Industry and Market Segmentation for Creating Competitive Advantage

Industries and markets are segmented to develop business and marketing strategies, respectively. Both strategies are equally important to generate and sustain a competitive advantage. Ignoring any of these will not produce effective results. A competitive business strategy focuses on outperforming rivals within the industry or market segment to improve its competitive position. And to prosper and become successful, a firm must establish a competitive advantage over its rivals. Marketing strategy deals with activities related to the target market and marketing mix. It is a functional strategy, and therefore, it must support the firm’s overall objectives and align with the firm’s overall business strategy. As a functional strategy, it is also concerned with developing distinctive competencies and improving resource productivity in the area of marketing to develop and sustain competitive advantage. In a nutshell, a marketing strategy is concerned about creating superior value relative to a firm’s competitors in the form of customer value, company value, and collaborator value.

An industry is a combination of firms that supplies similar goods and services to its submarkets, specific markets, or markets. Additionally, an “industry” is a broader term or an umbrella term that encompasses the entire markets in the same business. In other words, a market is a subset of an industry. Examples of industries within the US include the banking industry, the telecommunications industry, and the automobile industry. Industry segmentation is a process of dividing and subdividing the industry into markets, and many other specific product markets. The banking industry can be disaggregated into three basic markets: corporate banking, retail banking, and investment banking. And the retail banking market can further be subdivided into checking, saving, mortgage lending, and transaction services. Industry segmentation analysis focuses on identifying attractive markets or segments of the industry, finding new markets for opportunities, determining which markets and how many markets to serve, determining how to serve those markets, and developing business strategies for different markets.

The market segmentation process involves disaggregating potential buyers or customers into relevant market segments to identify attractive segments and to facilitate targeting. Segment attractiveness is determined by the segment’s ability to create value for the company, as well as the company’s ability to match its offerings to the needs of that segment. Unattractive and irrelevant segments are ignored to improve marketing expenditure efficiency. The market segmentation process first categorizes customers into groups, based on their varying needs and buying behavior, and then these groups are combined or integrated to form a segment. This process facilitates to target relevant segments that finally pave the way to create value and generate competitive advantage. It is about finding a fit between what the segment’s customers need and what products or services the company can provide them to satisfy those needs. Marketing strategy involves determining which buyers to target and how to reach them cost-effectively.

Industry segmentation uses a broader approach to segmentation, while market segmentation takes a much narrower approach to segmentation. Industry segmentation generally uses two (products & buyers) or more variables, while market segmentation uses one variable (customers or buyers). The one variable approach to market segmentation cannot effectively capture all the customer differences required for proper segmentation, and therefore, this topic still remains an issue for debate among marketers, to find the best method for segmenting customers. The industry segmentation process focuses on the entire value chain, while market segmentation focuses only on the marketing activities in the value chain. Due to variation in competition across different submarkets, the attractiveness among submarkets also varies, and therefore, for this reason, industry segmentation becomes essential for identifying attractive segments while ignoring the unattractive ones. The industry segmentation process also facilitates in defining a firm’s competitive scope. A firm’s competitive advantage is determined by its competitive scope, which is the breath of the firm’s target market. Finally, a company can decide to choose a narrow target market (also called niche market) or a broad target market (also called mass market). Both have their own advantages and disadvantages. Competitive advantage emerges by serving the markets through lower costs or differentiation, or both.

In conclusion, segmentation is a common but particularly crucial element of a two-pronged competitive business and marketing strategy for creating and sustaining a competitive advantage.

References and Further Reading

1. T. L. Wheelen & J.D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2000), p. 113 & 160.
2. M. E. Porter, Competitive Advantage (New York: Free Press, 1998), pp. 231-272.
3. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), pp. 77-104.
4. A. Chernev, Strategic marketing Management (USA: Cerebellum Press, 2014), pp. 43-62.
5. L. E. Boone & D. L. Kurtz, Contemporary Marketing (USA: Harcourt, Inc., 2001), pp. 234-252.