Strategic Market Choices and Targets

Strategic market choices and targets:Where to compete and where not to

Strategic thinking and thinking strategically Market sensing and learning strategy Strategic market choices and targets Customer value strategy and positioning Strategic relationships and networks Strategic transformation and strategy implementation The strategic pathway

Agenda • Market definition and the competitive box • Market segmentation and targeting • Market positioning • Market choices

Markets are not fixed or static The way they are defined should not be either The danger is being trapped inside the competitive box while the important changes occur outside the box Market definition and the competitive box

The trap of the competitive box The competitive box The usual suspects Known competitors, operating in traditional ways with the existing, known customer base and competing for market share through incremental innovation New types of competitor New business models Conventional value propositions New customers New customers Existing customer base New customer base

Re-thinking market boundaries is a high priority The way management understands and defines its markets is one of the most significant strategic issues The product-customer matrix a practical tool for looking at markets in new ways Market definition and the competitive box

The product-customer matrix Market: 1. 2. 3. 4. 5. 6. 7. Total Products Customers 1. 2. 3. 4. 5. 6. 7. Total

Mapping market structure and change insights into drivers of change fundamental to looking at market segmentation and targeting Market definition and the competitive box

Mapping market structure and trends for central heating units Production = Consumption = 100,000 units 100,000 units Direct sales = 10,000 units Commercial Construction Companies Construction 84,000 units 42,000 units 75,000 units Independent (85,000 units) Sub - Distributors Contractors 42,000 units 7,000 units Production 40,000 Of Central Small units Heating Hardware Units Retailers 2,000 units Large 5,000 units 5,000 units Hardware Domestic Retailers Customers (15,000 units) Direct sales = 1,000 units

Market segmentation dividing market into groups of buyers who make coherent targets, e.g., by demographics for consumers to industry type for companies aims to develop consistent marketing programmes for segments with potentially different approaches for each Market segmentation and targeting

Consistency versus differentiation in market segmentation Market segments A B C D Product Price Communications Distribution & service Differentiated marketing actions across market segments Marketing actions Consistent value offerings for each market segment

Insightful segmentation is based on the customer benefit from the product or service e.g., customer loyalty-based segmentation e.g., customer relationship-based segmentation Market segmentation and targeting

Customer loyalty-based segmentation Loyalty segments Our customers Competitors’ customers Committed to us and rate us highly, they show little interest in competitors Committed to competitors and rate them highly, show little interest in us Satisfied stayers Loyal customers, but this may only be inertia, may be vulnerable to competitors Repeat buyers for competitors, but may be interested in us Hostages Show little positive commitment, may become interested in alternatives Little commitment to competitors, may be interested in our offer Happy wanderers Show strong preference for the best “deal” on the market, with low supplier loyalty No commitment to competitors - open to superior offers Dealers

Customer relationship-based segmentation Relationship segments Our customers Competitors’ customers Invest in customer relationship management and loyalty programmes to give a close relationship that is long term Find ways to offer a relationship that is superior in the customer’s terms to attract away from competitors Relationship seekers Emphasize superiority in value offering and rewards for long-term retention superior to those of competitors Focus on retention through the value offering and not through relationship emphasis Loyal buyers Control expenditures on loyalty incentives and provide economic contact, e.g. through Internet Offer relationship-based incentives to switch suppliers, but control costs to allow for short retention Relationship exploiters Emphasize value offering and avoid relationship investments unless can be converted to Loyal Buyers Arm’s length transactional customers Demonstrate superior value offering and lack of ties or barriers to switching

Broad segments and micro-segments Strategic market segmentation distinction between strategic and managerial issues in segmentation Market segmentation and targeting

Strategic and managerial segmentation Corporate mission Values Strategic intent Strategic segmentation Market position Resource allocation Marketing plans Operational management (sales, advertising) Managerial segmentation

Conventional views of market segmentation methodology to identify criteria for evaluation segmentation approach (differentiated, concentrated, undifferentiated) An extended model of market segmentation a diagnostic framework to distinguish between strategic and operational issues and address implementation questions Market segmentation and targeting

An extended model of market segmentation Explicitness and focus Explicit/external Implicit/internal Strategic segmentation • Customer benefits • Qualitative approach • Links to mission and • vision • Organizational structure • Information processing • Corporate culture and • history Strategic Organizational decision making level Managerial segmentation • Sales and distribution • organization • Advertising and • promotion • Media buying • Pricing tactics • Conventional • segmentation bases • Quantitative approach • Conventional tests • and criteria of choice Operational

Market segment attractiveness and internal compatibility consider not just how attractive a segment is as a target, but also how well it fits with company capabilities a significant implementation question Market segmentation and targeting

Unattractive segments Unattractive segments but with match to that do not match with company company capabilities capabilities Segment attractiveness and internal compatibility Internal compatibility High Low High Attractive segments Attractive segments that match with but with poor match company with company capabilities capabilities Market segment attractiveness Low

Market positioning • How customers compare you to the competition and what they decide • The logic of blue oceans and red oceans • finding spaces where there is no competition

Market positioning • Creating new market space • looking across substitute industries • looking across strategic groups within the industry • redefining the buyer group • look across to complementary products/services • re-think the functional/emotional orientation of the industry • participate in shaping external trends

Market positioning • But, will the big idea work? • buyer utility • strategic pricing • business model • adoption hurdles

Usually there are choices – which markets/segments to target? how do we set priorities? Portfolio approaches compare market/segment attractiveness (how well the opportunity fits our goals and capabilities market position (how well we believe we can do in this market/segment) Market choices

Market attractiveness and position Market attractiveness High Low Core business Peripheral business Strong Market position Illusion business Dead-end business Weak

Portfolio approach identifies core business – targets with a good fit and where we can do well peripheral business – market is less attractive to us but we will take a strong position illusion business – attractive markets where we can take only a weak position dead-end business – unattractive markets where we do badly. Provides a basis for making investment choices Market choices

Strategic Market Choices and Targets