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Cost Management-final                                                                                                       19

If the nature and intensity of Porter's five forces or the core competencies vary for various segments of an industry, then the structural characteristics of different industry segments need to be examined. This analysis will reveal the competitive advantages or disadvantages different segments. A firm may use this information to decide to exit the segment, to enter a segment, reconfigure one or more segments, or embark on cost reduction/differentiation programs.

Differences in structure and competition among segments may also mean differences in key success factors among segments.

Using the value chain approach for segmentation analysis, Grant (1991) recommended five steps:

1.Identify segmentation variables and categories;

2.Construct a segmentation matrix;

3.Analyse segment attractiveness;

4.Identify key success factors for each segment; and

5.Analyse attractiveness of broad versus narrow segment scope.

1. Identify segmentation variables and categories : There may be literally millions of ways to divide up the market into segments. Typically, an analysis considers between five to ten segmentation variables. These variables are evaluated on the basis of their ability to identify segments for which different competitive strategies are (or should be) pursued.

The selection of the most useful segment-defining variables is rarely obvious. Industries may subdivided by product lines, type of customer, channels of distribution and region/geography. The most common segmentation variables considered are type of customer and product related as illustrated in Exhibit .

APPROACHES TO DEFINING SEGMENTATION VARIABLES

CUSTOMER CHARACTERISTICS

Geographic- Small communities as markets for discount stores

Type of organisation- Computer needs of restaurants versus manufacturing firms versus

banks versus retailers

Size of firm- Large hospital versus medium versus small

Life-style- Jaguar buyers tend to be more adventurous, less conservative than buyers of Mercedes-Benz and BMW

Sex- The Virginia Slims cigarettes for women

Age- Cereals for children versus adults

Occupation- The paper copier needs of lawyers versus bankers versus dentists

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