The Hierarchy of Target Market Selection Criteria. Bill Callaghan and Clive Morley, RMIT University. Abstract

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1 The Hierarchy of Target Market Selection Criteria Bill Callaghan and Clive Morley, RMIT University Abstract The selection of target markets represents a critical strategic decision in planning. Despite this importance the appropriate nature and usage of evaluative selection criteria has been neglected in the literature and some researchers have argued that a considerable theory practice gap exists in this area of segmentation research. In this investigation the results of a survey of target market selection practice in 124 large organisations are reported. Marketing practitioners provided ratings of the importance the currently attached to some 40 criteria and also rated their potential value. The results show strong evidence that there is a generalised hierarchy of importance across industries and marketplace types. This conclusion is largely supported in the literature and represents a significant finding for both researchers and practitioners, given that such generalisations are rare in marketing. The research also highlights the need to include criteria that cover internal organisational considerations, such as the fit with business strategy and the ability of the organization to deliver. Introduction Despite the strategic importance of target market selection, Simkim and Dibb (1998) observed that there was little consistency and guidance in the literature. They noted the need for an extensive research agenda to guide more effective decision making in this area. This included research for better identification of the criteria used by organisations, the relationship between these criteria and how short and long term considerations might be balanced. This paper directly addresses these challenges in an examination of the criteria used in practice by managers. The need to employ such criteria to ensure that the segmentation was properly done was underlined by Hlavacek and Reddy (1986, p.11), who observed that following the rules could reduce threats and uncover innovative product, price, distribution and service strategies. These benefits were seen as resulting from adherence to the criteria specified in a normative segmentation approach. The objective of this paper is to identify how relevant criteria might be better applied to this important strategic decision. Qualification and Selection Criteria The use of criteria to select a segmentation base has often been confused with the criteria proposed for target market selection (Simkin & Dibb 1998). The distinction between the two decision stages was first made by Hlavacek and Reddy (1986) who first identified the preliminary qualification stage where the operational relevance of the segments was assessed. Their qualification stage criteria for an industrial example covered measurable characteristics, identifiable competitors, primary channel of distribution, defined communication mix and common decision-making unit characteristics. ANZMAC 2002 Conference Proceedings 761

2 Earlier there had been much discussion of appropriate target market selection criteria. Frank et al. (1972) did not effectively distinguish between the qualifying and selection stages but specified the criteria as segment size, stability, the degree of heterogeneity between segments, the level of competition in segments and some organizational factors, including the fit between segments and company strengths. (Wind and Cadozo 1974, p.158) treated the target identification stage more simply as an analysis of the profitability of differentiating the marketing program. Shapiro and Bonoma (1984) proposed qualifying criteria of identifiability and accessibility to the seller and considered that the cost and profitability of addressing each target had to be estimated to select targets. Further explicit and extensive sets of selection criteria have since been given in the literature (Clancy and Roberts 1992; Abratt 1993; Cravens 2000). These attractiveness criteria have included level of market domination, entry barriers, value added and demonstrable competitive advantage, indicating a debt to Porter (1980). A portfolio basis was also used (Hussey 1978; Haspeslagh 1982) in some of these approaches, where criteria could be categorised into market attractiveness and business strengths dimensions. In some of the normative guidelines given, market fit with the organization was proposed as a consideration, where the extent to which the organization has the resources and targeting the segment is compatible with corporate objectives, is the focus (Abratt 1993; Sudharsham and Winter 1998). Sarabia (1995) also emphasized the more internal considerations with an interest criteria, which referred to the attitude of the firm towards each segment. This criterion was linked to management expectations and the overall view of the business. Piercy and Morgan (1994) took a more purely internal view when they also noted the need for organizational compatibility when selecting targets. Given the wide-ranging nature of selection criteria proposed in the literature and the different definitions adopted, it is not surprising that there has been confusion about how segment attractiveness should be assessed. The overlap between qualifying and selection criteria has added to this lack of clarity for practitioners. Theory Versus Practice Deficiencies On a broader front, both Weinstein (1998) and Dibb (1998) have pointed out that academics and practitioners have quite different objectives in their approach to segmentation. Weintsein (1998) pointed out that the purpose of much academic work in segmentation, based on intellectual curiosity, was to develop and refine theory and find new applications, whereas he observed the practitioners concern was to solve marketing problems and make sound customer decisions. This theory practice gap was also observed by Kalafatis and Tsogas 1998, p.35) who commented that Over the past few years examination of potential gaps between segmentation concepts as presented in normative models and practice has emerged as a key issue in business segmentation research. To investigate this potential gap in the area of selection criteria a management survey was undertaken to determine the priorities and evaluations of marketing managers. The Management Survey and the Study Design The sample frame used was organisations with over 250 employees operating in Australia. This sample basis was chosen to ensure that the marketing role was reasonably well defined in the business and the marketing orientation was reasonably sophisticated. After telephone ANZMAC 2002 Conference Proceedings 762

3 screening and identification of marketing directors willing to participate, a mail survey was sent out. A response rate of 24% provided a sample of 124 businesses. Approximately half these businesses were involved in business to business (i.e. b2b) activities, whilst the target market for the other half were end consumers (i.e. b2c). From the literature, a list of 40 potential target market selection criteria were identified and in the survey managers were asked to rate each criterion from three perspectives. These were the current importance placed on it in selecting target markets, its potential importance and the extent to which it should be considered to be a short or longer-term consideration. The importance scale was a 5-point explicit ratings scale ranging from very high, high, medium, low and no importance. The Hierarchy of Importance of Selection Criteria In this survey of organizational practice, the individual target selection criteria at the top of the importance hierarchy covered a wide range of issues (Table 1). Around 40% to 70% of the sample considered these top rated criteria to be important, but the top box (i.e. very important ) scores highlight the proportion considering the criteria as essential. Those criteria at the top of the current importance hierarchy stress the key importance of both profit magnitude (sales volume and market size) and profitability. The high levels of related measures, such as market share, reinforce this emphasis on financial performance. Similarly the competitive considerations are rated highly. These include competitive rivalry/intensity in segments, your organization s ability to deliver a differentiated offer and the likelihood of being able to have a sustainable differential advantage. Criteria related to more internal aspects, such as fit with business strategy, ability of the business to provide added value and organizational strengths in key functions, are slightly lower down the hierarchy. Criteria with less importance include a range of technical and tactical level considerations including ease of profiling customer characteristics, compatibility with existing marketing programs, level of risk involved, ease of communication via the sales force, and segment stability over time. These criteria were rated as very important by around 10% of managers, and, in some cases, could be interpreted as qualifying criteria. The more general industry forces such as the role and power of suppliers, barriers to market entry and the negotiating power of customers are also given lower levels of importance. Following a check on the normality of the distributions, statistical testing of the b2b and b2c sub samples showed limited differences between these market places. This suggested that the hierarchy might be generalised across different marketplaces to a large extent. The ratings of the potential value of the criteria showed an almost identical hierarchy to the current approach, although respondents indicated that virtually all selection criteria could be utilized more. The Consistency of The Findings Across Studies The survey results of current practice also showed a very high level of agreement with those suggested in a limited survey by Simkin and Dibb (1998). In this study of large UK companies covering a range of industries, the usage levels was used to deduce the priorities of ANZMAC 2002 Conference Proceedings 763

4 the 23 individual criteria examined. In both studies, high priority is given to profitability and size and growth factors, and comparatively low priority given to the industry forces in general. Results from the current study give a much higher priority to the fit with business strategy criterion and a lower priority to likely customer satisfaction, than that estimated in the Simkin and Dibb (1998) study. Other variations in the results are surprisingly small, given the small sample sizes and the slight differences in criterion wording. This suggests that the hierarchy may be fairly robust. Although the literature on the importance hierarchy is limited, as noted by Freytag and Clarke (2001), the results of the current study also support proposals by Sarabia (1995), who suggested a three level approach. His initial, first stage criteria were essentially profitability, risk and segment accessibility. In the next stage, he proposed three levels with the first level being strategic fit, the second level involved evaluating the degree of segment sustainability against the competition, and third level covering a range of operational or tactical considerations. The results were also largely consistent with the normative recommendations of McDonald and Dunbar (1995), who argued that growth rate, segment size and profit potential criteria should be incorporated in selecting the five or six key factors for target market evaluation, which they suggested needed to be determined by management. Implications for Theory and Practice Thus the current study provides substantial evidence that a generalised importance hierarchy exists across industries for target market selection decision making. Since generalised rules are rare in marketing this represents a significant finding. The study results also suggest that practitioners could utilize virtually all selection criteria more. This includes even those attributes already at the top of the importance hierarchy, which still offer scope for potential usage. Criteria such as customers image of the organization, the organizations ability to deliver a differentiated offer, the likelihood of being able to have a sustainable differential advantage were under-utilised, according to this measure and more definite attention to these specific criteria should be worthwhile. Whilst common checklist criteria found in this literature tend to be very market place oriented, with emphasis on aspects such as profitability and accessibility, the research results highlight the need to consider internal organisational issues more. The fit with business strategy, the ability of the organization to deliver a differentiated product offer and the need to take account of the organizations current position with customers are all high up in the hierarchy. This supports the observations of Sudharsham and Winter (1998) who argued the need for careful consideration of these internal factors. Piercy and Morgan (1994) noted the need for organizational compatibility when selecting target markets, which was reinforced by Freytag and Clarke (2001) who found that, in the evaluation and selection of segments, the company itself is generally not considered. Thus the literature supports the findings on the need to consider business strengths and weaknesses more directly. Research in the future might therefore further investigate the usage and importance of various target market selection criteria. As a key decision area and one that may allow some lawlike generalisations to be established it represents a rich opportunity for theorist to help guide better practice. ANZMAC 2002 Conference Proceedings 764

5 Table 1 Importance Currently Given to Target Selection Criteria Criteria Mean Std. Error % rate very high importan ce p value (two sided t test)+ B2b vs b2c 5. Sales volume potential of segment % Profitability associated with the segment/s Your reputation with customers in a segment/s Market size of segment Current and potential market share position Strength of current business relationship Market growth rate of segment/s Fit with business strategy/strategic relevance of segment/s 35. Ability of business to provide added value to the segment 12. Relative organisational strengths in key functions required to deliver the product offer/s Ease of access through distribution channels Your organizations ability to deliver a differentiated product offer Pot customer loyalty of segment/s Service quality requirements of the segment/s Competitive rivalry/intensity in segment/s Likelihood of being able to have a sustainable differential advantage Extent to which segment is clearly identifiable Current or likely customer satisfaction levels Technological factors involved Segment/s needs for product differentiation Overall ease of access to customers Compatibility with current marketing programs Segment customers image of your organisation Level of risk involved Significance Levels, using plus and minus signs 99%,95% and 90% two-sided levels. Plus means b2c places more importance on the criterion. ANZMAC 2002 Conference Proceedings 765

6 References Abratt, R. (1993) Market Segmentation Practices of Industrial Marketers. Journal of Industrial Marketing Management 22, Clancy, K.J. and Roberts, M.L. (1992) Towards an optimal market target: A Strategy for Market Segmentation. Journal of Product and Brand Management 1, Cravens, D.W. (2000) Strategic Marketing, 6rd International edn. US: Irwin McGraw Hill. Dibb, S. (1998) Market Segmentation: Strategies for Success. Marketing Intelligence and Planning 16, Frank, R., Massy, W. and Wind, Y. (1972) Market Segmentation, edn. Englewood Cliffs, NJ: Prentice Hall. Freytag, P.V. and Clarke, A.H. (2001) Business to Business Market Segmentation. Industrial Marketing Management Journal 30, Haspeslagh, P. (1982) Portfolio Planning: Uses and limits. Harvard Business Review Hlavacek, J.D. and Reddy, N.M. (1986) Identifying and qualifying industrial market segments. European Journal of Marketing 20, Hussey, D.E. (1978) Portfolio Analysis: practical experiences with the directional policy matrix. Long Range Planning 2-8. Kalafatis, S.P. and Tsogas, M.H. (1998) Business segmentation bases: Congruence and perceived effectiveness. Journal of Segmentation in Marketing 2, McDonald, M. and Dunbar, I. (1998) Market Segmentation: How to do it,how to profit from it, edn. GB: MacMillan Business. Piercy, N. and Morgan, N. (1994) The Marketing Planning Process: Behavioural problems compared to analytical techniques in explaining marketing planning credibility. Journal of Business Research 29, Porter, M.E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, edn. New York, NY: The Free Press. Sarabia, F.J. (1995) Model for Market segment evaluation and selection. European Journal of Marketing 30, Shapiro, B.P. and Bonoma, T.V. (1984) How to segment industrial markets. Harvard Business Review 62, Simkin, L. and Dibb, S. (1998) Prioritising target markets. Marketing Intelligence and Planning 16 (7): Sudharsham, D. and Winter, F. (1998) Strategic Segmentation of Industrial Markets. Journal of Business and Industrial Marketing 13, ANZMAC 2002 Conference Proceedings 766

7 Weinstein, A. (1998) Editorial Forum on Consumer Behaviour, Research and Segmentation. Journal of Segmentation in Marketing 2, Wind, Y. and Cadozo, R. (1974) Industrial Market Segmentation. Industrial Marketing Management Journal 3, ANZMAC 2002 Conference Proceedings 767