This is a lesson from a marketing course I teach for business admin. students. It analyzes the concept of segmentation using Nirmalys Kumar's 3Vs based on the book Value Merchants.

1. From Market Segments to Strategic Segments
Nirmalya Kumar
Marketing’s basic mission: create a difference
between a company’s offering and that of its
competitors on an attribute important to customers.
To create differentiation, marketers use
segmentation, targeting, positioning (STP).
Segmentation: process of dividing the market into
homogeneous groups of customers who respond
similarly to a particular marketing mix of the four Ps

2. Problem: inability to create perceived differentiation
...too much reliance on mkt.g mix / 4Ps (tactical tool)
Differentiation is achieved by building the firm’s source of
competitive advantage into the value network (=value chain) that
serves a particular strategic segment.
Differentiation beyond marketing…to encompass
- R&D
- operations
- service
MOVE FROM MARKET TO STRATEGIC SEGMENTS
IN TERMS OF

3. VALUED CUSTOMER
VALUE PROPOSITION
3 Vs
VALUE NETWORK
1. How does a firm create sustainable differentiation?
2. What are the cross-functional implications
of serving a particular segment?
3. What positive or negative synergies exist in serving
combinations of different segments?
4. Where should the value network be sliced to serve
different segments?
5. How unique is our marketing concept?
6. What are sources of our differential advantage in terms of
competences, processes and assets?

4. TRADITIONAL PROCESS
- identify market segments
- select the appropriate segment(s) to target
- position the company’s offer within the targeted segment(s)
using the four Ps
Segmentation process: identify variables that will
Segment
A
Segment B
Segment C
maximize differences between segments
AND
minimize differences within each segment

5. Creative segmentation can help a company get closer to its customers
Mass customization:
each customer is a
distinct segment.
COMPANY
LOGIC
Ec. of scale =
larger segments
CUSTOME
R LOGIC
Unique needs
MOST
COMPANIES must
TRADE OFF

6. Goal: ACTIONABLE SEGMENTS
(1) distinctiveness i.e. different segments respond
differentially to the marketing mix
(2) identity that is, the ability to reasonably profile
which customers fall within which segment
(3) adequate size, so that the development of tailored
marketing programs for individual segments is
economically viable for the firm.

7. Xerox
Xerox
a priori segmentation:
large medium small
post hoc segmentation

8. TARGETING
deciding which segments to
actively pursue to generate sales
UNDIFFERENTIATED
OK if it lowers the cost of delivering the value proposition and
opens up the industry to large numbers of new customers
DIFFERENTIATED
simultaneously targets several market segments, each with a
unique marketing mix.
(Ford: Aston Martin, Ford, Jaguar, Land Rover, Lincoln, Volvo)
CONCENTRATED (one segment): PORSCHE
Subsegments (Psychographics):
Top Guns - Elitists - Fantasists - Proud Patrons - Bon Vivants
Power - Power
ctrl
ctrl
Old
Old
money
money
Escape n
Escape n
feel guilty
feel guilty
Ownership - Ownership
trophy
trophy
Jet setters - -thrill - Jet setters thrill
excitement
excitement

9. Positioning is developing a USP for the target segment
A well articulated USP should be capable of being
briefly communicated by completing the sentence:
“You should buy my product or service because . . .”
EXPRESSED WITH BENEFITS
NOT FEATURES OR ADVANTAGES
inability to do so results in either a price
negotiation with the customer or a loss of
the sale.

10. U.S
.
younger, more educated, more affluent
demographic, adventurous, confident
psychographic of customers who enjoy driving and
even disobey speed limits
A) Positioned rationally
“affordable and German engineered,”
B) Positioned emotionally
a “different driving experience more connected to the road and
world.”
Compared to
customers perceive VW to be more drivable, more substantial,
more individual, and more spirited.
VW is more approachable, more likeable,
a better value, and more human.

11. Be very specific in terms of the
intended positioning or unique
selling proposition

12. MIDAS
(1) age of the car: (older car, more likely will need Midas
(2) size of the car: bigger car = higher value of the sale / margin
(3) sex of the driver:women more likely to buy additional services
car lovers - 5) utilitarians
same basic value proposition
fast, reliable, one-time repair
4)
- Additional services
- phone call after 6 mnths
- smalltalk
- newspaper
- videogame
- guarantee
Market and service segments as the abv only
require changes in the marketing mix

13. Strategic segments require distinct value networks
A) “fast mechanical repair”
B) “guaranteed repair” (factory-authorized dlr)
C) “specialty repair” (independent workshops)
D) “heavy-duty accidental repair” (body shops)
E) “do-it-yourself repair”
u
n
i K
q S
u F
e
develop two unique value networks
three Vs
valued customer - value proposition - value network

14. London - Glasgow 29£
Southwest airlines
Southwest airlines
I. valued customer: who to serve? Leisure, small bsnss,
entrepr.
II. value proposition: what to offer?
- bsnss travel: seat comfort + selection - bsnss class,
newspaper, freq. flyer, travel agency, flexible schedule
- leisure travel: ABV IS OK BUT LOW PRICE IS BETTER
III. value network

15. four key questions to chal lenge an industry's
strategic logic and business model:
Eliminate
Which of the
factors
that the
industry
takes for
granted
should be
eliminated?
Reduce
Which factors should
be reduced well
below the industry's
standard?
NEW
VALUE CURVE
Raise
Which factors should
be raised well
above the industry's
standard?
Create
Which factors
should
be created that
the industry
has
never offered?

16. CXL: free meals (sell snacks) - travel agents (95% tickets thru
the Internet or call center 5%)
(attributes really create value?)
REDUCE: flexibility in flight changes (all fares non-refundable switchable with penalty) - seat selection (first-come/first-served
and group boarding)
(factors overdesigned by industry)
RAISE: lower prices, greater punctuality, younger fleet of planes
(understand the compromises that the industry currently forces
its customers to make)
CREATE: one-way fares, refunds for delays abv 4 hrs, ticketless
travel.
(new sources of value creation)

17. EASYJET STRATEGY CANVASS
3.5
3
2.5
2
1.5
1
0.5
0
traditional carriers
easyjet
s
ity ion
s
ing
als
s
t
s
s
ls
n lane tual
ct
as spac t me mea lane fligh ight enes
io p
l
t w
c
le
tw
n
e
e
h
p
fl
r
bu
iv
sc t
e
pu at s
e n istri ne
ns sea n flig flye late ang sed ract
e
s
id
s
i
w
nt
fb
or o ch mis e att
nd
rld
ue ds f
t
ei
yo
q
or ric
it
wo
p
oic
fre efun bility nd f
bil
h
a
r
xi refu
ec
ail
d
fle
av
wi
k
or

18. EasyJet strategy canvass (modified)
3.5
3
2.5
2
1.5
1
0.5
0
s
s
t
n
ss
n
ls
ls
ng
ity
es
rk
es
ht
io
es
gh
ci
al
ea
t io
ea
c la
ct
an
an
lig
wo
fli
f
en
m
tu
t
m
s
pa
le
pl
bu
pl
t
e
s
s
e
ri
t iv
nc
ne
e
er
ed
w
gh
at
ng
sn
st
ts
e
at
ly
ac
pu
ne
iss
f li
di
id
rl
se
ha
tf
ea
fb
tt r
c
s
w
n
m
o
a
in
fo
in
e
r
y
e
e
to
rld
fo
ds
qu
lit
ic
ic
ty
wo
bi
pr
un
fre
nd
ili
ho
a
f
c
b
fu
re
ail
e
xi
re
av
id
fle
w
traditional carriers
easyjet

19. Intangible benefit
Tangible benefit
Refunds abv 4 hrs:
unlikely for short hauls
Perceived
benefit
VALUE PROPOSITION STRIPPED TO THE
BONE

20. III. value network - How to deliver
20 to 25% savings - 10% bgt mkt.g

21. Reinventing the Value Network.
5 cost principles to build easyJet’s value network:
1. Avoid fixed costs whenever possible: no secretaries!
2. Make fixed costs work harder than the rest of the
industry: EasyJet planes fligh 11 hrs/day, VS 6.5-hr avg
3. Eliminate generally accepted variable costs as travel
agents.
4. Keep variable costs to a min., such as airport fees.
5. Convert variable costs associated with services into
revenue generators, as selling snacks on the plane.

23. British airways
IS IT GOOD TO LOOK FOR SYNERGIES?
different strategic segments require divergent value networks
synergies = shared portions of the value network
NOT OPTIMIZED FOR
FULL SERVICE - LOW COST

24. OPTIMIZING THE VALUE NETWORK
(1) To what extent does our marketing concept differ from
others in the industry?
(2) To what extent do elements of our marketing concept
mutually reinforce each other?

25. ‘82 - ‘90 UK grocery sales of branded products: 52% to 33%
PRIVATE LABELS: 33% TO 46%
EATING OUT: 15% TO 21%

26. private labels and branded businesses are strategic segments?
Share logistics, marketing, sales force
PRIVATE
LABEL
CHEAPER
RAW MAT.
REVERSE
ENGINEER
BIDDING
FEW SKUs
LONGER
LEAD
TIME
0
BRANDED
PRODUCT
COPYCAT
12
9.5
NEW
PRODUCTS
JOINT
DEVELOPMENT
OF
PROPRIETARY
MATERIALS
Σ
WIDE
RANGE
OF SKUs
NEW
FUNCTIONALITY
2
15
KAM
COPY
PACKAGE
6
RESEL
OP.
LER
AVG.
PROFIT GPM PRICE
4.5
32.5
65
9
40
100
EXTENSIVE
BRAND
INVESTMENT
LARGE
QUICK
SALES
RESPONSE
FORCE
14
20
Ret margin 32.5/65 vs 40/100
ABS. $
4.5/32.5=13.8
9/40= 22.5

27. In continuous process industries such as toilet paper or aluminum
foil, value network separation at the level of purchasing and
manufacturing would severely compromise production
efficiencies.
1. Concentrate exclusively on being either a branded or a
private label player.
2. Become primarily a branded player, but accept private
label manufacturing only under very strict criteria: meet
a hurdle rate of return on sales, use only excess plant
capacity, and do not “borrow” packaging or recently
introduced innovative features of the company’s branded
product.
3. Completely separate the private label business from
the branded business and let each optimize its own
value network.

28. Drive Marketing Innovation Using the Three Vs
1. Are there customers who are either unhappy with all of the
industry’s offerings or are not being served at all?
E.G. cheap HIV drugs mfrs
2. Can we offer a value proposition that delivers dramatically
higher benefits or lower prices, compared with others in the
industry?
3.Can we radically redefine the value network for the
industry with much lower costs?

29. Exploit the Three Vs–Related Growth Opportunities
Understanding where customers are not being served
helps determine which markets and industries the
firm should operate in or “who to serve.”
Clarity in the winning formula and economic logic create
the potential to offer dramatically different value
propositions and help determine “what to offer.”
The value network, or “how to deliver,” explicates the
timing (when to move into which markets) and vehicles
(how to get there)

33. Checklist for Marketers on the Three Vs
Valued Customer
• Who are our valued customers?
• Are there customers who are unhappy with all the current
offerings of the industry?
• Are there customers who have a need but are not being currently
served by the industry?
• Are we trying to reach customers who are unaware that they
need our product? If so, how are we going to create the need?
• Who is the user? The buyer? The influencer? The payer? What are the
preferred criteria of each and their power in the buying decision?
• Is the target segment large enough to meet our sales
objectives?
• What is the growth rate of the target segment?
Value Proposition
• What are the core needs we are trying to address with our value
proposition?
• Does the value proposition fit the needs of our valued
customers?

34. • What benefits are we actually delivering to the customers?
• Is our value proposition differentiated from the competitors or are we positioning
in a crowded space?
• Are our value proposition claims reinforced by underlying product and service
features?
• Are we positioning on attributes that we can defend against competitive attacks?
• Are we positioning on too many benefits to be credible?
Value Network
• Can we serve the valued customers with the value proposition at a profit?
• Do we have the necessary capabilities to deliver the value proposition? If not,
could we acquire or partner with them?
• Would serving the valued customers have negative consequences on our existing
customers or businesses? If so, how are we going to control for this?
• Which high-cost or low-value-added activities could be eliminated, reduced, or
outsourced in our value network?
• Where are the advantages of scale in our value network? Can we maintain scale
while not losing flexibility?
• How different is our value network from the rest of the industry?
• What is our break-even point? Could we lower it by slightly varying the value
network?

35. CONCLUSION
As companies enter and operate in related segments of businesses,
are they facing strategic segments or market segments?
How far back in the value network should they separate the two
businesses?
Is it enough to separate marketing, or should marketing and
distribution be segregated?
Or does one need a completely distinct value network for the new
segment?
How can marketing be used to generate innovation and growth in the
industry?
Using the three Vs lens to answer these questions, a company
can find new strategic segments, build deep differentiation,
and drive innovation and growth