Market segmentation: an integrated framework

Market Segmentation: an Integrated Framework Y. Datta

MASS MARKETS ARE DEAD. Today's m o r e demanding customers want variety and choices. In a global, fast-changing competitive environment, market segmentation and product differentiation have become the battleground where competitive wars are now being fought. Thus, in today's fragmented markets, a good understanding of how a market is, or can potentially be, segmented should no longer be a matter of interest to marketing analysts alone. It should be a central concern of top management and strategic planners as well. Pine et a l . 1 go a step further. They suggest that customers do not just want more choices, but they demand exactly what they want, when they want and how they want it. Today, they add, computer technology and flexible manufacturing systems make it possible to customize many goods and services for individual customers in large volume at relatively low cost. So, they suggest that if a business wants to keep customers forever, it should start building an on-going learning relationship with each customer. Thus, they are calling for the ultimate in market segmentation: a segment of one. MOST

Two Segmentation Examples First, we present the case of the Apple Computer Corp. 2 to show how a good understanding of the way a market is segmented can be critical to business success. According to Apple's former CEO, John Sculley, Apple designed its Macintosh PC to be user friendly: achieved by its visual-graphic-intuitive interface as opposed to the more rigid environment offered by character-based IBM-compatibles. As Gelernter sees it, Apple had incorporated into the Macintosh "the most elusive equation in the technology world: Power plus simplicity makes elegance" (italics added). However, in the words of Apple's Pergamon PII: S0024-6301(96)00073-8

cofounder, Steve Wozniak, Apple saw itself as a hardware company, and chose--unlike Microsoft-Long Range Planning, Vol. 29, No. 6, pp. 797 to 811, 1996 Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0024-6301/96 $15.00+0.00

not to license Macintosh's operating system. But, in order to get this beautiful operating system, adds Wozniak, customers had to "buy our hardware at twice the price". Thus, Apple chose the path of shortrun profits--with a 'premium' price strategy--over long-run market share: a strategy which discouraged Microsoft Windows users from switching. Second, the company thought the best technology was going to win. But the best product and higher quality does not always win because people are able to adapt to the standard product, even when it is not the best. A case in point is the failure of Dvorak, the more efficient and easier-to-learn keyboard, to displace the conventional typewriter with the QWERTY keyboard. 3 In a market such as the PC, where the main product--the computer--is part of a larger system, the most critical dimension in segmenting a market is not h o w good an operating system is, important though this is, but rather h o w widely-accepted one is in relation to the other. In other words, the real basis of competition is between the operating system which has become the industry standard and the one that has not. It is this factor which drives the industry in terms of availability--and p r i c e - - o f application software and computer hardware. Thus, with a market share well below 10% Apple seems to have lost the PC war to Microsoft Windows. The other example is that of tiny Church & Dwight, which entered the US toothpaste market in 1989 with the Arm & Hammer Dental Care brand, gaining 6.5% market share at the end of 1990 and retaining that market share for the year ending May 1995. In a joint venture with Occidental Petroleum, Church & Dwight wanted to expand the use of the former's key resources: the reputation of the Arm & Hammer brand, its technological capability to produce the ingredient baking soda and its access to mass marketing channels. With a brilliant advertising campaign during the preceding decade, Arm & Hammer had dramatically raised consumer awareness of its baking soda--in its use and association--as a refrigerator deodorant. So, exploiting the now well-known reputation of baking soda as a deodorizer and freshener--and its longstanding reputation as an effective dentifrice-Church & Dwight successfully launched the Dental Care brand nationally in 1989. Now almost every major brand offers a baking soda toothpaste. Thus, Church & Dwight created a new market segment that the two industry giants--P&G and Colgate--had ignored. 4 (A further analysis of the toothpaste market can be found towards the end of this article.)

Marketing' s Demand-oriented Approach to Market Segmentation Every market has two sides: demand and supply, customers and suppliers. It is only when the two sides interact that a market develops. While this meaning Market Segmentation: an Integrated Framework

of the term 'market' is widely accepted, marketers and strategists have traditionally adopted a rather limited view which is demand oriented. They define market segmentation in terms of customers--with a focus on 'people' characteristics. 5 An opposite view, which may be called 'product' segmentation, is a supplyoriented approach to market segmentation which starts with product characteristics.

Strategic Importance of Supply-side Segm en ta tion One of the major strengths of the marketing area is its customer orientation. Customers are the ultimate arbiters of who succeeds in the marketplace. Marketers' emphasis on the customer is therefore quite laudable. Nonetheless it is not very meaningful to discuss market segmentation without knowing what your competition is, as well as the resources and capabilities which are necessary to be competitive in each segment. Thus, when an enterprise is competing in or considering entry in to a specific product-market, it needs to address the following supply-side concerns: [3 What are the structural characteristics of the market? Its major products--including their subs t i t u t e s - a n d the customer benefits or needs they can serve, its major technologies and its major competitors. H o w should an enterprise define its business? [3 What is the price-quality segmentation profile of the market? What is the competitive intensity in different price-quality or benefit segments? Are there gaps in some segments or niches which may be a source of future growth? [3 What is the relationship between market segm e n t a t i o n - a n d its counterpart positioning--on the one hand, and corporate and competitive strategy on the other? [3 How is market segmentation related to product differentiation? [3 H o w does a business communicate the quality of its brand(s) and h o w do customers perceive and evaluate such quality?

Need for an Integrated Approach to Market Segmentation Regardless of h o w one approaches it, market segmentation must aim at understanding customer behaviour and the benefits--or quality--they seek from different products. Therefore, product attributes have to be a central part of such an analysis. They are the basis upon which sellers try to differentiate themselves from their competition. Product characteristics-e.g, benefits, price-quality segmentation, physical product attributes and so on--also form the lens through which customers usually search for benefits and perceive differences between products and brands.

So even if one were to approach market segmentation from the demand side, product charact e r i s t i c s - a n d the concerns of the supply s i d e - cannot really be separated from this analysis because the two sides are so closely interwoven. Thus, we need an integrated approach to market segmentation which includes both the demand and supply sides of competition, where 'people' [customer] and 'product' characteristics are not mutually exclusive paths to market segmentation but, rather, two sides of the same coin. 6 The product characteristics approach makes it possible to reverse the normal sequence of market segmentation analysis: focusing on customers and their needs. Instead, an enterprise could start with its given resources first and then figure out the customer needs it could satisfy with those resources on a competitive basis. The basic premise of this article is that the product characteristics approach is both easier and a more actionable way of analysing h o w a market is--or can b e - - s e g m e n t e d than the traditional marketing approach that typically begins with the customer. It focuses both on customer benefits or needs and the resources necessary to satisfy them. This approach makes it possible to develop a panoramic view of the structural characteristics of a market. Most industries have complex structures which are not easily understood nor objectively defined. Market segmentation is concerned not just with customers' known needs, but also with anticipating their latent needs. So, firms competing in a market may have different perceptions of how a market is segmented. How accurately such perceptions match reality can be an important source of competitive advantage. 7 The integrated approach suggested here can be a helpful guide in creating an industry map for understanding its competitive scope and dynamics. Strategists need such a map before making strategic decisions about entering a new market or a new segment and the resources needed to compete in it. 8 We have proposed an integrated framework of market segmentation which can be found in Figures i and 2. Table 1 contains many examples of application of the product characteristics approach to market segmentation, Table 2 indicates how different benefits call for different resources and Table 3 provides a comparative overview between the traditional versus the proposed approach to market segmentation. Figure 3 and Table 4 demonstrate a practical application of the proposed framework to the US toothpaste market.

'Market' Segmentation Marketers have traditionally looked at market segmentation in terms of customer characteristics. They recognize two types of variables for this purpose: 1.

general customer characteristics which focus on the customer; 2. benefit-situation specific customer characteristics with a concentration on their needs. However, it is the first category of variables which has generally received the primary attention in the marketing area. Several marketers have n o w begun to question this focus on general customer characteristics, g They offer two main arguments. First, as Dickson argues, market segmentation is not synonymous with customer segmentation. Second, product benefits--combined with person and situation--provide the most useful and actionable foundation for segmenting a market. Most of the market segmentation literature in marketing has addressed this issue in relation to consumer markets, as any marketing text w o u l d testify. So, we too will use consumer markets as the basis of our discussion in this section. Marketers recognize three key general characteristics in segmenting consumer markets: demographics, socioeconomic characteristics and psychographics: 1°

El Demographic variables (sex, age, life-cycle stage etc.) are commonly used in identifying broad customer groups. However, demographics pose practical problems for segmentation because they are not particularly actionable. They act more as constraints than as a cause for behaviour. Therefore they should be used mainly to reduce the number of possible alternatives. E3 Social class has a significant influence on consumer choice in many markets, such as cars, clothing, home furnishings and leisure activities. El While psychographic variables (personality, lifestyle) can be useful in segmenting markets, their use without considering the situation is a "game of shadow boxing rather than target marketing".

'Product' Segmentation Segmentation based on product characteristics can be explored from two perspectives: external and internal. The external perspective is represented by what marketers call the marketing mix. Traditionally, marketers recognize four major variables in the marketing mix--the four Ps: product (quality), price, place (distribution) and promotion (advertising). These four together are the primary instruments a business uses to serve its customers, to communicate to them and to differentiate itself from the competition. It is also generally through these characteristics that customers perceive differences between products, brands and segments. The internal perspective is concerned with a company's resources and capabilities: a subject which is known as the resource-based view in the strategic management literature. 11 Using the term 'capabilities' for internal resources, Stalk et al. divide them into Long Range Planning Vol. 29

December 1996

I CUSTOMER NEEDS I

I Consumer I

I Industrial I

[ Geographic I" t Dem°graphic I I Sociographicp Psychographic ]

Situation J Physical product attributes

ir

I Product usage andJ attributes

Tangible

Intangible

__•

Channels of distribution and service

~

Technology

*The term market has been used here in a broad sense to include close substitutes even though they may technically be considered part of another "industry"

two categories: 1. core competence which reflects technological skills; 2. support infrastructure. Resources can also be viewed as tangible and intangible. But the usefulness of an internal resource for market segmentation is directly related to whether it yields benefits to the customer. Intangibles, such as corporate and brand reputation, are considered an internal resource, as Robert Grant suggests. Yet they are also an integral dimension of customer-perceived quality. Since channels of distribution and service-a critical part of support infrastructure, another resource--are also an important part of the marketing mix, that leaves technology as the sole contributor from the resource side. Based on the above arguments and adopting an integrated approach, we suggest the following five factors as major product characteristics: • • • • •

type of market; price-quality segmentation; channels of distribution and service; product quality; technology.

Market Segmentation: an Integrated Framework

Type of Market Depending upon the market, the type of demand can be divided into different segments such as those indicated below: • original equipment manufacturer (OEM) versus replacement market (e.g. automobile parts); • new versus used (e.g. automobiles); • buying versus leasing versus renting (e.g. automobiles); • 'firsts' versus 'seconds' (e.g. athletic shoes); • 'first-run' versus 'second-run' (e.g. movies); • regulated versus non-regulated (e.g. prescription versus non-prescription drugs).

Price-Quality Segmentation According to the PIMS research and that by Gale, customer-perceived quality is the single most important factor affecting the success of a business in the long term. 12 Quality cannot, however, be meaningfully separated from price in formulating competitive strategy. Regardless of the level of quality,

PRODUCT CHARACTERISTICS /

L Type of market "Premium" "Mid-price" "Economy"

]

OEM vs replacement New vs used Buying vs leasing "Firsts" vs "seconds" "First-run" MS "second-run" Regulated vs non-regulated

Channelsof distribution and service Basic ~ technology

Performance Convenience Reliability Conformance Durability Serviceability Aesthetics

*Based on Garvin(1988):"PerceivedQuality" includedin Figure 1. Also the dimension "Features"is replaced by "Convenience"; "Features" includedunder PhysicalAttributes.

customers generally will not buy products they cannot afford, nor pay for quality they may not need. So, sellers often offer different grades of quality at different price levels in response to customer differences in income, social class, psychographic characteristics and situation. Although the number of major price-quality segments can vary from product to product, many markets can be divided into three basic price-quality segments: premium, mid-price and economy. Price-quality segmentation is closely tied to corporate strategy. It can be a good indicator of segment gaps which may be targeted for future growth. For example: E3 The most celebrated and successful is the classic example of General Motors (GM). In 1921 Sloan rationalized GM's product line in five price-quality segments representing "a car for every purse and purpose"--Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac. 1:~

Company reputation

Operating system or standard

Core competence

Product design

~

Process design

Lt Bran0name i

Size Features Packaging "Looks" Ingredients Components Taste

O To supplement its mid-price Whirlpool line, the Whirlpool Corporation acquired KitchenAid and Roper brands which represented, respectively, the premium and economy segments of the major appliance industry. Maytag has also followed a corporate strategy similar to that of Whirlpool. ~4 [3 Marriott, long a major player in the upscale hotel segment, decided to expand its presence in the US lodging industry by entering the mid-price segment through the Courtyard chain and the economy segment via the Fairfield chain. 15 Price is often used by a business to position itself within a price-quality segment in an attempt to differentiate it from its competition. We cite just two examples: [:3 When Sloan targeted a car at each of the five price segments in the US automobile market, as described earlier, he positioned GM cars at the top of each segment. Long Range Planning Vol. 29

December1996

Product characteristics

Some real-world examples

Creating a segmentation profile of a market: identifying major segments and nEhes Price-quality segmentation GM segments the US automobile market in five price-quality segments in 1921 Product class (automobiles) Sedan; sports/sporty car; minivan; station-wagon; Sp.-utility vehicle; light pickup truck Product size (PCs) Tower; desktop; laptop; notebook; subnotebook; palmtop; wallet Product benefits (toothpaste) Health; taste, colour and convenience; appearance; aesthetics; economy Diversifying into new segments~niches or filling segment gaps Price-quality segmentation Whirlpool acquires the premium Kitchen-Aid and the economy Roper brands Channels of distribution/service Dell opens a new marketing channel in the PC market--direct mail; L'eggs distributes panty hose through a non-traditional channel--supermarkets Product class Chrysler discovers a hot market: the minivan segment long ignored by its competition Source of market power or competitive advantage Operating system MS Windows (versus Apple Macintosh); Intel's microprocessors; VHS (versus Betamax) Positioning or differentiating a brand Price-quality segmentation Anheuser Busch positions Michelob as the first national premium beer in the USA Channels of distribution Honda, Toyota and Nissan establish separate dealerships for their luxury car lines Product class Embassy Suites uses the "Garfield" advertising campaign to differentiate suite hotels from standard upscale hotels, such as Hilton, Hyatt, Marriott and so on Product benefits Reliability (Maytag); safety (Volvo); user-friendly (Macintosh) Process technology Instant picture (Polaroid); custom-blending gasoline pumps (SUNOCO) Communicating a brand's quality and its perception~evaluation by customers Product The first automobile in the early 1900s: "horseless carriage" Product appearance Fit and finish (automobiles); kicking of tires by a bear in a Honda automobile commercial Ingredients Arm & Hammer baking soda in a toothpaste for conveying a "clean and fresh feeling" Packaging P & G's Crest toothpaste in the "Neat Squeeze" tube Component--storage area Honda positions its family of products--lawn mowers, tractors, generators etc.--around two shared attributes: Honda's light, small engine expertise and the two-car garage Brand name Danish name H~agen-Dazs lends cachet to a superpremium New York ice cream Testimonial P & G's Crest secures the first-ever endorsement by the American Dental Association Process technology Zenith's advertising theme of hand-wired TV sets during the 1950s and 1960s *Many of the examples herein are drawn from various sources in the References section.

D Leigh reports, in an apparent reference to Fairfield Inn, that Marriott first decided to target this new chain at the economy segment. Marriott then chose to position Fairfield at the upper end of the pricing range within that segment.

Product Quality Product quality can be divided into two broad categories: 1. physical product attributes; 2. product benefits.

Physical Product Attributes Channels of Distribution and Service Channels of distribution/service are an important part of the marketing mix because it is through them a seller can serve his customers. At the same time, they can also be a key ingredient in the capabilities of a business and a significant source of competitive advantage. For example, Stalk et al. say that Honda's expertise in dealer management was an important factor in its success in several diverse markets, e.g. motor cycles, cars and lawn mowers. Market Segmentation: an Integrated Framework

Physical product attributes can vary a great deal from one product to another and include such variables as ingredients, components, size, features, packaging, looks, taste and so on. They may be: 1. associated with benefits, either directly or indirectly, through a link to a broad or narrow customer group or 2. they may be used by customers as an indicator of quality. For example, extended-stay hotels, such as Marriott's Residence Inn, are targeted mainly at ]ong-stayguests. Similarly, the electric car immediately brings to m i n d a smoke-

Benefit segment

Corporate resources

Some examples of opportunities missed or exploited

Performance

Engineering innovation; core competence

Using its small gasoline engine skills, Honda enters the US home lawn-mower market positioning itself in the largely vacant premium segment BMW enters the US luxury car market catering to 'Yuppies' who wanted a high-performance car which is "fun to drive": a segment Detroit had ignored

Engineering innovation; brand reputation

Reliability

Product engineering; highquality parts; rigid quality control Process engineering

Maytag Corporation successfully differentiates its Maytag brand by focusing on reliability and positions itself in the premium segment of the major appliances market RCA introduces printed circuit boards in its TV sets in 1955, but loses the market share leadership to Zenith because the process was premature and unreliable

Ease of use

R & D capability

Apple Macintosh loses the market share war with MS Windows

Convenience

Process engineering R & D capability; OEM licensing

SUNOCO's custom-blending gas pumps JVC's VHS format becomes the standard in the VCR market, ultimately forcing out pioneer Sony's Betamax because VHS offered more viewing time Kodak decides in 1970 to focus on the Iow-tech, lowprice, easy-to-use, cartridge-loaded 110 mm pocket camera for the casual picture-taker, and leaves the pricier, high-tech 35 mm segment to Japan. Now 35 mm cameras have almost wiped out the 110 mm camera because it can offer both performance and easeof-use

Product engineering; access to marketing channels; film-making capability

Portability

R & D capability; core competence

Sony has used its miniaturization capability as a major source of competitive advantage, and has introduced innovative products such as the transistor radio, Walkman and so on

Guaranteed delivery/speed

Integrated carrier system with its own fleet of jets

Federal Express creates the express delivery market: a segment the traditional air cargo industry totally missed Polaroid introduces the instant camera

R & D capability Aesthetics

Access to key inputs; brand reputation; access to marketing channels

Church & Dwight enter the US toothpaste market with Dental Care to exploit Arm & Hammer's favorable brand name and baking soda's image of "a clean and fresh feeling"

Economy

Flexible production system; rigid quality control

Dell enters the PC market offering relatively lower prices and more features through a new low-cost channel: direct mail (versus IBM's salesforce and Compaq's dealer network) WaI-Mart becomes the largest and most profitable retailer in the world by making inventory replenishment the centre of its strategy, resulting in a cost structure that allowed it to offer quality goods at every-day low prices

Inventry and logistics control; company-owned truck fleet; on-line information system; close touch with suppliers; 'hands-on' management

*Many of the examples herein are drawn from various sources in the References section.

free car.

Likewise, in evaluating a car customers may judge its quality "by the alignment of body panels, or the sound the door makes when you close it"? 6

Product Benefits

Product benefits are of two types: 1. tangible and 2. intangible. Tangible benefits,

like physical product attributes, can vary substantially from one product to another. Quality is quite complex and multi-dimensional. Garvin 17 has identified eight distinct dimensions of product quality (see Figure 2 for details). Intangible benefits can be divided into three Long Range Planning Vol. 29

December 1996

Traditional

Proposed

Starts with the customer

Starts with the product

Focuses primarily on customer benefits

Focuses on customer benefits and the resources necessary to satisfy them

Supply side generally ignored

Industry structure central to market segmentation and strategic group analysis

Relatively more difficult to apply

Easier to use and more actionable; lends itself more easily to product differentiation and positioning

Communicating messages of product quality more difficult because customers usually perceive and evaluate q u a l i t y - - b e n e f i t s - - u s i n g product characteristics

Much easier to communicate to customers

Importance of price-quality segmentation not adequately recognized

Plays an important role

Does not lend itself easily to corporate-strategy decisions about defining a business, or entering a new market segment and identifying the resources needed to compete in it

Far easier to make such decisions

Market segmentation and product differentiation cannot be compared: because market segmentation is defined in terms of customer characteristics only

Easy to make this comparison because product characteristics are the basis for both

A common basis for analysing a market which serves both consumer and industrial customers not possible using customer characteristics

Product characteristics make it possible to have a common frame of reference for both

Aesthetics

Appearance

1

1

White Anti-stain teeth

1

Clean, fresh feeling

Super-premium

Taste, Colour and Convenience

Health

1 Natural ingredients

Gels Desensitizing _ Anti-cavities _ Anti-plaque _ Anti-tartar Colours/stripes teeth Anti-gingivitis Unusual flavours

Premium

I

Mid-price

Low price

Pum )s or other special containers

Economy

*In a 1968study Haley(see References)identifiedfour major benefit segments in the US toothpaste market: (1) decay prevention, (2) bright teeth, (3) flavour and appearanceand (4) low price. These benefitsegmentswere occupied,respectively,by: (a) families with children, (b) young marrieds, (c) children (as brand deciders)and (d) price-orientedbuyers.

Market S e g m e n t a t i o n : an Integrated F r a m e w o r k

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Long Range Planning Vol. 29

December 1996

categories: 1. corporate reputation, 2. brand image and 3. brand name. Customers generally consider corporate reputation as an indication of whether the company is a "substantial, committed player" in the industry. 18 Brand image is generally concerned with reputation for quality a brand has, but it may also be related to a product's use or association, such as Arm & Hammer's baking soda, as mentioned earlier. However, a brand's reputation for quality should not be confused with core competence, because it is the result of performing some important activities well. 19 A favourable brand image can be a powerful competitive weapon that can last a long time. So, in today's complex and over-communicated society a business needs to go beyond share-of-the-market and cultivate share-of-the-mind as well. 20 Whereas the benefits of company reputation and brand image are better understood, the importance of brand name may not be so apparent. When the Coca Cola Corporation replaced Coke with New Coke in 1985, Coca Cola's rationale was that it was offering customers better taste. But to millions of Americans it meant depriving them of an important part of their heritage. To them Coke was not just a soft drink; it was " w h a t America is all about". It was this strong emotional bond with the 100-year old brand which forced the Coca Cola Corporation to bow to public pressure and reintroduce Coke as Coke Classic. 21 In general, however, brand name is more useful in creating a brand image as an instrument of communicating its quality--real or imagined, tangible or intangible--than a customer benefit per se. For example, Procter & Gamble (P&G) has very successfully used different brand names to target each to a different benefit segment--Tide for 'white', Cheer for 'whiter than white' and Bold for 'bright'. Brand names that clearly reflect their benefits are generally likely to be more successful than those that do not--e.g. Sears' 'Die-Hard' battery, P&G's 'Head & Shoulders' shampoo and Unilever's 'Close-Up' toothpaste. 22

menting a market. Segmentation based on an operating system may also be translated into a benefit segment which can then become the foundation for brand positioning. For example, as indicated earlier, Apple Computer Corporation has positioned its Macintosh as user friendly and easy to learn. A widely-accepted operating system or standard can become a major resource and a tremendous source of market power. Microsoft's Windows operating systems is an excellent example.

Basic Technology What do we mean by core, or basic, technology? First, it must be a specific 'skill': not just a theory. Second, the technology must be central rather than incidental to the product or service. 23 Many products grounded in different technologies, such as steel, aluminium and engineered plastics, are commonly considered different 'industries'. But they often compete as substitutes in the same market (e.g. the automobile), each offering different benefits--e.g, light weight for aluminium and engineered plastics over steel--and so may be considered different segments in the markets in which they compete. 24

Technology

Core Competence Hamel and Prahalad define core competence as a bundle of skills and technologies that allows a company to offer specific benefits to customers. This capability does not depend merely upon possession of discrete skills or technologies, but requires a blending of several skills and integration of different functions. For example, Sony's core competence of miniaturization offers the benefit of 'pocketability' or portability. Similarly, Wal-Mart's core competence is logistics management which permits the company to offer benefits of choice, availability and value. One advantage of this concept, as Boardman and Vining have noted, is that business definitions based on traditional industry (supply) or market (customer) perspectives may not be able to identify competitors that share a common core competence.

The last of the five major product characteristics is technology, of which there are five major facets:

Product Design

• • • • •

operating system or standard; basic technology; core competence; product design; process design.

Operating System or Standard An operating system or standard is usually a general standard that governs the basic design of a product in a significant way. In some situations a single standard may exist in an industry; whereas in others mare than one standard may co-exist at the same time. When more than one standard exists it can then be a basis for segMarket Segmentation: an Integrated Framework

Three factors deserve attention here. First, as the runaway success of the sports car Mazda Miata shows, customers are now increasingly taking a holistic view of products which they view not merely as bundles of attributes, but as a gestalt. As one Detroit executive commented: "You could never produce the Mazda Miata solely from market research. It required a leap of imagination to see what the customer might want"--i.e, a focus on the customer's latent needs. 25 Second, growing global competition--in particular from lean producerswis putting a pressure on company prices and margins. Now prices are increasingly being set by the market--the customers--in m a n y industries in which product life cycles have become

very short. So many managers and writers advocate the need for controlling tomorrow's costs through today's designs by adopting the new imperative of target costing: as opposed to the more comfortable tradition of cost-plus p r i c i n g . 26 Third, early proactive efforts by a business to secure cooperation of major OEM producers--through licensing--toward making its product design an industry standard can yield rich dividends. Such a prize can be an important source of competitive advantage or market power. For example, Matsushita's (JVC) VHS format became the industry stand a r d - f i n a l l y driving out Sony's pioneering Betamax design--for a very simple reason: the VHS offered 4-6 hours of viewing time, as opposed to Betamax's 2 h o u r s . 27

Process Design

In industrial markets process design or technology can be an important basis for segmenting a market. For example, colour television sets are produced differently in the USA, Europe and Japan. As such, the process technology employed has a direct effect on the producers' demand for testing equipment, tooling and components. 28 Even process technology, usually not visible to the customer in the manufacturing sector, can sometimes produce customer benefits and so may be the basis for brand positioning or product differentiation (see Tables 1 and 2 for examples).

An Integrated Framework of Market Segmentation Market or industry segmentation is closely tied to corporate and business strategy; it is the building block for analysing strategic groups in an industry Two major factors explain their interdependence. First, different industry segments generally have diverse structural characteristics that call for different competitive capabilities. Second, competing in different segments often requires resources which are commonly shared.

Relating Market Segmentation to Industry Boundary and Business Definition It is widely felt that market boundaries are changing rapidly today. Hamel and Prahalad and others have criticized the practice of defining a business narrowly in terms of a product market, e.g. the copier business, the camera business and so on. In the same vein, analysts have complained that the British financial institutions are product and price-oriented rather than market led. 29 In the last few years several major corporations have pursued a diversification strategy that defines their business in overly broad customer needs, e.g. travel and financial services, and such efforts have not been very successful either.

Abell offers a business definition that is neither too narrow nor too broad. His view of a market includes both the supply and the demand sides of competition. He says the outer boundaries of a market are defined by interchangeability or cross-elasticity of demand between a product and its substitutes. He suggests a dynamic framework for defining a market that includes customer groups, customer functions or needs and technologies.

Market Segmentation and Product Differentiation No general agreement exists in marketing about how market segmentation is related to product differentiation. In a review of the literature, Dickson and Ginter found considerable variation in h o w various authors defined the two terms. Consequently, contrary to the marketing tradition, they offer a definition of market segmentation which is based on product characteristics: both tangible and intangible. Each segment is different from the other because the brands offered in each carry a different price tag and a different combination of product characteristics. They define product differentiation as the customer perception of differences between a brand and its competition on any product characteristics including price. They, along with Schnaars, cite Mercedes-Benz as an example of product differentiation in the automobile industry. 3° As reported in a recent issue of Consumer Reports, the medium-sized Mercedes-Benz E-Class model has a sticker price range of $39,900-$49,900 in the luxury segment. In contrast, a similar size Ford Taurus has a price that is less than half as much, $17,995-$22,000, i.e. a part of the mid-price segment. Clearly, it is much more meaningful to compare the Mercedes E-Class with other cars in its own class--such as BMW's 5s e r i e s - r a t h e r than with Ford Taurus which competes more directly with moderately-priced cars like the Chevrolet Lumina and the Toyota Camry. Thus, based on the above argument, we suggest that product differentiation should be visualized two ways: 1. differentiation across or between segments and 2. differentiation within segments. But what is it that provides a link between the two? The answer is the concept of price-quality segmentation. For example, Four Seasons, Hyatt, Holiday Inn and Fairfield Inn are competing, respectively, in the luxury, upscale, mid-price and economy segments of the US lodging industry. This is an example of differentiation between segments. In contrast, as reported earlier, positioning Fairfield Inn at the upper end of the pricing range in the economy segment is an example of differentiation within a segment. In general, one w o u l d expect greater differentiation between segments than within segments. Similarly, one w o u l d normally find more competition within rather than between segments. Thus, in our view the difference Long Range Planning Vol. 29

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between market segmentation and product differentiation is more a matter of degree than of kind.

Proposed Integrated Framework of Market Segm en ta tion Based on the previous discussion, we propose a threedimensional framework for market segmentation which includes: 1. customer characteristics, 2. product characteristics and 3. situation-benefit-specific customer characteristics. These three dimensions are consistent with Abell's view of business definition mentioned earlier. A simple illustration of this framework appears in Figures 1 and 2. While Figure 1 presents an overview, Figure 2 provides the necessary details. The concept of market segmentation presented here is simply a way of viewing a market-the characteristics of its customers and p r o d u c t s - regardless of the competitive strategy a firm may have. In Table 1 we have presented same examples to illustrate h o w various product characteristics, as portrayed in Figure 2, can play a useful role in several ways: 1. providing a segmentation profile of a market, 2. identifying sources of potential growth and spotting segment gaps, 3. offering sources of product differentiation and positioning and 4. communicating a brand's quality and its perception/evaluation by customers. Table 2 contains some actual illustrations of how different customer benefits offered in a product-market call for different corporate resources, and Table 3 provides a comparative overview between the traditional approach to segmentation vis-a-vis the perspective suggested in this article.

A Two-step Approach to Market Segmentation No single measure of market segmentation can be appropriate for all purposes. Such purposes can be divided in two categories that complement each other: the more macro demands of corporate and competitive strategy on the one hand, and the more micro concerns of target marketing and positioning on the other. We suggest that a two-stage approach to market segmentation can effectively bridge the gap between these two decision-making needs. Shapiro and Bonoma used a comparable hierarchical approach to segmenting industrial markets. The first step in this process lies in identifying broad segments using such factors as major customer groups, technology, price-quality segmentation, key physical product attributes and benefits. Such a macro perspective may often be sufficient for deciding which segment(s) to compete in, or to screen out alternatives that are of little or no interest. The second step involves building on the foundation of the first step. It is more refined and generally calls for the use of market research techniques. This step requires the identification of a profile of welldefined customer g r o u p s - - c o m b i n e d with situation-Market Segmentation: an Integrated Framework

who seek different benefits. The benefits sought by different customer groups could also be fine-tuned or otherwise modified at this stage. These micro segments can then become the basis for target marketing and positioning at narrower, more clearly defined customer groups. It is important to point out, however, that recognizing unmet and latent customer needs is a creative process. Thus, customer-benefit segmentation of today's rapidly-changing markets requires both traditional market research and a substantial dose of creativity.

An Illustration of Application to the US Toothpaste Market We have used the US toothpaste market to illustrate our segmentation framework. The toothpaste market is quite complex today. In a study from Consumer Reports, 47 different brands of toothpaste were tested! Now you can buy toothpaste in paste or gel; packed in a pump or a tube that may either have a screw-top or a flip-top; buy a toothpaste for kids, older adults with sensitive teeth or smokers; buy a toothpaste with fluoride, special bleaches--e.g, peroxide--enzymes, baking soda or ingredients for plaque and tartar control. While most toothpastes could be classified under the mid-price segment in the past, now premium and even super-premium segments have emerged in this market. A comprehensive structural map of the complex toothpaste market based on product characteristics will be quite complex. So, we decided to keep the industry model as simple as possible without sacrificing its essential character. Such a model--representing a price-quality-benefit segmentation profile--is presented in Figure 3 which shows five major benefit segments and four price-quality segments. Table 4 extends the segmentation profile of Figure 3 and features individual brands competing in the industry. This table reveals three strategic groups. The price-quality-benefit segmentation model of the US toothpaste market in Figure 3 and Table 4 represents the first step in the two-step process. The next step is to figure out, usually through market research, how the benefits, combined with situation, sought by different customer groups match the pricequality-benefit segments indicated in Figure 3. However this process is beyond the scope of this article. Market research conducted about three decades ago, when the toothpaste market was far simpler than it is today, found four major benefit segments in the market: 1. decay prevention, 2. bright teeth, 3. flavour and appearance and 4. low price. These benefit segments were occupied, respectively, by the following customer groups: families with children, young marrieds, children (as brand deciders) and price-oriented

buyers (mostly men) who tended to buy brands that were on sale. 31 As one would expect, the benefit segmentation picture proiected in Figure 3 and Table 4 captures a m u c h richer profile which includes five characteristics: 1. health, 2. colour, taste and convenience, 3. appearance, 4. aesthetics and 5. economy. Although the concept of strategic groups, and related research, has been criticized by several authors, many feel that it is a useful concept that strategists use in subtle ways to classify competitors in an industry. 3"~An analysis of Table 4 reveals three strategic groups: The Big Two (P&G and Colgate), The Medium Three [SmithKline-Beecham, Unilever and Church & Dwight (Arm and Hammer)] and The Niche Players which cover all the rest. Since the publication of the Consumer Reports toothpaste ratings noted above, some interesting dynamics have occurred. Business Week reports that after it was nationally introduced in 1993, Mentadent, a peroxide-baking soda toothpaste, achieved the third rank behind the giants Crest and Colgate by garnering 11.5% market share for the year ended May 1995. In contrast, P&G has experienced a significant drop in market share since the 1980s. So, what is behind the success of Church & Dwight's Dental Care and Unilever's Mentadent? Business Week suggests that the Big Two--P&G and Colgate-had concentrated too m u c h on therapeutic benefits and had ignored the cosmetic dimension. Both have now begun to respond to this challenge and have introduced a baking soda version of toothpaste: a category that accounts for 30% of the market. Colgate has also added a peroxide-baking soda version to compete with Mentadent. However, the Big Two, especially P&G, could offer the following arguments in support of their strategy. In its tests Consumer Reports found that baking soda toothpastes were disappointing in their ability to clean. This is because baking soda quickly dissolves in water and loses its cleaning effectiveness. Similarly, Consumer Reports and the American Dental Association have questioned the safety of bleaching toothpastes that contain peroxide. P&G also seems to have a similar view. One Crest advertisement says that dentists think baking soda and peroxide have not been proved to do anything special. Canadians also do not allow the sale of peroxide toothpaste in their country.:~3 In response to the above criticism, the developers of Mentadent argue that the risk of peroxide in Mentadent is no higher than in "your pickle". They claim the primary benefit of baking soda and peroxide is the taste and feel which encourages people to brush longer--and more frequently--which then results in a major contribution to oral hygiene. This is w h y Church & Dwight uses the slogan "clean and fresh feeling" to position Dental Care (see Table 1 ).

Conclusion We have offered a perspective of market segmentation that is m u c h broader than the traditional customerdriven view which dominates the marketing area. We haw.~ argued that one can picture how a market is--or can potentially be--segmented not only in terms of customer characteristics, but also in terms of key product characteristics. Integrating the internal resource-based view of strategy with the external orientation of marketing, this approach focuses both on customer benefits and the resources necessary to satisfy them. The basic premise of this article is that the product characteristics approach is both an easier and more actionable way of determining how a market is, or can be, segmented than the traditional marketing approach which usually begins with the customer. This path to market segmentation can be a valuable guide in defining a business: by providing an understanding of the structural characteristics of a market, its competitive scope and its dynamics. It can help spot segment gaps and areas of potential growth. Strategists need such a map before deciding on whether to enter a new market or segment and identifying the resources needed to compete in it. The product characteristics approach of this paper can be employed by a business to differentiate a brand from its competition, position it in the market and to communicate its characteristics to the customers. Likewise, the paper indicates how customers usually employ product characteristics to perceive and evaluate the quality claims made by different competitors. Thus, the article bridges an important gap between strategy formulation and strategy implementation: an area often neglected in the strategy literature. 34 Our plea for an integrated approach to market segmentation also has several other benefits: Ca It is consistent with the TQM (total quality management) philosophy. For example, IBM's AS/400 system won the Malcolm Baldrige National Quality Award because the project leaders recognized the need for continuous improvement before, during and after product launch. Thus, the main reason behind the system success was that it was both product and market centred. 35 Ca This approach can facilitate a meeting of the minds between strategic planners and market researchers. For example, it is important for market researchers to have an idea of the big picture. Likewise, for many planners the idea is more important than the methodology or data which are part of market research. 36 Ca Market segmentation is the foundation for performing strategic group analysis. The framework proposed here can be quite useful for this purpose (Figures i and 2). The major benefits from such Long Range Planning Vol. 29

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analyses include: 1. identification of key factors in the industry, 2. strength and character of competitive rivalry in the industry and 3. knowledge about market opportunities through an identification of niches and segments. 37 We believe the concept of price-quality segmentation discussed here deserves more attention than it has received, either from marketers or from strategic plan-

ners. In a business world that seems to be moving toward mass customization, the broader subject of market segmentation deserves serious attention from strategists. We hope the integrated framework proposed here will be helpful in stimulating their interest and guiding their attention. The author is grateful to ProfessorsPeter Dicksonand John H. Grant for their valued comments.

References 1. B.J. Pine II, D. Peppers and M. Rogers, Do you want to keep your customers forever?, Harvard Business Review, March-April, 103-114 (1995). Also see the major findings of an international survey of marketing and general managers reported by K. Kashani, Marketing futures: priorities for a turbulent environment, Long Range Planning, August, 87-98 (1995). 2. S. Wozniak, How we failed Apple, Newsweek, 19 February, 48 (1996); D. Gelernter, Computer lesson, New York Times, 11 February, E 15 (1996); Business Week, The fall of an American icon, 5 February, 34-42 (1996); S. Levy, How Apple became Avis, Newsweek, 21 August, 42 (1995); J. A. Sculley (with J. A. Byrne), Odyssey, Chapter 6, Harper & Row, New York (1987). 3. P. Passell, Why the best doesn't always win, New York Times Magazine, 5 May, 60-61 (1996). Economists call this phenomenon a case of 'path dependence' [For an explanation of this concept see P. Krugman, Peddling Prosperity, Chapter 9, W. W. Norton & Co., New York (1994).] For another example of its occurrence see the discussion on VHS versus Betamax later in this article. 4. P. R. Dickson, Marketing Management, p. 433, Dryden Press (1994); Church & Dwight Co., It scores big with the brand-name pull of Arm & Hammer, Barrons, 10 December, 49-50 (1990); The sound and the fluoride, Business Week, 14 August, 48 (1995); The truth about toothpaste, 20/20 Programme, ABC News (1996); Toothpaste, Consumer Reports, September, 602-606 (1992). 5. A typical example is P. Kotler, Marketing Management, 8th Edition, Chapter 11, p. 7, Prentice-Hall, Englewood Cliffs, NJ (1994). 6. The integrated approach to market segmentation advocated in this article is similar to what M. E. Porter calls 'industry' segmentation. However, while Porter (p. 5) has placed substitutes outside the boundary of an industry, we have included them inside. Furthermore, this article is more comprehensive in scope; see Competitive Advantage, Free Press, New York (1985). A. E. Boardman and A. R. Vining, in proposing product-customer matrices, also advocate a similar approach; see Defining your business using product-customer matrices, Long Range Planning 29(1), 38-48 (1996). 7. P. R. Dickson and J. L. Ginter, Market segmentation, product differentiation, and marketing strategy, Journal of Marketing, April, 1-10 (1987); S. P. Schnaars, Marketing Strategy: A Customer-driven Approach, pp. 142-151, Free Press, New York (1991). 8. Kim Warren suggests the need for building future industry scenarios in today's environment of change and uncertainty. He says such a scenario must be built around the strategic actions of all major competitors in the industry, and should explore what the future might be and how the firm's own actions might affect that future. See Exploring competitive futures using cognitive mapping, Long Range Planning, October, 10-21 (1995). 9. P. R. Dickson, Person-situation: segmentation's missing link, Journal of Marketing, Fall, 56-64 (1982); R. K. Srivastava, M. I. Alpert and A. D. Shocker, A customer-oriented approach for determining market structures, Journal of Marketing, Spring, 32-45 (1984); F. W. Winter, Market segmentation: a tactical approach, Business Horizons, JanuaryFebruary, 57-63 (1984). 10. For demographics, social class and psychographics respectively, see Winter op. cit., Kotler op. cit. and Dickson (1982) op. cit. 11. D. J. Collis and C. A. Montgomery, Competing on resources: strategy in the 1990s, Harvard Business Review, July-August, 118-128 (1995); G. Hamel and C. K. Prahalad, Competing for the Future..., Chapters 4, 7, 9 and 11, Harvard Business School Press, Cambridge, MA; G. Stalk, P. Evans and L. E. Shulman, Competing on capabilities: the new

Market Segmentation: an Integrated Framework

rules of corporate strategy, Harvard Business Review, March-April, 57-69 (1992); A. V. Snyder and H. W. Ebeling Jr, Targeting a company's real core competencies, Journal of Business Strategy, November-December, 26-32 (1992); R. M. Grant, The resource-based theorY of competitive advantage: implications for strategy formulation, California Management Review, Spring, 114-135 (1991). 12. R. D. Buzzell and B. T. Gale, The PIMS Principles: Linking Strategy to Performance, Free Press, New York (1987); B. T. Gale, Quality comes first when hatching power brands, Planning Review, July-August, 4-9 and 48 (1992). 13. A. Reis, Focus: the Future of Your Company Depends On It Chapter 12, HarperBusiness, New York (1996); A. P. Sloan, My Years with General Motors, pp. 73-74, Anchor Books, Garden City, NY (1972). Originally, Sloan offered GM's cars in six price-quality segments. 14. The source of the Whirlpool Corporation's strategic move is the Keynote Address by its CEO, D. R. Whitwam, delivered at the 1989 International Conference, Planning Forum (1989). For the Maytag Co. see R. L. Rose, Maytag's acquisitions don't wear as well as washers and dryers, WallSt. Journal, 31 January, A1 and A6 (1991). 15. For Marriott's diversification into the mid-price and economy segments see B. Gillette, Conservative approach fuels Marriott's success, Hotel and Motel Management, 19 June, 3, 58-59 and 91 (1989). For positioning Fairfield Inn see T. W. Leigh, Competitive assessment in service industries, Planning Review, January-February, 10-19 (1989). In this case study Leigh talks about the fictional Grinstead Inn. There seems little doubt that the real actor behind this feeble disguise is Marriott's Fairfield Inn. 16. C. Bowman and D. Faulkner, Measuring product advantage using competitive benchmarking and customer perceptions, Long Range Planning, February, 119-132 (1994). 17. D.A. Garvin, Managing Quality: the Strategic and Competitive Edge, Free Press, New York (1988). 18. D. A. Aaker, Managing assets and skills: the key to a sustainable competitive advantage, California Management Review, Winter, 91-106 (1989). 19. Snyder and Ebeling op cit. 20. Hamel and Prahalad op cit. Also see A. Reis and J. Trout, Positioning: the Battle for Your Mind, McGraw-Hill, New York (1981). 21. T. Oliver, The Real Coke, The Real Story, Random House, New York (1986). 22. Reis and Trout op cit. 23. This definition has been adapted from the criteria Drucker has specified for using technology as a common core of unity for diversification; see P. F. Drucker, Management: Tasks, Responsibilities, Practices, Chapter 57, Harper & Row, New York (1974). 24. D. F. Abell, Defining the Business: the Starting Point of Strategic Planning, Chapter 2, Prentice-Hall, Englewood Cliffs, NJ (1980). 25. R. S. Sisodia, Competitive advantage through design, Journal of Business Strategy, November-December, 33-40 (1992); P. M. Senge, The leader's new work: building learning organizations, Sloan Management Review, Fall, 7-23 (1990). 26. For example see R. Cooper and W. B. Chew, Control tomorrow's costs through today's designs, Harvard Business Review, January-February, 88-97 (1996); Kashani op cit. 27. P. R Nayak and J. M. Ketteringham, Break-throughs!, Chapter 2, Revised Edition, Pfeiffer, Munich (1994); R. T. Pascale and A. G. Athos, The Art of Japanese Management, p. 41, Warner Books, Detroit, MI (1981). 28. B. P. Shapiro and T. V. Bonoma, How to segment industrial markets, Harvard Business Review, May-June, 104-110 (1984). 29. Guy de Moubray, Banking is not like selling toothpaste, Long Range Planning, October, 68-74 (1991). 30. Dickson and Ginter, op cit. 31. R. I. Haley, Benefit segmentation: a decision-oriented research tool, Journal of Marketing, July, 30-35 (1968). 32. R. K. Reger and A. S. Huff, Strategic groups: a cognitive perspective, Strategic Management Journal 14, 103-124 (1993); C. Carroll, P. M. Lewis and H. Thomas, Developing competitive strategies in retailing, Long Range Planning, April, 81-88 (1992). 33. Business Week (1995) op cit.; ABC News op cit. 34. H. Mintzberg, The Rise and Fall of Strategic Planning, Chapter 5, Free Press, New York (1994). 35. V. Tang and E. Collar, IBM AS/400 new product launch process ensures satisfaction, Long Range Planning, February, 22-27 (1992). 36. T. M. Pavia, Using marketing models in strategic planning, Long Range Planning, October, 59-67 (1991). 37. Carroll et al., op cit.

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