Business to Business Market Segmentation

  • Published on
    02-Jul-2016

  • View
    212

  • Download
    0

Transcript

  • 0019-8501/01/$see front matterPII S0019-8501(99)00103-0

    Industrial Marketing Management

    30

    , 473486 (2001) 2001 Elsevier Science Inc. All rights reserved.655 Avenue of the Americas, New York, NY 10010

    Business to Business Market Segmentation

    Per Vagn FreytagAnn Hjbjerg Clarke

    This article discusses the characteristics of industrial mar-kets in relation to some of the major industrial market segmen-tation models. To understand the different market situations,we describe a scale with simple market transactions at one endand complex relationship management at the other, suggestingthat the segmentation approach must be different for each endof the spectrum. The article presents a general industrial seg-mentation model directed towards situations characterized byrelationships and networks. The model stresses the importanceof having a deep understanding of the customers characteris-tics, needs, future directions, as well as identification of whatkind of overall relationship is required by the customer. Thismodel involves identifying, selecting, and monitoring ofsegments. 2001 Elsevier Science Inc. All rights reserved.

    INTRODUCTION

    Segmentation is a crucial activity in marketing, but theway it is viewed has changed over time. Some authors

    view segmentation as being closely related to another ofmarketings major thoughts, the marketing concept [1].The essence of the marketing concept is that the best wayto address the customer is by satisfying their needs andwants. These needs and wants thus need to be fully under-stood, and several ways exist to collect and analyze thenecessary information. Which ways are used depends onthe guiding methodology and techniques applied, but sta-tistical analysis approaches are the most common.

    Other authors do not see segmentation as a statisticalanalysis technique, but as a tool for resource allocation.They regard segmentation as an overall way of identify-ing different target groups (for the purpose of makingsome general strategic decisions, such as which busi-nesses the company should be in and how resourcesshould be allocated) [2]. A major question is thereforewhether or not both points should be addressed at thesame time. In principle, segmentation is about identifyingand targeting customer groups through their needs andwants, as well as determining which customers and needswill be addressed and with what manner and intensity [3].

    The industrial market often is characterized by cooper-ation between customer and supplier; with the supplier

    Address correspondence to Dr. A. H. Clarke, University of SouthernDenmark, Department of Marketing, Grundtvigs Alle 150, 6400 Sanderborg,Denmark.

  • 474

    thus having in-depth knowledge of the customers needsand wants. When it is known beforehand that customersare interested in such collaborative relationships, this de-sire can be used as a segmentation base. In connectionwith Wind and Cardozos micro and macro segmentationmodel [4], they talk about the influence different combi-nations of decision units (buying center) can have on themarket segmentation. They, however, do not directlymention the relevance of the buyers attitude to collabo-ration as a segmentation base.

    Another approach is represented by Bonoma and Sha-piro [5] in their nested approach. They do not explicitlytalk about using the customers attitude to collaborativerelationships as segmentation base either. However,within the framework of the nested approach, it is possi-ble to use questions about the customers interest in col-laborative work, because either the purchasing strategyor the buying center can be used as a segmentation base.

    This article develops an analytical framework that ex-plicitly presents the opportunity to use the customers in-tentions towards collaboration with the supplier as a seg-mentation base.

    INDUSTRIAL MARKETING THEORIES

    Segmentations main uses are therefore of both opera-tional and strategic nature. It should result in guidelines forthe operational level that have the purpose of gaining acontinual competitive advantage for the company. Indus-trial marketing literatures various approaches all appear to

    be pointing in roughly the same direction. Jackson [6] dis-tinguishes between lost-for-good and always-a-sharesituations, with the difference being how closely the sup-plier and customer cooperate. Lost-for-good situations arecharacterized by strong bonds between the supplier andcustomer that make switching suppliers expensive for thecustomer. Always-a-share situations are mainly character-ized by weak bonds and suppliers competing on price.

    Jacksons [6] approach is closely connected to the stra-tegic management approaches called lean managementor lean thinking [7]. In lean management, customershave close relationships with some of their suppliers,based on things such as mutual product or process devel-opment, or using only one or a limited amount of suppli-ers in certain areas. The opposite is arms length man-agement, which keeps more distance to the suppliers whoas a result mainly compete on price.

    In the Swedish network theory [8, 9], the industrialmarkets are characterized by cooperation and mutual ad-aptation between the supplier and customer. This theorymakes a distinction between the overall situation and sin-gle episodes, making it possible to see different imagesof the market, depending on the companies involved, theindustry, the contents of the exchange process, etc.

    These points of view see segmentation as more than justa technique for analyzing the environments and for allocat-ing marketing resources. They engage segmentation in theinternal workings of the company, and the company, as apart of the market, shares in shaping the environment.

    A scale showing the facets of the relationship betweensupplier and customer can illustrate these three ap-proaches. One end of the scale is characterized with no co-operation, no bonds, no switching cost, and an nonadaptedproduct. Close cooperation, strong bonds, high switchingcost, and a highly adapted product mark the other end. Thedifferent factors often will be interrelated. The two ex-tremes are labeled simple market transaction and com-plex relationship management. At a certain point on the

    The two extremes are labeled simple market transaction and complex

    relationship management.

    PER VAGN FREYTAG is Associate Professor of Marketing at the University of Southern Denmark.

    ANN HJBJERG CLARKE is a doctoral candidate in Marketing

    at the University of Southern Denmark.

  • 475

    scale, the term market is replaced by relationship. Thismarks the change in emphasis from satisfying the cus-tomer in the short term to satisfying the customer in thelong term; however, the exact point is difficult to identify.

    The best way to segment a market in a given situationmay depend on what part of the scale the companys focuslies. This distinction has not been made in segmentationtheory before. In Wind and Cardozos [4] two-step, macro-micro model and in Shapiro and Bonomas [10] multiplestep, nested approach, the premise is that segments can gofrom being on a very general level to an individual level bybreaking down the segmentation bases until segmentsare acceptable in the terms of accessibility, measurability,and substantiality. Arndt [3], Hutt and Speeh [11], andKotler [10] claim that it may be more suitable to start outfrom the premise that potential buyers are different, andthat the task is to find similarities, to go from the individ-ual level to a general levelin other words to build up.

    In an ex post situation, the buyers needs and wants havebeen made manifest. A company that has adapted to theseneeds and wants over time comes close to complex relation-ship management, whereas a company that has not adaptedto the buyers needs and wants while serving the market iscomparable to the simple market transaction situation.

    In simple market transaction situations, few, if any, ad-aptations are made to cater for the buyers needs and wants.Who supplies the product is often of little importance to thebuyer, providing major criteria are met, that is, stable deliv-eries, uniform quality, and low price. Suppliers regard sim-ple market transactions as matters of volume and the bestpossible price. In complex relationship management situa-tions, other criteria carry the importance, that is, the capa-bility of adapting to individual customers, the capabilityand willingness to enter development projects, etc.

    Segmentation should be based on the current marketsituation; it must identify the main reasons the buyersbuy. One approach is to look at the actual product pur-pose and the needs and wants that arise from particular

    usage, because these are the most central in buying orga-nizational behavior [12].

    This understanding of segmentation comes very close toPlank [2] in his critical review of industrial market segmen-tation. One of Planks major conclusions is that User re-quirements clearly have to be defined in a more systematicmanner. A preliminary conceptual model needs to be de-veloped around user requirements (p. 90) [2]. It is possiblethat neglecting to use the customer as the foundation for de-veloping segmentation models is a fundamental reason forthe problems associated with implementing them.

    In an empirical study, Abratt [13] found that Themost difficult stage appears to be the transaction of re-sults into an effective implementation strategy (p. 79).Abratt found that the three most common variables usedto segment industrial markets are: geographic (87.5% ofthe companies), demographic (62.5%), and how often theproduct is used (62%). Because user requirements are notcommonly used, it comes as no surprise that implementa-tion frequently gives difficulty.

    The following material purposes to conceptualize thefoundation and major procedures for an implementableindustrial marketing segmentation model suitable forcomplex relationship management situations. The reasonfor concentrating on complex relationship situations, isthat the industrial marketing literature recommends them,whereas to date most segmentation models [4, 10, 14] arejust based on simple market transaction situations.

    CONCEPTUALIZING AN INDUSTRIAL SEGMENTATION MODEL

    Before the conceptual frame is outlined, the industrialmarkets characteristics and trends are described. Shethand Sharma [15] point out the increasing turbulence inindustrial markets and regard relationship marketing asan appropriate strategic response. With increasing tur-bulence in the market place, it is clear that firms have to

    Use the customers intentions towards collaboration with the supplier as a

    segmentation base.

  • 476

    move away from transaction oriented marketing strate-gies and move towards relationship oriented marketingstrategies for enhanced performance (p. 91) [15].

    Tendencies likely to be identified during research aresummarized as follows:

    Supplier as a customer Service procurement Crossnational rules Crossnational values Global sourcing Bonding with suppliers Hub and spoke organizations Supply experience curves Partnering Crossfunctional supplier teams

    The conceptual segmentation framework must be ableto deal with these tendencies, and relationship marketingappears to be appropriate as relationships help build pre-dictability into the companys environment. Relationshipmarketing requires that any tendencies be dealt with in astrategic manner, as the organizations of both the sup-plier and customer are affected in several ways and at allorganizational levels.

    A relationship approach involves trying to understandthe individual needs and wants of the customer. The overallperspective on the customer therefore should be that thecustomer is unique, equal to the main idea of the build-upapproach within segmentation theory [3]. It is important tounderstand all the consequences of using a relationship ap-proach, because managing supplier/buyer relationships isnot an easy task. It normally would be impossible to have a

    Segmentations main uses are of both

    operational and strategic nature.

    FIGURE 1. Relationship marketingconsequences on strategic issuesand segmentation.

  • 477

    close relationship with every customer, so strategic deci-sions need to be made concerning with whom, how close,when, and for what purpose the relationships will be. Inparticular, it is a question of what core competencies shouldbe offered to the customer and what governance conceptsand actual structures to choose [16] (Figure 1).

    When starting the segmentation process, instead ofseeing customers as identical, the build-up approach be-gins by viewing customers as different and then proceedsto identify possible similarities between them. In a turbu-lence market, using a build-up approach is more suitablethan a breakdown approach. The selling company also isable to play a part in shaping its own environment by thechoices it makes. Partnering and bonding are examples ofhow companies can influence the turbulence of their en-vironments. The segmentation model thus should be ableto identify the factors affecting the markets turbulenceand be able to adjust to these by being dynamic.

    A segment often is described as something that has to beidentified, chosen, and thereafter targeted by an adjustedmarketing mix [1]. This can be seen as a static (nondynamic)way of dealing with segmentation in markets where custom-ers develop their needs and wants in interaction with theirsuppliers. Segments are developed as a result of the interac-tion processes between the buying and the selling company.Who plays the most active part in initiating the contact andhow the needs and wants are developed may differ consider-ably from situation to situation.

    Sometimes the buyer will be the most active part bytaking initiative, because the concept of reverse market-ing is proposing [17]. Conversely, the seller at times maybe the most active part. Therefore, it is not an unreal hy-pothesis that both buyer and seller will take initiatives,developing the buyers needs and wants by cooperating,and simultaneously direct the sellers capabilities and(strategic) development towards these needs and wants.

    Derived from this, a more suitable basis for a segmen-tation model is that segments are developed in the inter-action between two or more parties.

    THE DIS (DYNAMIC INTERACTION SEGMENTATION) MODEL

    The following section gives further detail on how tocreate segments in the more complex, relationship fo-cused part of the market (Figure 2).

    The buyers perception of their own needs and wantsstill are regarded as important variable of segment identi-fication. Needs and wants are developed through interac-tion between buyer and seller but also are influenced bythe activities of the competitors and general changes inthe environment (see the DIS model). As an example,mutual product development projects often lead to thedetermining for the buyers needs and wants. Competi-tors will try to influence the buyers perception of hisproblem and the solution [18]. Changes in the environmentalso will affect the needs and wants of the buyer, that is,new technologies offering new possibilities or new regu-lations from the formal authorities. As a result of the lat-ter, the potential or the actual relations between buyerand sellers may form an adequate basis of segmentation.

    Dwyer, Suhrr, and Sejo [19], Ford [20], and Hkans-son [9] describe the development of relationships overtime. A distinction often is drawn between the overall re-lationship and specific interactions or episodes. This hassome implications on how to segment markets. As an ex-ample, Ford [20] describes the contents and the develop-ment of a relationship over time with categories of the

    Segmentation should identify the main

    reasons the buyers buy.

    FIGURE 2. The Dynamic Interaction SegmentationModel.

  • 478

    following variables: experience, uncertainty, distance,commitment, and adaptation. In the beginning of a rela-tionship, these variables can be used in particular for thedescription of the overall relationship with the underlyingpurpose being to highlight the intentions and the capabil-ities of the parties involved. If this evaluation gives apositive result, it may be a suitable ground for the investi-gation of how a specific interaction and transfer betweenthe parties can take place.

    The uncertainty the company has for suppliers in gen-eral will change to specific levels of uncertainty relatingdirectly to specific suppliers. Experiences also will be re-lated to specific suppliers instead of just being groupedtogether as experiences with suppliers in general. Dis-tance, with regard to factors such as differences in orga-nizational culture and technological levels will be de-tected and be able to be dealt with in a suitable manner.In the same way, there will be no adaptations or commit-ments at the start of the relationship, but this will changeover time due to the necessities of the relationship (Fig-ure 3).

    The initial main task is to find out the capabilities andintentions of the other party in the relationship. Over timethe focus will shift in towards the contents of the relation-ship [22]. The focus on the overall relationship will bemaintained. The overall relationship gives a frame withinwhich the actual activities between the parties are takingplace. Both parties will follow the other parties perfor-mance with regard to sales, earnings, competencies, stra-tegic development, and so on. If the performance of oneof the parties provides problems, the other party maycontact the nonperforming party, or the nonperformingparty may make contact on their own accord. A resultingconsequence is the segmentation initially being directedat both the overall relationship and the single episodes,with the relative importance of the overall relationshipbecoming lower as the relationship develops.

    In the development of a relationship between two par-ties, it is particularly the types of experiences both part-ners have had in other relationships that affect the newrelationship. However, the parties intentions for enteringthe relationship, their views on how extensive it should

    Strategic decisions . . . concerning with whom, how close, when, and

    for what purpose . . .

    FIGURE 3. The development of relations over time.

  • 479

    be, and the relative positions of the partners involved arealso of importance.

    As stated by Morgan and Hunt [21], the intentions be-hind the supplier/customer collaboration and the relativepower each partner has also bears much influence over therelationship. A way of clarify this is to look at the custom-ers buying behavior. Relationship marketing success, inall its context requires co-operative behavior (p. 31).Morgan and Hunt [21] emphasis the commitment and trustand end by saying identifying commitment and trust askey mediating variables is critical to the study and man-agement of relationship marketing (p. 31). The followingattempts to make this type of identification (Figure 4).

    In other words, to the seller, the task is now to identify thebuyers need for, and intentions behind joining the coopera-tion, and the buyers previous experiences with cooperation.

    The demands that the relationships development willrequire from the involved parties also need to be identi-fied and considered. The seller particularly will be re-quired to make adaptations and commitments, but adap-tations and commitments also may be needed from thebuyer (Figure 5).

    Company characteristics (who is the customer?)

    the image of the customer (i.e., loyal and conserva-tive or innovative and profit oriented)

    Product, process, and production technologies Cooperation with other companies (i.e., strategic al-

    liances) Competencies and employees

    The measurement of these dimensions will be difficult inpractice, because they, to some extent, demand preciseknowledge of the buyers actual needs and wants. In a prere-lationship situation where there is no particular buyerknowledge, the measurement therefore will be more indi-rect. Factors like the ones mentioned below might be useful:

    Goals (What does the Customer Want?) Strategic issues and goals Purchasing strategies Sales strategies Product characteristics (product, service, system wants)Behavior (What does the customer do?) The frequency of the replacement of suppliers Other suppliers Buying potential of the customer now and in future

    Segments are developed in the interaction

    between two or more parties.

    FIGURE 4. Experiences with cooperation and the need for cooperation.

  • 480

    Single or multiple sourcing

    Some of the above mentioned factors may fit on morethan one level depending on the particular situation [25].

    In an article such as this, it is difficult to make assump-tions on which factors are the best to begin with. The com-pany should develop a model applicable for its own situa-tion, based upon its knowledge of the market. As can beseen from above, the most suitable factors for market seg-mentation are closely related to the individual company (i.e.,the precise nature of the buying company needs and knowl-edge of individuals inside the companies), rather than togeneral market development. General market developmentis more useful for forecasting tasks, that is, who wants tobuy what and how much? Product needs and wants canrarely be described in advance. In many situations, the needsand wants of the customer will be developed in interactionbetween the parties. The interaction process also shows howthe employees of the two companies work together.

    As a main conclusion at this stage, this article has em-phasized that when identifying customers to establish rela-tionships with, it is important to consider both parties indi-vidual characteristics and which direction the parties aredeveloping. It is also important to obtain knowledge about

    the customers general needs, and the amount of adapta-tion and commitment needed from both parties. Later, dur-ing the relationship, it will be useful to make a more de-tailed analysis of other factors within the buying company.

    EVALUATION AND SELECTION OF SEGMENTS

    After identifying segments, the next step is to evaluateand select the segment or segments that the companywants to target. Wind and Thomas [23] stress that this isa critical management decision because all other compo-nents of a marketing strategy follow it. This articlewidely agrees; however, not only marketing but also thewhole organization should follow the strategy for thesegments.

    Unfortunately, existing literature offers only sparseguidelines on how to evaluate and select segments. Mostauthors have chosen to focus on the design of segmenta-tion studies and different approaches for grouping cus-tomers. [23, 24, 29].

    However, the interest in segment evaluation and selec-tion has been growing. Before the late 1980s, remarks onthe topic were sparse. It was expected that evaluation and

    . . . identify the buyers need for, and

    intentions behind joining the cooperation.

    FIGURE 5. Demands for adaptation and commitments.

  • 481

    selection was something that happened as a logical partof the segment identification process if the marketer hadthe model and the right variables. The evaluation and se-lection processes were not defined. Wind [26] referred tothe selection process as a complex art to be performedby management, which should take into account factorssuch as reachability, competitive activity, and ability toimplement. Shapiro and Bonoma [10] in How to Seg-ment Industrial Markets do not address segment evalua-tion, and later in Evaluating Market Segmentation Ap-proaches, they give criteria on how to determine theprofitability of segments being served but do not discussevaluation criteria and selection processes.

    Hlavacek and Reddy [27] are one of the first to includea selection stage in the segmentation model, consisting ofthe attractiveness stage. They give some attractivenesscriteria to be considered in evaluating a market segment.

    In many later discussions of segment evaluation, thecontributions of researchers revolve around determiningsegment attractiveness by using Kotlers [1] measurabil-ity, substantiability, accessibility, and actionability crite-ria [23, 24]. These often are translated into numerousother related criteria, such as segment size, segmentgrowth, segment structural attractiveness, expected seg-ment profitability, and risk [1, 13, 23].

    One of the problems with Kotlers [1] criteria for at-tractiveness is that there is no guidance on determiningthe relative importance of each criterion. Second, thecompany itself is not considered, although Kotler [1]does mention taking the companies objectives and re-sources into consideration. The final problem is that seg-mentation is only weakly linked to business strategy andimplementation.

    THE PROPOSED MODEL/PROCESS

    To select the best segments that match the company, it iscrucial that the company conducts thorough studies of the

    different segments. Segments need to be selected where thecompany can create competitive advantages and gain theposition in the segment that they want. Segments that mayseem attractive, big, growing and with little competition,may not suit the company if the segment cannot be handledwell enough internally to gain the desired position in themarket. Because no two companies are the same, the pro-cess of finding the segments that best match a companyscapabilities should reflect the companys unique situation.

    This article uses a two-step process. The proposed pro-cess can be conducted both in a simple transaction situa-tion and in a relationship situation. The first step is a run-ning segment evaluation that takes place during segmentidentification and involves the segments. The second stepis the selection and involves the company and the seg-ments. The aim of this process is to find a perfect matchbetween segment demands and an optimal use of thecompanys capabilities.

    The Evaluation of the Segments

    The evaluation of the segments is a process that runsthroughout the identification of the segments. The evaluationprocess is broken into two steps. The remaining segments be-ing identified become more qualified as the process goes on,until only the most potentially worthwhile segments are left.

    First the segments need to be scanned for a few crucial,relatively easily identified variables defined by the com-pany themselves, because they should reflect the goal ofthe segmentation. These variables need only be estimated.Examples include segment size, growth, customer needs,and the fit with the companys core competence.

    The second step is a more thorough evaluation of thesegments that remain. These segments are now evaluatedfor further variables to determine their suitability for se-lection. The following criteria could be used: the expected demands on the company the potential profit compared with the related risk

    The most suitable factors for market segmentation are closely related to the

    individual company.

  • 482

    the competition, number of competitors, and theirstrengths, preferences, etc.

    governmental and public moves the ability to reach buyers in the market technology ability to gain a competitive advantage the connections between present networks (such as

    strategic alliances) and the identified segments and thepossibility of any conflicts

    The evaluation should result in a description of the seg-ments that is used in the selection stage.

    The segments that now remain need to be evaluated todecide how many and which segment the companywishes to focus on further. When evaluating to decidewhich segments the company should focus on, it is ad-vantageous to find a synergy between the segments. Thecloser segments are to each other regarding customerneeds and technology, the less they require of the com-panys resources.

    The Process of Selecting Segments

    This attempt to give a new process for selecting seg-ments has its foundation in strategic managementthought, especially the work by Fry and Killing [28] inthe book

    Strategic Analysis and Action.

    Strategic man-agement deals with complex and dynamic markets and ischaracterized with ongoing as well as yearly strategicplanning processes [30].

    This comprehensive model may seem like a lot ofwork; however, the process can be run through in more orless detail depending upon the importance of the reasonfor the segmentation. For example, if the company is po-tentially changing the whole business focus the processshould be run through thoroughly. A decision about distri-bution systems would not demand as thorough an analy-sis; the whole model should still be used but in less detail.

    The following model shows the process the companyhas to go through to find and select the segments that bestmatch its capabilities (Figure 6).

    The model should be understood in the following way.First, a description of the segment being focused on andthe expected development within it need to be given. Sec-ond, estimation needs to be made of what will be de-manded now and in the future for the company to effi-ciently target the segment. Next, estimate if the companysresources will be able to meet the estimated demands. Ifthey cannot, can changes be made within the company tomake it possible? If the answer is no, try another segment;if the answer is yes, continue the analysis by seeing if thecompanys management can meet the demands. If theycannot, see if changes can be made within the company tomake management capable of meeting the segments needs.If the answer is no, a new segment needs to be selected; ifthe answer is yes, continue the analysis to see if the organi-zational structure can meet the estimated demands, etc.

    Segments that seem attractive . . . may not

    suit the company.

    FIGURE 6. A segmentation selection process.

  • 483

    T

    HE

    D

    EVELOPMENT

    IN

    THE

    S

    EGMENTS

    (S

    TEP

    1). It isimportant to focus on the external factors that will influ-ence the success of each segment. The segments futuredevelopment should be estimated within at least the fol-lowing areas:

    the expected demands on the company the size of the segment and its expected growth the potential profit compared with the related risk the competition, number of competitors, their

    strengths, preferences, etc. Governmental and public moves customer demands technology existence of relationships with the customers in the

    segments and assessment of the difficulty expected indeveloping relationships

    assessment of the influence selecting a segment has onpresent relationships

    By estimating the development within the segments, itbecomes possible to evaluate whether the identified seg-ments are likely to be beneficial in the long run. For thosethat are, the next step is to compare the segments with thecompanies resources.

    R

    ESOURCES

    (S

    TEP

    2). Next, it must be consideredwhether the company can comply with the segments de-mands. Both the present and future demands required ofthe resources from the following areas need to be consid-ered to do so: customer needs, technology, demands, com-petition, political moves, handling of relationships, etc.

    The company should identify the present and future re-source base that would be required to target the segmentin the following areas: assets, financial areas, human re-sources, relationships, and image. To get a reliable pic-ture, it would be advantageous to look at the resourcebase throughout the different parts of the company, such

    as purchasing, sales, service, marketing, production, anddevelopment. It is important to evaluate the resourcescompared with the segments and not as a general evalua-tion of the companys strength and weaknesses. Next, thecompany must hold the present resource base up againstthat which would be required in the future to find andevaluate the critical gaps between them. The gaps shouldbe understood as the differences between the present andthe future situations. A critical gap is one in an area im-portant for the future handling of the segment and thuswill not necessarily be the biggest gap.

    After identifying the critical gaps, the action necessaryto reduce them needs to be considered. This could in-volve changes within the company or influencing thesegment to change. If a gap is too big to be reducedenough, it is necessary to start the process again with an-other segment. Otherwise, it is now time to look at thedemands the segment makes on the management.

    M

    ANAGEMENT

    (S

    TEP

    3). It is important to compare thedemands of the segment on the company, to the preferencesand expectations of the management. This involves under-standing the company and career directions preferred by in-fluential individuals and groups within the management.

    The current and potential gaps between the segmentsdemands and the managements preferred directionshould be identified. The company then needs to look atwhat organizational actions are necessary to close thegap. If the gaps cannot be closed, it may be necessary toselect another segment and start the process again, or seeif the changes can be met in the organization level.

    O

    RGANIZATION

    (S

    TEP

    4). Provided the company hasidentified the organizational capabilities demanded bythe segment, as well as those required to minimize anygaps at the resource and management levels, the com-pany can compare the demanded capabilities with the ca-pabilities it has today. Thus, the gaps in the organiza-tional capabilities can be found.

    . . . find a perfect match between segment demands and an optimal use of the

    companys capabilities.

  • 484

    Based on the missing demanded capabilities, it mustbe evaluated what changes in the companys culture, sys-tems, structure, management, policies, etc. would be nec-essary to eliminate the gaps. Often changes will beneeded in more than one of the organizational character-istics. The segment also needs to be evaluated to see whatchanges in it could minimize gaps in the organizationscapabilities.

    After identifying the required changes, it must be esti-mated whether these changes can be completed withinthe time available and whether the risk involved is ac-ceptable. If the changes demanded are impossible withinthe given time frame or the related risk is too high, it maybe necessary to go back and find another segment. How-ever, if a segment has reached this far in the analysis, it isprobably satisfactory and more beneficial to consider fur-ther changes within the organization. The next stagelooks at the strategic and implementation phases.

    STRATEGY AND IMPLEMENTATIONS

    Little attention has been given to the strategy and im-plementation phases [2, 23, 24, 27].

    The proposed model can help in both strategic devel-opment and implementation. During the selection pro-cess, a part of the strategy creation process already willhave been performed. Likewise, as internal factors are in-cluded when evaluating and selecting the segments, theconsiderations concerned and problems that may be ac-crued with implementation are revealed.

    However, implementation is not the final step, becausethe company still needs to react to dynamic internal andexternal changes.

    DYNAMICS

    There have not been many contributions in the areas ofdynamics even though it is recognized as an important

    area. Wind and Thomas [23] stress that dynamics re-quire explicit consideration in the segment researchmodel. Plank [2] notes that there are limited discussionsof feedback loops or other dynamic considerations. Hla-vacek and Reddy [27] who have done some of the morecomprehensive work in this area, state that literature todate has totally ignored the dynamic and changing natureof industrial market segments over time.

    Hlavacek and Reddy [27] suggest that by keying in onapplication requirements of the segments, it is possible tomonitor the impact of competitive activity and techno-logical change on industrial market segment boundaries.However, they do not give guidelines on this process.Neither do Wind and Thomas [23] though they do sug-gest using both an interactive research approach tomeasure changing responses to marketing stimuli and apanel survey to assess the changing segment structuresregarding products.

    Strategic management has continual competitive ad-vantages as one of its main goals. This is achieved by re-sponding to the changes in the surroundings. A continualmonitoring of the market is required to realize changesneeded. As segmentation models do not handle marketdynamics, it is of value to look at the way strategic man-agement handles dynamics and see how the theory can beadapted to suit segmentation.

    Lund and Lorentzen [31] suggest a continual dynamicprocess that can be adapted to the situation, consisting ofthe following tasks:

    monitor changes in the segments surrounding analyze the consequences of the changes realize changes needed in the company make the right decision at the right time carry out the decision the effectively

    When the segmentation is finished and the strategiesare created, it is important to realize what segment factorsare critical for the companys success, and they should becontinually monitored. Some of the critical success fac-

    This article uses a two-step

    selection process.

  • 485

    tors are likely to be the criteria that were critical in theidentification of the segments. Others could be critical as-sumptions made while developing the strategy, for exam-ple, the technology. Other critical success factors couldinclude the customer needs, relationships, technologicaldevelopment, and competitor offerings and moves.

    The company also needs to identify and constantlymonitor the internal factors that are critical to the com-panys success in the segment. By monitoring the inter-nal factors alongside the changes in the segments, thecompany can continuously identify the best match be-tween the company and segments. Achieving the bestmatch is not simply a matter of adapting to the segmentbut also of influencing the segment in the direction thecompany wants to go.

    By applying too narrow an approach, the companycould fail to see market opportunities or potential com-petitive threats. An approach could be too narrow by notlooking far enough into the future, or if it considers toonarrow a selection of the segments surroundings.

    The risks of having too narrow an approach can beminimized if the segment monitoring is combined withscanning the segments surroundings. To avoid collect-ing data that has no relevance to the segment, only theborders of the business area need to be scanned. Thingsthat should be scanned could include long-term trends insocioeconomic conditions, competitor situations, politi-cal moves and technological developments, etc. Thescanning is an ongoing process that can show new possi-bilities for and threats to the companys future perfor-mance and reveals attractive opportunities for consider-ation in other segments.

    Databases can be useful tools to assist in the continualmonitoring and scanning processes. However, an infor-mation system is not a simple answer. It needs thoroughdesign if the results are to be useful and will take time, re-sources, and motivation from within the company to bothmaintain it and analyze the results. Taking advantage oftechnology, such as the Internet, would allow sales sub-sidiaries and customers to contribute to the feedback loop.

    The first step is to determine the information sourcesthat will provide the data. It is important to use the criticalsuccess factors of both the segment and the company. De-pending upon the importance of the segments being mon-itored, other factors could be included choosing thosemost important to the segmentation process first. It thenneeds to be determined how the data for these variableswas initially measured and how the data can continue tobe gathered in the future. The database needs to highlightmovements in measurable variables and common themesthat appear in customer and company feedback. Move-ments highlighted for attention should reflect both the sizeof the changes or frequency of the common feedback andthe criticality of the particular factor in relation to thecompanys activity in this and other segments to avoidgiving unnecessary attention to irrelevant details.

    The monitoring should be supplemented by control soa control and monitoring system is created. Messagedmonitoring ensures the assumptions underlying the com-panys approach to the segments are still valid. Controlsystems can be used to determine whether the strategy isbeing implemented as planned to establish whether thestrategy is delivering the promised objectives or ifchanges are needed, if the companies moves have the ex-pected effect and if the results produced by the strategyare those intended. Together the two activities form asystem that as time progresses shows how the company isdoing in achieving the goals set for the segment in rela-tion to changes in the segment.

    Using such a system, it is possible to recognize and re-spond to environmental changes and to correct planningassumptions [32, 33].

    CONCLUSIONS

    This article has outlined some new areas of segmentation.First, the article suggests that it is important to realize

    where the market situation stands on a scale with simplemarket transactions at one end and complex relationshipmanagement at the other. Second, it suggests that segmen-

    A continual monitoring of the market is

    required to realize changes needed.

  • 486

    tation for the two different situations must be based upontwo different approaches. Relationship management needsa deep understanding of the customers characteristics,needs, and future directions, whereas this same informa-tion would be too time consuming to collect and too com-prehensive to use for the simple identification of similarcustomer needs and wants, as needed when segmenting forsimple market transaction situations.

    Third, the article suggests that the segmentation taskshould be to identify what kind of overall relationship thecustomer requires, and then to investigate the needs andwants of each type of interaction. Fourth, segment identi-fication must conform to the kind of overall relationshipand the needs and wants of the particular type of interac-tion. The selection of the segments should include howwell companies, within a particular segment, match thecompany making the segmentation.

    Fifth, turbulence in the market makes it important tohave a system for continuously monitoring and scanningfor changes in the markets and in close relationships ofstrategic importance. Finally, segmentation has value onmore than just strategic level.

    The outline above is only a step in the development ofa framework for a dynamic strategic industrial marketingsegmentation model. Its applicability still needs to beproven and further developed for specific situations.

    It is only possible to outline general management im-plications from the model: Who are the customers? What do the customers want? What do the customers do? How can the answers to the raised questions be ful-

    filled within our organization?

    REFERENCES

    1. Kotler, Philip:

    Marketing Management

    . Prentice Hall International Edi-tions, Upper Saddle River, NJ, 1994.

    2. Plank, Richard E.: A Critical Review of Industrial Market Segmentation.

    Industrial Marketing Management

    14,

    7991 (1985).3. Arndt:

    Market Segmentation.

    Universitetsforlaget, Bergen Oslo Troms, 1974.4. Wind, Yoram, and Cardozo, Richard: Industrial Market Segmentation.

    Industrial Marketing Management

    3,

    153166 (1974).5. Bonoma, Thomas V., and Shapiro, Benson P.: Evaluating Market Segmen-

    tation Approaches.

    Industrial Marketing Management

    13,

    257268 (1984).6. Jackson, Barbara Bond: Build Customer Relationships that Last.

    HarvardBusiness Review

    November-December,

    120128 (1985).7. Womack, James P., Jones, Daniel T., and Roos, Daniel: The Machine that

    Changed the World: The Story of Lean Production. Rawson, New York,NY, 1991.

    8. Hkansson, Hkan, and Snehota, Evan:

    Developing Relationships in Busi-ness Networks

    . Routledge, London, 1995.9. Hkansson, Hkan:

    International Marketing and Purchasing of IndustrialGoods: An Interaction Approach

    . John Wiley and Sons, New York, 1982.10. Shapiro, Benson P., and Bonoma, Thomas V.: How to Segment Industrial

    Markets.

    Harvard Business Review

    May-June,

    104110 (1984).11. Hutt, J., and Speeh, W.:

    Industrial Marketing Management.

    Dryton Press,New York, 1995.

    12. Webster, F., and Wind, Y.:

    Organizational Buying Behavior

    . Prentice-Hall Inc., Englewood Cliffs, NJ, 1972.

    13. Abratt, Russell: Market Segmentation Practices of Industrial Marketers.

    Industrial Marketing Management

    22,

    7984 (1993).14. Choffray, C., and Lillien, G. L.: A New Approach to Industrial Market

    Segmentation.

    Sloan Management Review

    Spring,

    1730 (1978).15. Sheth, J. N., and Sharma, A.: Supplier RelationshipsEmerging Issues

    and Challenges.

    Industrial Marketing Management

    26,

    91100 (1997).16. Harmel, L., and Prahalad, C. K.: The Core Competence of the Corpora-

    tion.

    Harvard Business Review

    Spring,

    7991 (1990).17. Blenkhorn, L., and Banting, P. M.: How Reverse Marketing Changes

    Buyer-Seller Roles.

    Industrial Management

    20,

    185191 (1991).18. Hill, R., and Hillier, T.:

    Organizational Buying Behavior

    . McMillian PressLtd., London, 1978.

    19. Dwyer, F., Suhrr, P. H., and Sejo, O.: Developing Buyer-Seller Relation-ships.

    Journal of Marketing

    51,

    1127 (1987).20. Ford, David: The Development of Buyer-Seller Relationships in Industrial

    Markets.

    European Journal of Marketing

    14,

    339354 (1980).21. Morgan, Robert M., and Hunt, Shelly D.: The Commitment-Trust Theory

    of Relationship Marketing.

    Journal of Marketing

    33,

    2028 (1994).22. Guillet de Monthoux, Pierre B.L.: Organizational Mating and Industrial

    Marketing ConservatismSome Reasons Why Industrial Marketing Man-agers Resist Marketing Theory.

    Industrial Marketing Management

    4,

    2636 (1975).

    23. Wind, Yoram, and Thomas, Robert J.: Segmenting Industrial Markets.

    Advance in Business Marketing and Purchasing

    6,

    5982 (1994).24. Dibb, Sally, and Simkin, Lyndon: Implementation Problems in Industrial

    Market Segmentation.

    Industrial Marketing Management

    23,

    5564 (1994).25. Boardman, Anthony E., and Vining, Aidan R.: Defining Your Business Using

    Product-Customer Matrices.

    Long Range Planning

    29(1),

    3849 (1976).26. Wind, Yoram: Issues and Advances in Segmentation Research.

    Journal ofMarketing Research

    XV, 317337 (1978).27. Hlavacek, James D., and Reddy, N. Mohan: Identifying and Qualifying Indus-

    trial Market Segments. European Journal of Marketing 20, 921 (1986).28. Fry, Joseph N., and Killing, J. Peter: Strategic Analysis and Action. 3rd

    Edition. Prentice-Hall, Englewood Cliffs, NJ, 1995.29. Chron, E.J., and Kleinschmidt, E.J.: A Review of Industrial Market Seg-

    mentation Research and a Proposal for an Integrated Segmentation Frame-work. Research in Marketing 2, 101115 (1985).

    30. Greenly, Gordon E.: Strategic Management. Prentice Hall InternationalLtd., London, UK, 1989.

    31. Lund, Jan F., and Lorentzen, Reidar: Foretaks-strategi-Teori og praksi.Universitetsforlaget AS, Oslo, 1992.

    32. Day, George S.: Strategic Market Planning. Prentice Hall International,London, UK, 1989.

    33. Muralidharan, Raman: Strategic Control for Fast-Moving Markets: Updat-ing the Strategy and Monitoring Performance. Long Range Planning 30,6473 (1997).

Recommended

View more >