Industry Segmentation Porter's Methodology

Peter Paz GBS 17 January 2010

A Market is...
1. 2. 3. 4. people or organizations with needs or wants, and with the ability and the willingness to buy

A group of people (organizations) that lacks any one of these characteristics is not a market

Market Segmentation
The process of dividing a market into: Sub group people or ..organizations with....one or more similar characteristics causing .....to have similar product needs
Lamb, Hair, McDaniel

Market Mix (4Ps)

A firm addresses the segment with a market mix consisting of four unique ingredients:
Product Price Place (Distribution) Promotion
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Some Observations
Segmentation is a subjective art not an absolute science It is challenging to address multiple markets with no common elements of the marketing mix Adjacent segments are addressed with some element/s of the marketing mix in common with each other Case in Point: The Pizza delivery segment has a similar product to the Pizza restaurant segment. They differ in the distribution (place) & promotion process. They both have similar pricing
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Steps in Segmenting a Market

People/Organizations with similar needs

Select a market for study

Choose bases for segmentation

Select descriptors

Profile and analyze segments

Select target markets

Design, implement, maintain mkting mix

Classic: Geographic, Demographic, Psychographics

What is you value proposition?

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Example Coffee Consumption

Demographic base: Age segmentation
Typical regular coffee consumer is over 35 years 75% of market Non regular is under 35 years - 25% of market

Behavior base: Benefit segmentation

Consume for taste enjoyment (coffee shop) Consume for the wake up effect (Nestle)
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Modification of Segmentation
In the 70s work done by BCG, GE on market share:
Domination of a segment in a competitive environment was critical (GE:> 15% share)

But Competitive scope was lacking in classic market segmentation (focuses on: identifying buyer
needs, product position, and marketing mix).

Michael Porters* developed an industry segmentation which is broader than market segmentation
* Harvard leading authority on competitive strategy
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What Creates Separate Segments?

Differences in buyers or products create industry segments if they impact industry structure Industry structure is determined by
The five forces Value chain activities

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Example of Buyer Impact on Structure

For example buyers of
Bottled beer
versus Buyers of draft beer

Value chain is impacted

Draft needs special containers /handling
Higher costs
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Buyer Type Variables (B2B)

B2B Buyer factors that imply structural or value chain differences:
Industry (e.g. price sensitivity, substitution, cost) Structure (e.g. conservative versus competitive) Strategy (e.g. seeks authorized vendor or one-stop-shop) Technological sophistication OEM vs end user Vertical integration Purchasing habits/process (internal customer) Size Ownership 14 Financial strength

Buyer Type Variables (B2C)

B2C Buyer factors that imply structural or value chain differences:
Demographics (family size, income, health, religion, sex, race, nationality, occupation, age, education, and family life cycle) Psychographics (social class, lifestyle, and personality) Decision-making process Purchase occasion

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Example: Buyer Industry & Strategy

A restaurateur is concerned with wine quality (product quality
= supplier power)

A chef/cook is concerned with cost of wine and less quality

(substitutability = buyer power)

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Example: Psychographics
A Top Gun* (driven, ambitious, power, control) premium car customer (premium brand reputation =
supply power)

A Fantasist* (escapist) premium car customer

(new entrant strategy = new market entrants power)

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*Note: Porsche definition of buyer types

Example: Buyer Purchasing Habits

Electronic manufacturers get timely supply of electronic components through regular channels

Electronic manufacturers buys last minute small rush orders of electronic chips bought through jobbers

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Example: OEM vs User

Firms that use products may have different requirements to OEM

Paper for office use has different qualities/quantities of paper for use by a publisher for book products

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Product Variables
Meaningful product differences are those that reflect structural/value-chain differences, e.g.
Price level Technology & design Ingredients Performance Ancillary services Packaging or bundling Design

Some variables may be interrelated

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Channel Impact?
Are channel types merely different ways to a segment? NO! => If they reflect value chain differences in cost, bargaining power, customer relationships, etc.
Direct vs distributors VAS System Integrators Strategic partners
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Buyer Differences
Typically can be found along 3 categories:
Buyer type Distribution channel Geographic location

By adding product varieties we achieve 4 categories of variables that can define relevant segments (other categories impact
marketing, production, etc. not competitive strategy)
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Infinity Project: Segmentation Variables

1. Demographics: e.g. wealthy versus high income (e.g. a 300,000 Nis threshold) 2. Distribution channel: e.g. dealership versus personal import 3. Psychographics: as per market research 4. Product: e.g. price, design, performance (which in turn map onto categories such as Sedan, SUV, Coupe)
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Industry Segmentation Matrix

Very helpful in visualizing:
Industry segmentation Target segments Penetration strategies Expansion strategies Competitive strategies Channel strategies New segments
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Choosing Matrix Variables

Consider the 4 categories (Product, Buyer,
Channel, Location);

What variables of these categories have a significant impact on the value chain or the five force structure?

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Building the Matrix

Plot a matrix two sets of most significant variables (buyers, channel, location) Eliminate null cells Combine variables e.g.: Fixed/OEM; Mobile/Direct Repeat as before Plot combined variables against product variables Test by locating competitors on them
Channel
Direct Fixed operator System Integrator OEM

Buyer Industry

Mobile operator Cable operator

Null
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Low scale-integrated SBC Peering/Trunking

Media Processing Tier 1 Fixed Service Provider No Media Processing Juniper Netrake Juniper Ditech(PeerPoint100) Netrake Juniper

SBC Access
No Media Processing Netrake Juniper Netrake Juniper Ditech(PeerPoint100) Netrake Juniper

High scale SBC Peering/Trunking

Media Processing Sonus Sonus Netrake NexTone Null

Media Processing

Tier 2-3 Fixed Service Provider Tier >=4 Fixed Service Provider Tier 1 Mobile Operator Tier 2-3 Mobile Operator Tier >=4 Mobile Operator Tier 1 MSO Tier 2-3 MSO Tier >=4 MSO Tier 1 OEM for Fixed Service Provider Tier 2-3 OEM for Fixed Service Provider Tier 1 OEM for Mobile Operator Tier 2-3 OEM for Mobile Operator OEM for MSO OEM for Enterprise

NexTone Ditech (PVP)

Example of Completed Matrix

Netrake Netrake Null Null Null Null Null Null Acme(Net-Net 4000) Acme(Net-Net 4000) Netrake Netrake Null Null

Netrake

Acme(Net-Net 4000)

Netrake

Acme(Net-Net 4000) Acme(Net-Net 4000) Acme(Net-Net 4000)

Large Enterprise Medium/Small Enterprise

Null

Null

Null

Null

Juniper Ditech Netrake Juniper Ditech Netrake

Null

Null

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Example: Oil Field Equipment

DrillCo is in the oil field equipment business DrillCo products: standard and premium deep drilling equipment Perceived differentiation: sophisticated high end, meets tough regulation for deep drilling Strength: strong financial ties to private large and major oil companies Situation Analysis: (1) market leaders (NeverGo, Alister, Ditech) hold 80% share of major and state oil market (which is 60% of total market) and (2) WW oil production has peaked; new deep drilling required
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Segmentation Variables
Buyer variables
Size: small, large, major oil companies Ownership: private, state owned Buyer technological sophistication: sophisticated, nonsophisticated

Geographic location variables

Developed countries Developing countries

Product variables
Performance: premium, standard Design: deep drilling, shallow

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Populated Industry Segmentation Matrix Oil Field Equipment Industry

Buyers
Sophisticated Non-Sophisticated
State Owned Oil Companies in Developing Countries

Product Variety
Premium Deep Drilling

Private Major Oil Companies NeverGo Alister Ditech

State Owned Oil Companies in Developed Countries NeverGo Alister Ditech NeverGo Alister Ditech

Private Large Oil Companies (Penetration) Alister Datripper

Private Large Oil Companies Alister Datripper NeverGo

Private Small Oil Companies Null (opportunity for new segment)

Null

Standard Deep Drilling

NeverGo Peach

(Expansion) Alister Datripper

Sonar NeverGo

Sonar

Alister

Standard Shallow Drilling

Null

Null

Null

Null

Sonar

Alister

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What is a Target Market?

A market for which a company designs, implements and maintains a market mix intended to meet the needs of that segment also considering segment competitive positioning

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Segment Competitive Positioning

Low Relative Differentiation High Relative Price Medium High

Medium

D
B
C

Low

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Competitive Positioning Differs per Segment

A
E

E B B

Segment 1

Segment 2
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When Choosing a Target Segment ask..

Is the offering sustainably differentiated when serving the segment ? Segment stage in the life cycle? How intensive are the competitive forces in the segment? Does the segment meet the firms objective relating to size and growth? Is it a good core segment for adjacent segments?
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Source
Competitive Advantage - Creating and Sustaining Superior Performance - Michael Porter, Free Press

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DrillCo Penetration Target Segment

Meets objectives of revenue, growth & profitability 30% of total market, 15% CAGR 5 forces analysis
Strong product differentiation: sophisticated, high end (top requirements), deep drilling regulation Supply power: relationship with customers Fewer strong competing firms; (-) NeverGo

Adjacent growth to expansion target segment

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DrillCo Expansion Target Segment

Combined with penetration segments meets objectives of revenue, growth & profitability 5 forces analysis
Strong product differentiation: deep drilling regulation Supply power: relationship with customers, range of products, installed base in penetration segment Fewer strong competing firms; (-) NeverGo

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Finding New Segments

Seeking untapped opportunities from (a) locating nulls with potential in the matrix or (b) new ways of segmentation for breakthrough strategies*:
Additional (or reduced) functionality Alternative functional technologies (e.g. disruptive) Alternative bundling of products & services New types of buyers

Seeking adjacent segments**

*See Blue Ocean Strategy W. Chan Kim, Renee Mauborgne **Profit from the Core, Chris Zook, Bain & Company
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Generic Differentiation Strategies

Measurable Customer benefits Ease of Use Improved Productivity Protecting customer investment Higher performance products Unique fundamental capabilities Standards Total solutions (Integration) Total cost of ownership Convenience Branding Unique features

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Typical Segment Life Cycle

Introductory Growth Stage Stage
Clear Differentiation

Maturity Stage

Decline Stage Product Category Sales

Dollars

Soft Differentiation

Product Category Profits

Low Differentiation Low Differentiation

Time
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