Slicing up the Business

August 17th, 2006

As markets have grown more competitive, managers have increased either segmentation of their business activities or customization of their product management offerings. To target buyers better, executives are developing products capable of meeting the needs of a narrower set of market segments either by customizing features to targeted segments or by standardizing offerings across segments.’ By fragmenting market segments, changing environments pressure managers both to target carefully their products and to customize features to local needs.
For U.S. soda giant Coca Cola, cutthroat competition with archrival Pepsico has meant that both firms have had to pursue aggressive strategies for building market share-introducing a wide range of new products targeted to ever narrower market segments-on the one hand, and, on the other, sponsoring extravagant promotions. Through its New Products group, formed in 1989, Coke hopes to snare various local markets from Pepsi with line extensions ranging from Fresca to New Coke and Caffeine Free Coca-Cola Classic K-Mart that appeal to the growing share of’ households with annual incomes less than $15,000. On the other side, their market is attacked by premium-priced outlets like Bergdorf Goodman and Bloomingdale’s expanding downward from their market of upper income households, and by specialty chains such as the Limited directly targeting the middle income market.
The Segmenting Solution
Companies differ in whether they attack a broad sweep or narrow niche within a market. At one extreme are generalist firms whose managers target multiple markets by standardizing the components that go into their products. Most car and cigarette manufacturers, for instance, do SO. Pursuing such a comprehensive strategy in times of environmental change, however, requires access to large pools of capital and human resources: Products must be tailored to the demands of each segment, calling simultaneously for standardized production and for customized packaging, marketing campaigns, and support services.
Most firms respond to environmental upheavals by specializing: They target their firms’ products to a limited number of segments. Geographical location often provides firms with such protected : The corner drugstore, dry cleaner, barber shop, or supermarket hold local monopolies that potential competitors find difficult to attack because of these firms’ established relationships to consumers. houses specializing in low-volume academic treatises, for instance, occupy a narrow but profitable niche within the larger college, trade, and mass-market segments of the industry, as the marketing strategy. In television, Fox has emerged as the United States’ fourth television network by targeting provocative, offbeat programming such as Married with Children and The Simpsons at kids, teens, and young adults-a market attractive to advertisers but relatively neglected by the three established networks. In pianos, Steinway holds a near monopoly in the limited high-priced segment for concert grands. It is increasingly threatened, however, by standardized manufacturers such as Yamaha who rely on innovative technology and automation to lower price and capture market share. Steinway has been slow to capitalize on its reputation to build market share in neighboring segments.
And look at Chemical Bank. Since 1983, under Walter Shipley’s , Chemical Bank has followed a strategy designed to differentiate it from its large New York rivals. Rather than emphasize lending to larger companies, a more congested niche, Chemical executives went after the middle market business, a group of 10,000 firms whose sales range from $10 to $250 million. Chemical now claims to have relationships with over 36 percent of those firms, a result that places it at the top of the heap in the middle-market segment, with Citicorp and National Westminster in second place and, not coincidentally, makes it an ideal merger partner for Manufacturer’s Hanover.
As segments have proliferated, the within which firms compete have grown narrower and tighter. Throughout the 1980s, some firms with access to larger pools of resources found it attractive to broaden their scope by acquiring small-niche players. In book , for example, McGraw-Hill purchased dozens of small businesses that provided access to specialized market segments. Integrating them into a coordinated whole, however, has proved to be a recurrent theme of McGraw-Hill’s reorganizations in the last few years, and should prove to be its key challenge in the years to come.
Customizing
More than before, competition is driving companies to customize their offerings to consumers within market segments. Take the industry. As competition has intensified, industry leaders such as Lotus and Microsoft, once content to mass market their successful spreadsheet packages 1-2-3 and Excel, now gear their programs to specific customers. However, tailoring products means hiring specialists who lavish weeks and months on specific customers-a costly departure from their traditional mass .
Similarly, although globalization significantly increases the market reach of firms, it has pit managers against strong rivals, many of whom are more closely attuned to the characteristics of local markets. Increasingly, both national and transitional marketing require more careful targeting of local consumers. Gone, then, are the mass markets of yesteryear for which manufacturers produced standard, single-brand name, homogeneous products. In their place, mass customized markets are emerging.
In recent years, Procter & Gamble, for example, has responded to globalization by revolutionizing its own operations and targeting local market segments. Recognizing cross-cultural diversity, they regularly customize products to individual tastes by linking consumer data to characteristics. They introduce line extensions to capitalize on brand names and advertise in new media such as schools or cable TV to reach target populations. In the intertwined but culturally disparate economies of the world, this kind of customized production and targeted marketing should be key to achieving competitive advantage in consumer products. P&G has already shown how applying these techniques globally can pay off: Between 1985 and 1989, P&G’s earnings from foreign operations grew from 14 percent to 33 percent, on $8.4 billion in foreign sales.
Although the prospect of scale economies encourages many firms to globalize, achieving these economies also calls for a degree of standardization. In the airline industry, United and American have emerged from the long era of deregulation as head-to-head competitors, vying for air supremacy. Scale economies have critical as both airlines, equally strong in their domestic markets, expand their operations on a global basis. So, in October 1990 United agreed to buy troubled Pan Am’s London routes in a deal valued at $400 million. Soon thereafter, American agreed to the purchase of TWA’s London routes for $445 million, demonstrating their intent to provide an identical service.
In many industries, however, scale economies have failed to materialize, partly because of pressure to customize, partly because of logistical barriers and transport costs associated with moving goods from centrally located plants to remote consumers and partly because efficient plant size precludes capturing additional scale economies. The washing machine industry in Europe, for instance, has demonstrated that local producers generally outdo competitors engaging in cross-border specialization because transport costs and costs of larger factories seriously dampen the gains from scale they produce. In the apparel industry, competitive pressures make speed of delivery an important factor, encouraging production closer to end markets and making standardization difficult to achieve. Technological developments now offer some assistance. Computer controlled devices facilitate precise cutting of cloth, eliminating precious waste. Garment patterns, stored in computers, enable cost-effective production of small runs and even individual garment orders. And telecommunications can save time:
- A subsidiary of the Limited, a L1 .S. retail chain, now uses satellite and highdefinition television to transmit pictures of the latest designs to factories in southern China, delivering finished garments within 6 weeks to U.S. stores.
Customizing also has become a familiar tune to airplane manufacturers like Boeing. Direct competition from McDonnell-Douglas and Europe’s Airbus has made the industry more competitive, demanding flexibility and efficiency in the design of airplanes to specifications. In one bidding auction to fill a $20 billion United Airlines order, Boeing, Airbus, and McDonnell-Douglas teams were provided a wish list of 54 demands and hundreds of subdemands for customizing a new long-distance aircraft. Competition was fierce to see who could best meet United’s needs.’ Airbus won. Indeed, defeated by Airbus in one too many such auctions, McDonnell-Douglas has actively sought an infusion of cash that would enable it to strenghten its efforts. In November 1991, it petitioned Congress for authorization to pursue an equity joint venture with Taiwan Aerospace (a government-backed operation), who agreed to provide $2 billion in exchange for 40 percent of ‘a new subsidiary. The aim of the joint venture is to produce and market aircraft for the rapidly growing Asian region.

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