Download The Hierarchy of Target Market Selection Criteria Bill Callaghan and

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.
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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
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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
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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.
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Table 1 Importance Currently Given to Target Selection Criteria
Criteria
p value (two
sided t –
test)+
B2b vs b2c
Mean
Std.
Error
% rate
very high
importan
ce
5. Sales volume potential of segment
1.94
0.08
33%
.703
1. Profitability associated with the segment/s
2.11
0.10
34
.112
40. Your reputation with customers in a segment/s
2.25
0.09
26
.048 --
3. Market size of segment
2.26
0.09
21
.040 ++
11. Current and potential market share position
2.34
0.10
26
.682
36. Strength of current business relationship
2.36
0.09
19
.069 -
2. Market growth rate of segment/s
2.37
0.09
19
.252
16. Fit with business strategy/strategic relevance of
segment/s
2.38
0.10
20
.682
35. Ability of business to provide added value to the
segment
2.40
0.10
22
.547
12. Relative organisational strengths in key functions
required to deliver the product offer/s
2.44
0.10
18
.350
27. Ease of access through distribution channels
2.45
0.10
20
.060 +
32. Your organizations ability to deliver a
differentiated product offer
2.47
0.10
20
.751
41. Pot customer loyalty of segment/s
2.48
0.09
18
.891
37. Service quality requirements of the segment/s
2.49
0.10
21
.005 ---
10. Competitive rivalry/intensity in segment/s
2.49
0.11
27
.962
6. Likelihood of being able to have a sustainable
differential advantage
2.50
0.10
20
.221
26. Extent to which segment is clearly identifiable
2.53
0.09
13
.602
4. Current or likely customer satisfaction levels
2.56
0.11
17
.950
15. Technological factors involved
2.59
0.10
15
.134
9. Segment/s needs for product differentiation
2.66
0.10
14
.552
7. Overall ease of access to customers
2.67
0.11
16
.605
25. Compatibility with current marketing programs
2.68
0.09
11
.031 ++
14. Segment customers image of your organisation
2.73
0.11
15
.946
24. Level of risk involved
2.74
0.09
9
.082 Significance Levels, using plus and minus signs 99%,95% and 90% two-sided levels. Plus
means b2c places more importance on the criterion.
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