In evaluating different market segments, the firm must look at two factors: the segmentâ€™s overall attractiveness and the companyâ€™s objectives and resources. How well does a potential segment score on the criteria? A potential segment must have characteristics that make it generally attractive, such as size, growth, profitability, scale economies, and low risk. Investing in the segment should make sense given the firmâ€™s objectives, competencies, and resources. Some attractive segments may not mesh with the companyâ€™s long run objectives, or the company may lack one or more necessary competencies to offer superior value.
Single Segment Concentration
Volkwagen concentrates on the small car market and Porsche on the sports car market. Through concentrated marketing, the firm gains a strong knowledge of the segmentâ€™s needs and achieves a strong market presence. Furthermore, the firm enjoys operating economies through specializing its production, distribution, and promotion. If it captures segment leadership, the firm can earn a high return on its investment.
However, there are risks. A particular market segment can turn sour or a competitor may invade the segment: When digital camera technology took off, Polaroidâ€™s earnings fell sharply. For these reasons, many companies prefer to operate in more than one segment. If selecting more than one segment to serve, a company should pay cost attention to segment interrelationships on the cost, performance, and technology side. A company carrying fixed costs (sales force, store outlets) can add products to absorb and share some costs. The sales force will sell additional products and a fast food outlet will offer additional menu items. Economies of scope can be just as importance as economies of scale.
Companies can try to operate in super segments rather than in isolated segments. A super segment is a set of segments sharing some exploitable similarity. For example, many symphony orchestras target people who have broad cultural interest, rather than only those who regularly attend concerts.
A firm selects a number of segments, each objectively attractive and appropriate. There may be little or no synergy among the segments, but each promises to be a moneymaker. This multi-segment strategy has the advantage of diversifying the firmâ€™s risk. When Procter & Gamble launched Crest White strips initial target segments included newly engaged women and brides-to-be as well as gay males.
The firm makes a certain product that it sells to several different market segments. An example would be a microscope manufacturer who sells to university, government and commercial laboratories. The firm makes different microscopes for the different customer groups and builds a strong reputation in the specific product area. The downside risk is that the product may be supplanted by an entirely new technology.
The firm concentrates on serving many needs of a particular customer group. An example would be a firm that sells an assortment of products only to university laboratories. The firm gains reputation in serving this customer group and becomes a channel for additional products the customer group can use. The downside risk is that the customer group may suffer budget cuts or shrink in size.