gabs industry segmentation porter's methodology jan 1010

8/3/2019 GABS Industry Segmentation Porter's Methodology Jan 1010

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Industry Segmentation -

Porter's Methodology

Peter Paz

GBS

17 January 2010


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A Market is...

1. people or organizations with

2. needs or wants, and with

3. the ability and4. the willingness to buy

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


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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


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Market Mix (4Ps)

A firm addresses the segment with amarket mix consisting of four unique

ingredients: Product

Price

Place (Distribution) Promotion


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Some Observations

Segmentation is a subjective art not an absolutescience

It is challenging to address multiple markets withno common elements of the marketing mix

Adjacent segments are addressed with someelement/s of the marketing mix in common witheach other

Case in Point: The Pizza delivery segment has asimilar product to the Pizza restaurant segment.They differ in the distribution (place) & promotionprocess. They both have similar pricing


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Steps in Segmenting a Market

Selecta

marketfor

study

Choosebases

forsegmen-

tation

Selectdescrip-

tors

Profileand

analyzesegments

Selecttarget

markets

Design,imple-ment,

maintainmkting

mix

Classic: Geographic,

Demographic, Psychographics What is you value proposition?

People/Organizations withsimilar needs


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Example Coffee Consumption

Demographic base: Age segmentation

Typical regular coffee consumer is over 35years 75% of market

Non regular is under 35 years - 25% ofmarket

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 marketshare: Domination of a segment in a competitive

environment was critical (GE:> 15% share)

But Competitive scope was lacking in classicmarket segmentation (focuses on: identifying buyerneeds, product position, and marketing mix).

Michael Porters* developed an industry

segmentation which is broader than marketsegmentation

* Harvard leading authority on competitive strategy


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What Creates Separate Segments?

Differences in buyers orproducts create industrysegments 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 valuechain 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

Financial strength


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Buyer Type Variables (B2C)

B2C Buyer factors that imply structural or valuechain 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 concernedwith wine quality (product quality= supplier power)

A chef/cook is concerned withcost 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)

*Note: Porsche definition of buyer types


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Example: Buyer Purchasing Habits

Electronic manufacturers get timelysupply of electronic componentsthrough regular channels

Electronic manufacturers buys lastminute small rush orders of electronicchips bought through jobbers


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Example: OEM vs User

Firms that use productsmay have differentrequirements to OEM

Paper for office use hasdifferent qualities/quantitiesof paper for use by apublisher for book products


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Product Variables

Meaningful product differences are those thatreflect 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 toa 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 4categories of variables that can define

relevant segments (other categories impactmarketing, production, etc. not competitivestrategy)


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Infinity Project: Segmentation Variables

1. Demographics: e.g. wealthy versus highincome (e.g. a 300,000 Nis threshold)

2. Distribution channel: e.g. dealership versus

personal import3. Psychographics: as per market research

4. Product: e.g. price, design, performance

(which in turn map onto categories such asSedan, SUV, Coupe)


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Industry Segmentation Matrix

Very helpful invisualizing:

Industry segmentation

Target segments Penetration strategies

Expansion strategies

Competitive strategies

Channel strategies

New segments


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Choosing Matrix Variables

Consider the 4categories (Product, Buyer,

Channel, Location); What variables of thesecategories have asignificant impact on the

value chain or the fiveforce 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 System Integrator OEM

Fixed operator

Buyer Industry Mobile operator Null

Cable operator


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Low scale-integrated

SBC Peering/Trunking SBC Access SBC PeeriMedia Processing No Media Processing Media Processing No Media Processing Media Processing

Tier 1 Fixed

Service Provider Juniper

Netrake

Juniper Sonus

Tier 2-3 Fixed

Service Provider

NexTone

Ditech (PVP)

Netrake

Juniper

Ditech(PeerPoint100)

Netrake

Juniper

Ditech(PeerPoint100)

Sonus

Netrake

NexToneTier >=4 Fixed

Service Provider

Netrake

Juniper

Netrake

Juniper Null

Tier 1 Mobile

Operator

Tier 2-3 Mobile

Operator NetrakeTier >=4 Mobile

Operator Netrake Null

Tier 1 MSO Null Null Acme(Net-Net 4000) Netrake

Tier 2-3 MSONull Null Acme(Net-Net 4000) Netrake

Tier >=4 MSO Null Null Null

Tier 1 OEM for

Fixed Service

Provider Netrake Acme(Net-Net 4000)

Tier 2-3 OEM for

Fixed Service

Provider Netrake Acme(Net-Net 4000)Tier 1 OEM for

Mobile Operator Acme(Net-Net 4000)Tier 2-3 OEM for

Mobile Operator Acme(Net-Net 4000)

OEM for MSO

OEM for

Enterprise

Large Enterprise Null Null

Juniper

Ditech

Netrake Null

Medium/Small

Enterprise Null Null

Juniper

Ditech

Netrake Null

ExampleofCompleted

Matrix


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Example: Oil Field Equipment

DrillCo is in the oil field equipment business

DrillCo products: standard and premium deep drillingequipment

Perceived differentiation: sophisticated high end, meets

tough regulation for deep drilling

Strength: strong financial ties to private large and major oilcompanies

Situation Analysis: (1) market leaders (NeverGo, Alister,

Ditech) hold 80% share of major and state oil market (whichis 60% of total market) and (2) WW oil production haspeaked; 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, non-

sophisticated

Geographic location variables Developed countries Developing countries

Product variables

Performance: premium, standard Design: deep drilling, shallow


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Populated Industry Segmentation MatrixOil Field Equipment Industry

Buyers

Sophisticated Non-Sophisticated

ProductVarietyPrivate Major Oil

Companies

State Owned Oil

Companies in

DevelopedCountries

Private Large OilCompanies

Private LargeOil Companies

Private SmallOil Companies

State Owned Oil

Companies in

DevelopingCountries

Premium Deep

Drilling

NeverGo

Alister

Ditech

NeverGo

Alister

Ditech

(Penetration)

Alister

Datripper

Alister

Datripper

NeverGo

Null

(opportunity for

new segment) Null

Standard Deep

Drilling

NeverGo

Peach

NeverGo

Alister

Ditech

(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 companydesigns, implements and maintains a

market mix intended to meet theneeds of that segment alsoconsidering segment competitive

positioning


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Segment Competitive PositioningRelative Price

Low

Low

Medium

High

Medium High

RelativeDifferentiation

B

A

C

D E


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Competitive Positioning Differs per

Segment

B

A

E

B

A

E

Segment 1 Segment 2


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When Choosing a Target Segment ask..

Is the offering sustainably differentiatedwhen 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 foradjacent segments?


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Source

Competitive Advantage -Creating andSustaining Superior Performance-MichaelPorter, Free Press


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DrillCo Penetration Target Segment

Meets objectives of revenue, growth & profitability30% of total market, 15% CAGR

5 forces analysis

Strong product differentiation: sophisticated, high end (toprequirements), 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 meetsobjectives 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) locatingnulls 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

Time

Dollars

ProductCategoryProfits

ProductCategorySales

IntroductoryStage

GrowthStage

MaturityStage

DeclineStage

0

LowDifferentiation

ClearDifferentiation

LowDifferentiation

Soft

Differentiation

gabs industry segmentation porter's methodology jan 1010

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