By Denise Harrison, Executive Vice President & COO
Customer Concentration and Market Segment Analysis
Customer concentration is a key characteristic to consider when thinking about market segmentation, it is important to understand the number of potential customers but also what percentage of your business is made up of your top 3-5 customers. With a highly concentrated customer base your strategy is often dictated by the key customer needs and preferences. Your ability to gain or lose market share is often dictated by how fast you are able to meet the changes required by these top customers.
For example, Fortune discussed how Wal-Mart set standards for their suppliers to implement RFID tracking technology on all of the products provided to Wal-Mart for sale. Even large companies like P&G are scrambling to meet these Wal-Mart requirements, Wal-Mart is over 15% of P&G’s business. Implementation of this technology will be a significant investment for P&G so it is important for the team to take this into account as they develop the P&G strategy plan and ensure that resources are allocated towards this project.
Strategy Tip: As you develop your market segments, be cognizant of the number of potential customers and any concentration of your company’s business in a particular customer. If you find you have high concentration then you must make sure you understand the customer’s changing needs and preferences and be sure you take these into account as you develop your strategy. If your market does not have high concentration you will want to identify bellwether clients to ensure you are able to spot industry trends early.
Innovation: Finding Innovation in Other Industries
A recent Course and Direction article (Innovation: Where to Find It) discussed potential sources for innovative ideas. One thought was to look to other industries for innovative ideas that could be applied to your industry.
An example appears in a WSJ article discussing how Allegheny General Hospital looked to the automotive industry for ideas. They took the concept: root cause analysis and applied it to the hospital’s intensive care unit. Once they identified the root cause of infections they were able to change procedures and lower the incidence of infections by 90% saving the hospital $500,000 per year (not to mention untold inconvenience and suffering by patients).
Strategy Tip: Look around; good ideas abound in other industries. What is even better, these ideas have already been tested and streamlined. One word of caution: be sure to understand what adjustments need to be made for your industry before moving ahead.
Market Feedback: Key to Identifying Growth Opportunities
Key to market segment analysis is market feedback. The retail industry is particularly prone to changing market trends and the whims of consumer. Business Week reviewed Coach, a formerly stodgy manufacturer and retailer of handbags. In order to spruce up the image to add style and fun to the brand the CEO hired a new designer. The designer was an important piece of the revamp; however, each new style was piloted in specific retail stores to develop feedback. Changes were made based on the feedback before the product was launched. By first evaluating the success of new styles before a national launch and making course corrections where necessary Coach has been able to double its sales in a slow growth market. Who would have thought that shocking pink would be a fast selling item? This constant customer feedback (over 10,000 interviews/year) enabled Coach to gain significant market share and change its image in the market.
Strategy Tip: Be sure that you get impartial feedback from your customers. This feedback is important to spotting changing trends before your competition.
Your market is shrinking; can you find a new market for your product/service?
International Visual Corporation manufactures and sells modular wall display panels to department stores. Department store consolidation started a decade ago and continues with no end in sight and this consolidation reduced International Visual’s client base significantly. The two partners who own the company were driving around wracking their brains for new ways to grow the company. One day (while driving) they came upon the idea of selling this paneling to homeowners for their garages so that they could attach cabinets, shelves and other units to organize garage storage. A success!! The company has a significant new market segment using the products that they already knew how to produce.
Strategy Tip: Selling an existing product/service to a new market — be creative! If this new market is viable, be sure that your team analyzes the distribution required and investigates any market requirements that would not be met by the existing product. Sometimes minor modifications are necessary to prevent a black eye when the product is launched into this new market.
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Denise Harrison is Executive Vice President and COO of the Center for Simplified Strategic Planning, Inc. She can be reached at email@example.com
© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.