Last Updated 27 Jul 2020

Market Segmentation Definition

Category economics, Market
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However, understanding the competitive circumstance in which segmentation strategy will work requires an understanding of the process of competition. That is, segmentation must be grounded in competition theory. This article examines the nature of market segmentation strategy and identifies the characteristics that a theory of competition must possess If It Is to provide a theoretical foundation for It.

The criteria are argued to be that a grounding theory must (1) provide for the existence of demand heterogeneity, (2) Justify why firms would choose to produce and market a variety of market offerings, and (3) explicate a mechanism by which a market segmentation strategy can lead to superior financial performance. This article argues that resource-advantage theory, a process theory of competition, meets these criteria and, therefore, provides a theoretical foundation for market segmentation strategy.

Furthermore, it argues that the use of market segmentation promotes public welfare by prompting the innovations that foster firm-level, industry-level, and societal-level productivity. Keywords: Segmentation, Competitive advantages, Resource-Advantage theory 1 . Introduction All marketing strategies Involve a search for competitive advantage Broadway and Abracadabra 1 993; Day and Weenies 1988; Abracadabra and Cunningham 1995).

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For market segmentation strategy, the fundamental thesis Is that the achievement of competitive advantage and, thereby, superior financial performance results from firms (1 ) identifying segments of demand, (2) targeting specific segments, and (3) developing specific marketing "mixes" for each targeted market segment (Dib, Siskin, Pride, and Farrell 1994; Hunt Bibb). Although market segmentation is accepted as a viable strategy for gaining competitive advantage, extant theories of competition in mainstream economics are inhospitable to segmentation strategy.

Indeed, the dominant theories of competition in mainstream economics, that is, neoclassical perfect competition and monopolistic competition, view the competitive advantages gained from segmenting markets as detrimental to societal welfare because market segments represent the artificial fragmentation of homogeneous demand, which implies that "segmentation is viewed as an Therefore, neoclassical, static-equilibrium theories serve poorly those researchers and practitioners who are interested in studying and/or implementing market segmentation strategies.

In contrast, Hunt and Morgan (1995, 1996, 1997) have developed an interdisciplinary, process theory of competition, labeled resourcefulness's theory (hereafter, R-A theory), that is claimed to be a positive theory of competition that is capable of providing a theoretical foundation for normative marketing strategies, such as relationship marketing and market segmentation (Hunt Bibb). Why is grounding market segmentation strategy important?

First, positive theories capable of grounding marketing theories increase our understanding of marketing through the explanation and prediction of Australian Marketing Journal 12 (1), 2004 7 marketing phenomena. In doing so, they also provide a basis for better decision models (I. E. , normative theories or strategies), for "Good normative theory is based on good positive theory' (Hunt Bibb, p. 238).

Therefore, a theory capable of grounding market segmentation strategy can guide both researchers and practitioners concerning the study and practice of market segmentation strategy. Second, grounding market segmentation strategy in a theory of competition contributes to the development of the macro dimensions of marketing, as Layton (2002) has so forcefully argued: A number of marketing scholars have written on the problems faced by the individual manager, seeking to guide managers in the choices they face.

However, it is the macro consequences of market related choices that also matter a great deal and which need to be addressed through social and economic policy choices, including regulation - and for this we need more than the narrow insights of the economists; we need sound macro marketing theory if the shaping of such policies is to lead on balance to benefit rather than cost for society as a whole (p. 0; italics added). In this paper, we explore - using Black & Decker as a continuing example - whether R-A theory can provide a theoretical foundation for market segmentation strategy and, as a result, better inform the study and use of such strategies.

First, our article examines the nature of market segmentation strategy and argues that, for a theory of competition to provide a theoretical foundation for such a strategy, it must (1) provide for the existence of demand heterogeneity, (2) Justify why firms would choose to produce and/or market a variety of market offerings, and (3) explicate a Achaeans by which a market segmentation strategy can lead to superior financial performance.

Second, we provide an overview of R-A theory. Third, we illustrate that R-A theory can ground market segmentation strategy. Fourth, we show how R-A theory can inform the study and practice of market segmentation strategy. Fifth, we argue that market segmentation strategy promotes social welfare. 2. Market Segmentation Strategy Market segmentation, in its tactical sense, often refers to such potential customers who have different needs, wants, tastes, and preferences.

In entrant, market segmentation strategy, as used here, is a broad concept that refers to the strategic process that includes (1) identifying bases for segmentation, (2) using the bases to identify potential market segments, (3) developing combinations (portfolios) of segments that are strategic alternatives, (4) ascertaining the resources necessary for each strategic alternative, (5) assessing existing resources, (6) selecting an alternative that targets a particular market segment or segments, (7) securing the resources necessary for the target(s), (8) adopting positioning plans for the market offerings for the segments, and (9) developing marketing mixes appropriate for each segment. All market segmentation strategies are premised on three basic assumptions. 1) Many markets are significantly, but not completely, heterogeneous regarding consumers' needs, wants, use requirements, tastes, and preferences, and, therefore, can be divided into smaller, meaningful, relatively homogeneous segments of consumers. 2 (2) A firm's market offerings (here, including price, promotion, and channels) can often be designed to meet the needs, wants, tastes, and preferences of such segments. And (3), for many firms, a strategy of targeting specific segments can lead to competitive advantages in the marketplace and, in turn, superior financial performance. Consider, for example, how Black & Decker (hereafter, B&D) used a global market segmentation strategy to reverse the performance of its power tools division in the sass. As Table 1 shows, B&D segments users of power tools into three groups.

The first segment consists of homeowners/do-it-yourself and is characterized by people who: (1) use power tools occasionally, (2) are price sensitive, and (3) tend to buy power tools at low price retailers (e. . , Smart). The second segment, "weekend warriors," contains people who: (1) use power tools on a regular basis, (2) are less price sensitive, and (3) tend to buy tools at home centers (e. G. , Buntings Warehouse). The third segment, professional users, consists of people who: (1) use power tools on a daily basis, (2) are willing to pay more for their power tools, and (3) tend to buy power tools from vendors that cater to professional contractors (e. G. , Buntings Warehouse, Susie Weld, and Spineless). To target each segment, B&D uses specific products lines with different brand names.

For example, power tools old under the B&D brand name are geared toward the homeowners/do-it- yourself, the Firestorm line of products is designed for weekend warriors, and the Dealt line is meant for professional users. As Table 1 illustrates, B&D's strategy is not Just a product strategy. Rather, it uses a complete marketing mix strategy for 8 Table 1 : The Market Segmentation Strategy of the Black & Decker Corporation Market Segment Homeowners/ Do-it-yourself Product Line Black & Decker Product Strategy TV ads during holidays Place Strategy* Smart, Buntings Warehouse, Miter 10 (lower tier stores), etc. Buntings, Warehouse, etc. Buntings Warehouse, Miter 10 (top tier stretches.

Weekend Warriors Firestorm Quality adequate for regular use Higher priced than B&D brand Ads in DID magazines/ shows Sales reps call on Job sites Professional Users Dealt Quality adequate for daily use Highest price * Note: Buntings Warehouse sells to both professional contractors and the general public. Miter 10 uses a four tier store model. The upper tier stores cater to professional contractors, while the lower tier stores do not. Source: Based on Black & Decker (2001). Each line of power tools. Consider the Firestorm products. Targeted at weekend warriors, they are: (1) engineered to be used more often than B&D tools, but less often than Dealt tools, (2) priced higher than the B&D products, but lower than the Dealt products, (3) sold by retailers that cater to weekend warriors (e. G. Buntings Warehouse), and (4) promoted in magazines and on televisions shows that target "serious" do-trolleybuses. B&D's market segmentation strategy has allowed it to become one of the most successful producers of power tools in the world (Stendhal and Output 2001). Success stories such as Back & Decker's have resulted in market segmentation strategy being a well-accepted component of marketing strategy (Dib 1995, 2001). Indeed, market segmentation strategy is "one of the most widely held theories in strategic marketing" (Pierce and Morgan 1993 p. 123), is "considered one of the fundamental concepts of modern marketing" (Wind 1978, p. 317), is "the key strategic concept in marketing today' (Myers 1996, p. ), and is one of the basic "building blocks" of marketing (Layton 2002, p. 11). The acceptance of market segmentation strategy as a key dimension of marketing strategy traces to Chamberlain's (1933/1962) argument that intra-industry heterogeneity of demand is ay be regarded as a force in the market that will not be denied. " 2. 1 The Nature of Market Segments Although scholars agree that market segments can and do exist, they tend to disagree as to why they exist. Research influenced by neoclassical, static- equilibrium economics tends to view market segmentation strategy as an artificial fragmentation of the market brought about by the efforts of suppliers (e. G. Bergsten 1973; Cowling and Mueller 1978; Samuelsson and Northward 1995; Siegfried and Titian 1974). From this perspective, marketing efforts by firms create "market imperfections" and, therefore, should be viewed as attempts to gain monopoly power. Market segmentation is seen as a variation on the theory of price setting by monopolists and is usually discussed under the topic of price discrimination (Frank, Massy, and Wind 1972). The influence of this school of thought is evident in articles describing price discrimination as the goal of market segmentation strategies. For example, Anderson and Semester (2001, p. 316) maintain that "firms often search for distinguishing traits that they may use to price discriminate between segments. In this view, market segmentation is customarily interpreted as a mechanism that allows firms to take advantage of consumers. For example, Glass (2001, p. 549) argues that segmentation strategies allow firms to "collude to price discriminate. " Glass (2001, p. 550) maintains that, since consumers differ in how much they value quality improvements, producers are able to "set prices that induce consumers types to separate" (I. E. , producers' pricing strategies fracture markets into artificial segments). Neoclassical economics tends to view this type of price discrimination as detrimental to society cause it results in welfare losses (Bergsten 1973; Stiller 1957). For example, U. S. Estimates of welfare losses due to price discrimination commonly range from . 1% to 13% of GAP (Bergsten 1973; Cowling and Mueller 1978; Siegfried and Titian 1974). Therefore, according to this view, society should discourage firms from using market segmentation strategies because it fosters price discrimination. In contrast, other researchers, including most marketing researchers, maintain that heterogeneity of demand is natural (e. G. , Alderman 1957, 1965; Allen, Roar, and Ginger 1998; Chamberlain 1933/1962; McCarthy 1960; Smith 1956). As Allen, Roar, and Ginger (1998, p. 384) point out, "demand heterogeneity is a critical element of marketing. Smith's (1956, p. 4) seminal article argued that a "lack of homogeneity on the demand side may be based upon different customs, desire for variety, or desire for exclusivity or may arise from basic differences in user needs. " He suggested that it is attributable to consumers' desires for more precise satisfaction of their varying wants. As Shawnee (1998, p. 54) emphasizes, "Customers are becoming very sophisticated and are demanding customized products and services to match existence of product variety can be a result of consumers seeking variety in their own consumption and/or different consumers wanting different variants because tastes differ.

From this perspective, firms using market segmentation strategies are actually benefiting consumers and society by providing them with market offerings that better satisfy individual wants and needs. Consequently, firms wishing to provide superior value to consumers should try to develop market offerings that are well suited to specific market segments. Furthermore, society should encourage firms to use market segmentation strategies. 2. Implications for Marketing Strategy and Public Policy The debate over the nature of market segments (I. E. , whether they are natural or artificial) has significant implications for marketing strategy and public policy.

If market segments are artificial, as neoclassical economic theory maintains, then firms in the same industry should all produce exactly the same market offerings because demand homogeneity requires supply homogeneity. If firms produce market offerings that satisfy homogeneous industry demand, then the market offerings produced will be fundamentally uniform, and any perceived differences among them would be purely seditious creations of firms or be the result of either consumer ignorance or irrational consumer preferences (Chamberlain 1950). Consistent with this view, Calibrating (1967) argues that marketing efforts by firms (e. G. , advertising) distort consumer demand. Furthermore, the product differentiation that results from distorting consumer demand (I. E. The artificial segmentation of markets) leads to welfare losses in the form of higher prices, lower quantities, excess capacity, inferior products, and the exploitation of the factors of production (Chamberlain 1933/1962; Stiller 1957). As a result, this view argues that to protect the publics welfare, firms should be discouraged (or, if necessary, prevented) from practicing market segmentation strategies. In contrast, if intra-industry demand is heterogeneous, "differences in tastes, desires, incomes, and locations of buyers, and differences in the uses which they wish to make of commodities all indicate the need for variety' (Chamberlain 1933/1962, p. 214). As Chamberlain's (1950) later work suggests, such differences are natural because human beings are individuals.

Following this line of reasoning, firms n the same industry are capable of producing products that have meaningful differences. As Frank, Massy, and Wind (1972) argue, because of improved production techniques and methods of handling information, product diversity exists that is based on meaningful differences. This argument is consistent with the view that market offerings should be considered 10 bundles of characteristics, and that consumers attempt to choose products that are B&D example, though the main utilitarian function of a power drill is to bore holes in objects, power drills differ on many dimensions, such as reliability, price, torque, and rower source (I. E. An electric cord or a battery). Because consumers desire different bundles of characteristics, different power drills, with different bundles, are produced. Consumers search for power drills that come closest to matching their desired sets of characteristics (I. E. , sets that contain the desired characteristics in the desired proportions). For example, people who plan on using a power drill only occasionally require different characteristics than do professional users. For occasional users, price might be the most important characteristic, while torque is of sees importance. For that reason, they may choose to buy a B&D brand power drill (see Table 1).

On the other hand, because professional users may consider torque to be most important, with price less so, they may choose a Dealt power drill (see Table 1). Therefore, market offerings may differ because (1) consumers seek variety and/or (2) satisfying the differing needs, wants, and use requirements of consumers requires offerings that have different bundles of characteristics. Therefore, marketplace characteristics suggest that firms should try to develop multiple market offerings (e. G. Different models of power drills) for a single "market" (e. G. , the "power drill market"), with each targeted toward a different set of consumers, if the market offerings do indeed represent different bundles of attributes that are desired by consumers.

Which view is more accurate? Are most markets significantly homogeneous and, therefore, most segments are artificial? Or, are most markets substantially heterogeneous and, therefore, most segments are natural? For neoclassical economics, all market offerings (e. G. , power drills, automobiles) can be considered commodities that can be modeled by means Table 2: The Foundational Premises of R-A Theory Pl : Demand is heterogeneous across industries, heterogeneous within industries, and dynamic. UP: Consumer information is imperfect and costly. UP: Human motivation is constrained self-interest seeking. UP: The firm's objective is superior financial performance.

AS: The firm's information is imperfect and costly. UP: The firm's resources are financial, physical, legal, human, organizational, informational, and relational. UP: Resource characteristics are heterogeneous and imperfectly mobile. UP: The role of management is to recognize, understand, create, select, implement, and modify trainees. UP: Competitive dynamics are disequilibrium-provoking, with innovation endogenous. Caveat: The foundational propositions of R-A theory are to be interpreted as descriptively realistic of the general case. Specifically, Pl, UP, UP and UP for R-A theory are not viewed as idealized states that anchor end-points of continua. Source: Hunt and Morgan (1997). 1 Societal Resources Societal Institutions Resources Comparative Advantage Parity Comparative Disadvantage Market Position Competitive Advantage Parity Competitive Disadvantage Financial Performance Superior Parity Inferior Competitors-suppliers Consumers Public Policy Figure 1 : A Schematic of Resource-Advantage Competition Read: Competition is the disequilibrium, ongoing process that consists of the constant struggle among firms for a comparative advantage in resources that will yield a marketplace position of competitive advantage and, thereby, superior financial performance. Firms learn through competition as a result of feedback from relative financial performance "signaling" relative market position, which, in turn signals relative resources. Source: Adapted from Hunt and Morgan (1997). DYADIC AD C B AAA AD C B AAA

Segment D Segment C Segment B Segment A Lower IA Indeterminate Position Indeterminate Position B AAA Competitive Disadvantage Competitive Disadvantage B AAA Competitive Disadvantage Competitive Disadvantage Competitive Advantage AAA Parity Position AAA Competitive Disadvantage AAA Indeterminate Position Higher Lower Parity Superior Relative Resource-produced Value Figure 2: Competitive Position Matrix Read: The marketplace position of competitive advantage identified as Cell AAA, for example, in segment A results form the firm, relative to its competitors, having a resource assortment that enables it to produce n offering that (a) is perceived to be of superior value by consumers in that segment and (b) is produced at lower costs than rivals. Note: Each competitive position matrix constitutes a different market segment (denoted as segment A, segment B... ). Source: 12 of "industry' demand and supply curves that yield an equilibrium price. This view traces to the classic work of Joan Robinson (1933).

She defines a "commodity' as a "consumable good, arbitrarily demarcated from other kinds of goods, but which may be regarded for practical purposes as homogeneous within itself " (Robinson 1933, p. 17; italics added). Therefore, she argues that the tastes, preferences, and use requirements of consumers of automobiles may be regarded "for practical purposes" as homogeneous. However, this view is in stark contrast to empirical evidence that suggests that the demand in most markets is substantially heterogeneous (Blather and Seen 1976; Kumara and Russell 1989). Indeed, as Allen, Roar, and Ginger (1998) maintain, heterogeneity of demand may be even more prevalent than most research suggests.

Therefore, the view that demand in most industries is homogeneous (or "close enough" to being homogeneous) is descriptively inaccurate. To ignore that consumers differ substantially in their wants and needs in such markets as power tools or automobiles, invites strategic failures. In the "automobile marketing of over 40 distinctly different market offerings (using seven different brand names). Similarly, as our continuing example shows, B&D offers a wide variety of power tools that are designed specifically to meet the needs of different market segments. Strategically, therefore, firms in the "automobile industry' or "power tool industry' should not try to develop market offerings that are designed to meet simultaneously the needs of all potential consumers.

Rather, a market segmentation strategy seems required, and society should encourage firms in such industries to use segmentation approaches. 2. 3 Market Segmentation and Firm Performance When is a particular segmentation strategy likely to succeed? For a firm, a market segmentation strategy makes sense only if it impacts positively its financial performance. The nine-step process outlined earlier of designing and implementing market segmentation strategies is complex. As a result, successful market segmentation strategies often require substantial amounts of resources. Therefore, reticular segmentation strategies will be successful only when the benefits of engaging in such strategies outweigh the costs. As Weinstein (1994, p. ; italics added) maintains, "The objective of segmentation research is to analyze markets, find niche opportunities, and capitalize on a superior competitive position. " From an efficiency standpoint, successful segmentation strategies lead to better planning and more effective use of firm resources because they allow firms to focus their resources on segments of consumers that are more likely to purchase their market offerings (McMahon and Join 978; Range, Minority, and Swartz 1992). The continued use of market segmentation strategies by firms suggests that firms believe that such strategies are profitable. Therefore, not only will market offerings differ (I. E. Contain different bundles of attributes) because of differences in consumer demand, market offerings will also differ because firms can increase profits by manufacturing a variety of market offerings tailored for specific market segments. Therefore, because segmentation strategies allow some firms to compete more efficiently and/or effectively, they are viable strategic options for firms. The preceding discussion implies that providing a theoretical foundation for market segmentation strategy requires a theory of competition that permits a market segmentation strategy to be successful and contributes to explaining when and why such a strategy will be successful.

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