strategic segmentation of industrial markets

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Journal of Business & Industrial Marketing Strategic segmentation of industrial markets D. Sudharshan Frederick Winter Article information: To cite this document: D. Sudharshan Frederick Winter, (1998),"Strategic segmentation of industrial markets", Journal of Business & Industrial Marketing, Vol. 13 Iss 1 pp. 8 - 21 Permanent link to this document: http://dx.doi.org/10.1108/08858629810206160 Downloaded on: 02 November 2014, At: 02:47 (PT) References: this document contains references to 28 other documents. To copy this document: [email protected] The fulltext of this document has been downloaded 3066 times since 2006* Users who downloaded this article also downloaded: Sally Dibb, (1998),"Market segmentation: strategies for success", Marketing Intelligence & Planning, Vol. 16 Iss 7 pp. 394-406 Sally Dibb, Lyndon Simkin, (1997),"A program for implementing market segmentation", Journal of Business & Industrial Marketing, Vol. 12 Iss 1 pp. 51-65 Lyndon Simkin, (2008),"Achieving market segmentation from B2B sectorisation", Journal of Business & Industrial Marketing, Vol. 23 Iss 7 pp. 464-474 Access to this document was granted through an Emerald subscription provided by 383794 [] For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. Downloaded by Dokuz Eylul University At 02:47 02 November 2014 (PT)

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Page 1: Strategic segmentation of industrial markets

Journal of Business & Industrial MarketingStrategic segmentation of industrial marketsD. Sudharshan Frederick Winter

Article information:To cite this document:D. Sudharshan Frederick Winter, (1998),"Strategic segmentation of industrial markets", Journal of Business & IndustrialMarketing, Vol. 13 Iss 1 pp. 8 - 21Permanent link to this document:http://dx.doi.org/10.1108/08858629810206160

Downloaded on: 02 November 2014, At: 02:47 (PT)References: this document contains references to 28 other documents.To copy this document: [email protected] fulltext of this document has been downloaded 3066 times since 2006*

Users who downloaded this article also downloaded:Sally Dibb, (1998),"Market segmentation: strategies for success", Marketing Intelligence & Planning, Vol. 16 Iss 7 pp.394-406Sally Dibb, Lyndon Simkin, (1997),"A program for implementing market segmentation", Journal of Business & IndustrialMarketing, Vol. 12 Iss 1 pp. 51-65Lyndon Simkin, (2008),"Achieving market segmentation from B2B sectorisation", Journal of Business & IndustrialMarketing, Vol. 23 Iss 7 pp. 464-474

Access to this document was granted through an Emerald subscription provided by 383794 []

For AuthorsIf you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors serviceinformation about how to choose which publication to write for and submission guidelines are available for all. Pleasevisit www.emeraldinsight.com/authors for more information.

About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio ofmore than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of onlineproducts and additional customer resources and services.

Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on PublicationEthics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

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Page 2: Strategic segmentation of industrial markets

IntroductionSegmentation is an important element of market planning. It is, in fact, at thevery crux of developing a thorough, well-reasoned, competitive advantageachieving strategic plan for a product and a business unit. Industrialmarketing, to a large extent, serves derived demand. This, coupled with theadoption of strategic thinking and strategic planning as central to businessoperations today, leads to a key direction for segmenting industrial markets:the formal grouping of customers/potential customers based on similaritiesin their strategies.

In this paper we first briefly review the existing literature on industrialmarket segmentation followed by a presentation of a strategic framework forindustrial market segmentation. This is followed by an analysis of a surveyof industrial buyers that supports our framework. A summary of our workand directions for future research conclude this paper.

Past literature in briefBonoma and Shapiro (1983) in their book on segmenting the industrialmarket, comment on the paucity of scholarly work on industrial marketsegmentation. In fact, Sheth, after reviewing over 1,000 published pieces onorganizational buying, expresses surprise at this near vacuum. Bonoma andShapiro (p. 4), in their literature review section, say “In August 1978 theJournal of Marketing Research published a special section, ‘MarketSegmentation Research.’ The editor, Yorman Wind of the Wharton School atthe University of Pennsylvania, is an expert on organizational buyingbehavior and market segmentation. Yet even a scholar of his stature andinterests had not one article to include in the special section that dealt inmore than a passing manner with industrial market segmentation. The reasonis that very little academic work has been done on industrial segmentation.”Bonoma and Shapiro (1983) and Hlavacek and Ames (1986)notwithstanding, we feel that there is considerable scope for work in thistremendously important area. For a more recent review, please see Plank(1985).

From our vantage point in the literature to date on industrial marketsegmentation, two streams of writing appear to have emerged. One suggeststhat industrial markets be segmented based on the characteristics of thebuying organization. The other suggests that segmentation be done based onthe decision-making process and its participants in buying organizations.(Webster (1979, pp. 80-103) provides an excellent summary of theliterature.) In the following, we present some of the more salientdevelopments along these two directions.

8 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998, pp. 8-21, © MCB UNIVERSITY PRESS, 0885-8624

Strategic segmentation ofindustrial marketsD. SudharshanProfessor of Business Administration, University of Illinois at Urbana-Champaign, Illinois, USAFrederick WinterDean of the School of Management, University of Buffalo, SUNY,Buffalo, NY, USA

Developments inliterature

Scope for more work onsegmentation

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Use of demographic data

Characteristics oforganizations

Global variables and their impact on industrial purchasingThese variables are sometimes called macro variables. Wind and Cardozo(1974) advance the concept of macro-segments which they suggest beformed on the basis of broadbrush variables of probable buyer reaction.Variables useful for this are believed to be SIC code, geographical location,etc. Wind and Cardozo then recommend that these macro segments befurther divided into micro-segments based on additional measures that relateto purchasing behavior. This notion has been advanced by others as well(e.g. Webster, 1979).

More recently, Griffith and Pol (1994) report on a successful use of firmdemographic data for segmenting industrial markets. Laughlin and Taylor(1991) propose that industries be classified based on their respectiveconcentration ratios and product customization requirements. It is suggested,by Laughlin and Taylor, that the classification thus arrived at be used as thebasis for segment selection decisions.

Individual decision maker characteristicsThe specific variables that are suggested at the level of micro analysis varyfrom author to author. Cardozo (1968) recommends industrial buyers’purchasing strategies, buyers’ risk tolerances, purchases requisitions, andenvironmental forces. Wilson (1971) adds buyers’ decision-making styles.Choffray and Lilien (1978) have formed micro-segments using clusteranalysis based on similarities in the functional areas involved in differentphases of the decision process for air conditioning products. Perrault andRuss (1976) as well as Lehmann and O’Shaughnessy (1974) considered aform of benefit segmentation and then attempted to identify segments basedon such factors as number of deliveries, number of alternate suppliers,dissatisfaction with distribution, average order cycle (Perreault and Russ,1976) or the type of product – varying from routine to those likely to invokepolitical considerations (Lehmann and O’Shaughnessy, 1974).

Among scholars in this area, many like Webster (1979) advocate the Wind-Cardozo two step approach in industrial market segmentation. Webster’sapproach to segmentation approaches advocates the recognition of theimportance of including additional variables that relate to the organization.Potential variable types recommended by Webster include characteristics ofthe buying organization (e.g., SIC, employees, and use of product, existenceof buying contracts), characteristics of the buying center (e.g., compositionby role, stage in big process, method of conflict resolution, type ofuncertainty in buying center) and characteristics of individual participants(e.g., demographic, roles, psychographics of individual actors).

Bonoma and Shapiro (1983) proposed a multi-level nested approach. Fivelevels are suggested. They range from the easily observable to those difficultto observe. The levels are organizational demographics, operating variables,purchasing approaches, situational factors, and personal characteristics ofdecision makers.

While micro-level variables may be interesting in studying industrial buyerbehavior, the potential for their application to strategy development inindustrial marketing is likely to be limited. Limitations in theimplementation of segmentation schemes based on micro-level variables arehighlighted by Robertson and Barich (1992) and Dibb and Simkin (1994).

JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998 9

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Page 4: Strategic segmentation of industrial markets

There are serious concerns in practice regarding the cost and difficulty ofcollecting measurements of these micro-segmentation characteristics andusing them. These difficulties are exemplified by the following two reasons.One, for the most part these variables are not observable prior to theallocation of a sales call that averages $150-200 in cost. Second, it isreasonable to expect that any good salesperson in a face-to-face situationcould read the customer with far greater accuracy and reliability than thatoffered by impersonal research results.

In industrial marketing segmentation, the complexity of the purchase processhas added to the complexity of market segmentation, perhaps unnecessarily.It would appear that many approaches to industrial market segmentation arereally attempts to better understand micro-industrial buyer behavior. (Simplybecause buyers are aggregated to test empirical hypotheses does not meanthat these aggregations are suitable bases for segmentation.) Consumermarketing research has managed to separate these two issues. The sameshould be done in industrial marketing. A recent review of the literature onorganizational buying behavior is to be found in Johnston and Lewin (1994).

In industrial marketing both the buyers and the suppliers are realizing that“buying partnerships” form the basis for attaining sustainable competitiveadvantage in the marketplaces (Ames and Hlavacek, 1984; Jackson, 1985).Such long-run orientations in the face of the current industrial environmentof tremendous global competition and a general slowing down of growthbehooves a strategic approach to choosing partners and serving them wisely(Kale and Sudharshan, 1987; Winter and Thomas, 1985). This dual processof choice and service requires more than the conventional segmentationfactors discussed earlier. It becomes critical to consider the strategy chosenby the buyer in its pursuit of competitive advantage. (In fact, Porter (1985),in his widely acclaimed book on competitive advantage (p. 242), includesBuyer Strategy as a segmentation factor. This book was published after wehad begun our study.)

Since derived demand is of such significance to industrial marketing, itshould dramatically influence the way in which much of industrialmarketing is practiced. For example, the SIC code of the potential purchaseris often recommended as a basis for industrial market segmentation.Understanding that the demand for a manufacturer’s goods are based on thedemand for the products that these goods become parts of, this deriveddemand approach would suggest that the SIC code of the customers’customer may be more appropriate. If the purchaser sells to consumers (as iscommon in reseller markets) then at least understanding the behavior of theconsumer market segments may be relevant. In spite of the potentialimportance of derived demand in the industrial market, this has yet to beseriously considered by past empirical research. The closest empirical workto this idea has been done by Gronhaug (1976), who noted differences in thepurchase process for firms that depend on marketing exchanges versus thosethat did not (e.g., rejected organizations). Other research that is related is bySnow and Hrebiniak (1980) and Spekman (1981). Snow and Hrebiniak(1980) found that strategies of a firm were related to its perceivedcompetences (purchasing or procurement was not mentioned). Spekman(1981), in observing that different types of firms monitor differentenvironmental factors, perhaps, summed this concept best:

10 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998

Complexity of thepurchase process

Significance of deriveddemand

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Page 5: Strategic segmentation of industrial markets

industrial marketers … must begin to devote more effort to gaining a better, morecomplete understanding of those organizations to which they sell …

As an example the buying strategies and requirements of a firm are clearlydependent on whether it pursues a strategy of cost leadership, differentiationor focus. If the marketer has as its major customers firms that pursue adifferentiation strategy, or even more narrowly a differentiation focusstrategy, it might need to adopt a flexible manufacturing system as opposedto mass manufacturing, fixed form systems. The strategies pursued by afirm’s customers should therefore be a critical consideration in its ownstrategy determination or the customer segments targeted by the firm.

A strategic framework for industrial market segmentationThe existing literature on strategic market planning posits that a firm woulddevelop the strategy for a product based on:

• the product’s strategic environment,

• its strategic position (strengths/weaknesses), and

• the corporate strategy/portfolio requirements of the firm (e.g. Day,1977).

Figure 1 is a pictorial representation of this model.

Given first that the strategy is a long-run, fundamental direction of pursuingcompetitive advantage and second that such a direction behooves integrationof various substrategies including purchasing strategy, we feel that acompany’s strategy of purchasing may be based on the strategy that it hasformulated for its own product. If this link does not hold then it indicates astrong lack of will in implementing strategy; the timely availability ofsupplies (subassemblies, components, etc.), the cost of the supplies, thequality of supplies, etc. are clearly critical to the implementation of productstrategy.

The fundamental direction of a firm’s strategy provides a unifying coherenceto its functional strategies. Nath and Sudharshan (1994) provide evidence,albeit in the context of a single industry, that firm coherence bears amonotonic relationship to firm performance.

JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998 11

Product’sStrategic

Environment

Product’sStrategicPosition

Company’sStrategicRequire-ments:Mission

andObjectives

ProductStrategy

AttainingSustainableCompetitiveGoals

Opportunitiesand Threats(DemandFactors)

Current Strengths/Weaknesses (RelativeExisting Capabilities)

Objectives

Figure 1. Determinants of product strategy

Strategies pursued bycustomers are critical

Firm’s strategies must becoherent

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Page 6: Strategic segmentation of industrial markets

For example, a low cost strategy has obvious implications for the price thatcan be paid for supplies, the order size, the timing of orders, etc. A companythat follows a differentiation strategy and develops a product variation foreach of its target segments may require such variations to be reflected in itssubcomponents. This could, in turn, lead its supplier to develop amanufacturing strategy based on flexible manufacturing systems. Further,these segments may exhibit different seasonalities. This would be expectedto be reflected in that company’s purchasing strategies. Another example isthat of a company whose customers require both an extremely reliabledelivery schedule and employ just-in-time inventory principles. These wouldnecessarily have to be reflected in the purchasing strategy of this company.In the long run this linkage between purchasing strategy and product strategyhas to fall into line, otherwise a cogent strategy will not exist and the bestlaid product strategy will go awry.

For a vendor engaged in strategically visualizing and segmenting its market,then the process of segmentation is the grouping of customer firms with likeproduct strategies. This process is depicted in Figure 2. Since thebuyers/potential buyers are grouped based on their product strategies thatimply the likely buying strategies, this process is sound. The segments arethus expected to be strategically homogeneous with respect to purchasing.

If the cost of doing so permits and client firms can be easily accessed toobtain information about their product strategy, then the procedure ofFigure 2 is straightforward. In the course of establishing long-termpartnership relationships, as well as where direct personal contact ismaintained, this might be possible. On the other hand, where client contact isthrough an intermediary, and/or the costs of such personal assaying areprohibitive and/or where such information sharing is not forthcoming, analternative operationalization is necessary. Figure 1 provides a basis fordeveloping this alternative operationalization. Given these depictedrelationships, estimating the strategic environment and the strategic positionof the clients’/potential clients’ products would then be surrogates for theproduct strategy. (This assumes, of course, that the client companies practicestrategic planning to fit their product strategies to the forecast environment.)This would provide the vendor with long-term and consequential (strategic)description of its clients and potential clients. The market definition for thevendor would thus be given by sets of pairings of its potential customers andtheir markets. Segmentation on this basis would thus be valuable formapping out the marketing strategy. Knowledge of other characteristics ofbuying organizations as well as knowledge of individual buying centerdecision processes would aid in further fine tuning the vendor’s strategy andimplementation.

12 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998

Company 1 Product Strategy Type A{ (e.g., their customers

Company 2 are price sensitive)

Company 3Product Strategy Type B

Company 4 { (e.g., their customersare delivery sensitive)

Company 5

StrategicSegment 1

Figure 2. Strategic segments

Grouping of customerfirms

Alternative strategy maybe required

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Study of purchasingdecision makers

Broad base ofrespondents

To test our ideas we studied an industry in which we had a corporatesponsor. The sponsor guided us in the selection of specific factors affectingthat industry. The sponsor also provided logistical and financial support forthe study. The methodology followed for the empirical study is nextdescribed. The methodology section is followed by a description of ourspecific hypothesis and a discussion of results obtained.

MethodologyA mail survey questionnaire was administered to a customer list ofpurchasing decision makers of a corporate sponsor. Titles of the respondentsranged from presidents to purchasing agents. Some of the respondents weremarketers or new product/R&D personnel. The number of returns were 226from an initial mailing of 1,164 (19 percent). Of those that were returnedthere were three refusals because of confidentiality and 72 which said thequestionnaire was not applicable to their business. Thus we mightconservatively estimate the response rate to be 20 percent. Quite possibly therate is really much higher (possibly 40 percent or more) because those whodid not buy the product would be less likely to respond.

The data included highly confidential measures as to profitability as well asfuture marketing plans. In order to assure respondents of confidentiality thequestionnaires were first sent to a nationally-prominent CPA firm whoremoved the respondent identification number from the questionnaire. Thus,we were able to tell who responded but also were not able to associateresponses with any particular respondent.

The survey questions relevant for this paper were:

(1) Data about the respondent (i.e. title level, years with company, etc.).

(2) Weights or importance placed on different factors in vendor selection.

(3) Marketing data:

• performance results for entire company (e.g. sales, growth,profitability)

• data for the product line which used the ingredient/ component beingstudied: perception of their customers’ needs.

The productThe exact identity of the product studied is confidential, but it can bereported as a raw material that is sold to a variety of firms who differ interms of product produced, competition, and size of firm. Respondentsreported that an average of 5.3 sources of supply were available to them.

ResultsThe overall tone of our examination is to scrutinize relationships betweenthe strategic environment and strategic position of clients’ products and theirrespective buying strategies. In trying to understand the data collection wewere impressed by the variation in respondent titles and tenure. Further, wefelt that the perspectives of, for example, a product manager versus that of aR&D manager may lead to differences in their assessment of the strategicenvironment of their products. We felt this likely if for no other reason thantheir having differential information. Thus, we felt that the data reportedwere distorted by the lenses, if you will, of the respondents actually fillingout the survey. So, in our analysis we sought to control for these lenses byfiltering out their effects using step-wise regression.

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Respondents were asked to provide, using a scale ranging from “not a factorin selection” to “extremely important,” the importance they attached tovarious factors in vendor selection (the factors listed were developed inconsultation with our sponsor). Table I provides some summary statistics ofthe responses.

It is clear from the mean and median values that these are indeed salientcharacteristics, the median is not lower than 4.0 for any of them. The threemost important factors are product consistency, delivery reliability, andprice, in that order. We studied the impact of these three factors in greatdetail. Product consistency was very highly rated by all the different types ofcustomers. This low variation resulted in extremely weak relationships. Wethus chose to focus on and discuss our results for price and deliveryreliability.

Figure 3 depicts the differences in the perceived importance of price byidentity of respondent. As is perhaps to be expected, purchasing managersattach the highest importance to price, and upper level technicians, withperhaps less of a market/strategic orientation, attach the least importance toit.

The key question is whether the perceived importance of price in choosing avendor is somehow related to the importance placed by the respondingfirm’s customers on price. In Figure 4 we plot the relationship between thesetwo perceived importances (after correcting for the differences inperceptions by respondent type). As is obvious from this graph, a strongpositive relationship is to be observed. This adds one piece of confirmingevidence that a company’s purchasing strategy is dependent on its strategicenvironment.

Another major element of a product’s strategic environment is reflected inthe expected change in the competitive intensity that it faces. From Figure 5we can observe the strong positive relationship between increasingcompetitive intensity and the perceived importance of price to the

14 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998

Table I. Summary of salient purchasing factors

Mean Median Deviation Min – Max

Product consistency over time 4.6 5.0 0.55 1 – 5

Delivery reliability 4.1 4.0 0.92 1 – 5

Price 3.74 4.0 0.95 1 – 5

Technical assistance 3.58 4.0 0.98 1 – 5

Manufacturer reputation 3.57 4.0 1.06 1 – 5

Delivery lead time 3.55 4.0 0.93 1 – 5

Product customization 3.29 4.0 1.37 1 – 5

Manufacturer’s financial stability 3.19 4.0 1.17 1 – 5

Guaranteed price contracts 3.01 4.0 1.19 1 – 5

Early payment discounts 2.725 4.0 1.21 1 – 5

Note: 5 – extremely important; 4 – very important; 3 – important; 2 – somewhat important; 1 – not a factor in manufacture selection

Salient factors

Importance of price

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JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998 15

VERYIMPORTANT

IMPORTANT

UNIMPORTANT

ALL OTHERS PURCHASING UPPER LEVELTECHNICAL

IDENTITY OF RESPONDENT

PERCEIVED IMPORTANCE OF PRICE TO RESPONDENT

Figure 3. Price perceptions by respondent type

IMPORTANT

UNIMPORTANT

PERCEIVED IMPORTANCE OF PRICE TO CUSTOMERS

PERCEIVED IMPORTANCE OF PRICE TO RESPONDENT

UNIMPORTANT IMPORTANT

Figure 4. The conduit effect in price

VERYIMPORTANT

UNIMPORTANT

CHANGE EXPECTED IN COMPETITIVE INTENSITY

PERCEIVED IMPORTANCE OF PRICE TO RESPONDENT

MUCH LESSCOMPETITIVE

MUCH MORECOMPETITIVE

Figure 5. The competitive intensity-price relationship

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Page 10: Strategic segmentation of industrial markets

intermediate companies. This adds another confirming piece of evidence tothe notion of the relationship between strategic environment facing a firmand its purchasing strategy.

In Figure 6, we present the differences in the perceived importance ofdelivery reliability by respondent types. In assessing the relationshipbetween the perceived importance that a company has for delivery reliabilityand that which its customers are perceived to place on it, we thus need tofilter out the differential lenses of the respondents shown in Figure 6. Theresultant Figure 7, shows the strong positive relationship between theimportance of delivery reliability to a customer and that for the customer’scustomer.

16 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998

VERYIMPORTANT

UNIMPORTANT

ALL OTHERS LOWER LEVELPURCHASING

LOWER LEVELTECHNICAL

IDENTITY OF RESPONDENT

PERCEIVED IMPORTANCE OF DELIVERY RELIABILITY BY RESPONDENT

Figure 6. Delivery perceptions by respondent

VERYIMPORTANT

UNIMPORTANT

PERCEIVED IMPORTANCE OF DELIV. RELIAB.TO CUSTOMERS

PERCEIVED IMPORTANCE OF DELIVERY RELIABILITY BY RESPONDENT

VERYIMPORTANT

UNIMPORTANT

Figure 7. The delivery reliability conduit

Delivery reliability

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Page 11: Strategic segmentation of industrial markets

Importance of themarketing conduit

Understanding consumerbehavior

Business strategy usedby customers

Thus, on price and delivery reliability we have obtained a conduit effect.That is, a product’s strategic market environment is reflected in thepurchasing strategies that would be used in obtaining the supplies tomanufacture it.

Respondents were also asked to rate, on the same scale as above, theimportance of price and delivery reliability, respectively, for the marketingsuccess of their product.

DiscussionAlthough the conclusions derived from this research are quite tentative,several important generalizations follow. From our earlier arguments and theempirical study presented, we feel that the marketing conduit is an importantdimension in industrial market planning. Further, in developing strategicsegments, to form a basis for mapping strategy we find that even broadindicators of a potential customer’s product market (e.g., change incompetitive intensity) are useful surrogates for their purchasing strategies.With the tremendous changes in the manufacturing environment and callsfor a greater role for purchasing in strategy development (e.g. Burt andSonkup, 1985), the need to consider clients’/potential clients’ strategies intheir respective markets is important for mapping vendor marketingstrategies. Both the constitution of the buying centers as well as importanceplaced on the various criteria seem to be dependent on the strategicenvironment and/or strategic position of the clients’/potential clients’products. Thus, we feel that strategic segmentation based on the notions of amarketing conduit offers a substantial advantage to industrial marketers.

Conclusion and directions for further researchWhy derived demand type variables have not received previous attention inthe industrial marketing research effort is not clear. Perhaps it is thought thatSIC codes are a form of derived demand since they define the kinds ofproducts produced by the industrial purchaser. However, two firms mayproduce the same kinds of goods but be vastly different in terms of likelypurchase behavior; witness, for example, the difference between GeneralMotors and Ferrari. This research will suggest that it may be moreappropriate to understand how Ferrari’s customers buy (and how Ferrarimarkets them) than to look for generalities between two differentorganizations that share the same SIC code. This “marketing conduit”suggests that the ultimate consumer does in some way pull through thechannels or manufacturing processes his/her needs and wants.

Since our customers’ customers dictate purchasing behavior, we shouldselect ultimate markets which fit our strategic growth strengths. Alsoapparent is the need to carefully survey and track behavior of secondaryconsumers of the product.

Understanding the business strategy of the customer would seem to be ofobvious importance. To the extent that strategy is the reaction of a firm to itsenvironment, the concept at least offers parsimony in that it incorporatesboth exogenous and endogenous variables ranging from environmental toorganizational variables. Research on organizational culture and the role ofpurchasing may well be replaced by this new concept since culture is really astrategic decision.

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Page 12: Strategic segmentation of industrial markets

What is so attractive about the derived demand concept is that it is, in somesense, observable. This offers new power in the hands of those who hope tounderstand and implement industrial marketing programs from a strategicperspective. Industrial marketers who are often thought to have a morecomplicated and therefore less manageable process than their consumermarketing counterparts. This research may indicate that the contrary is true.

Future workIn this study we have focussed on different aspects of derived demand. Thevariables ranged from the most observable kind, the strategic profile of thefirm to those that might be inferred or observed with some error, theperceptions of the purchaser and the plans of the firm in the future.However, other strategic decisions of the firm such as organizational,production, and financial strategy may be very telling in understanding theexchange potential between two firms and therefore the attractiveness to theselling firm’s market portfolio.

References

Abratt, R. (1993), “Market segmentation practices of industrial markets,” Industrial MarketingManagement, Vol. 22, pp. 79-84.

Ames, B.C. and Hlavacek, J.D. (1984), Managerial Marketing for Industrial Firms, RandomHouse, New York, NY.

Bonoma, T.V. and Shapiro, B.P. (1983), Industrial Market Segmentation: A Nested Approach,Marketing Science Institute, Cambridge, MA.

Burt, D.N. and Sonkup, W.R. (1985), “Purchangi’s new role in new product development,”Harvard Business Review, September-October, pp. 90-7.

Cardozo, R.N. (1968), “Segmenting the industrial market,” in King, R.L. (Ed.), Marketing andthe New Sciences of Planning, AMA Fall Conference Proceedings, American MarketingAssociation, Chicago, IL.

Choffray, J-M. and Lilien, G.L. (1980), “Industrial market segmentation by the structure of thepurchasing process,” Industrial Marketing Management, Elsevier North Holland,New York, NY, Vol. 9 No. 4.

Day, G.S. (1977), “Diagnosing the product portfolio,” Journal of Marketing, Vol. 41 No. 2,April, pp. 29-38.

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Different aspects ofderived demand

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Executive summary and implications for managers andexecutives

Industrial segmentation based on marketing channels: a welcomedevelopmentMarket segmentation is, as Sudharshan and Winter rightly assert, “…at thevery crux of developing a thorough, well-reasoned…” strategic plan. Yet forindustrial marketers the available tools are limited and, in many ways,crude. Firm “demographics” (size, SIC, turnover, etc.), location and tradinghistory do not make for precise segmentation. For existing customers we cancreate our own segmentation systems incorporating sales data and otherinformation. However, Sudharshan and Winter again provide usefulcomment by saying that “…any good salesperson in a face-to-face situationcould read the customer with far greater accuracy and reliability than thatoffered by impersonal research results.”

So where do we go from here? I see the need for new segmentation tools andmethods. But we cannot “reinvent the wheel” by trying to do what our salesteam already does! Any system must use readily available information ratherthan the product of detailed research. And any system must reflect thedifferences between buying organizations. Sudharshan and Winter take usseveral steps nearer solving this problem.

The heart of future segmentation systems for industrial markets lies in theability to distinguish between buying strategies in customer and prospectfirms. Sudharshan and Winter’s observation that customers’ markets andmarketing strategies provide a surrogate for buying approaches gives us thefoundation for a usable system. Not one that applies to every industrial salessituation but one that will apply where demand is derived from demand forthe customer’s products. Since this represents the majority of industrial salessituations we are able to segment with more effect than with the limited toolsavailable up till now.

We can also learn from those organizations with established methods ofassessing customers’ markets. Manufacturers of fast moving consumergoods (fmcg) have always looked beyond the retailer to the consumer.Understanding consumer demand means that these firms create strategiesfounded on the knowledge of what their customers’ customers require. Wecan also look at the successes of those firms promoting “ingredients” toconsumers and even firms such as Intel with its “Intel Inside” marketingcampaign.

I suspect that the simplest segmentation approach based on Sudharshan andWinter’s work is to define firms by the type of market served. These marketsinclude:• consumer mass market (fmcg);• consumer mass market (durables);• consumer mass market (services);• consumer niche market (fmcg);• consumer niche market (durables);• consumer niche market (services);• capital markets (buildings);• capital markets (plant and machinery);• public sector markets;• industrial markets (goods);• industrial markets (services).

20 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 13 NO. 1 1998

This summary has beenprovided to allowmanagers and executivesa rapid appreciation ofthe content of thisarticle. Those with aparticular interest in thetopic covered may thenread the article in toto totake advantage of themore comprehensivedescription of theresearch undertaken andits results to get the fullbenefit of the materialpresent

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Page 15: Strategic segmentation of industrial markets

We can observe how marketing channel strategies and promotions differacross these market types. And, since marketing strategy relates closely tobuying, we can segment accordingly.

A further refinement will come from adding firm size variables. It seemssensible to assume a more complex buying centre in large firms. Thereforethe business selling to small industrial businesses needs a different strategyfrom a firm with large customers. Moreover, we should distinguish betweenour customers on this basis.

Looking to the future development of industrial segmentation strategies wemight add other information of value in targeting. These include:

Financial information and creditworthiness. The ability of a customer to payyour bill represents an important variable in marketing strategy. It is notunreasonable to see such financial information becoming available as asegmentation tool especially in the UK and USA where such electronicstorage of such data has proceeded apace.

Ownership information. It may be that ownership affects buying behaviour.Distinguishing between types of ownership may improve segmentationfurther. Categories include privately owned, publicly quoted single firm,conglomerate business unit, subsidiary, joint venture, non-profit and publiclyowned.

Sector growth. This relates to the marketplace analysis derived fromSudharshan and Winter’s work. We might expect different buying behaviourfrom firms in a declining market compared to firms in a stable or expandingmarket. Again adding this type in information to SIC or other standardsegmentations can be realized without excessive research to gather newdata.

Regional growth. Performance in national or regional economies may affectbuying strategies. Since location is an easy variable to assess and economicdata extensive, we should have no difficulty connecting to two to give afurther segmentation variable. For some firms interest rates and exchangerates may prove useful alongside growth figures.

For years industrial marketers have had limited opportunities to segmenttheir markets. For some the cost of developing segmentation outweighs thevalue – especially when dealing with a small niche industrial market. If youonly have a couple of hundred possible customers worldwide then treatingeach one individually makes more sense than applying a segmentationmodel. However, linking readily available information from publishedsources to individual firms presents a great chance for marketers to improvesales management, advertising and promotional targeting.

Sudharshan and Winter, by linking marketing a buying strategies in targetfirms, provide us with the means to target on the basis of buying strategy aswell as firm demographics. Much remains to be done and the authors notelimitations to their research, but we have the beginnings of a method forsegmentation that will improve industrial marketing planning and targeting.

(A précis of the article “Strategic segmentation of industrial markets.”Supplied by Marketing Consultants for MCB University Press.)

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