COURSE 10- MARKETING MANAGEMENT

2. Give an account on market segmentation for industrial

products.
Introduction: -
A market segment is commonly defined as "a group of present or potential
customers with some common characteristics which is relevant in explaining /
predicting their response to a supplier's marketing stimuli “
In contrast to consumers, industrial customers tend to be fewer in number
and purchase larger quantities. They evaluate offerings in more detail, and the
decision process usually involves more than one person. These characteristics
apply to organizations such as manufacturers and service providers, as well as
resellers, governments, and institutions.
Many of the consumer market segmentation variables can be applied to industrial
markets.
Moreover, companies collaborate among themselves heavily even in consolidated
industries. One eg. is the automobile industry. There is not one single car
manufacturer in the world that does not collaborate with at least one other car
manufacturer either on drive-train technology, platform design, assembly,
marketing or some other discipline. This makes it highly challenging for suppliers
to differentiate themselves according to the needs of any one particular customer
or segment. Yet others propose a totally different method by emphasizing on
supply chain analysis and competitive advantage.
Segmentation Variables for Industrial products
Segmentation variables as "customer characteristics that elate to some important
difference in customer response to marketing effort" & recommends the following
three criteria:
1. Measurability, "otherwise the scheme will not be operational" according to
Webster. While this would be an absolute ideal, its implementation can be
next to impossible in some markets. The first barrier is, it often necessitates
field research, which is expensive and time-consuming. Second, it is

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 impossible to accurate strategic data on a large number of customers. Third,
if gathered, the analysis of the data can be daunting task. These barriers
lead most companies to use more qualitative and intuitive methods in
measuring customer data, and more persuasive methods while selling,
hoping to compensate for the gap of accurate data measurement.
2. Substantiality, i.e. "the variable should be relevant to a substantial group
of customers". The challenge here is finding the right size or balance. If the
group gets too large, there is a risk of diluting effectiveness; and if the group
becomes too small, the company will loose the benefits of economies of
scale. Also, as Webster rightly states, there are often very large customers
that provide a large portion of a suppliers business. These single customers
as sometimes distinctive enough to justify constituting a segment on their
own. This scenario is often observed in industries which are dominated by a
small number of large companies, e.g. aircraft manufacturing, automotive,
turbines, printing machines and paper machines.
3. Operational relevance to marketing strategy. Segmentation should
enable a company to offer the suitable operational offering to the chosen
segment, e.g. faster delivery service, credit-card payment facility, 24-hour
technical service, etc. This can only be applied by companies with sufficient
operational resources. For eg., just-in-time delivery requires highly efficient
and sizeable logistics operations, whereas supply-on-demand would need
large inventories, tying down the supplier's capital. Combining the two within
the same company - e.g. for two different segments - would stretch the
company's resources.
Nevertheless, academics as well as practitioners use various segmentation
principles and models in their attempt to bring some sort of structure. Here, we
discuss a few of the most common approaches:
A Generic Principle
One of the recommended approaches in segmentation is for a company to decide
whether it wants to have a limited number of products offered too many segments
or many products offered to a limited number of segments. Businesses are

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encouraged not to offer many product lines to many segments, as this would dilute
their focus and stretch their resources too much. Yet this happens relatively often
in practice, which hints to the question, to what extent the recommended models
realistic.
The advantage in attempting the above approach is that although it may nor work
at all times, it is a force for as much focus as practicable. The one-to-many model
ensures – in theory – that a business keeps its focus sharp and makes use of
economies of scale at the supply end of the chain. In "kills many birds with one
stone".
Eg.s: Coca Cola and some of the General Electric businesses. The drawback
is that the business would risk loosing business as soon as a weakness in its supply
chain or in its marketing forces it to withdraw from the market. Coca Cola's
attempt to sell its Mineral bottled water in the UK turned out to be a flop mainly
because it tries to position this "purified tap water" alongside mineral water of
other brands. The trigger was a contamination scandal reported in the media.
Two-Stage Market Segmentation
Industrial market segmentation based on broad two-step classifications of
a. Macro-segmentation and
b. Micro-segmentation.
This model is one the most common methods applied in industrial markets today.
It is sometimes extended into more complex models to include multi-step and
three- and four-dimensional models.
Macro-segmentation centers on the characteristics of the buying organisation,
thus dividing the market by:
- Company / organisation size: one of the most practical and easily identifiable
criteria, it can also be good rough indicator of the potential business for a
company. However, it needs to be combined with other factors to draw a realistic
picture.
- Geographic location is equally as feasible as company size. It tells a company a
lot about culture and communication requirements. For eg. A company would
adapt a different bidding strategy with an Asian company than an American

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customer. Geographic location also relates to culture, language and business
attitudes. For eg., Middle Eastern, European, North American, South American and
Asian companies will all have different sets of business standards and
communication requirements.
- SIC core (standard industry classification), which originated in the US, can
be a good indicator for application-based segmentation. However it is based only
on relatively standard and basic industries, and product or service classifications
such as sheet metal production, springs manufacturing, construction machinery,
legal services, cinema's etc. Many industries that use a number of different
technologies or have innovative products are classified under the 'other' category,
which does not bring much benefit if these form the customer base. Eg.s are
access control equipment, thermal spray coatings and uninterruptible power
supply systems, none of which have been classified under the SIC.
- Purchasing situation, new task, modified re-buy or straight re-buy. This is
another relatively theoretical and unused criterion in real life. As a result of
increased competition and globalisation in most established industries, companies
tend to find focus in a small number of markets, get to know the market well and
establish long-term relationship with customers. The general belief is, it is cheaper
to keep an existing customer than to find a new one. When this happens, the
purchase criteria are more based on relationship, trust, technology and overall cost
of purchase, which dilutes the importance of this criterion.
- Decision-making stage. This criterion can only apply to newcomers. In cases of
long-term relationship, which is usually the objective of most industrial businesses,
the qualified supplier is normally aware of the purchase requirement, i.e. they
always get into the bidding process right at the beginning. & "with increasing
turbulence in the marketplace, it is clear that firms have to move away from
transaction-oriented marketing strategies and move towards relationship-oriented
marketing for enhanced performance".
- Benefit segmentation: The product's economic value to the customer, which is
one of the more helpful criteria in some industries. It "recognizes that customers
buy the same products for different reasons, and place different values on

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particular product features. For eg. The access control industry markets the same
products for two different value sets: Banks, factories and airports install them for
security reasons, i.e. to protect their assets against. However, sports stadiums,
concert arenas and the London Underground installs similar equipment in order to
generate revenue and/or cut costs by eliminating manual ticket-handling.
- Type of institution: banks would require designer furniture for their customers
while government departments would suffice with functional and durable sets.
Hospitals would require higher hygiene criteria while buying office equipment than
utilities. And airport terminals would need different degrees of access control and
security monitoring than shopping centers. However, type of buying institution and
the decision-making stage can only work on paper. As institutional buyers cut
procurement costs, they are forced to reduce the number of suppliers, with whom
they develop long-term relationships. This makes the buying institution already a
highly experienced one and the suppliers are normally involved at the beginning of
the decision-making process. This eliminates the need to apply these two items as
segmentation criteria.
- Customers' business potential assuming supply can be guaranteed and prices
are acceptable by a particular segment. For eg., 'global accounts' would buy high
quantities and are prepared to sign long-term agreements; 'key accounts' medium-
sized regional customers that can be the source of 30% of a company's revenue as
long as competitive offering is in place for them; 'direct accounts' form many
thousands of small companies that buy mainly ob price but in return are willing to
forego service.
- Purchasing strategies, global vs. local decision-making structure, decision-
making power of purchasing officers vs. engineers or technical specifies.
- Supply Chain Position: A customer' business model affects where and how
they buy. If he pursues a cost leadership strategy, then the company is more likely
to be committed to high-volume manufacturing, thus requiring high-volume
purchasing. To the supplier, this means constant price pressure and precise
delivery but relatively long-term business security, e.g. in the commodities
markets. But if the company follows a differentiation strategy, then it is bound to

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offer customised products and services to its customers. This would necessitate
specialised high-quality products from the supplier, which are often purchased in
low volumes, which mostly eliminates stark price competition, emphasises on
functionality and requires relationship-based marketing mix.
Micro-segmentation on the other hand requires a higher degree of knowledge.
While macro-segmentation put the business into broad categories, helping a
general product strategy, micro-segmentation is essential for the implementation
of the concept. "Micro-segments are homogenous groups of buyers within the
macro-segments" Macro-segmentation without micro-segmentation cannot provide
the expected benefits to the organisation. Micro-segmentation focuses on factors
that matter in the daily business; this is where "the rubber hits the road". The most
common criteria include the characteristics of the decision-making units within
each macro-segment
E.g. - Buying decision criteria (product quality, delivery, technical support, price,
and supply continuity). "The marketer might divide the market based on supplier
profiles that appear to be preferred by decision-makers, e.g. high quality – prompt
delivery – premium price vs. standard quality – less-prompt delivery – low price".
- Purchasing strategy, which falls into two categories, according to Hutt and
Speh: First, there are companies who contact familiar suppliers (some have vendor
lists) and place the order with the first supplier that fulfils the buying criteria.
These tend to include more OEM's than public sector buyers. Second, organizations
that consider a larger number of familiar and unfamiliar suppliers, solicit bids,
examine all proposals and place the order with the best offer. Experience has
shown that considering this criterion as part of the segmentation principles can be
highly beneficial, as the supplier can avoid unnecessary costs by, for eg. not
spending time and resources unless officially approved in the buyer's vendor list.
- Structure of the decision-making unit can be one of the most effective
criteria. Knowing the decision-making process has been shown to make the
difference between winning and losing a contract. If this is the case, the supplier
can develop a suitable relationship with the person / people that has / have real
decision-making power. For eg., the medical equipment market can be segmented

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on the basis of the type of institution and the responsibilities of the decision
makers, according to Hutt and Speh. A company that sells protective coatings for
human implants would adapt a totally different communication strategy for doctors
than hip-joint manufacturers.
- Perceived importance of the product to the customer's business (e.g.
automotive transmission, or peripheral equipment, e.g. manufacturing tool)
- Attitudes towards the supplier: Personal characteristics of buyers (age,
education, and job title and decision style) play a major role in forming the
customers purchasing attitude as whole. Is the decision-maker a partner,
supporter, neutral, adversarial or an opponent? Industrial power systems are best
"sold" to engineering executive than purchasing managers; industrial coatings are
sold almost exclusively to engineers; matrix and raw materials are sold normally to
purchasing managers or even via web auctions.
The above criteria can be highly beneficial depending on the type of business.
However, they may be feasible to measure only in high-capital, high-expense
businesses such as corporate banking or aircraft business due to high cost
associated with compiling the desired data. "There are serious concerns in practice
regarding the cost and difficulty of collecting measurements of these micro-
segmentation characteristics and using them".
The prerequisite to implementing a full-scale macro- and micro-segmentation
concept is the company's size and the organisational set-up. A company needs to
have beyond the certain number of customers for a segmentation model to work.
Smaller companies would not need a formal segmentation model as they know
their customers in person, so they can apply Hunter's n=1 model.
Nested Approach to Segmentation:
The application of all the criteria recommended by Wind and Cardozo and
subsequent scholars who expanded upon their two-stage theory became
increasingly difficult due to the complexity of modern businesses, Bonoma and
Shapiro suggest that the same / similar criteria be applied in multi-process manner
to allow flexibility to marketers in selecting or avoiding the criteria as suited to

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their businesses. "They proposed the use of the following five general
segmentation criteria which they arranged in a nester hierarchy:
i) Demographics: industry, company size, customer location
ii) Operating variables: company technology, product/brand use status,
customer capabilities
iii) Purchasing approaches: purchasing function, power structure, buyer-
seller relationships, purchasing policies, purchasing criteria
iv) Situational factors: urgency of order, product application, size of order.

Buyers' personal characteristics:

The idea was that the marketers would move from the outer nest toward the inner,
using as many nests as necessary". As a result this model has become one of the
most adapted in the market, rivaling the Wind & Cardozo model head-on. One of
the problems with the nested approach "is that there is no clear-cut distinction
between purchasing approaches, situational factors and demographics. Bonoma
and Shapiro are aware of these overlaps and argue that the nested approach is
intended to be used flexibly with a good deal of managerial judgment.
Bottom-up Approach
According to Kotler, where masses of customer data are studies and similarities
searched to make up segments that have similar needs, i.e. assessing the
customer base quantitatively and grouping them – i.e. building up – the segments
based on similarities in purchasing attitude.
When starting the segmentation process, instead of seeing customers as identical,
the build-up approach begins by viewing customer as different and then proceeds
to identify possible similarities between them. In a turbulence market [pretty much
all markets today], using a build-up approach is more suitable than a breakdown
approach".
Targeting and Positioning
"There is a critical difference in emphasis between target market and audience.
The term audience is probably most useful in marketing communication". (Croft,
1999) Indeed, people to whom a product or service is sold are target markets.

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Therefore, marketing operations include the entire go-to-market processes such as
product lifecycle management, pricing, distribution, sales and after sales service
as well as communication.
Target markets can include end user companies, procurement managers, company
bosses, contracting companies and external sales agents. Audiences, however, can
include individuals that have influence over purchasing decision, but may not
necessarily buy a product themselves, e.g. design engineers, architects, project
managers and operations managers, plus those in target markets.
Competition
Attempting to include two vast topics such as India and China into this discussion
is naive. However, one element that should never be left out of sight while
segmenting, targeting and positioning, is competition. This is a key concern that
may impact the success of the company, especially as one of segmentation's core
objectives is differentiation.
Apart from the expected competition within a company's known geographic reach,
competition is seriously taking shape from China and India, both of whom have
been predicted to become global economic superpowers within a few years. The
bulk of the threat is facing Europe and North America. "Italy is the sick man of
Europe–its economy has shrunk 4% since 1999. Along with Germany and France,
the nation has been struggling with weak consumer spending, waning productivity
and rising government deficit. Italy's economic structure is almost perfectly shaped
for an attack by China. "The threat is not only relevant to Italy, but the whole of
Europe, including the UK,
The second major threat comes from India. Where China is turning into the world's
'manufacturing house', India is focusing on IT outsourcing, software development,
business process off shoring (BPO), banking, insurance and legal services. "Exports
from India's IT industry and from BPO are on track to reach $60 billion a year by
2010, representing a 28% annual growth rate. India currently accounts for 65% of
the world's offshore IT services and 46% of its BPO."
As modern industries are driven by mechanical and electronics technologies, and
both of these are being dominated by either China or India, the balance of

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economic power is bound to shift from West to East. This will impact the way
companies do business. Those that can offer low-cost, efficient solutions sourced in
either of those countries are likely to survive and prosper provided they take
advantage of the modern communication skills to market themselves
appropriately.

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