuition-based methods (Naudé 1995; Millier 2000;Palmer and Millier 2004). Most proposed methods or models in industrialsegmentation have been based on either statistical methods or a breakdownprocess (e.g., Bonoma and Shapiro 1983, 1984; Wind and Cardozo 1974).Only a few contributions are based on build-up models. The breakdownand build-up methods are based on two different assumptions as to wherethe segmentation process should start (Flodhammer 1979; Freytag andClarke 2001; Kotler 2001). In the breakdown approach, the research startswith the entire market and then moves down toward more company-specific information. The build-up approach starts out with the individualcustomers and then builds up an understanding and segmentation of themarket as a whole. The build-up approach sees the customer as so uniquethat it can be difficult to find similarities on which to build market segments(Arndt 1974; Freytag and Clarke 2001).

While the literature has focused on new variable and normative models,few authors have considered segmentation as a process. Goller, Hogg, andKalafatis (2002) find that segmentation bases are industry-specific and theyidentify a need to focus on the segmentation process and related activitiesrather than on creating normative models or suggesting bases. They proposethat any generalization of segmentation models is questionable. Thus there isa need to further research both the descriptions and proposal of segmenta-tion processes and guidance on how companies undertake segmentation(Plank 1985; Reid and Plank 2000). Similar thoughts are given by Palmer andMillier (2004, 780) who write, “despite the proliferation of advice on tech-niques for segmentation, there is much less guidance in the literature onhow to undertake this task.” Furthermore, Dibb and Simkin (2001) foundthat companies need information on the process, such as who to involve,what data to gather, what variables to use, and how to employ the identifiedsegments. These are areas where the segmentation literature provides littleguidance and consideration. Action research is a method used for gainingdeep and comprehensive insight into a company, and it can be used by aca-demia to design better segmentation processes by developing methods incooperation with a company. This study is an action research case con-ducted in a Danish industrial company over a two-year period.

The lack of guidance in the segmentation literature can help explainwhy companies have problems segmenting their market. Several journalarticles have demonstrated how segmentation models have not beenapplied in practice (Abratt 1993; Hlavacek and Reddy 1986; Mitchell andWilson 1998). However, the problems companies face with segmentingtheir market and implementing the identified segments occur not only as amismatch between literature and practice but also as an internal mismatchwithin the company. Segmentation or a re-segmentation can be a majorchange for a company, which is a concern that has been discussed in the



academic literature (Dibb and Simkin 2001; Goller, Hogg, and Kalafatis2002; Mahajan and Jain 1978; Piercy and Morgan 1993). How easily thesegments are implemented may depend on the impact and purpose behindthe segmentation. Piercy and Morgan (1993) distinguish between strategiclevels and the more operational levels of segmentation. Implementation ofsegments on the strategic level can be comprehensive for a company andmight demand structural and strategic changes. Furthermore, Dibb andSimkin (2001) found that implementation problems can be divided intothree major areas: infrastructure barriers, segmentation process issues, andimplementation barriers. How to implement segmentation in the companyis an area that needs further attention in the segmentation literature (e.g., inthe proposed models and processes).

Segmentation for product innovation has, over the years, been sug-gested as an important purpose in the segmentation literature. However,there are only a few examples of how it can be done (Mitchell and Wilson1998; Yankelovich and Meer 2006) even though segment selection hassignificant implications to industrial product strategy (Montoya-Weiss andCalatone 1999). Focus on product development has become more pressingas many industrial companies have experienced increased demands forfaster development of new products and services, increased functionalitiesand variety in the products, increased product differentiation, and productsand services that are better customized to the individual needs of customers(Drejer and Gudmundsson 2003; Halman, Hofer, and van Vuuren 2003;Ramdas 2003). This increased complexity and variety in needs is generatingincreasing market fragmentation and adding new challenges to the segmen-tation process and its design (Dibb 2001; Sheth, Sisodia, and Sharma 2000).In order to respond to changes in customer needs and demand for morecustomized products, many companies are starting to apply new architec-tures (e.g., modularity and product platforms). These architectures supportcustomization, faster development of new variants, introduction of newproducts, and so on. However, these new forms of development do notmake market segmentation obsolete. On the contrary, it has become moreimportant to have a sound strategic segmentation plan that supports prod-uct-line planning and differentiation, and helps identify the varying needs ofcustomers, thus identifying where products can share common elementsand where elements need to be unique. Thus, in the product platform andmodularity literature, segmentation is often coined as an important andnecessary activity (Dahmus, Gonzalez-Zugasti, and Otto 2001; Meyer andLehnerd 1997; Meyer and Utterback 1993; Robertson and Ulrich 1998;Sundgreen 1999).

An outcome of all of this is that marketing and product-planning man-agers must analyze the different market segments and determine whichones to enter, what customers want in each segment, and what productattributes will appeal to those customers (Lundbäck and Karlsson 2005).


348 A. H. Clarke

Thus, a good understanding of how a market works or how it can poten-tially be segmented should no longer be of interest to marketing analystsalone; it should also be a central concern to top management and strategicplanners, as pointed out by Datta (1996). A further consequence is thatcompanies based on platforms and a modular approach can focus on spe-cialized products in narrow market segments, thus supporting moresegments with a given level of product-creation resources (Sanchez 1999;Sköld and Karlsson 2007). This can also create a foundation for enhancedrelationship development (Peppers, Rogers, and Dorf 1999). Segments canpotentially consist of just a few customers, or even perhaps a single cus-tomer. However, it is not uncommon for companies in industrial markets tohave segments with only a few large key accounts with which they haveclose relationships, although it has become more accessible with the newarchitectures. Even so, it seems that there is a movement taking place in theconsumer market toward more customized products and solutions, and anattempt is being made to continuously build closer relationships withcustomers. This can lead to a one-to-one segmentation phenomenon. How-ever, many companies do not have the desire nor gain advantages ofpursuing such strategy, and the pros and cons should be carefully scruti-nized before engaging this approach (Dibb 2001; Steenkamp and Hofstede2002).

COMPANY DESCRIPTION

The research was undertaken in a large Danish industrial company thatdevelops, produces, and sells high-performance electronic products. Theproducts are widely used in the production facilities of various companiesor are built into machines, thus the products are sold to both productioncompanies and original equipment manufacturers (OEMs). Customers usethe products in many different applications with varying performancedemands. The company is experiencing a market that is growing with newapplication needs and a continuous introduction of new customer types. Hav-ing a comprehensive knowledge of the market and a clear understanding ofthe needs of target customers has become critical to remain competitive.

The company had a segmentation it had used for years, which seemedto be appropriate for sales, including such activities as handling market infor-mation, market communication, pricing, distribution, and management ofsales forces. However, situations arose with increasing frequency where thesegments did not seem appropriate and were not able to explain which cus-tomers bought different products and used different features and why. Fur-thermore, those in product development felt that they had problems usingthe segments because a direct link between the segments and customers’product needs was lacking. The marketing department reflected the missing



link in the existing segments through problems they had in specifying futureproducts and planning product lines and the tendency toward creating all-encompassing specifications. This tendency resulted in more technology-based specifications rather than market demand-driven specifications. Thisproblem increased as the market became more complex and customer needsmore fragmented. As the company moved from more integrated to productplatform-based development, it became more apparent that it needed to linkthe segments better to product-line planning. “Product platform is the set ofparts, subsystems and interfaces that form a common structure from which astream of derivative products can be efficiently developed and produced”(Meyer and Lehnerd 1997, 39). Product platforms are used to create com-monality and re-use between different products and they help the companyoffer greater levels of product variety so that the company can better meetthe diverse needs of customers in global markets (McGrath 1995).

Marketing had attempted, on several occasions, to segment the market.Marketing applied the traditional break-down methods (micro and macro)but because of the high complexity, the task was unmanageable, and focus-ing on the customers’ needs within the segmentation process was difficult.The company realized it was necessary to find an alternative method forsegmenting the market.

ACTION RESEARCH METHODOLOGY

Action research is a qualitative method in which the researcher collaborateswith a group in its natural settings to solve a specific problem of the group(Gummesson 2001; Carson et al. 2001; Perry and Gummesson 2004) andcontributes to science (Gummesson 2000). Action research is a process of sys-tematically collecting research data about an ongoing system (Cunningham1993); it is research in action rather than research about action (Coughlanand Coghlan 2002). Involvement, collaboration, and active participationfrom members of the system distinguish action research from other forms ofsocial research (Coughlan and Coghlan 2002).

Action research was chosen for this study for several reasons. First,action research helps create a comprehensive understanding of the condi-tions under which the company operates and, therefore, of the limitationsand demands placed on the end result so that it is usable for practitioners.Further, close cooperation with employees through action research helpsidentify processes, models, and tools that are easily approachable for thecompany. In addition, action research can give further insight into thechange processes often needed for implementation. Finally, the use ofaction research in this study contributes to the segmentation literature bybridging the gap between theory and practice.


350 A. H. Clarke

In the early phase of this research focus was on gaining a compre-hensive and holistic understanding of the company and its context, involv-ing its technology, strategy, customers, competitors, and so forth. Thisfocus resulted in a diagnosis of the situation and problems that lead to thedesire for re-segmenting the market. The first period, defining the overallpurpose, was turbulent. When the company moved to platform-baseddevelopment, the need for segmentation became apparent and the focuschanged to carrying out the segmentation with urgency. The focus changeresulted in a change of purpose for the research, a typical occurrence inaction research.

The company and the researcher established a cross-functional taskgroup consisting of seven people representing the different departmentsand employees that would use or depend on the future segments. Theteam participated in the different phases of the segmentation process andwas involved in planning, information gathering, analysis, syntheses, andimplementation.

Several methods were developed and tested in cooperation with thecompany, and this article presents the methods that provided the bestresults and, therefore, became part of the final segmentation process.Initially the process consisted of four meetings. This initial phase identifiedthe purpose, established bases for the segmentation, and created a commonunderstanding and language. Next, a questionnaire and a question guidewere developed over the course of two meetings. The employees were thentrained in interview techniques and in using the questionnaire and questionguide. Next, the employees and the researcher conducted 45 companyinterviews. The interviewers recorded each interview, and the quantitativeinformation was entered into a database. Afterwards, a two-day workshopused the information collected during the interviews to identify the seg-ments. Finally, the identified segments were communicated to the rest ofthe company. The involved employees participated in the verbal communi-cation of the segments, and a subsection of the group developed thedocumentation and visual communication.

The action research process was characterized by close interaction andcooperation with the company, especially the task group, in the form of aniterative cycle of discussing, planning, carrying out, reflecting on, and thenevaluating the activities. In some situations it was necessary to plan andconduct an activity again; in other situations the process was able to moveon to the next phase. This method, or a variant, is common in actionresearch (Argyris, Putnam, and McLain Smith 1985; Carson et al. 2001;Cunningham 1993; Dickens and Watkins 1999; Gummesson 1988, 2000). Inperiods, the researcher interacted closely with the company in order to gaininsight and clarity, as well as to develop and test methods or activities. Inother periods the researcher was more distant in order to reflect on andanalyze the findings and plan the further stages. In addition to their



concrete participation, the core employees stayed informed and acceptedthe results, understandings, and interpretations made by the researcher.

The process continuously adjusted to the needs of the company, tonew knowledge, to new understandings, and so forth. The methods appliedalso varied, for example, from periods with interviews, observation, andparticipation to facilitated meetings and workshops and other means ofcooperation. A description of the process and activities conducted followsthe presentation of the segmentation process.

THE SEGMENTATION PROCESS

The following section presents the segmentation process that was devel-oped, describing the activities and considerations made in the company.The process consists of seven overall stages, outlined in Figure 1, withimplementation considered throughout each stage.

Presegmentation: Setting the Scene for the Process

The research showed that it is important to start the segmentation process byconsidering how the company will conduct the process and implement thesegments; this should be done before the first meetings in the segmentation

FIGURE 1 Segmentation Process Stages, Central Process Questions, and ImplementationConsiderations

How to prepare the organization for new segments?

Who should participate in the different activities, and how? (Employees that are affected are important for the implementation of the segments etc.)

How to insurance of managerial commitment and resource

How should we communicate to non-participants and what?

How can we create commitment and trustworthiness towards the segments?

1. Identification of purpose

2. Identification of market to segment

3. Identification of variables and model

4. Segmenting and analysis

5. Verification, evaluation and selection of segments

6. Communication and implementation

7. Monitoring and updating

What is the background for segmenting the market, how and who will use the identified segments?

Which market should the company segment?

Which variables should the segmentation use? How can the company gather data? What methods should the process

use to create the segments?

How should the data be analyzed and the segment created?

Do the segments exist, how attractive are they? What do the segments demand and how well do they match the

company?

To whom should the company communicate the segments, and how? How should they use the segments?

When should the company re-segment the market? Consideration warranted both of degree and importance of

external changes and internal flexibility and changes

Important process and implementation considerations Important process questions


352 A. H. Clarke

team. Three factors are important for the success of the project: (1) have a highdegree of backing, commitment, and involvement by senior management, (2)have sufficient resources allocated, and (3) set a good team. Dibb and Simkin(2001) also consider all three factors important in order to remove infrastructurebarriers.

The commitment in the research was high because the company itselfhad already broadly felt both a need for a new segmentation and pressureto change to platform-based product development. This created focus and apositive attitude toward the segmentation project. Careful selection of theparticipants was an early core activity in which the following groups ofemployees were involved.

• Employees that had the knowledge and expertise to carry throughsegmentation

• Employees with implementation power, for example, managers and gate-keepers

• Employees that would be affected by the results and have to work withthe segments

• Employees from the involved departments (cross-functional)• Important employees that could possibly resist new segments

Central employees that were likely to create resistance were involvedin order for them to gain understanding through participation and influence.This was based on the presumption that a lack of understanding as to whythe company needs a new segmentation might cause resistance. Throughparticipation, the parties are more likely to understand the need to re-segment, which can lead to easier acceptance and implementation of thenew segmentation. However, it was also necessary to be aware of andavoid those that could be destructive to the process.

The final core team was made up of seven cross-functional employees:the project manager and the marketing employee from the platform project(they had to implement the segments in the platform project), the innova-tion manager (who was responsible for the product line planning), thestrategic marketing manager, an employee from strategic marketing (con-ducts market researches, specifies products and had previously segmentedthe market), a key account manager, and the researcher.

Step 1: Identification of Purpose

Once the team was formed, the first step in the process was to define thepurpose behind the segmentation, the problem the company wanted tosolve, and the decisions they wanted to make based on the segmentation.Identifying the purpose took a long time and the purpose changed severaltimes. Eventually, through three meetings and discussions, a common



understanding was reached that clarified both the need for segmenting andhow the company would use the segments. The final purpose was to findsegments that, besides supporting marketing activities, could support theplanning of future product lines and the creation of product platforms, inaddition to the selection of target customer groups.

Although it was time consuming, the knowledge and commitment theparticipants gained at this stage proved beneficial later on when conductinginterviews and taking part in the segment identification, as well as in thefinal communication and implementation. At the preliminary meetings, thecompany and the researcher agreed on what the needs were in productdevelopment. The preliminary meetings were also influential in gaining acommon language between the different departments. Because the purposewas identified clearly before moving on to the following steps, it likelyshortened the subsequent process because the purpose was not being con-tinuously revised. Therefore, when the strategy had to be executed basedon the segments, it was relatively straightforward because it was consideredin the segmentation process, for example, in the selection of bases.

Step 2: Identification of Market to Segment

The next step was to identify the market to segment. This segmentationused a more narrow approach to the market identification, involving exist-ing or potential customers of related product areas, that is, the market thecompany at present could consider users of either their or their competitors’products. This covered their entire product portfolio, which consisted offour product lines. Expanding the company’s business into new productswas not part of the strategy. More incremental development was in focusrather than discontinued development of new products. The research wasopen to new needs and new solutions within the existing product type orcategory. However, the focus was on the industrial market, for example,production companies or OEMs. The selection of a clean-cut product focusalso made implementing the segmentation easier.

Step 3: Identification of Segmentation Variables and a Segmentation Model

Identifying segmentation variables (bases and descriptors) is critical informing the foundation of the segments. The selected variables shouldclosely correlate with the purpose identified for the segmentation.Several approaches were used in order to identify and select appropriatesegmentation bases (variables used to form the segments). Theresearcher conducted interviews internally in the company with peoplewho had close customer contact with sales subsidiaries and with


354 A. H. Clarke

customers. The researcher and a marketing employee from the coreteam conducted eight customer visits to find variables, levels of cus-tomer understanding, and to find what type of data the customer couldgive. This information was used as background information for the core-team meetings. The core team held meetings to discuss what marketinformation was necessary, how to structure the data, what variableswere relevant to segmentation for both marketing and product develop-ment, and how various variables would contribute to the definition ofsegments. Thus, it was a process of external information and proposalsof how to divide the market into appropriate segments, combined withwhat type of information and what segments were desirable internally.The process has to be considered carefully in order to prevent undesir-able weight from being given to either the market or the internal needs,unless that is what the company wants.

This discussion of what information was needed and potential segmen-tation bases and descriptors formed the basis of a questionnaire and a moreopen question guide. The gathered information covered a broader rangethan what was finally used in the segmentation; part of it was detailed,future-oriented product needs that later were used in the product-lineplanning. The segmentation bases that are the most important to formingthe segments are: product and service needs, application, and customerrelationships preferences.

The segmentation process used variables to provide a better under-standing of the segments, and these, therefore, helped describe the identi-fied segments. A multidescriptor approach was used to arrive at a rich andcomprehensive description of the target market. The most importantdescriptors were International Standard Industry Classification (ISIC) sub-groups. Data on demographics and purchasing approaches were gatheredbut were not significant enough to describe the segments and the variationbetween the them.

Product needs and applications were initially seen as individualsegmentation bases; however, the analysis showed that many of the cus-tomers’ needs could, on a higher aggregated level, be seen as descrip-tions of applications. However, in order to understand the applications,it was necessary to understand the related needs, especially as the seg-ments had to be used for product development. Further, the customershad different service needs and preferences toward the desired relation-ship with their supplier. The ISIC could help describe some of the seg-ments, but it could not be used as a segmentation base because how thecustomer produced their product was more important than what theyproduced, which is the foundation of the ISIC. This further depends onthe description of the identified segments. Establishing which base anddescriptors were important took place after the actual forming of thesegmentation.



Step 4: Segmenting and Analysis

GATHERING DATA

The next step is to decide who should carry out the interviews and whatdata is needed. The core team conducted 45 interviews in seven countries;the guide and questionnaire were tested in four companies. Each interviewlasted from approximately two to three hours and was carried out by arepresentative from the core team from Denmark together with the localsales representatives who facilitated the contacts. Members of the core teamcarefully selected the customers for the interviews based on clear instructionon countries, industries, and customer status (customer or noncustomer),and sales representatives in the different countries found customers tocontact based on given profiles.

The company considered having sales subsidiaries conduct the inter-views in order to save money. However, the selected segmentation methodrequired that the employees conducting the segmentation also conduct theinterviews so that the company had the internal information needed tounderstand the market and product needs. Because the customers’ knowl-edge varies, some situations require the use of a translator between thecustomer level of understanding and the level of product data required.However, the use of a translator can create a validity problem, especially ifthe customer and interviewer are not familiar with technical issues. But forthis research the customers and interviewers were engineers or from thetechnical marketing department.

The method chosen to collect the data was primarily a priori and partlypost hoc. The main part of the method was a questionnaire with productdata and general data and an open question guide used to collect informa-tion and future-oriented data on new, not previously identified subjects. Itwas found that drawings of products and systems (either brought by theinterviewer or drawn during the interview) were good tools for facilitatingdiscussion during the interviews. The drawings were used to gain an under-standing of the customers’ production and use situation or, if it was anOEM, the machines they were building, the customers’ present productneeds, the identification of problem areas not yet fulfilled, and, finally, thedrawings supported the talk about future trends and needs. The drawingsthus helped focus the conversation and further the understanding betweenthe customer and interviewer. However, the drawings also created adetailed focus on the product, and were therefore used at the end of theinterview, with the beginning of the interviews based around more openquestions. This is something that needs to be tested by companies that wantto use drawings in the first couple of interviews in order to understand theeffect that drawings have and what types of information they bring to theinterview. If not used carefully, drawings can unintentionally confirm acompany’s preunderstanding and not give the needed new insight.


356 A. H. Clarke

THE IDENTIFICATION OF SEGMENTS

The process of moving from having the data to creating the actual segmentsis often problematic. This research identifies a build-up and break-downmethod. Qualitative data forms a basis of the method that is both flexibleand simple. The method used to identify the segments was a KJ analysis,which in the research was adjusted for segmentation (KJS). The KJ analysisis named after Professor Jiro Kawakita, who originally developed themethod to analyze anthropological data (Mizuno 1988).

The KJ analysis is a method of organizing, assimilating, and interpretinglarge amounts of qualitative data into manageable groups based on themesthat emerge from the data itself, and it can be used for building up data intogroups as well as studying their interrelationships. No predefined categoriesare given; rather, a structure and categories arise from the data. Traditionally,the KJ analysis groups customer statements separating fact from opinion,finding links between seemingly unorganized facts, and clarifying and prior-itizing ideas in a nonconfrontational way (Brassard 1989). This researchapplies the method quite differently; instead of structuring statements intogroups, the research structures companies into segments.

CONDUCTING THE KJS ANALYSIS

The researcher facilitated the KJS analysis at a two-day workshop in whichthe interviewers and four more employees participated. The purpose of theworkshop was to identify potential segments. The group held the workshopat a noncompany location to avoid interference so that they could focus onthe task. A further description of each step is presented in Figure 2.

PRESENT AND MAKE A CARD FOR EACH COMPANY

The first day of the segment identification started with the employeespresenting the customers they interviewed, one at a time, in turn. Theemployees could present anything they felt applicable, but the focus had tobe on the information that shaped their understanding of each customerand their use of the products. Typical information included production pro-cesses, products produced, expectations of the supplier, the environment inwhich the product existed, product and service needs, applications, specialsolutions that the customer demanded, future needs, and trends.

During each presentation, one person noted the important points on anA5-card. The A5-sized card was pre-printed with the customer’s logo (or aproduct picture) and general information (name, industry, country, product,etc.) for easy identification. Directly thereafter, the referent read back thepoints aloud and the presenter and the group accepted these points as cap-turing the most important information. The interviewers had much to tell,and each presentation took an average of six to seven minutes.



FORMING SEGMENTS

After the presentation, the participants split into two groups of five andused the KJS analysis to build up the segments. First, the group shuffled thecustomer information cards to eliminate any preexisting order and thenplaced the first card on a large sheet of paper. They then placed the nextcard and discussed whether the customer was similar to or different fromthe other customers. The group then placed all the cards closer to or fartheraway from each other, based on how similar they seemed.

As a ground rule, the discussion of how the companies were alike ordifferent was fine, but direct discussion of which variables or dimensionsmade the difference had to be avoided. Instead, the participants wereencouraged to base their choices on an intuitive or holistic integration ofqualitative information. This made it possible to base segments on multipledimensions and prevented a discussion of potential variables from limitingthe flow of the process. The participants needed to free themselves fromnormally held presumptions and structures or models normally used by thecompany, and let the information gathered lead to the structure. The knowl-edge and experience of the participants, however, is important when workingwith something as complex as large industrial customers.

During the process, the participants moved the cards around based onthe structure that was forming. How the companies related to each otherwas under much discussion. Sometimes placing companies to the side wasnecessary because they did not match any of the others. This method

FIGURE 2 The KJS Analysis.

1. The participants present the results from each company visited and make notes on a card representing the company. Traditionally, KJS groups individual statements, but here a card represents a company.

2. The participants place the cards on the table one at a time and discuss how to position them in relation to the cards (companies) already on the table.

3. After the participantsthey have placed all the cards, theythe participants describe the segments that arose.

4. The participants name the segments, discussing how and on what dimensions or variables the segments differ from each other. Do companies not placed in the process represent new segments?

5. Challenge the segments. If the participants find that the segments do not give an excellent and useful picture of the market, they can repeat the KJS-KJS analysis.

6. Result.


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should not force the cards into a group; individual cards can representsegments represented in the sample by just one company. The processcontinued until no cards remained.

After placing all the cards, the group discussed whether the structurethat had emerged was a meaningful representation of the market. In thiscase, a single iteration of the grouping activity was enough to develop asatisfying structure. A comment from a participant when he later describedthe method was: “and then suddenly the structure was there.” When thegroup finished placing the companies and accepted the structure, theyglued the cards onto large posters.

DESCRIBE THE SEGMENTS

On the second day of the workshop the task was to describe the uniquecharacteristics of the identified segments and identify the segmentationbases that made them different. The participants worked in the same twogroups as the day before. Each group then wrote characteristics describingthe identified segments on Post-It notes and attached them to the posters.Example descriptive characteristics included the type of solutions wanted,particular product requirements, expectations from the company, require-ments not met by the company, future trends, and competitors.

NAME THE SEGMENTS

Individually, the two groups then named the segments. The segments wereall defined using multiple dimensions with each segment having particulardimensions that were most important to them, including performance levelsand type of desired relationship. Initially this caused some confusion andfrustration for the representative from the marketing department, becausethey saw any more than three dimensions as too complex. Eventually, how-ever, everyone accepted the need for multiple dimensions within each seg-ment.

The two groups then presented their results and found the two seg-mentations surprisingly similar. One of the two segmentations, with slightmodifications taken from the other, became the focus of the workshop.

CHALLENGE THE SEGMENTS

A discussion of how well the segments represented the market followed.For example, the groups discussed whether categories or company typeswere missing and the reason several companies did not fit the segments.Other subjects debated included entrance strategies, the competitors in eachsegment, segment geography, segment demands, and where the company



had its strengths. The participants also discussed which parts of the newsegmentation the companies traditionally handle and why, whether thefocus segments should remain the same in the future, and what a focuschange would demand in service, sales, and product features to gain cus-tomers in the new segments. Finally, the participants discussed how wellthe segments fit with product development and the creation of platforms.

DESCRIPTION OF THE IDENTIFIED SEGMENTS

The research identified six segments that varied based on the customers’product and service needs and desired relationship with the company (seeTable 1). Three of the segments were based on the customers’ applicationuse, and thus product needs, and were grouped based on how theyproduced their products rather than what they produced. This meant thatpart of the ISIC data could be used, but not on the aggregated industrylevel. This explained why, although the company had customers within abroad range of industries, it could not fully cover the needs of one particu-lar industry, for example, in the food industry the company could handle

TABLE 1 Description of the Six Segments

Segment Distinctive characteristics

1. Design their production themselves, but are dependent on OEMs. Simple production process, desire high product loyalty, but are affected by OEMs. Want simple products that are easy to use, find that products are often overspecified for their use. For example, part of the food and chemical industry.

2. High performance, often specialized, application knowledge is demanded. They expect sales people with dedicated knowledge. The want to configure the product themselves.

3. Production companies and OEMs where transportation and material handling often is an important part of the production. They use standard performance, but demand small adoptions. The end user can often specify the preferred supplier. Often demand suppliers to cooperate to create unique solutions. Demand rapid responses from sales people.

4. OEM that produces components; often low performance for process industry. Expect dedicated solutions. Long-term and close relationships with the mother company based on large contracts.

5 OEM producer of high performance and speed machines. Expect small but high performance products that can be standardized. Expect knowledgeable salespeople that can provide advice during the design process. Loyal until they have to redesign their machines.

6. OEM that wants small, dedicated, and low-performance solutions with unique features for nonprocess industry. Long-term and close relationships with the mother company based on large contracts. Complex decision processes.

Note: More specific product information and applications are not included.


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customers that produced milk and beer, but had problems with producersof vegetable oil. A fourth segment consisted of OEMs that demanded high-performance products and close contact to the service people. The fifthsegment demanded customized solutions and close contact to the mothercompany. The final segment was based on large project sales anddemanded another sales structure with close-contact large consorters.Therefore, it was not only the product needs that were important but alsohow the product was sold and the demanded relationship with thecompany and its sales subsidiaries.

Step 5: Verification, Evaluation, and Selection of Segments

VERIFICATION OF THE SEGMENTS

Knowing whether a segmentation solution is sensible and robust can bedifficult. To ensure that the identified segments can be trusted as the basisfor company strategy, the group challenged, tested, and evaluated thesegments. This phase also served the purpose of building up employeeconfidence in the segments, particularly among those who were not part ofthe identification process.

The group described and evaluated the segments in order to establishwhether they differed sufficiently and in a way that was appropriate for thecompany to adjust the marketing mix. The focus was particularly onwhether the segments differed in a manner that was appropriate. Further-more, employees were encouraged to find customers that did not fit intothe segments, connections not yet found, and areas where the segmentswere not homogeneous. The researcher also received feedback from thesales subsidiaries by asking whether they could recognize the segments,what relevance the segments had, and if any company did not fit into any ofthe segments.

EVALUATION AND SELECTION OF SEGMENTS

A company cannot handle every attractive segment and must instead selectthose that best match the company’s competences and strategies. Selectingsegments requires a comprehensive understanding of the characteristics ofeach segment and the demands of handling them effectively. This researchendeavored to consider holistically both the segments and the company’sneeds.

The evaluation procedure presented here shows some of the criteriaused by the company to evaluate the segments. The evaluation procedure ismade up of four parts: (1) evaluation of the segments, (2) determination ofhow attractive they are, (3) identification of the core factors to success, and(4) determination of how well the company can handle these demands. An



employee from the marketing department, an innovation manager, and theresearcher investigated and discussed the different areas and identified thecore questions presented here as important to answer.

To evaluate the segments different questions were asked involvingwhether the segments actually existed and whether the company could findthem again. Are the segments measurable? Are they accessible, for example,with a separate product offer? Do they make sense to the organization?As an example, can they explain some of the customer demands that havepreviously seemed confusing and contradictory?

The second stage was to determine how attractive the segments were.The evaluated areas included actual and potential market size, growth andprofitability (a segment needs to be large enough to support a uniquebusiness strategy), and rate of change in market, expected competitiveactivities, and trends. Researching and visualizing the relative attractivenesswere among others used as a portfolio analysis based on ISIC data.

The third stage was to identify the factors that are essential to succeedin the market. In other words, what does each segment demand from thecompany in order for it to operate successfully? This stage involves under-standing the customer demands and the competitors operating in thesegment and the demands of being successful against them. Examples ofcore success factors and trends include distribution, product demands/needs, service, preferred forms of sales (e.g., highly educated sales people),and types of relationships the customer would like.

Finally, the company made an internal analysis of how well it was ableto handle these demands. The example includes the following topics: strat-egy, organization structure and focus, competence needs related to those heldin the company, existing relationships to customers, the match between thecustomer’s needs and the company’s product and service concepts,demanded and available resources, the cost of handling the segment, and,finally, synergy between the different segments in relation to the company.

A segment can be large and growing and still not be appropriate for acompany. Of the six segments, the company chose to focus on four—twoof which the company already focused on and a third on which the com-pany had only partly focused—but the customers’ needs were similar tothose the company already served. The fourth segment was selected to beserved, but in order to handle this segment a new organization had to bebuilt as the customer’s needs were fundamentally different from existingcustomers. The company chose not to handle either the fifth segment, as itrequired a radical change in technology and training of the sales representa-tives, or the sixth, as the technological demands were outside the com-pany’s focus and capabilities. The result was that the company also chosenot to serve two of the segments from their previous segmentation, as theirneeds were too far away from the product needs of the rest of the com-pany’s customers. Using this segmentation, the company could serve a


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larger and more homogeneous customer group, and would do so withfewer products.

Step 6: Communication and Implementation

COMMUNICATION

How the segments are communicated is critical to implementation.Communication involved both materials developed for this process and theemployees’ communication.

The group documented the segments and described them accuratelyand informatively in a form that was easy to remember and communicate.The company used several forms of communication depending on thepurpose and the target group. The following section describes what waspossibly the most effective method employed in the research. The presentationform targeted product development and had the purpose of creating apicture of the customers and corresponding considerations, preferences,and situations. Moreover, the company used the resulting posters widely inthe organization, for example, with strategic work, marketing, and salessubsidiaries. The material used some clear key points, illustrations, andstatements that customers used to express a need.

To create these descriptions the group used “customer use characteris-tics,” a method from product design for bringing out the contrast betweencustomers, for example, slow versus fast. The group found a modified formof this method suitable for segmentation, imagining segments made up ofcompanies rather than individual persons.

The group kept the list of areas to describe the segments short so thatgaining and remembering an overview was easy. The six areas chosen were:

• What the customer does• Performance demands• Placement of the product• Loyalty (decision makers in the industry and how they relate to the

decisions)• Service• Usability

These areas were demonstrated using typical statements that a cus-tomer in each segment would say about each area, followed by a longerexplanation, for example, “I always feel that I pay for more than I get” or“I want XXX.” These quotes gave a picture of the customer needs based onthe world that they live in and show what motivates their requirements. Thepurpose was to provide the product design team with a short list of keycustomer needs, which could provide associations and ideas on which to



base the design. Information about industries, applications, and examples ofcustomers in each segment was also included in the description. The bottomof the poster listed product characteristics in a matrix. Large posters represent-ing each segment presented the segment descriptions. The company dis-played the posters in the product development and marketing departments.

IMPLEMENTATION

The segmentation process, no matter how well planned and executed, doesnot guarantee successful implementation of segments. Several factorsplayed an important role in the implementation and communication of thesegmentation. First, the segmentation had a well-defined purpose that wasagreed on by all involved. The process continually considered the uniquecharacteristics and strategy of the company. The research came to beconducted using the company’s own terminology and matched their cul-ture. Seven cross-functional employees were involved representing, amongothers, employees with implementation powers and users of the segments.

Credibility is vital for the implementation. Implementing segments canbe difficult, therefore, having management communicate the importanceand credibility of the segments explicitly and implicitly was valuable.Management communication builds awareness and credibility and legiti-mizes new viewpoints. Gatekeepers and colleagues in the different depart-ments also participated in the communication. Having participated in thesegmentation, these colleagues have a better understanding of and are morecommitted to the segments and the communications.

The results were positive. The participants became more committed asthey had expended energy on and built psychological commitments to theidentified segments, fully understanding the segments and their characteristics.Through their involvement, the participants formed an attitude of owner-ship toward the segmentation and actively communicated their results totheir peers in the company.

Communication was both informal, mouth-to-mouth, and formal,presentations at both the main office and the sales subsidiaries. There wasno formal training program of the segments; it was, therefore, more evolu-tionary in how it spread throughout the organization. However, this was anactivity that would have improved the implementation and manifested thesurvival further in the organization. It would have been a significant sign ofthe commitment of management to the segments and more people wouldhave been introduced to the segments. A further weak link was highlightedwhen, after the project finished and the researcher left, the segmentationlacked an internal champion. Several people had the job, but no one wasdirectly responsible for following up on the implementation. The companyshould have delegated an internal champion for implementation of thesegments.


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The company applied the segmentation in several ways. At the corpo-rate level, the segmentation was used to select focus segments and makethe future strategy. One of the segmentation goals was to select newsegments on which to focus market activities and abandon others. Thisresulted in reorganization among key account managers in the mothercompany; the effect seemed minor in the sales subsidiaries. In relation toproduct development, the company used the segments to plan the futureproduct line so that they would form the basis of future product platformsand were thus used as the base for specifying future products. This resultwas also the case with the previous segmentation, but these new segmentsprovided a better context for the products so the company could specifymore customer-dedicated products. Furthermore, the company used thenew segments to plan their next large communication campaign. After thisstage, the researcher left the company and no longer followed its concreteactivities.

The researcher revisited the company a year later. The new segments wereused in the organization but had to compete against the old segmentation thatoriginally was well integrated in the marketing department and sales subsid-iaries (but not by engineering). This meant that segmentations lived side byside in the organization and each served their purpose. Engineering pushedheavily for the new segmentation and demanded that all specification wasrelated to the new segmentation.

Step 7: Monitoring and Updating

The dynamics of the segmented market are an important considerationbecause these dynamics change the nature of market segments. This wasconsidered, however, these considerations were not tested and thus notpresented here.

DISCUSSION AND CONCLUSION

Based on action research in a large Danish industrial company, a process ofsegmenting was constructed. The segmentation process has a close link to acompany’s reality. The process thoroughly describes the types of activitiescarried out and some of the considerations the researcher and the companymade within the different stages. The following section presents managerialand theoretical implications.

Managerial Issues

Segmentation can be a major change for a company. Segments normallyrepresent the company’s common understanding of the market structure,



and companies base many plans and strategies on them. Resistance tonew segments can occur because implementing them might mean changein the organization’s structure, culture, resources, and so forth. Thisresearch found that the segmentation process itself played an importantrole in how well segments are accepted and implemented. In addition, theresearch found that participation enhanced understanding and accep-tance, creating a feeling of ownership and commitment to the segmenta-tion among the participants. This research started with an initial awarenessof the need for new segmentation. However, if the realization of this needis not present within the company, an early phase can be necessary tocreate awareness or a sense of importance and perhaps urgency. Further-more, in the final implementation, a plan for training the employees andan internal marketing plan can be necessary. As well as continuousimplementation over time, it is recommended that the task be given to achampion.

Cross-functional cooperation was an important aspect and, whenappropriate, the company should emphasize it. As segmentation gains astrategic position in the company, more functions should be involved inidentifying and determining which segments the company should handle.Furthermore, when conducting the segmentation, the company shouldevaluate whether they have the expertise necessary to conduct it. If externalexpertise is used, an important consideration is how to transfer knowledgeback to the company.

Although the steps are sequential in this article, a company couldconduct several of the stages simultaneously; for example, identification ofpurpose, markets to segment, identification of variables, and method. Othersteps must take place during a longer period, for example, verification,evaluation, and selection of the segments. The critical steps, however, needconsideration during the segmentation process. The process is likely to beiterative as the company gains more knowledge and understanding of seg-mentation and the need for segmenting.

The KJS analysis method is flexible and can handle large amounts ofdata and a high degree of market complexity while at the same time use thelanguage understood by the company. The KJS analysis method can alsouse fewer materials, for example, if the resources available are limited. Incases with few materials and little preunderstanding forming the basis of theanalysis, being critical toward the findings and challenging the identifiedsegments is particularly important. An advantage is that the company canbuild up a comprehensive knowledge of the market during the segmenta-tion process. A KJS analysis should not be based purely on the experienceof employees because in a changing market employee experience willalways be out-of-date to some degree. Furthermore, unlike the traditionalbreak-down segmentation methods, the build-up method of KJS analysis isvery close to the customer’s unique requirements.


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Second, a company could perceive KJS analysis as needing scientificcredibility in comparison to statistics-based models. This perception is verydependent on the company, but if this perception is present, the segmenta-tion might not carry enough weight for the implementation to be successful.Having potential skeptics involved in the KJS analysis could be advanta-geous so they can form a first-hand opinion.

When used in relation to product development, the reader should beaware that the segmentation method is likely to create more incrementalproducts because the starting point is in existing products and markets. Thesegmentation conducted here handled new features, technologies, services,and so forth. Incremental development—product development based onsmall steps—is the most common form of product development. Incrementaldevelopment can be innovative, but if a company wishes to create radicalnew products, other methods might be more appropriate. Sometimes withradical new products, segmenting the market might not be possible untilafter the product has been developed, or at least until the development pro-cess has advanced. Considering what information the customer possessesand how the customer can articulate this information is also important.

The purpose of developing and using this method was product devel-opment; however, with modifications based on the specific situation of thecompany, the method could be applicable in a broad variety of situations.The research has not tested the process in other companies.

Future Research

This article has presented a segmentation process with methods, activities,and considerations, and has supplemented this process with implementationconsiderations. The combination of these aspects has provided a more holis-tic approach to segmentation, which is a contribution to the segmentationliterature. The segmentation literature has previously investigated many ofthe different aspects of the process, the methods, and some implementationconsiderations. However, the literature has not presented an entire processcombining all of these considerations and methods. Few have presented aprocess approach to segmentation, although the approach has been pro-posed as important (Goller, Hogg, and Kalafatis 2002). Some authors havepresented stages or steps that companies have to go through. As an exam-ple, Wind and Thomas (1994) present a segmentation decision process withfive key interacting managerial decisions, and Goller, Hogg, and Kalafatis(2002) present four stages. However, these studies do not present thesegmentation approach in a broader process view.

Explicitly defining the purpose behind the segmentation is a critical step.The different segmentation approaches emphasize identification of the pur-pose, but do not fully develop this step. This article states some of the consid-erations made and the implications, but does not consider what consequences



different segmentation purposes have to the selection of variables andmethods and how they affect the process. The literature has relatively few con-siderations and this is an area that needs further investigation; for example,how and when different segmentation bases are most appropriate.

This article also proposes a new method to identify segments combin-ing a break-down and build-up approach. Methods previously proposed aretypically break-down methods or statistical methods. The research proposesa process starting with the unique characteristics of the individual companyand then building up the segments. The process needs further experimentsand testing outside of the specific company context.

The segmentation process in this research was for a company operatingin a complex and changing environment. The company found the tradi-tional segmentation methods problematic when trying to work with highmarket complexity while still focusing on the user. This finding is especiallythe case when segmenting for product development where the startingpoint is in gathering more specific user information, including individualcustomer’s requirements, applications, and needs, and this level of informa-tion appears too complex for the existing models. The solution proposed inthis research is to combine the break-down and build-up approaches. Theliterature needs more methods and guidance for companies that face theproblem of complexity. Companies need new methods because traditionalsegmentation is difficult to apply in complex environments.

When segmenting at the industrial market, the issue of relationshipsbecomes an important consideration. The nature of relationships with customersmay affect how segmentation is conducted and who is involved in the process.Traditionally, the segmentation literature has focused on situations characterizedwith some distance between the company and its customers. It is assumed,then, that the company can more freely select both how to segment and whichcustomers to handle. However, when the company’s relationship with thecustomer is close, the attachment to customers also plays an important role inrelation to the segmentation. This was investigated only to a limited degreewithin this article; it is an area that needs further investigation in the future.

This article has not touched on when to re-segment and how to monitorthe market. These issues need further attention within the industrial marketingliterature.

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IMPLICATIONS FOR BUSINESS MARKETING PRACTICE

Businesses use market segmentation in their marketing and strategicplanning. Segmentation is widely considered a fundamental concept inmodern marketing and many regard segmentation as vital to businesssuccess. The idea behind segmentation is to group potential and actualbuyers with similar needs into subgroups that can be targeted with anappropriate marketing mix. Within the literature, many contributions tosegmentation can be found; however, there are many reports of segmenta-tion problems in relation to a company using and applying segmentationand of companies implementing the identified segments. Authors criticizethe segmentation literature for not giving enough attention to implementa-tion and giving marketers little help and guidance on how to makesegmentation work.

The central aim of this research is constructing a market segmentationprocess and method that is practical in nature, easily approachable forcompanies, operational in the company, and that considers the eventualimplementation throughout the segmentation process. The research buildson action research that took place during a two-year period in a Danishindustrial company. Close cooperation with the company and a foundationin what is possible formed the basis of the segmentation process. Thisarticle describes the segmentation process and the methods used within thedifferent stages, as well as important considerations.

The segmentation process is based on the following considerations andactivities: (1) identification of purpose, (2) identification of market tosegment, (3) identification of variables and model, (4) segmentation andanalysis, (5) verification, evaluation, and selection of segments, and (6)communication and implementation.


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The research showed the importance of considering how the companywill conduct the segmentation process and implement the segments beforestarting the segmentation. Particular attention was paid to the selection ofthe participants in order to improve the later implementation and accep-tance of the segmentation.

An important first stage in segmentation is to define the purposebehind it. This should reflect the problem the company wants to solve andthe decisions they want to make based on the segmentation. The moreaccurately the segmentation’s purpose is defined, the more successful thesegmentation is likely to be. The specific purpose of the segmentation is toidentify segments that can support strategic decisions as well as help planfuture products and product lines. At the second stage, the market to besegmented should be identified. A question is, should the entire market besegmented? If not, how broad or narrow should the focus be? This decisionis closely related to the identification of the purpose. A broad market defini-tion can be beneficial because it allows for the opening up of new marketsand opportunities. However, broad definitions are also harder to handleand are normally reserved for the corporate level or for making overall busi-ness strategies.

The identification of the segmentation method and variables is criticaland should reflect the purpose behind the segmentation. The segmentationvariables can be identified using internal experience, external studies, or acombination of both. Depending on knowledge of the market and the seg-mentation purpose, it is more or less important to conduct prestudies in theform of customer visits. Several approaches were used in the research. Dueto the purpose, the main variables identified focused on customer productneeds, applications, use situation, the purchase situation, and customerpreference in relation to service and relationships. The next step is todecide who should carry out the interviews and what data is needed as wellas what kind of data. A prestudy was conducted to find the varying custom-ers’ understandings of the product. The core team conducted 45 interviewsin seven countries.

The process of moving from having the data to creating the actualsegments is often problematic. The method identified for segmenting themarket is an adjusted build-up approach. As opposed to the traditionalbreak-down method, the build-up approach starts with the individualcompany’s unique characteristics and builds up the segments from there.Qualitative data forms the basis of the method, which is both flexible andsimple and can organize and assimilate large amounts of data on customersinto groups that emerge from the data. The participants from the companywho are heavily involved in identifying the segments in the company endup with a very good understanding of the identified segments and what liesbehind them.



It can be difficult to know if a sensible and robust segmentationsolution has been found. The segmentation was challenged, tested, andevaluated. The selection of segments to target involved a comprehensiveunderstanding of the segments and their consequences so that the segmentscould be selected to match best the company’s competences, resources,strategies, and so forth. Both the segment’s and the company’s needs wereviewed holistically. Several means of communication were used in thisresearch. The customer classifications were found to be the most effective.

The segmentation process in this research emphasized the strength andvalue of having a high level of involvement by cross-functional employees,which directly resulted in a better implementation through deeper under-standing and more commitment among the participants. When it was timeto implement the results, key people in the company were already knowl-edgeable about the results and were interested in implementing the seg-ments. The high level of employee involvement was also important inensuring that the models and processes developed were practical in nature.


bridging industrial segmentation theory and practice

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