A set of businesses or group of individual customers with distinct characteristics

4.1 Why are Market Segmentation, Targeting, and Positioning Important?

In the digital age, the internal and external environments of information organizations are characterized by the constant changes, ongoing development of information and communication technologies, and increasing user needs and wants. For instance, not only are collections switching to electronic formats but education itself is moving online with increasing numbers of distance education programs in academic libraries. The constant changes of the past two decades have reinvented the way in which information organizations develop relationships with their users.

In an increasingly competitive market, with companies like Amazon and Netflix suggesting the books and films that we might like to read and watch, it is very important that information organizations keep marketing as an ongoing part of operations, understand their users’ needs, and develop products and services to meet those needs and demands (CIVIC Technologies, 2009, p. 2). Information organizations cannot achieve this aim unless they adopt a user-driven marketing strategy and effective segmentation, targeting, and positioning strategies.

According to Kotler and Armstrong (2014, p. 192), companies today “cannot appeal to all buyers in the marketplace,” and “must design customer-driven marketing strategies that build the right relationships with the right customers” and the main steps in designing a customer-driven strategy include segmentation, targeting, differentiation, and positioning. Market segmentation refers to “dividing a market into smaller segments of buyers with distinct needs, characteristics, or behaviors that might require separate marketing strategies or mixes,” targeting is defined as “evaluating each market segment’s attractiveness and selecting one or more segments to enter,” differentiation means “differentiating the marketing offering to create superior customer value,” and positioning is “arranging for a marketing offering to occupy a clear, distinctive, and desirable place relative to competing products in the minds of target consumers” (Kotler & Armstrong, 2014, p. 192). Information organizations cannot appeal to all users in a similar manner. Their numbers are numerous, and they can be spread over wide geographic areas with ever changing requirements and user behaviors. An information organization’s ability to satisfy different user groups will vary so it needs to work out which ones they can best serve (Kotler, Brown, Adam, & Armstrong, 2001, p. 292).

Information organizations may try to serve the entire market through the provision of generic services and resources. However, this does not pay attention to the market diversity and this would result in being unable to fully meet the needs and wants of users (Andreasen & Kotler, 2008, p. 139). Instead, information organizations can identify smaller user groups with similar characteristics and needs, who can then be targeted accurately and served successfully (De Saez, 2002, p. 115; Matthews, 1984, pp. 19–20; McDonald & Dunbar, 2012, p. 9). This is market segmentation which is fundamental to the user-driven marketing strategy applied in information organizations. In order to successfully offer specific services and resources to the users of information organizations, it is essential to first identify what those users need and want. The most successful way of establishing this foundation is through a market segmentation analysis. Markets can be segmented in a number of ways using the specific qualities and characteristics that differentiate and identify each unique user. The segmentation of these markets enables an information organization to target certain groups with services or resources in order to best position an information organization in the market.

Market segmentation plays an important role in the marketing strategy of an information organization, and as a powerful tool, its importance reflects in the following:

nearly all markets include groups of people or organizations with different products needs and preferences;

market segmentation helps marketers to define customer needs and wants more precisely;

because market segments differ in size and potential, segmentation helps decision-makers to define marketing objectives more accurately and to better allocate resources; and

in turn, performance can be better evaluated when objectives are more precise (Summers, Gardiner, Lamb, Hair, & McDaniel, 2005, p. 112).

Sun (2009, p. 64) suggests that market segmentation is an effective marketing tool as it can:

define customer needs and wants;

identify potential target markets;

assist identifying under or over served user groups;

identify market opportunities;

provide a basis for the design of the marketing mix; and

provide a strategy for dealing with competition, limited resources and increasing costs.

The importance of targeting lies in its ability to help information organizations become more successful by focusing on the segments and positioning enables an information organization to focus on what it needs to do in order to fully satisfy users’ needs and wants.

Determining Where to Compete

Deciding where a firm should compete starts with identifying the firm's current and potential customers and their primary needs. This is the single most important activity in building a business plan and is based on the process of market segmentation.

Market Segmentation Theory

Under market segmentation theory, it is acknowledged that securities of different terms are attractive to different investors. For example, liabilities of many pension funds are long term, and consequently, they demand longer term assets. The liabilities of banks are very short term (investors may withdraw funds at short notice); hence, banks invest in very short-term assets. The demand for securities therefore differs for different terms. The supply of securities will also vary with term, as governments’ and companies’ financing requirements change. The market segmentation theory argues that a term structure will emerge from the action of supply and demand at each different term, and deviate from the tendency of the yield curve to increase under the liquidity preference theory.

In what follows we neglect the term structure of interest rates and, for ease of explanation, return to assuming that yields are independent of term. Of course, the material presented throughout this book can be generalized to include the effects of a term structure if required.

3.5.3 Segmented Markets Hypothesis

The segmented markets hypothesis seeks to explain the shape of the yield curve by stating that different types of market participants invest in different sectors of the term structure, according to their requirements. So for instance, the banking sector has a requirement for short-dated bonds, while pension funds will invest in the long end of the market. This was first described in Culbertson (1957). There may also be regulatory reasons why different investors have preferences for particular maturity investments. A preferred habitat theory was described in Modigliani and Sutch (1967), which states not only that investors have a preferred maturity but also that they may move outside this sector if they receive a premium for so doing. This would explain “humped” shapes in yield curves. The preferred habitat theory may be viewed as a version of the liquidity preference hypothesis, where the preferred habitat is the short-end of the yield curve, so that longer-dated bonds must offer a premium in order to entice investors to hold them. This is described in Cox, Ingersoll and Ross (1981).

Globally Integrated Markets Versus Segmented Capital Markets

The world’s economies have become more interdependent since WWII due to expanding international trade. Financial markets have displayed similar interdependence or global integration such that fluctuations in financial returns in one country’s equity markets impact returns in other countries’ equity markets. Factors contributing to the long-term integration of global capital markets include the reduction in trade barriers, the removal of capital controls, the harmonization of tax laws, floating exchange rates, and the free convertibility of currencies. Improving accounting standards and corporate governance also encourage cross-border capital flows. Transaction costs associated with foreign investment portfolios have also fallen because of advances in information technology and competition. Multinational companies can now more easily raise funds in both domestic and foreign capital markets.

These developments represent a mixed blessing for the world’s economies. Globally integrated capital markets provide foreigners with unfettered access to local capital markets and provide local residents access to foreign capital markets and ultimately a lower cost of capital. However, they also transmit disruptions rapidly in capital markets in major economies throughout the world, as evidenced by the global meltdown in the equity and bond markets in 2008 and 2009.

Unlike globally integrated capital markets, segmented capital markets exhibit different bond and equity prices in different geographic areas for identical assets in terms of risk and maturity. Arbitrage should drive the prices in different markets to be the same (when expressed in the same currency), since investors sell those assets that are overvalued to buy those that are undervalued. Segmentation arises when investors are unable to move capital from one market to another due to capital controls, prefer to invest in their local markets, or have better information about local rather than more remote firms.4 Investors in segmented markets bear a higher level of risk by holding a disproportionately large share of their investments in their local market as opposed to the level of risk if they invested in a globally diversified portfolio. Reflecting this higher level of risk, investors and lenders in such markets require a higher rate of return on local market investments than if investing in a globally diversified portfolio of stocks. As such, the cost of capital for firms in segmented markets, having limited access to global capital markets, often is higher than the global cost of capital.

6.8.4 Segmentation hypothesis

The capital markets are made up of a wide variety of users, each with different requirements. Certain classes of investors will prefer dealing at the short-end of the yield curve, while others will concentrate on the longer end of the market. The segmented markets theory suggests that activity is concentrated in certain specific areas of the market, and that there are no inter-relationships between these parts of the market; the relative amounts of funds invested in each of the maturity spectrum causes differentials in supply and demand, which results in humps in the yield curve. That is, the shape of the yield curve is determined by supply and demand for certain specific maturity investments, each of which has no reference to any other part of the curve.

For example banks and building societies concentrate a large part of their activity at the short end of the curve, as part of daily cash management (known as asset and liability management) and for regulatory purposes (known as liquidity requirements). Fund managers such as pension funds and insurance companies are active at the long end of the market. Few institutional investors however have any preference for medium-dated bonds. This behaviour on the part of investors will lead to high prices (low yields) at both the short and long ends of the yield curve and lower prices (higher yields) in the middle of the term structure.

Since according to the segmented markets hypothesis a separate market exists for specific maturities along the term structure, interest rates for these maturities are set by supply and demand.10 Where there is no demand for a particular maturity, the yield will lie above other segments. Market participants do not hold bonds in any other area of the curve outside their area of interest11 so that short-dated and long-dated bond yields exist independently of each other. The segmented markets theory is usually illustrated by reference to banks and life companies. Banks and building societies hold their funds in short-dated instruments, usually no longer than five years in maturity. This is because of the nature of retail banking operations, with a large volume of instant access funds being deposited at banks, and also for regulatory purposes. Holding short-term, liquid bonds enables banks to meet any sudden or unexpected demand for funds from customers. The classic theory suggests that as banks invest their funds in short-dated bonds, the yields on these bonds is driven down. When they then liquidate part of their holding, perhaps to meet higher demand for loans, the yields are driven up and prices of the bonds fall. This affects the short end of the yield curve but not the long end.

The segmented markets theory can be used to explain any particular shape of the yield curve, although it fits best perhaps with positive sloping curves. However it cannot be used to interpret the yield curve whatever shape it may be, and therefore offers no information content during analysis. By definition the theory suggests that for investors bonds with different maturities are not perfect substitutes for each other. This is because different bonds would have different holding period returns, making them imperfect substitutes of one another.12 As a result of bonds being imperfect substitutes, markets are segmented according to maturity.

The segmentations hypothesis is a reasonable explanation of certain features of a conventional positively-sloping yield curve, but by itself is not sufficient. There is no doubt that banks and building societies have a requirement to hold securities at the short end of the yield curve, as much for regulatory purposes as for yield considerations, however other investors are probably more flexible and will place funds where value is deemed to exist. Nonetheless the higher demand for benchmark securities does drive down yields along certain segments of the curve.

A slightly modified version of the market segmentation hypothesis is known as the preferred habitat theory. This suggests that different market participants have an interest in specified areas of the yield curve, but can be induced to hold bonds from other parts of the maturity spectrum if there is sufficient incentive. Hence banks may at certain times hold longer-dated bonds once the price of these bonds falls to a certain level, making the return on the bonds worth the risk involved in holding them. Similar considerations may persuade long-term investors to hold short-dated debt. So higher yields will be required to make bond holders shift out of their usual area of interest. This theory essentially recognises the flexibility that investors have, outside regulatory or legal requirements (such as the terms of an institutional fund’s objectives), to invest in whatever part of the yield curve they identify value.

2.4 ESCO Markets and Marketing

ESCOs have established themselves in well-defined niche markets using either geographic or industry-specific market segmentation strategies. For example, ESCOs that have been selected in DSM bidding programs naturally target certain types of customers (e.g., hospitals and small retail) in specific utility service territories. ESCOs have also tended to focus on regions in which retail electricity prices are high in order to maximize differences between project cost and benefits to customers from energy-efficiency investments. Other ESCOs, particularly those affiliated with the large controls and equipment companies, utilize a decentralized and extensive branch sales force that targets certain industries or sectors (e.g., schools and state and local governments).

The focus of most ESCOs has been on medium to large commercial and institutional customers: Local and state government, schools, and universities account for approximately 65–75% of overall ESCO activity. ESCOs have also achieved success among other groups of commercial-sector customers (e.g., owner-occupied office buildings, shopping malls, hotels, and a few national franchises). The federal government, for which military projects have huge energy bills, is also targeted by many ESCOs.

Industrial customers have hosted fewer performance-based efficiency projects, but their share of projects has increased slightly over time as energy services are becoming integrated with other services. In the industrial sector, ESCOs have attempted to differentiate themselves through specialized expertise in certain technologies (e.g., adjustable-speed drives and controls) or processes (e.g., pulp/paper and automotive).

Because the typical ESCO project costs more than $350,000, small commercial and industrial companies and residential customers are generally not served by ESCOs. Some ESCOs do work in certain niche markets (e.g., large multifamily projects and water and wastewater facilities), but these are rare.

The so-called MUSH institutional markets (municipal governments, universities, schools, and hospitals) have been the focus of ESCO marketing because they tend to be very capital constrained; have a longer investment horizon; are faced with an aging infrastructure and equipment in need of modernization; and often have limited technical expertise to develop, coordinate, and manage a comprehensive energy-efficiency project. Furthermore, ESCOs have been able to arrange relatively attractive financing terms with the MUSH markets because financial institutions have regarded these customers as relatively good credit risks (i.e., they are unlikely to go out of business or relocate).

Role of Subcultural Values

Subcultures exert even a greater influence upon their members in terms of behavior than the dominant culture. They are easily carved out for market segmentation, and can be easily reached with specific marketing campaigns. Religious groups are a common subculture in society—one that has overwhelming influence on their followers. Every religion stipulates for its members what should be regarded as good or bad behavior in terms of what to eat, where to visit, what to wear and so forth. Through their teachings, some of the religions condition their members to accepting a lifestyle that anticipates gratification in the life to come at the expense of material gains in this world. As a result of such indoctrination, evaluation of certain goods and services by the members tend to be below par relative to what happens in the larger society. Religion is particularly powerful in shaping people’s behavior in this way because religious beliefs are typically construed so as to make it impossible for people to demonstrate the truth or falsity of the beliefs they hold. Instead, the true believer finds in daily experience some confirmation of religious faith (Goode, 1971: 51).

Marketing officers in banks have really had to join some religious groups so as to attract deposits from them. Joining religious groups in this way may achieve the desired results. In doing so, for instance, the religious groups might have the impression that they are accepted even by the larger society. Yet, there could be more aggressive marketing strategies to tap into the overwhelming business opportunities that abound in sub–cultural groups and institutions in the societies. Consider the case of the defunct IBTC Ethical Fund in Nigeria which appeals to the devout religious practitioners. This is a capital market product that promises to pool funds from individuals, especially the religious adherents, for investment in quoted stocks of companies other than those that produce alcoholic drinks, cigarettes, and all such products. These are products the consumption of which certain religious beliefs prohibit. Perhaps the making of this product originated in the thinking of the bank’s management that as many people dislike alcohol, smoking, and similar products, it would be appropriate and profitable to develop such a special product to serve their religious belief. In order to convert this thought into a profitable business opportunity, the bank introduced the Ethical Fund which is targeted mainly at those who by their religious inclinations dislike alcohol and cigarettes.

Cultural Dimensions

It is acknowledged that culture has a significant impact on consumer behaviour (De Mooij, 1998). Cultural boundaries often act as criteria for market segmentation while research often focuses on culture as an underlying determinant of consumer behaviour. In general, culture can be defined as an “evolving system of concepts, values and symbols inherent in a society” (Yau et al., 1999, p. 98). To understand a culture and the behaviour of its members, one has to understand the underlying values. Cultural values refer to conceptions of the desirable, of the good and true, the bad and false. They act as guiding principles in life within the specific society (Schwartz, 1999).

The most established concepts to compare national cultures originate from Hofstede and Bond (1984), Hofstede (2011) and Hall (1976). Hall (1976) differentiates between high-context and low-context cultures. A key element in his theory is the context in which communication in a certain culture takes place. In high-context cultures such as China, many things are left unsaid as a few words in combination with gestures or objects can communicate a complex message very effectively (Kim et al., 1998). In low-context cultures such as the United States, communication is more explicit and the context has minimal importance.

Hofstede’s (2011) framework of national culture has been applied in a wide and diverse range of consumer marketing and strategic marketing contexts. In Fig. 4.1, Hofstede’s (2011) six cultural dimensions are defined. Although a number of researchers has criticized the validity of Hofstede’s cultural instrument (e.g., Blodgett et al., 2008; Brewer and Venaik, 2012; McSweeney, 2002; Shenkar, 2001; Smith et al., 2002), the framework is widely recognized as one of the most important applications of national culture types. Fig. 4.2 compares the Chinese value-structure with the most typical representative of Western culture, the US-American value-structure. As the sixth dimension “Indulgence and Restraint” lacks empirical data, this will not be compared.

While there are minor differences between China and the US regarding the dimensions MAS and UAI, there are significant differences regarding IDV, PDI und LTO (Hofstede, 2013). The US represents a typical individualistic and low-context culture; China is a typical collectivistic and high-context culture (Hall, 1976; Hofstede and Bond, 1984).

Confucianism has shaped Chinese culture and society for centuries and favours the collective well-being of a society and virtues such as courtesy, selflessness, respect, communal obligation and social harmony – as compared to individual self-fulfilment or individual rights. In such collectivistic cultures, people live in networks and groups. They are deeply involved with each other and have closer and more intimate relationships than people in individualistic societies. These relationships are structured within a strong social hierarchy, which is also reflected by China’s very high score on the PDI dimension. A person’s identity is deeply embedded in familial, cultural, professional and social relationships (Wong and Ahuvia, 1998). Inner feelings are kept under strong self-control, even when the individual’s desires are conflicting with the group’s goals. There should be no (explicit) differences between the goals of the individual and the group and the desire for conformity and harmony within a group is of paramount importance.

In individualistic cultures like the US, the notion of nonconformity is often regarded positively as being authentic (Kim et al., 1998). It is a person’s inner self including his or her preferences, tastes, and personal values that regulates one’s behaviour as opposed to the social hierarchy within the group. In contrast, an individual’s social status in collectivistic cultures depends very much on the social position of the groups he or she belongs to (Wong and Ahuvia, 1998). It also influences the extent to which group members identify with their task group’s goals (Chatman et al., 2015). In a similar vein, Triandis (1995) argues that high-context and collectivistic societies emphasize social norms and duty defined by the group.

It can be summarized that China’s specific cultural values, including high levels of collectivism, power distance and masculinity, make it a true luxury (addicted) culture. It can also be deduced that social influence is an important determinant of luxury consumption as reported by Zhan and He (2012) in a study of Chinese middle class consumers. The specific combination of cultural values explains why several consumer surveys show especially positive attitudes towards luxury in China (KPMG, 2013).

Market segmentation

The fundamental dynamics of the software industry is characterised by firms engaged in software research and development and the provision of products and services. Classical theory on market segmentation was initially explained as a marketing strategy that firms choose to adopt. The concept of market segmentation was defined as viewing a heterogeneous market (one characterised by divergent demand) as a number of smaller homogeneous markets in response to differing product preferences among important market segments.2 The goal of market segmentation is to describe such within-product category conditions that point to valued attributes and benefits.

Market segmentation has been the software industry's practical approach to finding the mechanism for the task of meeting consumer wants and needs. Consider, what is at issue? Regarding any one offering, management has resources to invest in responding to a finite set of consumer wants. Within a product category, it considers the diverse nature of wants, current state of want satisfaction – reflecting its own and competitive responses – and its likely ability to obtain a satisfactory return from supporting or continuing to support an offering. Providing information about consumer wants within a market is the task of market segmentation analysis (see Figure 5.1).

One of the benefits of using market segmentation is that it allows firms who operate at a global level to differentiate clusters of added value. As pointed out in Chapter 1, both China and India compete within a global industry and as such rely on close collaborations with partner organisations. Increasing competitiveness within market sectors requires individual firms to position their resources where they can best leverage added value and shareholder returns. For Chinese and Indian firms entering the software markets, or for existing firms, making decisions on how to position the firm and become competitive in a global market are important considerations.

As previously stated, segmentation is necessary to address the central question of competitive scope within an industry, or what segments of an industry a firm should serve and how it should serve them. It is also the basis for the choice of focus strategies, as it exposes segments that are poorly served by broadly-targeted competitors in which focus can be both sustainable and profitable. Broadly-targeted competitors must also understand industry segmentation, because it reveals areas where they are vulnerable to focusers and may suggest unattractive segments that are best left to competitors. Attention to segmentation from a strategic perspective is increasingly important, because new developments in technology are altering some of the old rules of segmentation, with implications for both focusers and broadly-targeted firms.

Chinese and Indian firms must think about the full range of environments in which they will compete and the entire economic spectrum of a business activity, including operations, suppliers, marketing, distribution and customer service. Only then can they identify strategic market segments, or economic activities, through which the firm can:

establish an advantage comparative to the competition;

define its market and competitive advantage over time; and

secure stable profitability levels.

The question here is ‘in which parts of the industry can firms expect the highest long-term returns?’ In practical terms, within which market segments will it be possible for the firm to:

Develop a supportable advantage relative to competitors in other, possibly neighbouring segments?

Dispute competitors attractive returns on any investments required to enter the chosen segments?

The most important attribute of a strategic market segment is its defensibility. Evidence that a segment exists is the barriers to competition that surround it. So, for example, the higher the barriers, the higher the profit potential in that segment. Such barriers can (and will) include:

trade barriers and taxation;

capital investment;

technology (patents and proprietary technology);

location and infrastructure (for example, closeness to natural resources and transport facilities); and

existing goodwill.

The nature of market segmentation involves firms designing products and services that satisfy smaller homogeneous groups of the total market (see Figure 5.2). Once these groups have been identified, and their needs understood, the firm may be able to develop a market mix appropriate for servicing a subgroup it considers a potential and profitable market. It could be argued however, that as we head towards the year 2010 firms should stop thinking of customers as part of an homogeneous market, and should instead consider customers as distinct, each of which requiring their own unique strategies in product policy, in promotional strategy, in pricing, in distribution methods and direct selling techniques (i.e. the ‘everybody markets’ – the philosophy of maximising the value of contact with each customer).

Evidence would suggest that future market strategies for China and India will need to be directed towards constantly-changing market needs. Under such conditions, market awareness, organisational flexibility, strategic vision, and external relationships are important strategic capabilities. Getting closer to the customer requires assessment of the customers needs and wants. The purpose of this assessment is to find an actual or potential competitive advantage.