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Strategic segments


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This is a lesson from a marketing course I teach for business admin. students. It analyzes the concept of segmentation using Nirmalys Kumar's 3Vs based on the book Value Merchants.

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Strategic segments

  1. 1. From Market Segments to Strategic Segments Nirmalya Kumar Marketing’s basic mission: create a difference between a company’s offering and that of its competitors on an attribute important to customers. To create differentiation, marketers use segmentation, targeting, positioning (STP). Segmentation: process of dividing the market into homogeneous groups of customers who respond similarly to a particular marketing mix of the four Ps
  2. 2. Problem: inability to create perceived differentiation ...too much reliance on mkt.g mix / 4Ps (tactical tool) Differentiation is achieved by building the firm’s source of competitive advantage into the value network (=value chain) that serves a particular strategic segment. Differentiation beyond marketing…to encompass - R&D - operations - service MOVE FROM MARKET TO STRATEGIC SEGMENTS IN TERMS OF
  3. 3. VALUED CUSTOMER VALUE PROPOSITION 3 Vs VALUE NETWORK 1. How does a firm create sustainable differentiation? 2. What are the cross-functional implications of serving a particular segment? 3. What positive or negative synergies exist in serving combinations of different segments? 4. Where should the value network be sliced to serve different segments? 5. How unique is our marketing concept? 6. What are sources of our differential advantage in terms of competences, processes and assets?
  4. 4. TRADITIONAL PROCESS - identify market segments - select the appropriate segment(s) to target - position the company’s offer within the targeted segment(s) using the four Ps Segmentation process: identify variables that will Segment A Segment B Segment C maximize differences between segments AND minimize differences within each segment
  5. 5. Creative segmentation can help a company get closer to its customers Mass customization: each customer is a distinct segment. COMPANY LOGIC Ec. of scale = larger segments CUSTOME R LOGIC Unique needs MOST COMPANIES must TRADE OFF
  6. 6. Goal: ACTIONABLE SEGMENTS (1) distinctiveness i.e. different segments respond differentially to the marketing mix (2) identity that is, the ability to reasonably profile which customers fall within which segment (3) adequate size, so that the development of tailored marketing programs for individual segments is economically viable for the firm.
  7. 7. Xerox Xerox a priori segmentation: large medium small post hoc segmentation
  8. 8. TARGETING deciding which segments to actively pursue to generate sales UNDIFFERENTIATED OK if it lowers the cost of delivering the value proposition and opens up the industry to large numbers of new customers DIFFERENTIATED simultaneously targets several market segments, each with a unique marketing mix. (Ford: Aston Martin, Ford, Jaguar, Land Rover, Lincoln, Volvo) CONCENTRATED (one segment): PORSCHE Subsegments (Psychographics): Top Guns - Elitists - Fantasists - Proud Patrons - Bon Vivants Power - Power ctrl ctrl Old Old money money Escape n Escape n feel guilty feel guilty Ownership - Ownership trophy trophy Jet setters - -thrill - Jet setters thrill excitement excitement
  9. 9. Positioning is developing a USP for the target segment A well articulated USP should be capable of being briefly communicated by completing the sentence: “You should buy my product or service because . . .” EXPRESSED WITH BENEFITS NOT FEATURES OR ADVANTAGES inability to do so results in either a price negotiation with the customer or a loss of the sale.
  10. 10. U.S . younger, more educated, more affluent demographic, adventurous, confident psychographic of customers who enjoy driving and even disobey speed limits A) Positioned rationally “affordable and German engineered,” B) Positioned emotionally a “different driving experience more connected to the road and world.” Compared to customers perceive VW to be more drivable, more substantial, more individual, and more spirited. VW is more approachable, more likeable, a better value, and more human.
  11. 11. Be very specific in terms of the intended positioning or unique selling proposition
  12. 12. MIDAS (1) age of the car: (older car, more likely will need Midas (2) size of the car: bigger car = higher value of the sale / margin (3) sex of the driver:women more likely to buy additional services car lovers - 5) utilitarians same basic value proposition fast, reliable, one-time repair 4) - Additional services - phone call after 6 mnths - smalltalk - newspaper - videogame - guarantee Market and service segments as the abv only require changes in the marketing mix
  13. 13. Strategic segments require distinct value networks A) “fast mechanical repair” B) “guaranteed repair” (factory-authorized dlr) C) “specialty repair” (independent workshops) D) “heavy-duty accidental repair” (body shops) E) “do-it-yourself repair” u n i K q S u F e develop two unique value networks three Vs valued customer - value proposition - value network
  14. 14. London - Glasgow 29£ Southwest airlines Southwest airlines I. valued customer: who to serve? Leisure, small bsnss, entrepr. II. value proposition: what to offer? - bsnss travel: seat comfort + selection - bsnss class, newspaper, freq. flyer, travel agency, flexible schedule - leisure travel: ABV IS OK BUT LOW PRICE IS BETTER III. value network
  15. 15. four key questions to chal lenge an industry's strategic logic and business model: Eliminate Which of the factors that the industry takes for granted should be eliminated? Reduce Which factors should be reduced well below the industry's standard? NEW VALUE CURVE Raise Which factors should be raised well above the industry's standard? Create Which factors should be created that the industry has never offered?
  16. 16. CXL: free meals (sell snacks) - travel agents (95% tickets thru the Internet or call center 5%) (attributes really create value?) REDUCE: flexibility in flight changes (all fares non-refundable switchable with penalty) - seat selection (first-come/first-served and group boarding) (factors overdesigned by industry) RAISE: lower prices, greater punctuality, younger fleet of planes (understand the compromises that the industry currently forces its customers to make) CREATE: one-way fares, refunds for delays abv 4 hrs, ticketless travel. (new sources of value creation)
  17. 17. EASYJET STRATEGY CANVASS 3.5 3 2.5 2 1.5 1 0.5 0 traditional carriers easyjet s ity ion s ing als s t s s ls n lane tual ct as spac t me mea lane fligh ight enes io p l t w c le tw n e e h p fl r bu iv sc t e pu at s e n istri ne ns sea n flig flye late ang sed ract e s id s i w nt fb or o ch mis e att nd rld ue ds f t ei yo q or ric it wo p oic fre efun bility nd f bil h a r xi refu ec ail d fle av wi k or
  18. 18. EasyJet strategy canvass (modified) 3.5 3 2.5 2 1.5 1 0.5 0 s s t n ss n ls ls ng ity es rk es ht io es gh ci al ea t io ea c la ct an an lig wo fli f en m tu t m s pa le pl bu pl t e s s e ri t iv nc ne e er ed w gh at ng sn st ts e at ly ac pu ne iss f li di id rl se ha tf ea fb tt r c s w n m o a in fo in e r y e e to rld fo ds qu lit ic ic ty wo bi pr un fre nd ili ho a f c b fu re ail e xi re av id fle w traditional carriers easyjet
  19. 19. Intangible benefit Tangible benefit Refunds abv 4 hrs: unlikely for short hauls Perceived benefit VALUE PROPOSITION STRIPPED TO THE BONE
  20. 20. III. value network - How to deliver 20 to 25% savings - 10% bgt mkt.g
  21. 21. Reinventing the Value Network. 5 cost principles to build easyJet’s value network: 1. Avoid fixed costs whenever possible: no secretaries! 2. Make fixed costs work harder than the rest of the industry: EasyJet planes fligh 11 hrs/day, VS 6.5-hr avg 3. Eliminate generally accepted variable costs as travel agents. 4. Keep variable costs to a min., such as airport fees. 5. Convert variable costs associated with services into revenue generators, as selling snacks on the plane.
  22. 22. British airways IS IT GOOD TO LOOK FOR SYNERGIES? different strategic segments require divergent value networks synergies = shared portions of the value network NOT OPTIMIZED FOR FULL SERVICE - LOW COST
  23. 23. OPTIMIZING THE VALUE NETWORK (1) To what extent does our marketing concept differ from others in the industry? (2) To what extent do elements of our marketing concept mutually reinforce each other?
  24. 24. ‘82 - ‘90 UK grocery sales of branded products: 52% to 33% PRIVATE LABELS: 33% TO 46% EATING OUT: 15% TO 21%
  26. 26. In continuous process industries such as toilet paper or aluminum foil, value network separation at the level of purchasing and manufacturing would severely compromise production efficiencies. 1. Concentrate exclusively on being either a branded or a private label player. 2. Become primarily a branded player, but accept private label manufacturing only under very strict criteria: meet a hurdle rate of return on sales, use only excess plant capacity, and do not “borrow” packaging or recently introduced innovative features of the company’s branded product. 3. Completely separate the private label business from the branded business and let each optimize its own value network.
  27. 27. Drive Marketing Innovation Using the Three Vs 1. Are there customers who are either unhappy with all of the industry’s offerings or are not being served at all? E.G. cheap HIV drugs mfrs 2. Can we offer a value proposition that delivers dramatically higher benefits or lower prices, compared with others in the industry? 3.Can we radically redefine the value network for the industry with much lower costs?
  28. 28. Exploit the Three Vs–Related Growth Opportunities Understanding where customers are not being served helps determine which markets and industries the firm should operate in or “who to serve.” Clarity in the winning formula and economic logic create the potential to offer dramatically different value propositions and help determine “what to offer.” The value network, or “how to deliver,” explicates the timing (when to move into which markets) and vehicles (how to get there)
  29. 29. Checklist for Marketers on the Three Vs Valued Customer • Who are our valued customers? • Are there customers who are unhappy with all the current offerings of the industry? • Are there customers who have a need but are not being currently served by the industry? • Are we trying to reach customers who are unaware that they need our product? If so, how are we going to create the need? • Who is the user? The buyer? The influencer? The payer? What are the preferred criteria of each and their power in the buying decision? • Is the target segment large enough to meet our sales objectives? • What is the growth rate of the target segment? Value Proposition • What are the core needs we are trying to address with our value proposition? • Does the value proposition fit the needs of our valued customers?
  30. 30. • What benefits are we actually delivering to the customers? • Is our value proposition differentiated from the competitors or are we positioning in a crowded space? • Are our value proposition claims reinforced by underlying product and service features? • Are we positioning on attributes that we can defend against competitive attacks? • Are we positioning on too many benefits to be credible? Value Network • Can we serve the valued customers with the value proposition at a profit? • Do we have the necessary capabilities to deliver the value proposition? If not, could we acquire or partner with them? • Would serving the valued customers have negative consequences on our existing customers or businesses? If so, how are we going to control for this? • Which high-cost or low-value-added activities could be eliminated, reduced, or outsourced in our value network? • Where are the advantages of scale in our value network? Can we maintain scale while not losing flexibility? • How different is our value network from the rest of the industry? • What is our break-even point? Could we lower it by slightly varying the value network?
  31. 31. CONCLUSION As companies enter and operate in related segments of businesses, are they facing strategic segments or market segments? How far back in the value network should they separate the two businesses? Is it enough to separate marketing, or should marketing and distribution be segregated? Or does one need a completely distinct value network for the new segment? How can marketing be used to generate innovation and growth in the industry? Using the three Vs lens to answer these questions, a company can find new strategic segments, build deep differentiation, and drive innovation and growth