Business-Level Strategy: Market Segmentation and Competitive Advantage
Business-Level Strategy
At its most basic, business-level strategy is about who a company decides to serve (which customer segments), what customer needs and desires the company is trying to satisfy, and how the company decides to satisfy those needs and desires. It is related to its mission statement.
Low Cost and Differentiation
Strategy is about the search for competitive advantage. A company has a competitive advantage if it can lower costs relative to rivals and/or if it can differentiate its product offering from those of rivals, thereby creating more value.
In commodity markets, competitive advantage goes to the company that has the lowest costs. Low costs will enable a company to make a profit at price points where its rivals are losing money. Low costs can also allow a company to undercut rivals on price, gain market share, and maintain or even increase profitability. Being the low-cost player in an industry can be a very advantageous position.
Although lowering costs below those of rivals is a particularly powerful strategy in a pure commodity industry, it can also have great utility in other settings.
Because its costs are so low, Walmart can cut prices, grow its market share, and still make profits at price points where its competitors are losing money. The same is true in the airline industry, where Southwest Airlines has established a low-cost position.
Differentiation
Differentiation implies distinguishing yourself from rivals by offering something that they find hard to match.
Nordstrom has differentiated itself from its rivals through excellence in customer service. There are many ways that a company can differentiate itself from rivals. A product can be differentiated by superior reliability (it breaks down less often, or not at all), better design, superior functions and features, better point-of-sale service, better after-sales service and support, better branding, and so on.
A Rolex watch is differentiated from a Timex watch by superior design, materials, and reliability; a Toyota car is differentiated from a General Motors car by superior reliability (historically new Toyota cars have had fewer defects than new GM cars); Apple differentiates its iPhone from rival offerings through superior product design, ease of use, excellent customer service at its Apple stores, and easy synchronization with other Apple products, such as its computers, tablets, iTunes, and iCloud.
Differentiation gives a company two advantages. First, it can allow the company to charge a premium price for its good or service, should it choose to do so. Second, it can help the company to grow overall demand and capture market share from its rivals. On the other hand, there are situations where successful differentiation, because it increases primary demand so much, can actually lower costs. Example: iPhone
The Differentiation-Low Cost Tradeoff
A low-cost position and a differentiated position are two very different ways of gaining a competitive advantage. The enterprise that is striving for the lowest costs does everything it can to be productive and drive down its cost structure, whereas the enterprise striving for differentiation necessarily has to bear higher costs to achieve that differentiation. Put simply, one cannot be Walmart and Nordstrom, Porsche and Kia, Rolex and Timex.
Value Innovation: Greater Differentiation at a Lower Cost
We use the term value innovation to describe what happens when innovation pushes out the efficiency frontier in an industry, allowing for greater value to be offered through superior differentiation at a lower cost than was previously thought possible. When a company is able to pioneer process innovations that lead to value innovation, it effectively changes the game in an industry and may be able to outperform its rivals for a long period of time.
This is what happened to Dell. After harnessing the power of the internet to sell PCs online, and coordinate the global supply chain, Dell outperformed its rivals in the industry for over a decade while they scrambled to catch up with the industry leader.
Three Approaches to Market Segmentation
There are three basic approaches to market segmentation that companies adopt.
First is to choose not to tailor different offerings to different segments, and instead produce and sell a standardized product that is targeted at the average customer in that market. This was the approach adopted by Coca-Cola until the early 1980s before the introduction of Diet Coke and different flavored cola drinks such as Cherry Cola. In those days Coke was the drink for everyone.
A second approach is to recognize differences between segments and create different product offerings for the different segments. This is the approach that Coca-Cola has adopted since the 1980s. In 1982 it introduced Diet Coke, targeting that drink at the weight and health-conscious. In 2007 it introduced Coke Zero, also a diet cola, but this time targeted at men. Coca-Cola did this because company research found that men tended to associate Diet Coke with women.
A third approach is to target only a limited number of market segments, or just one, and to become the very best at serving that particular segment. In the automobile market, for example, Porsche focuses exclusively on the very top end of the market, targeting wealthy middle-aged male consumers who have a passion for the speed, power, and engineering excellence associated with its range of sports cars. Porsche is clearly pursuing a differentiation strategy with regard to this segment, although it emphasizes a different type of differentiation than Toyota.
Market Segmentation
Business-level strategy begins with the customer. It starts with deciding who the company is going to serve, what needs or desires it is trying to satisfy, and how it is going to satisfy those needs and desires. Answering these questions is not straightforward, because the customers in a market are not homogenous.
Market segmentation refers to the process of subdividing a market into clearly identifiable groups of customers with similar needs, desires, and demand characteristics.
When they decide to serve many segments, or even the entire market, producing different offerings for different segments, we say that they are pursuing a segmentation strategy. When they decide to serve a limited number of segments, or just one segment, we say that they are pursuing a focus strategy.
Market Segmentation by Consumer Groups
Communications research identifies the target markets a company seeks to serve. Target markets exist in two areas: consumer markets and business-to-business markets, known as market segments.
Requirements for a market segment to be viable:
- People or businesses within the segment are homogeneous.
- Segments are distinct from other segments and from the general population.
- The market segment must be large enough to be financially viable.
- The market segment must be reachable through media or marketing communications method.
Market segmentation: Consists of identifying the specific consumer and business groups that are most likely to purchase the brand based on their needs, attitudes, and interests.
Methods of segmenting customer markets:
- Demographics
- Psychographics
- Generations
- Geographic
- Geodemographics
- Benefits
- Usage
Segments Based on Demographics
It is one of the most important methods of segmentation.
Demographics involve several variables, among them:
- Gender
- Age
- Education
- Income
- Ethnicity
Gender
Men and women purchase different products, buy similar products with different features (deodorants, beer), desire products for dissimilar reasons (men prefer bigger TVs to watch sports), and buy the same products after being influenced by different kinds of appeals through different media.
Official reports show that women control 66%, or $12 trillion of the world’s annual consumer spending.
Age
Marketing programs often concentrate on people of certain age, such as children, young adults, middle-age adults, and senior citizens. Often combined with another demographic, such as gender.
If brand loyalty can be obtained at a young age, a company might retain a customer for a lifetime.
Tweens (ages 9 – 11) have great power of influence. Their advanced digital knowledge helps to get attention.
Income
A family’s level of income and educational background are often closely related.
Most of the time members of lower-income homes, often with less education, primarily purchase necessities such as food, clothing, and housing needs (they also buy more expensive products but not on a frequent basis).
If income and educational achievements increase consumers will buy more expensive goods and services (fancy higher-end restaurants, expensive clothing, sophisticated vacation trips, organic groceries, and so on.
Ethnicity
Only in the U.S.A ethnic minorities represent $2.5 trillion in buying power.
Hispanics are a viable ethnic group for market segmentation.
There are pros and cons. Some ethnic groups want marketing campaigns only focused on them. That increases expenditures.
The plus side is the increasing rate of mix-ethnic relationships. Their kids have lower prejudices towards retail campaigns.
Psychographics
Psychographics emerge from patterns of responses that reveal a person’s activities, interests, and opinions (AIO).
It can be combined with demographic information.
Strategic Business Insights provides a classification of lifestyles using psychographic segmentation.
Geodemographic Segmentation
Geodemographic segmentation identifies potential customers using:
- Demographic information
- Geographic information, and
- Psychographic information.
For example, colleges and universities use geodemographics to locate zip codes of communities that match particular student profiles.
Usage Segmentation
Includes: heavy users, average users, casual or light users, and nonusers.
The goal is try to provide the highest level of service to the best customers while promoting the company to the other two usage groups in the attempt to move them up to the next usage group.
Ways to identify heavy users: bar-code scanners, point of sale systems; and data from credit, debit, and so on.
For many companies, 10 or 30% of their customers generate 70 to 90% of total sales.
Business-to-Business Market Segmentation
The primary goals of business segmentation efforts are to group similar organizations into meaningful clusters in order to provide better service.
Categories:
- Segmentation by industry
- Segmentation by size of business
- Segmentation by geographic location
- Segmentation by product usage
- Segmentation by customer value
Segmentation by Size
Some market segments may be based on a company’s sales volume or number of employees. Larger firms needs differ from mid-size and small companies.
The benefits packages should be different too. Examples: Pacifico, Rimac.