Leg 2 from Lisbon to Cape Town (II). Stages in Intra-Industry Segmentation.
Hello to all of you.
Today we will go through the topic Stages in Intra-Industry Segmentation Analysis.
Let me share with you “literally” word by word, what Professor Robert Grant has described in his text “Contemporary Strategy Analysis, Text and Cases. 9th Edition”. Professor Grant book is a classic book in Strategy. You can find him at the University of Bocconi, Milan. He is Full Professor of Strategic Management and holder of the ENI Chair of Strategic Management in the Energy Sector. His previous faculty positions include the following universities: Georgetown University, London Business School, City University, California Polytechnic, UCLA, University of British Columbia, and University of St. Andrews (Scotland). When doing my MBA degree, I was a Scholar at London Business School and there I buy his book. I received classes using his text-book and later in my life, I taught Corporate Strategy for 2 years using his book as a core reference one for certain topics. If you are planning to do a Master Degree, an Executive Program or a Doctorate (P.h.D) or to build some academic implant in your brain, take SDA Bocconi School of Management in your plans. It is a good option. I love to write. One of my dreams is to publish a book… maybe in the future Alex Guillermo Lozano Artolachipi will like to go with me to Italy, I would love to be hired to write as a Researcher with Grant Bocconi for some months. I have a lot to write in my head, my own model on how to do strategy…
Deliberately I have copied exactly what Professor Robert Grant has written in his books, about how to do an Intra-Industry Segmentation Analysis. Tomorrow we will do a couple of examples where you will understand how to apply this theory to practice. With this topic, I will stick to Robert Grant Theory, and I will develop my own examples for you.
“The purpose of segmentation analysis is to identify attractive segments, to select strategies for different segments, and to determine how many segments to serve. The analysis proceeds in five stages:
1. Identify Key Segmentation Variables. The first stage of segmentation analysis is to determine the basis of segmentation. Segmentation decisions are essentially choices about which customers to serve and what to offer them: hence segmentation variables relate to the characteristics of customers and the product.
The most appropriate segmentation variables are those that partition the market most distinctly in terms of limits to substitution by customers (demand-side substitutability) and producers (supply-side substitutability). Price differentials are a good guide to market segments. Typically, segmentation analysis generates far too many segmentation variables. For our analysis to be manageable, we need to reduce these to two or three. To do this we need to:
- Identify the most strategically significant segmentation variables. Which variables are most important in creating meaningful divisions in a market?
- Combine segmentation variables that are closely correlated.
2. Construct a Segmentation Matrix. Once the segmentation variables have been selected and discrete categories determined for each, the individual segments may be identified using a two- or three-dimensional matrix.
3. Analyze Segment Attractiveness.
Profitability within an industry segment is determined by the same structural forces that determine profitability within an industry as a whole. As a result, Porter’s five forces of competition framework is equally effective in relation to a segment as to an entire industry. There are, however, a few differences. First, when analyzing the pressure of competition from substitute products, we are concerned not only with substitutes from other industries but, more importantly, substitutes from other segments within the same industry. Second, when considering entry into the segment, the main source of entrants is likely to be producers established in other segments within the same industry. The barriers that protect a segment from firms located in other segments are called barriers to mobility to distinguish them from the barriers to entry, which protect the industry as a whole. When barriers to mobility are low, then the superior returns of high-profit segments tend to be quickly eroded.
Segmentation analysis can also be useful in identifying unexploited opportunities in an industry. For example, a segmentation matrix of the restaurant industry in a town or locality might reveal a number of empty segments. Companies that have built successful strategies by concentrating on unoccupied segments include Wal- Mart (discount stores in small towns), Enterprise Rent-A-Car (suburban locations), and Edward Jones (full-service brokerage for small investors in smaller cities). This can be an intermediate step in the quest for “blue oceans”—new markets untainted by competition.
4. Identify the Segment’s Key Success Factors (KSFs). Differences in competitive structure and in customer preferences between segments result in different key success factors. By analyzing buyers’ purchase criteria and the basis of competition within individual segments, we can identify key success factors for individual segments. Key success factors in the enthusiast segment are technology, reputation and dealer relations. In the economy segment, KSFs are low-cost manufacture (most likely in China) and a supply contract with a leading retail chain.
5. Select Segment Scope. Finally, a firm needs to decide whether it wishes to be a segment specialist, or compete across multiple segments. The advantages of a broad over a narrow segment focus depend on two main factors: similarity of key success factors and the presence of shared costs. If key success factors are different across segments, a firm will need to deploy distinct strategies and may have difficulties in drawing upon the same capabilities”.
See you tomorrow. Again, We will see a couple of examples of my own on how to implement this material from Professor Robert Grant. You will discover the importance of examples when learning. Blessings to you.
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