Because businesses exist to serve customers, the beginning point in developing competitive strategy is customer analysis. To establish a strategic edge over its competition, the firm must define the broad market it intends to serve, segment the market, and identify specific segment(s) it intends to concentrate upon. In this article the steps in customer analysis that are essential for the development of a competitive strategy are reviewed.
Defining the market
Proper market definition is critical to strategic success. It is a difficult task, however, since markets can be defined in a wide variety of ways. Frequently, markets are defined in terms of products or product classes. For example, it is common to hear people speak of ‘the automobile market’ or ‘the soft drink market’. Such marker descriptions imply that buyers of products are relatively homogeneous in needs and can therefore be defined in terms of those products. In fact, the underlying delineating factor in market definition should be customer need. An effective strategy develops a way to satisfy customer needs better than competitors. A second factor useful for defining a market is the type of basic technology that is utilized in some situations, such as home entertainment. Several different technologies may be employed to satisfy a particular customer need. For example, stereos, phonographs, tape players, or compact disc players represent different technologies for music reproduction. The third factor in defining a market is the customer group(s) served. Each customer group typically has a preference for a somewhat different product or service. To establish an effective market definition, the range of alternative customer segment(s) must be considered.
In the example, three alternative customer needs are identified, each of which can be satisfied with different technologies and may be required by three different customer segments.
A specific firm may choose to define its market narrowly (baking in household gas appliances) or quiet broadly (all cooking needs and technologies). The decision in terms of market definition is critical to the analysis of competition and the development of specific strategy. From the standpoint of distribution, or example, different channels would be necessary for the distribution of charcoal boilers to restaurants than for the marketing of natural gas ovens to households.
Even given the definition of customers illustrated in each group could be further subdivided into finer segments. Since different buyer segments tend to seek different benefits, not only in terms of product features, but also in terms of purchasing convenience, product availability and servicing, channels strategy must be responsive to heterogeneous demands. Clearly, for example, household users of cooking appliances differ in their needs for specific features, their preferences for where to shop the amounts they want to cook, the prices they want to spend, and a multitude of other factors. The various bases for specific market segmentation are discussed, where their direct relevance to design of specific distribution channels is discussed. The broad market definition developed at this stage of analysis provide the parameters for determining certain critical information: market size and growth rates, sales patterns and cycles, and overall attractiveness of an industry. This information can be used as a guide for the evaluation of strategic opportunities. It also provides the necessary foundation for identifying the competitive arena in which the firm will operate ad the specific competitors. Broad market segments must be identified for the purpose of developing a strategic position, but more specific segment identification and analysis is necessary to implement distribution channel strategy.
The second major analytic process in developing a strategic position is competitive analysis. The fundamental purpose of strategy is to beat competition. Competitive analysis begins with an examination of the structure of an industry. This structural overview provides insight into the attractiveness of an industry and the competitive rivalry. Competitors must be identified and their strengths and weakness assessed to understand how different firms in the market are likely to perform with and respond to a new competitor entering the marketplace.