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0019-8501/01/$–see front matter
PII S0019-8501(99)00103-0
Industrial Marketing Management
30
, 473–486 (2001)
© 2001 Elsevier Science Inc. All rights reserved.
655 Avenue of the Americas, New York, NY 10010
Business to Business
Market Segmentation
Per Vagn Freytag
Ann Højbjerg Clarke
This article discusses the characteristics of industrial mar-
kets in relation to some of the major industrial market segmen-
tation models. To understand the different market situations,
we describe a scale with simple market transactions at one end
and complex relationship management at the other, suggesting
that the segmentation approach must be different for each end
of the spectrum. The article presents a general industrial seg-
mentation model directed towards situations characterized by
relationships and networks. The model stresses the importance
of having a deep understanding of the customers’ characteris-
tics, needs, future directions, as well as identification of what
kind of overall relationship is required by the customer. This
model involves identifying, selecting, and monitoring of
segments. © 2001 Elsevier Science Inc. All rights reserved.
INTRODUCTION
Segmentation is a crucial activity in marketing, but the
way it is viewed has changed over time. Some authors
view segmentation as being closely related to another of
marketing’s major thoughts, the marketing concept [1].
The essence of the marketing concept is that the best way
to address the customer is by satisfying their needs and
wants. These needs and wants thus need to be fully under-
stood, and several ways exist to collect and analyze the
necessary information. Which ways are used depends on
the guiding methodology and techniques applied, but sta-
tistical analysis approaches are the most common.
Other authors do not see segmentation as a statistical
analysis technique, but as a tool for resource allocation.
They regard segmentation as an overall way of identify-
ing different target groups (for the purpose of making
some general strategic decisions, such as which busi-
nesses the company should be in and how resources
should be allocated) [2]. A major question is therefore
whether or not both points should be addressed at the
same time. In principle, segmentation is about identifying
and targeting customer groups through their needs and
wants, as well as determining which customers and needs
will be addressed and with what manner and intensity [3].
The industrial market often is characterized by cooper-
ation between customer and supplier; with the supplier
Address correspondence to Dr. A. H. Clarke, University of Southern
Denmark, Department of Marketing, Grundtvigs Alle 150, 6400 Sanderborg,
Denmark.
474
thus having in-depth knowledge of the customer’s needs
and wants. When it is known beforehand that customers
are interested in such collaborative relationships, this de-
sire can be used as a segmentation base. In connection
with Wind and Cardozo’s micro and macro segmentation
model [4], they talk about the influence different combi-
nations of decision units (buying center) can have on the
market segmentation. They, however, do not directly
mention the relevance of the buyers’ attitude to collabo-
ration as a segmentation base.
Another approach is represented by Bonoma and Sha-
piro [5] in their nested approach. They do not explicitly
talk about using the customers’ attitude to collaborative
relationships as segmentation base either. However,
within the framework of the nested approach, it is possi-
ble to use questions about the customer’s interest in col-
laborative work, because either the purchasing strategy
or the buying center can be used as a segmentation base.
This article develops an analytical framework that ex-
plicitly presents the opportunity to use the customers in-
tentions towards collaboration with the supplier as a seg-
mentation base.
INDUSTRIAL MARKETING THEORIES
Segmentation’s main uses are therefore of both opera-
tional and strategic nature. It should result in guidelines for
the operational level that have the purpose of gaining a
continual competitive advantage for the company. Indus-
trial marketing literature’s various approaches all appear to
be pointing in roughly the same direction. Jackson [6] dis-
tinguishes between “lost-for-good” and “always-a-share”
situations, with the difference being how closely the sup-
plier and customer cooperate. Lost-for-good situations are
characterized by strong bonds between the supplier and
customer that make switching suppliers expensive for the
customer. Always-a-share situations are mainly character-
ized by weak bonds and suppliers competing on price.
Jackson’s [6] approach is closely connected to the stra-
tegic management approaches called “lean management”
or “lean thinking” [7]. In lean management, customers
have close relationships with some of their suppliers,
based on things such as mutual product or process devel-
opment, or using only one or a limited amount of suppli-
ers in certain areas. The opposite is “arm’s length” man-
agement, which keeps more distance to the suppliers who
as a result mainly compete on price.
In the Swedish network theory [8, 9], the industrial
markets are characterized by cooperation and mutual ad-
aptation between the supplier and customer. This theory
makes a distinction between the overall situation and sin-
gle episodes, making it possible to see different images
of the market, depending on the companies involved, the
industry, the contents of the exchange process, etc.
These points of view see segmentation as more than just
a technique for analyzing the environments and for allocat-
ing marketing resources. They engage segmentation in the
internal workings of the company, and the company, as a
part of the market, shares in shaping the environment.
A scale showing the facets of the relationship between
supplier and customer can illustrate these three ap-
proaches. One end of the scale is characterized with no co-
operation, no bonds, no switching cost, and an nonadapted
product. Close cooperation, strong bonds, high switching
cost, and a highly adapted product mark the other end. The
different factors often will be interrelated. The two ex-
tremes are labeled “simple market transaction” and “com-
plex relationship management.” At a certain point on the
The two extremes are labeled “simple
market transaction” and “complex
relationship management.”
PER VAGN FREYTAG is Associate Professor of Marketing at
the University of Southern Denmark.
ANN HØJBJERG CLARKE is a doctoral candidate in Marketing
at the University of Southern Denmark.
475
scale, the term “market” is replaced by “relationship.” This
marks the change in emphasis from satisfying the cus-
tomer in the short term to satisfying the customer in the
long term; however, the exact point is difficult to identify.
The best way to segment a market in a given situation
may depend on what part of the scale the company’s focus
lies. This distinction has not been made in segmentation
theory before. In Wind and Cardozo’s [4] two-step, macro-
micro model and in Shapiro and Bonoma’s [10] multiple
step, nested approach, the premise is that segments can go
from being on a very general level to an individual level by
“breaking down” the segmentation bases until segments
are acceptable in the terms of accessibility, measurability,
and substantiality. Arndt [3], Hutt and Speeh [11], and
Kotler [10] claim that it may be more suitable to start out
from the premise that potential buyers are different, and
that the task is to find similarities, to go from the individ-
ual level to a general level—in other words to “build up.”
In an ex post situation, the buyer’s needs and wants have
been made manifest. A company that has adapted to these
needs and wants over time comes close to “complex relation-
ship management,” whereas a company that has not adapted
to the buyer’s needs and wants while serving the market is
comparable to the “simple market transaction” situation.
In simple market transaction situations, few, if any, ad-
aptations are made to cater for the buyer’s needs and wants.
Who supplies the product is often of little importance to the
buyer, providing major criteria are met, that is, stable deliv-
eries, uniform quality, and low price. Suppliers regard sim-
ple market transactions as matters of volume and the best
possible price. In complex relationship management situa-
tions, other criteria carry the importance, that is, the capa-
bility of adapting to individual customers, the capability
and willingness to enter development projects, etc.
Segmentation should be based on the current market
situation; it must identify the main reasons the buyer’s
buy. One approach is to look at the actual product pur-
pose and the needs and wants that arise from particular
usage, because these are the most central in buying orga-
nizational behavior [12].
This understanding of segmentation comes very close to
Plank [2] in his critical review of industrial market segmen-
tation. One of Plank’s major conclusions is that “User re-
quirements clearly have to be defined in a more systematic
manner. A preliminary conceptual model needs to be de-
veloped around user requirements” (p. 90) [2]. It is possible
that neglecting to use the customer as the foundation for de-
veloping segmentation models is a fundamental reason for
the problems associated with implementing them.
In an empirical study, Abratt [13] found that “The
most difficult stage appears to be the transaction of re-
sults into an effective implementation strategy” (p. 79).
Abratt found that the three most common variables used
to segment industrial markets are: geographic (87.5% of
the companies), demographic (62.5%), and how often the
product is used (62%). Because user requirements are not
commonly used, it comes as no surprise that implementa-
tion frequently gives difficulty.
The following material purposes to conceptualize the
foundation and major procedures for an implementable
industrial marketing segmentation model suitable for
complex relationship management situations. The reason
for concentrating on complex relationship situations, is
that the industrial marketing literature recommends them,
whereas to date most segmentation models [4, 10, 14] are
just based on simple market transaction situations.
CONCEPTUALIZING AN INDUSTRIAL
SEGMENTATION MODEL
Before the conceptual frame is outlined, the industrial
markets characteristics and trends are described. Sheth
and Sharma [15] point out the increasing turbulence in
industrial markets and regard relationship marketing as
an appropriate strategic response. “With increasing tur-
bulence in the market place, it is clear that firms have to
Use the customers intentions towards
collaboration with the supplier as a
segmentation base.
476
move away from transaction oriented marketing strate-
gies and move towards relationship oriented marketing
strategies for enhanced performance” (p. 91) [15].
Tendencies likely to be identified during research are
summarized as follows:
• Supplier as a customer
• Service procurement
• Crossnational rules
• Crossnational values
• Global sourcing
• Bonding with suppliers
• Hub and spoke organizations
• Supply experience curves
• Partnering
• Crossfunctional supplier teams
The conceptual segmentation framework must be able
to deal with these tendencies, and relationship marketing
appears to be appropriate as relationships help build pre-
dictability into the company’s environment. Relationship
marketing requires that any tendencies be dealt with in a
strategic manner, as the organizations of both the sup-
plier and customer are affected in several ways and at all
organizational levels.
A relationship approach involves trying to understand
the individual needs and wants of the customer. The overall
perspective on the customer therefore should be that the
customer is unique, equal to the main idea of the build-up
approach within segmentation theory [3]. It is important to
understand all the consequences of using a relationship ap-
proach, because managing supplier/buyer relationships is
not an easy task. It normally would be impossible to have a
Segmentation’s main uses are of both
operational and strategic nature.
FIGURE 1. Relationship marketing—consequences on strategic issues
and segmentation.
477
close relationship with every customer, so strategic deci-
sions need to be made concerning with whom, how close,
when, and for what purpose the relationships will be. In
particular, it is a question of what core competencies should
be offered to the customer and what governance concepts
and actual structures to choose [16] (Figure 1).
When starting the segmentation process, instead of
seeing customers as identical, the build-up approach be-
gins by viewing customers as different and then proceeds
to identify possible similarities between them. In a turbu-
lence market, using a build-up approach is more suitable
than a breakdown approach. The selling company also is
able to play a part in shaping its own environment by the
choices it makes. Partnering and bonding are examples of
how companies can influence the turbulence of their en-
vironments. The segmentation model thus should be able
to identify the factors affecting the market’s turbulence
and be able to adjust to these by being dynamic.
A segment often is described as something that has to be
identified, chosen, and thereafter targeted by an adjusted
marketing mix [1]. This can be seen as a static (nondynamic)
way of dealing with segmentation in markets where custom-
ers develop their needs and wants in interaction with their
suppliers. Segments are developed as a result of the interac-
tion processes between the buying and the selling company.
Who plays the most active part in initiating the contact and
how the needs and wants are developed may differ consider-
ably from situation to situation.
Sometimes the buyer will be the most active part by
taking initiative, because the concept of reverse market-
ing is proposing [17]. Conversely, the seller at times may
be the most active part. Therefore, it is not an unreal hy-
pothesis that both buyer and seller will take initiatives,
developing the buyers needs and wants by cooperating,
and simultaneously direct the sellers capabilities and
(strategic) development towards these needs and wants.
Derived from this, a more suitable basis for a segmen-
tation model is that segments are developed in the inter-
action between two or more parties.
THE DIS (DYNAMIC INTERACTION
SEGMENTATION) MODEL
The following section gives further detail on how to
create segments in the more complex, relationship fo-
cused part of the market (Figure 2).
The buyer’s perception of their own needs and wants
still are regarded as important variable of segment identi-
fication. Needs and wants are developed through interac-
tion between buyer and seller but also are influenced by
the activities of the competitors and general changes in
the environment (see the DIS model). As an example,
mutual product development projects often lead to the
determining for the buyer’s needs and wants. Competi-
tors will try to influence the buyer’s perception of his
problem and the solution [18]. Changes in the environment
also will affect the needs and wants of the buyer, that is,
new technologies offering new possibilities or new regu-
lations from the formal authorities. As a result of the lat-
ter, the potential or the actual relations between buyer
and sellers may form an adequate basis of segmentation.
Dwyer, Suhrr, and Sejo [19], Ford [20], and Håkans-
son [9] describe the development of relationships over
time. A distinction often is drawn between the overall re-
lationship and specific interactions or episodes. This has
some implications on how to segment markets. As an ex-
ample, Ford [20] describes the contents and the develop-
ment of a relationship over time with categories of the
Segmentation should identify the main
reasons the buyers buy.
FIGURE 2. The Dynamic Interaction Segmentation
Model.
478
following variables: experience, uncertainty, distance,
commitment, and adaptation. In the beginning of a rela-
tionship, these variables can be used in particular for the
description of the overall relationship with the underlying
purpose being to highlight the intentions and the capabil-
ities of the parties involved. If this evaluation gives a
positive result, it may be a suitable ground for the investi-
gation of how a specific interaction and transfer between
the parties can take place.
The uncertainty the company has for suppliers in gen-
eral will change to specific levels of uncertainty relating
directly to specific suppliers. Experiences also will be re-
lated to specific suppliers instead of just being grouped
together as experiences with suppliers in general. Dis-
tance, with regard to factors such as differences in orga-
nizational culture and technological levels will be de-
tected and be able to be dealt with in a suitable manner.
In the same way, there will be no adaptations or commit-
ments at the start of the relationship, but this will change
over time due to the necessities of the relationship (Fig-
ure 3).
The initial main task is to find out the capabilities and
intentions of the other party in the relationship. Over time
the focus will shift in towards the contents of the relation-
ship [22]. The focus on the overall relationship will be
maintained. The overall relationship gives a frame within
which the actual activities between the parties are taking
place. Both parties will follow the other parties’ perfor-
mance with regard to sales, earnings, competencies, stra-
tegic development, and so on. If the performance of one
of the parties provides problems, the other party may
contact the nonperforming party, or the nonperforming
party may make contact on their own accord. A resulting
consequence is the segmentation initially being directed
at both the overall relationship and the single episodes,
with the relative importance of the overall relationship
becoming lower as the relationship develops.
In the development of a relationship between two par-
ties, it is particularly the types of experiences both part-
ners have had in other relationships that affect the new
relationship. However, the parties’ intentions for entering
the relationship, their views on how extensive it should
Strategic decisions . . . concerning
with whom, how close, when, and
for what purpose . . .
FIGURE 3. The development of relations over time.
479
be, and the relative positions of the partners involved are
also of importance.
As stated by Morgan and Hunt [21], the intentions be-
hind the supplier/customer collaboration and the relative
power each partner has also bears much influence over the
relationship. A way of clarify this is to look at the custom-
ers buying behavior. “Relationship marketing success, in
all its context requires co-operative behavior” (p. 31).
Morgan and Hunt [21] emphasis the commitment and trust
and end by saying “identifying commitment and trust as
key mediating variables is critical to the study and man-
agement of relationship marketing” (p. 31). The following
attempts to make this type of identification (Figure 4).
In other words, to the seller, the task is now to identify the
buyer’s need for, and intentions behind joining the coopera-
tion, and the buyer’s previous experiences with cooperation.
The demands that the relationship’s development will
require from the involved parties also need to be identi-
fied and considered. The seller particularly will be re-
quired to make adaptations and commitments, but adap-
tations and commitments also may be needed from the
buyer (Figure 5).
Company characteristics (who is the customer?)
• the image of the customer (i.e., loyal and conserva-
tive or innovative and profit oriented)
• Product, process, and production technologies
• Cooperation with other companies (i.e., strategic al-
liances)
• Competencies and employees
The measurement of these dimensions will be difficult in
practice, because they, to some extent, demand precise
knowledge of the buyer’s actual needs and wants. In a prere-
lationship situation where there is no particular buyer
knowledge, the measurement therefore will be more indi-
rect. Factors like the ones mentioned below might be useful:
Goals (What does the Customer Want?)
• Strategic issues and goals
• Purchasing strategies
• Sales strategies
• Product characteristics (product, service, system wants)
Behavior (What does the customer do?)
• The frequency of the replacement of suppliers
• Other suppliers
• Buying potential of the customer now and in future
Segments are developed in the interaction
between two or more parties.
FIGURE 4. Experiences with cooperation and the need for cooperation.
480
• Single or multiple sourcing
Some of the above mentioned factors may fit on more
than one level depending on the particular situation [25].
In an article such as this, it is difficult to make assump-
tions on which factors are the best to begin with. The com-
pany should develop a model applicable for its own situa-
tion, based upon its knowledge of the market. As can be
seen from above, the most suitable factors for market seg-
mentation are closely related to the individual company (i.e.,
the precise nature of the buying company needs and knowl-
edge of individuals inside the companies), rather than to
general market development. General market development
is more useful for forecasting tasks, that is, who wants to
buy what and how much? Product needs and wants can
rarely be described in advance. In many situations, the needs
and wants of the customer will be developed in interaction
between the parties. The interaction process also shows how
the employees of the two companies work together.
As a main conclusion at this stage, this article has em-
phasized that when identifying customers to establish rela-
tionships with, it is important to consider both parties indi-
vidual characteristics and which direction the parties are
developing. It is also important to obtain knowledge about
the customer’s general needs, and the amount of adapta-
tion and commitment needed from both parties. Later, dur-
ing the relationship, it will be useful to make a more de-
tailed analysis of other factors within the buying company.
EVALUATION AND SELECTION OF SEGMENTS
After identifying segments, the next step is to evaluate
and select the segment or segments that the company
wants to target. Wind and Thomas [23] stress that this is
a critical management decision because all other compo-
nents of a marketing strategy follow it. This article
widely agrees; however, not only marketing but also the
whole organization should follow the strategy for the
segments.
Unfortunately, existing literature offers only sparse
guidelines on how to evaluate and select segments. Most
authors have chosen to focus on the design of segmenta-
tion studies and different approaches for grouping cus-
tomers. [23, 24, 29].
However, the interest in segment evaluation and selec-
tion has been growing. Before the late 1980s, remarks on
the topic were sparse. It was expected that evaluation and
. . . identify the buyer’s need for, and
intentions behind joining the cooperation.
FIGURE 5. Demands for adaptation and commitments.
481
selection was something that happened as a logical part
of the segment identification process if the marketer had
the model and the right variables. The evaluation and se-
lection processes were not defined. Wind [26] referred to
the selection process as a complex “art” to be performed
by management, which should take into account factors
such as reachability, competitive activity, and ability to
implement. Shapiro and Bonoma [10] in “How to Seg-
ment Industrial Markets” do not address segment evalua-
tion, and later in “Evaluating Market Segmentation Ap-
proaches,” they give criteria on how to determine the
profitability of segments being served but do not discuss
evaluation criteria and selection processes.
Hlavacek and Reddy [27] are one of the first to include
a selection stage in the segmentation model, consisting of
the “attractiveness” stage. They give some attractiveness
criteria to be considered in evaluating a market segment.
In many later discussions of segment evaluation, the
contributions of researchers revolve around determining
segment attractiveness by using Kotler’s [1] measurabil-
ity, substantiability, accessibility, and actionability crite-
ria [23, 24]. These often are translated into numerous
other related criteria, such as segment size, segment
growth, segment structural attractiveness, expected seg-
ment profitability, and risk [1, 13, 23].
One of the problems with Kotler’s [1] criteria for at-
tractiveness is that there is no guidance on determining
the relative importance of each criterion. Second, the
company itself is not considered, although Kotler [1]
does mention taking the companies objectives and re-
sources into consideration. The final problem is that seg-
mentation is only weakly linked to business strategy and
implementation.
THE PROPOSED MODEL/PROCESS
To select the best segments that match the company, it is
crucial that the company conducts thorough studies of the
different segments. Segments need to be selected where the
company can create competitive advantages and gain the
position in the segment that they want. Segments that may
seem attractive, big, growing and with little competition,
may not suit the company if the segment cannot be handled
well enough internally to gain the desired position in the
market. Because no two companies are the same, the pro-
cess of finding the segments that best match a company’s
capabilities should reflect the company’s unique situation.
This article uses a two-step process. The proposed pro-
cess can be conducted both in a simple transaction situa-
tion and in a relationship situation. The first step is a run-
ning segment evaluation that takes place during segment
identification and involves the segments. The second step
is the selection and involves the company and the seg-
ments. The aim of this process is to find a perfect match
between segment demands and an optimal use of the
company’s capabilities.
The Evaluation of the Segments
The evaluation of the segments is a process that runs
throughout the identification of the segments. The evaluation
process is broken into two steps. The remaining segments be-
ing identified become more qualified as the process goes on,
until only the most potentially worthwhile segments are left.
First the segments need to be scanned for a few crucial,
relatively easily identified variables defined by the com-
pany themselves, because they should reflect the goal of
the segmentation. These variables need only be estimated.
Examples include segment size, growth, customer needs,
and the fit with the company’s core competence.
The second step is a more thorough evaluation of the
segments that remain. These segments are now evaluated
for further variables to determine their suitability for se-
lection. The following criteria could be used:
• the expected demands on the company
• the potential profit compared with the related risk
The most suitable factors for market
segmentation are closely related to the
individual company.
482
• the competition, number of competitors, and their
strengths, preferences, etc.
• governmental and public moves
• the ability to reach buyers in the market
• technology
• ability to gain a competitive advantage
• the connections between present networks (such as
strategic alliances) and the identified segments and the
possibility of any conflicts
The evaluation should result in a description of the seg-
ments that is used in the selection stage.
The segments that now remain need to be evaluated to
decide how many and which segment the company
wishes to focus on further. When evaluating to decide
which segments the company should focus on, it is ad-
vantageous to find a synergy between the segments. The
closer segments are to each other regarding customer
needs and technology, the less they require of the com-
pany’s resources.
The Process of Selecting Segments
This attempt to give a new process for selecting seg-
ments has its foundation in strategic management
thought, especially the work by Fry and Killing [28] in
the book
Strategic Analysis and Action.
Strategic man-
agement deals with complex and dynamic markets and is
characterized with ongoing as well as yearly strategic
planning processes [30].
This comprehensive model may seem like a lot of
work; however, the process can be run through in more or
less detail depending upon the importance of the reason
for the segmentation. For example, if the company is po-
tentially changing the whole business focus the process
should be run through thoroughly. A decision about distri-
bution systems would not demand as thorough an analy-
sis; the whole model should still be used but in less detail.
The following model shows the process the company
has to go through to find and select the segments that best
match its capabilities (Figure 6).
The model should be understood in the following way.
First, a description of the segment being focused on and
the expected development within it need to be given. Sec-
ond, estimation needs to be made of what will be de-
manded now and in the future for the company to effi-
ciently target the segment. Next, estimate if the company’s
resources will be able to meet the estimated demands. If
they cannot, can changes be made within the company to
make it possible? If the answer is no, try another segment;
if the answer is yes, continue the analysis by seeing if the
company’s management can meet the demands. If they
cannot, see if changes can be made within the company to
make management capable of meeting the segments needs.
If the answer is no, a new segment needs to be selected; if
the answer is yes, continue the analysis to see if the organi-
zational structure can meet the estimated demands, etc.
Segments that seem attractive . . . may not
suit the company.
FIGURE 6. A segmentation selection process.
483
T
HE
D
EVELOPMENT
IN
THE
S
EGMENTS
(S
TEP
1). It is
important to focus on the external factors that will influ-
ence the success of each segment. The segment’s future
development should be estimated within at least the fol-
lowing areas:
• the expected demands on the company
• the size of the segment and its expected growth
• the potential profit compared with the related risk
• the competition, number of competitors, their
strengths, preferences, etc.
• Governmental and public moves
• customer demands
• technology
• existence of relationships with the customers in the
segments and assessment of the difficulty expected in
developing relationships
• assessment of the influence selecting a segment has on
present relationships
By estimating the development within the segments, it
becomes possible to evaluate whether the identified seg-
ments are likely to be beneficial in the long run. For those
that are, the next step is to compare the segments with the
companies’ resources.
R
ESOURCES
(S
TEP
2). Next, it must be considered
whether the company can comply with the segment’s de-
mands. Both the present and future demands required of
the resources from the following areas need to be consid-
ered to do so: customer needs, technology, demands, com-
petition, political moves, handling of relationships, etc.
The company should identify the present and future re-
source base that would be required to target the segment
in the following areas: assets, financial areas, human re-
sources, relationships, and image. To get a reliable pic-
ture, it would be advantageous to look at the resource
base throughout the different parts of the company, such
as purchasing, sales, service, marketing, production, and
development. It is important to evaluate the resources
compared with the segments and not as a general evalua-
tion of the company’s strength and weaknesses. Next, the
company must hold the present resource base up against
that which would be required in the future to find and
evaluate the critical gaps between them. The gaps should
be understood as the differences between the present and
the future situations. A critical gap is one in an area im-
portant for the future handling of the segment and thus
will not necessarily be the biggest gap.
After identifying the critical gaps, the action necessary
to reduce them needs to be considered. This could in-
volve changes within the company or influencing the
segment to change. If a gap is too big to be reduced
enough, it is necessary to start the process again with an-
other segment. Otherwise, it is now time to look at the
demands the segment makes on the management.
M
ANAGEMENT
(S
TEP
3). It is important to compare the
demands of the segment on the company, to the preferences
and expectations of the management. This involves under-
standing the company and career directions preferred by in-
fluential individuals and groups within the management.
The current and potential gaps between the segment’s
demands and the management’s preferred direction
should be identified. The company then needs to look at
what organizational actions are necessary to close the
gap. If the gaps cannot be closed, it may be necessary to
select another segment and start the process again, or see
if the changes can be met in the organization level.
O
RGANIZATION
(S
TEP
4). Provided the company has
identified the organizational capabilities demanded by
the segment, as well as those required to minimize any
gaps at the resource and management levels, the com-
pany can compare the demanded capabilities with the ca-
pabilities it has today. Thus, the gaps in the organiza-
tional capabilities can be found.
. . . find a perfect match between segment
demands and an optimal use of the
company’s capabilities.
484
Based on the missing demanded capabilities, it must
be evaluated what changes in the company’s culture, sys-
tems, structure, management, policies, etc. would be nec-
essary to eliminate the gaps. Often changes will be
needed in more than one of the organizational character-
istics. The segment also needs to be evaluated to see what
changes in it could minimize gaps in the organization’s
capabilities.
After identifying the required changes, it must be esti-
mated whether these changes can be completed within
the time available and whether the risk involved is ac-
ceptable. If the changes demanded are impossible within
the given time frame or the related risk is too high, it may
be necessary to go back and find another segment. How-
ever, if a segment has reached this far in the analysis, it is
probably satisfactory and more beneficial to consider fur-
ther changes within the organization. The next stage
looks at the strategic and implementation phases.
STRATEGY AND IMPLEMENTATIONS
Little attention has been given to the strategy and im-
plementation phases [2, 23, 24, 27].
The proposed model can help in both strategic devel-
opment and implementation. During the selection pro-
cess, a part of the strategy creation process already will
have been performed. Likewise, as internal factors are in-
cluded when evaluating and selecting the segments, the
considerations concerned and problems that may be ac-
crued with implementation are revealed.
However, implementation is not the final step, because
the company still needs to react to dynamic internal and
external changes.
DYNAMICS
There have not been many contributions in the areas of
dynamics even though it is recognized as an important
area. Wind and Thomas [23] stress that “dynamics re-
quire explicit consideration in the segment research
model.” Plank [2] notes that there are limited discussions
of feedback loops or other dynamic considerations. Hla-
vacek and Reddy [27] who have done some of the more
comprehensive work in this area, state that literature to
date has totally ignored the dynamic and changing nature
of industrial market segments over time.
Hlavacek and Reddy [27] suggest that by keying in on
application requirements of the segments, it is possible to
monitor the impact of competitive activity and techno-
logical change on industrial market segment boundaries.
However, they do not give guidelines on this process.
Neither do Wind and Thomas [23] though they do sug-
gest using both an “interactive research approach” to
measure changing responses to marketing stimuli and a
“panel survey” to assess the changing segment structures
regarding products.
Strategic management has continual competitive ad-
vantages as one of its main goals. This is achieved by re-
sponding to the changes in the surroundings. A continual
monitoring of the market is required to realize changes
needed. As segmentation models do not handle market
dynamics, it is of value to look at the way strategic man-
agement handles dynamics and see how the theory can be
adapted to suit segmentation.
Lund and Lorentzen [31] suggest a continual dynamic
process that can be adapted to the situation, consisting of
the following tasks:
• monitor changes in the segment’s surrounding
• analyze the consequences of the changes
• realize changes needed in the company
• make the right decision at the right time
• carry out the decision the effectively
When the segmentation is finished and the strategies
are created, it is important to realize what segment factors
are critical for the company’s success, and they should be
continually monitored. Some of the critical success fac-
This article uses a two-step
selection process.
485
tors are likely to be the criteria that were critical in the
identification of the segments. Others could be critical as-
sumptions made while developing the strategy, for exam-
ple, the technology. Other critical success factors could
include the customer needs, relationships, technological
development, and competitor offerings and moves.
The company also needs to identify and constantly
monitor the internal factors that are critical to the com-
pany’s success in the segment. By monitoring the inter-
nal factors alongside the changes in the segments, the
company can continuously identify the “best match” be-
tween the company and segments. Achieving the best
match is not simply a matter of adapting to the segment
but also of influencing the segment in the direction the
company wants to go.
By applying too narrow an approach, the company
could fail to see market opportunities or potential com-
petitive threats. An approach could be too narrow by not
looking far enough into the future, or if it considers too
narrow a selection of the segment’s surroundings.
The risks of having too narrow an approach can be
minimized if the segment monitoring is combined with
scanning the segment’s surroundings. To avoid collect-
ing data that has no relevance to the segment, only the
borders of the business area need to be scanned. Things
that should be scanned could include long-term trends in
socioeconomic conditions, competitor situations, politi-
cal moves and technological developments, etc. The
scanning is an ongoing process that can show new possi-
bilities for and threats to the company’s future perfor-
mance and reveals attractive opportunities for consider-
ation in other segments.
Databases can be useful tools to assist in the continual
monitoring and scanning processes. However, an infor-
mation system is not a simple answer. It needs thorough
design if the results are to be useful and will take time, re-
sources, and motivation from within the company to both
maintain it and analyze the results. Taking advantage of
technology, such as the Internet, would allow sales sub-
sidiaries and customers to contribute to the feedback loop.
The first step is to determine the information sources
that will provide the data. It is important to use the critical
success factors of both the segment and the company. De-
pending upon the importance of the segments being mon-
itored, other factors could be included choosing those
most important to the segmentation process first. It then
needs to be determined how the data for these variables
was initially measured and how the data can continue to
be gathered in the future. The database needs to highlight
movements in measurable variables and common themes
that appear in customer and company feedback. Move-
ments highlighted for attention should reflect both the size
of the changes or frequency of the common feedback and
the criticality of the particular factor in relation to the
company’s activity in this and other segments to avoid
giving unnecessary attention to irrelevant details.
The monitoring should be supplemented by control so
a control and monitoring system is created. Messaged
monitoring ensures the assumptions underlying the com-
pany’s approach to the segments are still valid. Control
systems can be used to determine whether the strategy is
being implemented as planned to establish whether the
strategy is delivering the promised objectives or if
changes are needed, if the companies moves have the ex-
pected effect and if the results produced by the strategy
are those intended. Together the two activities form a
system that as time progresses shows how the company is
doing in achieving the goals set for the segment in rela-
tion to changes in the segment.
Using such a system, it is possible to recognize and re-
spond to environmental changes and to correct planning
assumptions [32, 33].
CONCLUSIONS
This article has outlined some new areas of segmentation.
First, the article suggests that it is important to realize
where the market situation stands on a scale with simple
market transactions at one end and complex relationship
management at the other. Second, it suggests that segmen-
A continual monitoring of the market is
required to realize changes needed.
486
tation for the two different situations must be based upon
two different approaches. Relationship management needs
a deep understanding of the customers characteristics,
needs, and future directions, whereas this same informa-
tion would be too time consuming to collect and too com-
prehensive to use for the simple identification of similar
customer needs and wants, as needed when segmenting for
simple market transaction situations.
Third, the article suggests that the segmentation task
should be to identify what kind of overall relationship the
customer requires, and then to investigate the needs and
wants of each type of interaction. Fourth, segment identi-
fication must conform to the kind of overall relationship
and the needs and wants of the particular type of interac-
tion. The selection of the segments should include how
well companies, within a particular segment, match the
company making the segmentation.
Fifth, turbulence in the market makes it important to
have a system for continuously monitoring and scanning
for changes in the markets and in close relationships of
strategic importance. Finally, segmentation has value on
more than just strategic level.
The outline above is only a step in the development of
a framework for a dynamic strategic industrial marketing
segmentation model. Its applicability still needs to be
proven and further developed for specific situations.
It is only possible to outline general management im-
plications from the model:
• Who are the customers?
• What do the customers want?
• What do the customers do?
• How can the answers to the raised questions be ful-
filled within our organization?
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