VIEWS: 27 PAGES: 3 CATEGORY: Strategy POSTED ON: 6/29/2012
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?
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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