LITERATURE REVIEW OF MARKET SEGMENTATION, MARKET SEGMENT EVALUATION AND SELECTION

Professor: Ta Chung ChuStudent: Nguyen Khoa Tu Uyen – M977Z215 Nguyen Phan Anh Huy – M987Z264

Steps in Market Segmentation, Targeting and Positioning

(FUZZY MCDM APPROACH)

Market segmentation Market segmentation is a concept in economics and marketing.

A market segment is a sub-set of a market made up of people or organizations sharing one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function. (Wikipedia).

Market segmentation involves detecting, evaluating and selecting homogeneous groups of individuals regardless of whether consumers or not with the intention of designing and directing appropriate competitive strategies (Ou, Chou and Chang, 2009).

Market Segmentation:

- is the process of dividing the total market for a particular product or product category into relatively homogeneous segments or groups.

- should create groups where the members are similar to one another but where the groups are dissimilar from one another.

- involves a fundamental decision of whether to segment at all.

- typically allows firms to be more successful due to the fact that they can tailor products to meet the needs or requirements of a particular market segment.

(Ferrell and Hartline, 2008)

Segmentation variables

Consumer Markets Personal characteristics Geodemographics Psychographics (values and lifestyles) Benefits sought (quality, price, style, image) Behavioral Measures (product usage and

actual behavior such as buying patterns, usage data, channel, ownership, quantities, brand loyalty, attitudes)

Ferrell and Hartline, 2008

The first is behavior segmentation includes:

- Benefits sought such as quality, value, taste, image enhancement, beauty, speed, excitement, entertainment, nutrition, convenience; - Product usage such as heavy, medium, and light users or nonusers, former users, first-time users; - Occasions or situations such as emergencies, celebrations, birthdays, anniversaries, weddings, births, funeral, graduation; - Price sensitivity such as price sensitive, value conscious, status conscious.

The second is demographic segmentation includes:

- Age such as newborns, 0-5, 6-12, 13-17, 18-25, 26-34, 35-49, 50-64;- Gender such as male, female; - Income such as under $15,000, $15,000-$30,000, $30,000-$50,000;- Occupation such as blue collar, white collar, technical, professional, managers, laborers, retired, homemakers, unemployed; - Education such as high school graduate, some college, college graduate, graduate degree; - Family life cycle such as single, married no children, married with young children, married with teenage children, married with grown children, divorced, windowed; - Generation such as generation X, generation Y, baby boomers, seniors; - - Social class such as upper class, middle class, lower class, working class, poverty level, etc.

The third is psychographic segmentation includes:

- Personality such as outgoing, shy, compulsive, individualistic, materialistic, civic minded, controlled, anxious, venturesome;

- Lifestyle such as outdoor enthusiast, sports-minded, homebody, couch potato, family centered, workaholic;

- Motives such as safety, status, relaxation, convenience.

The fourth is geographic segmentation includes:

- Regional such as Northeast, Southeast, Midwest, etc;

- City or country size such as under 50,000, 50,000-100,000, etc;

- Population density such as urban, suburban, rural.

Segmentation in B2B Market

Business markets:

- purchase products for use in their operations, such as acquiring raw materials to produce finished goods or buying office supplies or leasing cars.

- consist of four types of buyers: Producer markets, reseller markets, government markets, and institutional markets.

- possess four unique characteristics not typically found in consumer markets:

+ The buying center: Economic buyers, technical buyers, and users comprise this element.

+ Hard and soft costs: Soft costs (downtime, opportunity costs, or human resource costs) are just as important as hard costs (monetary price or purchase costs).

+ Reciprocity: Business buyers and sellers often buy products from each other.

+ Mutual dependence: Sole-source or limited-source buying makes both buying and selling firms mutually dependent.

(Ferrell and Hartline, 2008)

Segmentation variables

(Segmentation in B2B Markets, A White Paper by Paul Hague of B2B International)

B2B Markets

The evaluation of the segment

The following criteria could be used: The expected demands on the company The potential profit compared with the related risk The competition, number of competitors, and their strengths,

preferences, etc. Governmental and public moves The ability to reach buyers in the market Technology Ability to gain a competitive advantage The connections between present networks (such as strategic

alliances) and the identified segments and the possibility of any conflicts

(Freytag and Clarke, 2001)

Freytag and Clark, 2001 In many later discussions of segment evaluation, the contributions of

researchers revolve around determining segment attractiveness by using Kotler’s measurability, substantiability, accessibility, and actionability criteria. These often are translated into numerous other related criteria, such as segment size, segment growth, segment structural attractiveness, expected segment profitability, and risk.

Segments need to be selected where the company can create competitive advantages and gain the position in the segment that they want. Segments that may seem attractive, big, growing and with little competition, may not suit the company if the segment cannot be handled well enough internally to gain the desired position in the market. Because no two companies are the same, the process of finding the segments that best match a company’s capabilities should reflect the company’s unique situation.

The evaluation of the segments

The evaluation of the segments is a process that runs throughout the identification of the segments. The evaluation process is broken into two steps. The remaining segments being identified become more qualified as the process goes on, until only the most potentially worthwhile segments are left. First the segments need to be scanned for a few crucial, relatively easily identified variables defined by the company themselves, because they should reflect the goal of the segmentation. These variables need only be estimated. Examples include segment size, growth, customer needs, and the fit with the company’s core competence.

Market Segment Evaluation and Selection

Non Fuzzy Approaches:

“Using a strategy-aligned fuzzy competitive analysis approach for market segment evaluation and selection”,

Ou, Chou and Chang, 2009.

Abstract:This study applies Five Forces Analysis to evaluate and select market segments for international business using a strategy-aligned fuzzy approach. An illustration segment evaluation procedure is used to demonstrate that our procedure is an effective quantification approach for integrating five forces, generic strategies and marketing information in a group decision-making process. The final decision-maker (DM) synthesizes the total crisp scores of individual alternatives by choosing judgmental coefficients k based on individual attitude towards core business competitiveness and market risks to accommodate differences among market segments to the specific environment with a better understanding of the decision problem and individual decision-making behavior. In the illustration presented here, the final solution is then obtained by identifying the best market segment for further development and negotiation.

In evaluating different market segments, firms must look at three factors: segment size and growth, segment structural attractiveness, and company objectives and resources. Firms must first collect and analyze data on current segment sales, growth rates, and expected profitability.

A review of academic research reveals that existing studies have relatively neglected segment evaluation and selection. Most existing studies merely evaluate the sales potential, attractiveness, or stability of individual segments, and fail to consider the needs of competitive strategic management.

The attributes of market segments must be associated with firm competitive strategies. The model of five forces of Porter thus enables a systematic and structured analysis of market structure and competitive situation. This model can be applied to specific companies, market segments, industries or regions. Therefore, the scope of the market to be analyzed must be determined in a first step. Subsequently, all relevant forces for this market are identified and analyzed. Hence, it is not necessary to analyze all of the elements of all competitive forces in the same detail.

Empirical Example:

A lucrative rental-car company growth strategy has been expansion into global markets. The company must aim at each national competition condition of the market selects the most beneficial market segment. The company first collects and analyzes data on each potential segment, including sales, growth rates, and expected profitability. Three market segments are considered for inclusion, including the home-city market, enterprise-rental market and airport-rental market. Evaluating and selecting these market segments is made considerably more complex and risky because of volatility and uncertainty in the global business environment. The company decision uses five forces as analytical tools. When evaluating such market segment, not only may the DMs’ judgments be imprecise, but the forces (criteria and sub-criteria) themselves may be imprecise and vague. Market segment evaluation and selection thus can be considered a MADM problem in fuzzy environments. The following market segment evaluation and selection example is applied to illustrate the proposed FFRS with GDM process.

Step 1:

Management appoints a special committee responsible for selecting the best segment for the rental-car market. The committee consists of five top managers from various functional departments within the company, that is, the general marketing manager D1, the financial manager D2, the customer service manager D3, the car maintenance manager D4, and the business section manager D5. Global market information had been received. The marketing research personnel collect the data and tidy it up to provide it to the special committee. The committee organizes a series of meetings to determine a profile of the firm market strategy and the most beneficial potential market segment using the tools provided by this study.

Step 2:

Following the compromised mechanism of the committee on the discussion, the importance weights of individual DMs It, (I1 = 3.0, I2 = 2.0, I3 = 3.0, I4 = 1.0, I5 = 2.0), are assigned by the final DM. Then, use linguistic weighting variables and their respective fuzzy numbers for DMs to assess the importance weights of the sub-criteria and criteria. Based on the assessment values, the fuzzy weights of individual sub-criteria and criteria can be computed or calculated.

Step 3:

Compute the defuzzified values of these aggregated fuzzy weights and the standardized weights of the sub-criteria and criteria.

Step 4: Use the linguistic rating variables and their respective fuzzy numbers for DMs to assess the fuzzy ratings of the three alternatives with respect to each sub-criterion, and then compute the aggregated fuzzy rating of each sub-criterion.

Step 5:

Compute the aggregated fuzzy rating of each segment-criterion combination, and then form the fuzzy rating matrix.

Step 6:

Compute the total fuzzy scores for the individual segment. Then compute the individual defuzzified values of these total fuzzy scores.

The ranking order for the three alternative segments is S2, S1 and S3. The final DM and the committee thus should identify S2 as the best selection and recommend it as the target segment.

The advantages of fuzzy approaches compare with statistical approaches:

Ou, Chou and Chang, 2009:

Market segment evaluation and selection (MSE/MSS) is a cross-functional, group decision-making (GDM) problem, frequently solved by a non-programmed decision making process, with long-term strategic implications for firms. Decision groups contain decision-makers/experts (DMs) dealing with specific issues, for example the marketing, sales, market research, and accounting and finance personnel dealing with MSS/ MSE issues, or other experts who are more experienced than others. In reality, the importance of individual DMs against a decision-making attribute may not be equal or uniform. Notably, the final outcome of the GDM process may be markedly influenced by the degree of importance of such individual DMs.

Additionally, from a long-term perspective, MSE/MSS is a semi-structured decision-making problem at the strategic management level. The inherent imprecision of the relevant information and decision process associated with such problems is broad, has foresight, and is non-recurring and external. Most of these attributes are evaluated by human perception and judgment, and thus the evaluation is subjective. Accordingly, MSE/MSS problems, particularly for new task situations, typically involve the vagueness inherent in linguistic assessment and multiple attributes/criteria decision-making (herein namely MADM). Approaches employing only exact numerical (crisp) values cannot support decision-making procedures for such evaluation problems.

Advantages and Disadvantages of fuzzy journal for market segment evaluation and selection:

Advantage:

They established fuzzy MADM (MCDM) model for market segment evaluation and selection.

Disadvantages:

In their research, they just focus on the competitive analysis and did not mention the other criteria while they are also important.

Accordingly, they did not divide the criteria into quantitative and qualitative as well as benefit and cost.

Selected Criteria for Market Segment Evaluation

Source Criteria Description Quantitative Qualitative

Freytag &

Clarke, 2001

Expected demand (C1) The expected demands on the company Benefit

Potential Profit (C2) The potential profit compared with the related risk Benefit

Competitive advantage (C3)

Ability to gain a competitive advantage Benefit

Competition (C4) Number of competitors Cost

Others

Cost To Reach (C5) How much does your company need to pay for reaching that segment? Cost

Actionability (including organizational capabilities) (C6)

(Jones et al., 2005)

Can programs be designed to attract and service this segment?

Can we, given our current staff and services, develop and implement activities for this market?

Benefit

Segment Size (C7)

(Jones et al., 2005)

How many people, what percentage of population? Benefit

Accessibility (or reachability) (C8)

(Jones et al., 2005)

Can we access and provide products/services this group? Benefit

Expected growth (C9)

Freytag & Clarke, 2001

The expected growth rate of that segment Benefit