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Using the Voice of the Customer to Develop an Alternative Market Segmentation

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					Using the Voice of the Customer to Develop an Alternative
Market Segmentation: More Impactful Business Strategy
for B2B Manufacturers
By Thomas P. Frauman
Market segmentation represents a fundamental component of global business
strategy. The story goes that all sources of competitive advantage drive from
the firm’s ability to deliver superior customer value on benefit attributes
that are both relevant and important to clients. To accomplish that end, the
firm should understand the universe of current and potential customers –
who they are, what they want and how they wish to be served. Without
this understanding, how might industrial goods manufacturers deliver
differentiated product and service offerings unique from the universe of other
potential competitive offerings?
Given the nature of a diverse and complex     Voice of Customer and Business               a more varied and richer set of potential
world, segmenting our business into                                                        customer needs.
                                              Strategy
“bite-sized” chunks represents a generally                                                    The final outcome is the same
                                              Meaningful market segmentation must
accepted approach to focus organizational                                                  regardless of rather 1:1 or group
                                              drive from sound current customer
resources and offerings that more                                                          interviews are conducted – ideally
                                              preference data. The importance
directly speak to the needs of a specific                                                  a comprehensive list of potential
                                              individual clients ascribe to specific
grouping of clients. Most commonly,                                                        benefit attributes that respondents
                                              product and service attributes forms
manufacturing firms employ an industry                                                     have identified as important. The next
                                              the foundation for all further analysis.
sector approach to group customers,                                                        step is to prioritize the responses to a
                                              An important starting point for voice of
using a publicly accepted framework such                                                   manageable set for survey research.
                                              customer research is for marketers to
as Nomenclature Génerale des Activités                                                     Group consensus can be employed to
                                              first determine what benefit attributes
Economiques dans les Communautés                                                           cull the list to a manageable number for
                                              to include in their query. A preliminary
Européennes (NACE), International                                                          survey. Respondents from the survey
                                              listing of attributes can be assembled
Standard Industrial Classification (ISIC),                                                 population can then score the importance
                                              through 1:1 interviews.
Standard Industrial Classification (SIC),                                                  of these specific attributes by completing
                                                 Effective 1:1 interviews conducted at a
or North America Industry Classification                                                   either a simple survey (Likert scale), or
                                              sampling of 10-30 respondents from the
(NAICS).                                                                                   through ranking hypothetical benefit
                                              total survey population provides a wealth
   At the corporate level, following                                                       combinations (conjoint analysis). The
                                              of information and a firm foundation
an industry sector approach affords                                                        later approach may provide a more robust
                                              for subsequent research. Interviews
the benefit of presenting a logical                                                        assessment of utility values ascribed
                                              typically take one hour each and should
organization structure to the financial                                                    to the specific benefit attributes, by
                                              be experiential in nature. In other
community supporting benchmarking                                                          considering the trade-offs clients make
                                              words, care should be taken to explore
against well studied economic sectors.                                                     when presented with multiple benefit
                                              a broad range of real and hypothetical
Organizations are aligned to specialize in                                                 combinations.
                                              client experiences in an effort to get the
markets with names like: transportation,                                                      Throughout my career, I witnessed
                                              respondent to articulate both current
building and construction, energy                                                          numerous well intentioned efforts
                                              and expected future needs. Through
and alike; but, does this sector-based                                                     to infuse the voice of the customer
                                              the interviewing process the researcher
structure stage impactful business                                                         into strategic planning and resource
                                              can probe to uncover both higher level
strategy and execution?                                                                    allocation. Many are doomed from the
                                              strategic needs, as well as more subtle
   In an attempt to divide potential                                                       beginning by the firm pre-selecting the
                                              aspects of customer preference. Individual
customers into more readily digestible                                                     attributes for respondents to score with
                                              interviews will typically end when no new
chunks, firms not adopting the industry                                                    little or no external input. Furthermore,
                                              ideas can be uncovered by the researcher.
sector approach may choose other                                                           after extensive data gathering employing
                                                 Focus groups represent an alternative
alternatives to partition their market such                                                various survey instruments, results are
                                              to 1:1 client interviews. Group interviews
as by technology type (steel, aluminum,                                                    scored and compared only to reach the
                                              offer the potential benefit that synergies
plastic, etc…), or geography (Asia Pacific,                                                startling conclusion that customers
                                              amongst group members may produce
North America, etc…).                                                                      in “segments” as diverse as waste
20                                                                                               MRA’s Alert! Magazine – September 2011
water treatment and metal furniture all       problems of an industry sector structure,     scores but stand out because of higher
ascribe highest value to quality, price       it is inherently inefficient, undermining     standard deviation values.
and delivery. While I don’t argue these       economies of scale. Excruciatingly long
are important benefit attributes, I do        business review meetings of dozens of         New Approach
suggest that this view of the world falls     important sub-segments fail to inspire        A variety of approaches may be
significantly short of providing actionable   senior corporate leaders to invest in         employed to implement a new need-
                                                                                            based segmentation structure. A more
                                                                                            formal but fairly common methodology
                                                                                            utilizes multivariate statistical tools

“The acid test for the validity of a market
                                                                                            from the marketing science discipline.
                                                                                            In a less complex business context,

segmentation structure is individuals within                                                individual clients can be grouped by
                                                                                            team consensus based on similarities in

a segment should have homogeneous benefit                                                   preference data.
                                                                                               Regardless of the scoring methodology,
affinities; in other words, they should want                                                the preference data once gathered
                                                                                            is compared in order to establish a
and value the same things.”                                                                 manageable number of groupings (ideally
                                                                                            5 or less). Using a multivariate statistical
market segment strategies that can guide      growing specific niches because of            analysis technique known as cluster
the firm in fortifying and positioning        perceived low business impact.                analysis, respondents are clustered
competitive advantage to expand share.          Within a sector, a deeper look at           by calculating the minimum squared
I propose that it is in fact incorrect        customer survey data typically reveals a      Euclidean distance between all clustering
segmentation standing in the way of           longer list of attributes, in aggregate not   variables. Likewise, a simpler approach
gaining the very clarity sought by the        as important as the big three, but still      is possible in less complex businesses.
researcher.                                   important to some and not as important        The illustration below details a simple
                                              to others – puzzling, right? As numerical     example.
Validity of Current Segmentation              values are assigned to survey responses,         For sake of illustration, call the sectors
The acid test for the validity of a           these outliers commonly have lower mean       in the top table anything you like.
market segmentation structure is
individuals within a segment should
have homogeneous benefit affinities;
in other words, they should want and
value the same things. Furthermore, this
grouping of like minded firms should have
discernibly different preferences than
firms in the other segments. Let’s explore
this concept further in the context of
the traditional industry sector approach.
As an example, if we take a look at the
aerospace market is it remotely plausible
that manufactures producing high-end
corporate jets would have the same needs
and wants as a manufacturer producing
rockets to launch telecommunications
satellites? Might it be likely that product
attributes that are aesthetic in nature
would be more relevant for the corporate
jet and of little to no importance for the
rocket? What about unit price sensitivity
of the corporate jet producer, versus a
mass market producer of single engine
propeller planes?
   In an effort to counter this
heterogeneity of preferences within
a “segment,” often market segment
managers take the approach of defining
and redefining their world in more
granular detail, creating ever more
specific sub-segments. Although
this approach does solve some of the

MRA’s Alert! Magazine – September 2011                                                                                                21
                                  Automotive          Petrochemical        Construction
        Price                        3 HIgH                2 HIgH                 3 HIgH
                                     6 Med                 7 Med                  6 Med
                                     1 LOW                 1 LOW                  1 LOW
        Tech Support                 4 HIgH                2 HIgH                 3 HIgH
                                     5 Med                 6 Med                  5 Med
                                     1 LOW                 2 LOW                  2 LOW
        Next day delivery            3 HIgH                2 HIgH                 5 HIgH
                                     4 Med                 6 Med                  4 Med
                                     3 LOW                 2 LOW                  1 LOW




                                                                     Segment1               Segment 2          Segment 3
                                                                      No Frills            Speed Freaks        Need Helps
                                         Price                         6 HIgH                 2 HIgH               0 HIgH
                                                                       3 Med                  7 Med                9 Med
                                                                       1 LOW                  1 LOW                1 LOW
                                         Tech Support                  0 HIgH                 1 HIgH               8 HIgH
                                                                       8 Med                  6 Med                2 Med
                                                                       2 LOW                  3 LOW                0 LOW
                                         Next day delivery             0 HIgH                 5 HIgH               5 HIgH
                                                                       4 Med                  5 Med                5 Med
                                                                       6 LOW                  0 LOW                0 LOW




Nonetheless, keep in mind these are           based only on clustering the preference        Conclusion
typical industry sectors like: automotive,    data, we come up with an alternative           I offer that incorrect segmentation may
petrochemical, building and construction,     segmentation that is actionable and            present the most significant hurdle
etc. In this illustration very simplistic     supports specific strategies that speak        preventing game changing strategy in
preference data was scored based on           to the needs of the clients within the         industrial markets. A concerted effort
importance – high, medium, low – for          segment. My non-traditional segment            in this area unleashes the power of the
three preference attributes identified        names may sound funny, as was my               organization to provide a unique set of
as important in our focus groups. The         intent, but the point is segmented in this     product and service attributes. Correct
numerical value represents the number         way you get a much clearer picture of          segmentation allows manufacturers to
of respondents selecting high, medium or      how to address these customers in a way        better focus research spending and cost-
low for that specific attribute.              that creates competitive advantage and         to-serve, while expanding market share,
   Looking only at the top table, imagine     supports market share expansion.               margins and competitive entry barriers.
you were the Marketing Director for one         The illustration was highly simplified,
of those sectors – what would you do          intended only to paint the most general        Thomas P. Frauman has more than 20
to craft and execute a game changing          picture of the concepts I have discussed.      years experience in coatings industry
strategy? Go ahead take your time.            In a technology driven context a rigorous      senior leadership roles developing and
   Now turn your attention to the bottom      assessment should include both product         executing global business strategy.
table. If we abandon our previous             and service attributes.
paradigm, creating new segments


22                                                                                                 MRA’s Alert! Magazine – September 2011

				
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Description: Market segmentation represents a fundamental component of global business strategy. The story goes that all sources of competitive advantage drive from the firm’s ability to deliver superior customer value on benefit attributes that are both relevant and important to clients. To accomplish that end, the firm should understand the universe of current and potential customers – who they are, what they want and how they wish to be served. Without this understanding, how might industrial goods manufacturers deliver differentiated product and service offerings unique from the universe of other potential competitive offerings?