How Customer Segmentation fits into Strategy

JWI 540, Strategy, Week3 Summary, 7/21/12
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This week I learned about customer segmentation and how it fits into an overarching strategy.

1. Who will buy what we sell ? (JWI 540, Week3, Lecture1)
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This is the all-important question that we should never lose sight of
- which customer segment to target ? => be clear about going after affluent, cost-sensitive or the most profitable segments
- which products & services to offer them ? => turn offerings to customer solutions rather than just products and services
- how to better satisfy their needs and desires ? => shift from producer perspective to customer-centricity; aim to develop customer relationship for the long term

2. Understand the consumption chain (Macmillan et al, 1997)
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Observe the consumer's demographics, behavior and relationship with industry brands
Alter the consumption chain if it helps the customer (as IKEA did in retail home furnishings)
Look at the life of the product and motivate repeat purchase where possible
Identify Key Performance Indicators (KPI) and segment customers into behavior clusters
Determine impact of clusters on revenue and profit and understand what drives the behaviors

3. Segment customers into behavior clusters using 10 best practices (Derick Jose, 2010)
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 http://www.b-eye-network.com/view/13090
(i) Business Questions: Be clear about the business questions to be answered by segmentation
(ii) Variables: Optimize between too many behavioral dimensions vs too few dimensions
(iii) Isolate key variable:  Evolve a methodology to isolate right behavioral variable
(iv) Cluster technique: Choose the right clustering algorithm & technique
(v) Iteration: iterate, iterate, iterate
(vi) Segment Personas: evolve segment personas to put human faces behind clusters make it real to the business
(vii) Overlay Geo: Overlay Behaviors on to a geospatial map
(viii) Overlay sentiment:  Overlay Behaviors on to Sentiments
(ix) Actionable: evolve the segment actionability framework
(x) Track ROI: track segments with highest impact on ROI & closely monitor segment migration

4. Translate Good segmentation into a winning strategy
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(i) Good segmentation is critical but it is only a starting point
- as it unearths customer needs at a given point in time only; customer preferences evolve over time
- execution is far more important than strategy & segmentation
(ii) Stay vigilant of changes in marketplace to avoid missing market shifts
Use Michael Porter's 5 forces framework to constantly monitor industry dynamics
- internally within the firm and externally with competitors, suppliers, customers, substitutes and new entrants.
(iii) More you understand your customer, the better you will be at
- choosing objectives (what you hope to achieve in a given time period)
- competitive advantage (how you will uniquely compete for the consumer's spending)
- scope (markets, products, channels, geos)

5. IKEA Case Studies (Bartlett et al ,1996; Moon et al 2004)
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Ingvar Kamprad's rags to riches story starting from humble beginnings is an inspiration for all. Driven by core values of simplicity, an indomitable will to translate challenges consistently into opportunities, and an incredible 5:30 AM to midnight work ethic, Ingvar Kamprad built an enduring company and served worldwide customers.  IKEA's entry into US gives us an opportunity to understand the differences between Scandinavian and American customers, and examine the growth strategy.

This class continues to offer tremendous insights into the underpinnings of business strategy. The class discussions are giving more food for thought.

I have resolved to also go beyond the class materials and research outside sources, generate new thought and attempt to create something new. For the push I got from Dr D in this regard, I am grateful.

Dr DP