Defining the Market Segment – a neglected critical issue

Eli Goldratt said: Segment the market – don’t segment your resources!

Goldratt wished to allow as much as possible market segmentation in order to price differently the same basic products, produced and delivered by the same group of resources. In order to do so successfully we need to understand every market segment very well and include in the package of product features and the service around it unique value for that particular segment. Airlines are great in exploiting the possibilities for different prices; from how long before the flight you purchase the ticket, through the different classes, whether you are allowed to change your flight and even when you like to sit in an exit row.

I claim that the concept of a decisive competitive edge (DCE) forces us to look again and in depth into the definition of the segment to which the DCE is most valuable. So, once we have a DCE in mind we should be able to conclude who are going to get the most value – and that group is the market segment we are looking for. For instance, offering superior inventory-turns as a DCE is attractive to clients that have all these characteristics:

• The client uses inventory-turns as a formal measurement.
• We are responsible to significant amount of the client’s inventory, at least the inventory for which the decision maker we do business with is responsible for.  Thus, we are able, using our logistics, to make a real impact on our client’s relevant inventory turns.
• We are considered by the client as a good supplier.
  • While this characteristic depends a lot on us, we need to recognize that when this is not the case it’d be very difficult to change the perception of the client.  Thus, we need to exclude from the segment definition clients who don’t trust us.
  • This condition usually considers old clients.  New clients might belong to the segment when we know they have heard good things about our company and products.
• The responsible person at the client is open enough to let’s manage our SKUs at his site.

We might think of another segment, which might still get a lot of value, like when inventory turns are not used as a formal measurement, but the client struggles with their cash, or suffers a lot of from shortages. However, the selling process would be quite different, certainly without the emphasis on inventory-turns.

My conclusions are that defining well the market segment(s) is absolutely critical to the choice of the DCE, and thus has a huge impact on the Strategy.

How do we analyze our clients to construct the segment definition?

I have often encountered the idea of constructing the CRT of our potential clients or the CRT of the whole market. I don’t really like the idea because of two points. First, I believe it is impossible to construct a CRT without the active participation of the organization. I’m also not sure whether the whole market has the same one core problem. Second, even if we succeed to identify the core problem then what is the probability that we are able to solve (evaporate the cloud) the core problem for our potential clients?

What we can do is identify several key UDEs that our clients are aware of, which we could eliminate or reduce. Please, note the difference. We don’t try to connect all client UDEs. We just contribute value by reducing the negative impact of one or few UDEs. For our clients this is usually enough to prefer us on our competitors and by this gain a decisive competitive edge.

How do we identify UDEs of our clients that we might be able to solve?

By considering the environment of the client and taking into account some of the common flawed paradigms, we are able to speculate several possible negative results, which are the UDEs we look for.

For instance, batching the transportation leads to overstock and shortages at the same time. When we speculate such an effect it is not difficult to validate that this is really the case. Offering low stock and very rare shortages hit directly at the pain, without having to fight with the paradigm of batching as a saving cost mechanism.

As a consultant to various types of organizations I’m amazed how little consideration to proper market segmentation analysis is given. The core cause is probably the naïve belief that “our products are good for everyone.” Most small to medium size organizations do not have active marketing people. Larger organizations have marketing efforts that are mostly advertising. The key messages in advertising campaigns consider very gross definition of the target market, like “young people between 16 and 24”, but that’s it. I have not seen many clear definitions of the market segment per SKU category. In cosmetics you just find a little bit more awareness to specific segments. We should, as part of our TOC background, demand clearer analysis of the potential customers who would draw the most value of specific products. Certainly we need a clear definition of the segment for which our DCE is target to.

A small example to discuss. Currently I use Windows 8 on my desktop computer. I get messages like “Your Free Upgrade to Windows 10”. It is nice to get value for free – BUT WHAT IS THE VALUE? Microsoft does not tell me. I don’t know whether the unique value is directed at software developers, people who practically spend their life in front of the PC, or elderly people who still use computers? Microsoft does not tell. Maybe they never thought about it. I do claim they should have. Even an operating system cannot yield a lot of value to everybody.