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List of Contents: a. List of Contents b. Introduction and abstract 1 2

c. Explanation of the underlying requirements for market segmentation: 1. Market Definition i. ii. iii. iv. v. vi. Measuring the market share and market growth Recognize the relevant competitors Identify the firm’s current competitive position Identify the nature of the market Purpose of the previous group of requirements 3 3 4 4 4, 5

Some suggested tools for implementing the previous requirements 5 5, 6, 7, 8 9, 10

2. Actual reasons for market segmentation d. An overview of major issues in segmentation e. List of references

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Student name: Ibrahim Moh. Eldeeb Id: 109414

Market Segmentation Introduction: Most of marketers agree that a business should be customer-focused in order to achieve the organizational objectives at all levels. Thus, most strategists try to design strategies that can better serve the target market. But, before designing strategies, they must well recognize the prospective market, customers’ needs, characteristics, preferences and different buying patterns. Then, they should combine the like-minded customers with each other in groups to represent segments of the market. This process is called ‘market segmentation’. Market segmentation is a process by which a strategist can divide the market into like-minded groups and put specific variables for segmentation which are based on the differences between customers (Hooley, Piercy and Nicoulaud, 2008:206). Thus, it is a critical tool for accurate recognition of prospective customers’ needs and responding accordingly. However, not all businesses are satisfied with market segmentation as a concept although they really know the

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logic behind it. This is because segmentation may be difficult to apply in some markets or may be given more attention than the market itself (Wilson and Gilligan, 2005:318). Therefore, a research for Lazarus Research Group (2006) has suggested a specific group of requirements that must be achieved by a strategist so as to create efficient and effective market segmentation. Thus, this paper will discuss the underlying requirements for accurate market segmentation. The topic will be discussed in a simple way that defines each requirement, suggest optimal tools for achievement and purpose of every single requirement. In addition, the information used in the discussion and explanation are very valuable because it is obtained from different resources to view the topic from diverse perspectives. What about an introduction for the issues used

Explain the underlying requirements for market segmentation. Customer needs should be put at the heart of market segmentation process. But, how a strategist can recognize these needs and how he or she best serves the target customer. First, define the market as follow: a. Measuring the market share and market growth (McDonald,MSC,2010): Strategists should wisely estimate the current market share, in terms of value and size, and the expected future growth rate to be able to assess the attractiveness of the potential market. In this context, the strategist tries to weigh the expected net profit compared to the costs incurred in the segmentation process in an attempt to assure whether the segmentation will be profitable, or not. b. Recognize the relevant competitors(McDonald,MSC,2010):

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Strategies should identify the key competitors in the prospective market and study them very well to be capable of assessing the level of competition within the market. By collecting such information, they become ready to fight against the prospective competitors.

c. Identify the firm’s current competitive position: Developers must recognize the firm’s strength among other competitors within the market so that they can judge whether a firm is qualified for the existing competition, or not. More importantly, if the firm is not qualified to fight against the current competitors, strategists should start to develop both short-run and long-run strategies. Short-run strategies may be difficult to be attained because of high costs incurred, but it will help a firm compete in a shorter time. Still, they are not enough for maintaining a competitive advantage over other players in the market, so a great effort should be done in the formulation of long-term strategies, taking into consideration the current situation of the firm against other firms within the market. d. Identify the nature of the market (Lazarus,2006:2): Strategists ought to study the nature of market, meaning that recognizing whether the market is dominated by a Business-To-Business market (B2B), a Business-To-Consumer (B2C) market, or a combination of both types. B2B market is a market in which a firm is selling its products or services to another company, whereas B2C market is the one where a company is selling its products or services to a consumer. Therefore, an assessment for the differences between both markets is highly recommended to be conducted in order establish an effective market segmentation strategy that better serves the needs of prospective consumers. This is because this assessment will provide the strategists with a clear understanding of the key differences already existed between B2B and B2C markets. For instance, the number of customers served in B2B market is small, whereas it is large in the B2C market.

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Purpose of the previous group of requirements: In addition to the stated reasons for every single requirement, there are common purposes for the previous whole group of requirements. This group can provide a rich understanding for the market structure in three critical areas which are consumers’ perceptions of brands, estimation of the current demand for a specific product and the ability to predict consumers’ responses to new and modified products accordingly (Wilson and Gilligan, 2005, p.328). As a result, a strategist can convert such an understanding to a basis for segmentation strategy. Some suggested tools for implementing the previous requirements: Wilson and Gilligan (2005:322) suggested a formal procedure that helps in collecting information about such requirements which has three steps as follow: I. Survey stage: in such a stage, the researcher collects the required information about brand awareness and its ranking among competitors, popular usage behaviors and consumers’ attitudes of a specific product. II. Analysis Stage: here the researcher tries to recognize specific groups within the market. Each group share similar characteristics among its members and is differentiated from other groups within the market. After that, each group will be called a segment which is one of the obtained results from market segmentation. III. Profiling Stage: this stage is the last one where the researcher collects the shared characteristics of each segment in a profile that is recommended to be given a distinctive name from other profiles. Second, the strategist must determine the actual reasons for market segmentation: The reasons behind segmentation may be one of the following reasons, a combination of them, or not (Lazarus, 2006, p.3). a. increasing profits, sales or return on investment, b. organizing or centralizing customer base, c. opening a new business,

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d. repositioning existing products or analyzing customers, and e. introducing new products The determination of the real reasons for segmenting the market in an earlier stage will be very beneficial in choosing the suitable methods and approaches of segmentation. By the accurate determination of the reasons behind segmentation, a firm will be able to decide on the best way to enter the prospective market. This way may be either introducing a single product for multiple segments, or multiple products to multiple segments (Lazarus, 2006:3). The first method, that is one product to multiple segments, is based on the different suggested packages for different segments. By using this method, a firm design different promotion and distribution programs that make the product suitable for the largest possible number of the potential target market. In contrast, the second method of introducing many products to many segments is based on an extensive research for the market to identify the current needs and respond by production and introduction of the new products accordingly. Therefore, a strategist has to determine whether a firm will introduce a single product or many products. Taking such a decision is not easy, so a strategist must first consider the costs and benefits of each method as follow: a. A single product to multiple segments method: This method is very simple since it avoids the high costs that may be incurred for the extensive research and introduction of other versions of the product. Although it is easy and simple to apply, it can be very risky because the market, partially or entirely, may not accept this product. Thus, a product needs to be differentiated and innovative enough to protect the firm from falling in such a trap. b. A multiple products to multiple segments: This method is more complicated than the other method as it requires more expenses for the research, development and introduction for different versions of a product. It may have risk lower than the other method as it introduces a diversified group of products that maximize the opportunities for sales.

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In fact, each method has advantages and disadvantages, so the wise strategist is the one who decides on a method which can be profitable and cost-effective and above all, serve the customers’ needs. By the wise choice of one of these methods, the firm has organized its products portfolio. Still, a firm needs to organize its customers into segments, so it has to select the suitable segmentation approach that will help the strategist use the obtained information from the above requirements. The choice decision should be based on the amount of knowledge acquired about the market (Wilson and Gilligan, 2005:325). For instance, if the results of the above used procedures give the strategist a rich understanding for the market, the strategist may use an approach called an a priori approach may be used. Whereas, if the above procedures, for information collection, do not give the strategist enough knowledge or assured facts about a specific market, the strategist ought to use post hoc approach. Wilson and Gilligan (2005, p.324) has explained the two methods as follow: a. An a priori approach: An approach in which a strategist decides on the basis be used in the segmentation process before the starting of doing the research. This decision cannot be taken if the strategist does not have enough understanding for the market. Hence, this method is used only by the strategist who understands the market very well. By the use of such an approach, buyers will be classified either on: 1. the basis of usage patterns (heavy, medium, light and non-users) as in the case of the industrial or the Business-To-Business markets, 2. demographic characteristics ( age, sex and income) as in the case of the Business-ToConsumer market, and 3. psychographic profiles (lifestyle and personality) as also in the case of consumer market After the choice of one or a combination of the above bases, the strategist becomes ready to use the chosen bases in identifying every single detailed related to the prospective customers such as their location and potential size.

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b. Post hoc approach: This approach is very dissimilar from the other approach as the basis for segmenting the market is chosen after the ending of conducting the market research. This means that the research findings are the key determinant for the used basis in segmentation. Consequently, it may have greater risk than the other method as it can be beneficial only if the obtained information about the market is complete and consistent. Nonetheless, if the research findings are partially or entirely doubtful, the determined basis for segmenting may cause a misunderstanding for the market. Misunderstanding of the market can lead to a surprise decline in a firm’s sales. For example, if a firm is operating in a market that puts the high quality products on the top of their choices, and for some unknown reasons, the market research found that the price of a product is the key determinant for choosing any product in this market. As it is illustrated in this example, the research has found a result other than what is actually existed in the market. Thus, the strategist must carefully determine the suitable approach whether the first one, the second one, or a combination of both.

By doing so, the all the requirements discussed by Hooley, Piercy and Nicoulaud (2008:211) can be easily implemented. These premises are as follow:  There must be differences between customers which lead to different buying patterns so that the strategist can use these differences as a basis for market segmentation. All these differences can be simply concluded from the use of either an a priori or post hoc approaches.  The segment target should be recognized carefully in terms of size and value. This can be assured from the above requirement of measuring the market share and market growth.  The selected segments can be isolated from the rest of the market by the clear understanding of the market by the researcher. This is to provide a distinctive offering for the selected segments.

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An overview of major issues in segmentation: There is a group of issues related to market segmentation that must be continually reviewed and considered by researchers. Some of these issues have discussed by Wilson and Gilligan (2005), which are called “factors affecting the feasibility of segmentation”. Part of this factors are also discussed by Piercy and Morgan (1993) under the name of “testing the robustness of segments”. These factors, which must be satisfied in any segment, are as follow: a. ‘Measurable’: The task of measuring the segment can be simple in the case of consumer market. In contrast, it is very complicated with most types of industrial markets that require a diversified group of technical goods because of lack of published technical data. b. ‘Accessible’: Not all markets can be easily entered because of the high capital needed to enter a specific market or the special expertise needed in a specific field. So, a firm may find that a definite segment is profitable and measurable, but it cannot exploit it. c. ‘Substantial’: The segment must be attractive for a firm in terms of relative size and value to the firm. This is necessary to be existed in order for the process of segmentation to be costeffective. d. ‘Unique in its response’: The segment should be distinctive from other segments in order to support the firm’s competitive advantage. e. ‘Appropriate’: The firm should have the resources and capabilities needed to exploit this segment. Likewise, the use of these capabilities and resources should not affect the overall performance of a company. f. ‘Stable’:

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Stability itself is impossible, but in order to stabilize a segment, a continual updating of information about a market segment is highly required. Piercy and Morgan (1993) have also suggested three other issues which are: a. The methodology of market segmentation: It includes the choice of discussed above bases of segmentation and the applied procedures and techniques of segment evaluation such as post hoc and as a priori approaches. b. Strategic segmentation decision: The decisions related to ‘segmental analysis, modeling and attractive segments’. The strategist has to decide whether the firm will target the market entirely or partially. c. Implementation of segmentation strategies: Implementing the segmentation strategy require a specific capabilities an resources to perfectly attain the organizational objectives.

References: 1. Strategic Marketing Management textbook, 3rd edition, 2005, Richard M.S. Wilson and Colin Gilligan 2. Marketing Strategy and competitive Positioning, 4th edition, Graham J. Hooley, Nigel F. Piercy and Brigitte Nicoulaud. 3. A research by Lazarus group, www.lazarussearch.com

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