B2B - Strategy Tools - Part 10

Strategies for different customer segments

As the size of your business grow you may find yourself providing different products or services to different customer segments.

By customer segment I mean a group of customers sharing the same important needs - as shown in a previous post customers in a customer segment do not necessarily belong to the same industry but they share they the same need - a need that you can fulfil with your product or service.

What strategies should you then pursue towards the individual customer segments?

Michael Porter, Lars Bergendorff Business Consulting and The Boston Consulting Group have each developed strategy tools that when combined give an excellent input to the choosing of strategy.

In his book:" Competitive Strategy", Michael Porter introduces "5 forces" that influence an industry's attractiveness. I believe that they can be used for customer segments as well:
In short you should look at the following 5 forces:

• Rivalry amongst you and your competitors
• Bargaining power of customers
• Bargaining power of suppliers
• Threats of substitute products or services
• Threat of new entrants

In addition to the above 5 forces I also believe that you should look at 2 more factors in order to determine the attractiveness of a customer segment:

• The yet unrealised potential of the segment, i.e. the potential customers for your particular product or service that are not currently your customers
• The growth rate of the customer segment

In my previous post: "Competitive Strength" I described the "Business Triangle" - an important strategy tool from Lars Bergendorff Business Development. The Business Triangle can be used to describe your strength in a particular customer segment in relation to fulfilling important customer needs better than competition.



Finally The Boston Consulting Group have with their classic "BCG matrix" developed a strategy tool whose principles are still valid. Using the above 2 dimensions: Segment attractiveness and competitive strength you can plot your customer segments in a strategy grid:


By making the size of the circles proportional to the current profitability of each of your customer segments you can add a 3rd dimension to the strategy grid - the current importance to your bottom line of each of your customer segments.

Due to issues with cost allocation you may want to use contribution or margin figures instead of profit per segment.

The strategy grid can now help you in making 1 of 4 strategic decisions for each of your customer segments:.

• Go - when your strength in a customer segment is strong and the segment is attractive.
  
• Keep - when your strength is strong but the attractiveness of the segment is low.
  
• Investigate - if the segment is attractive but your strength is low.
  
• Drop - if both segment attractiveness and your strength are low.
  

How you from an operational point of view execute your decisions is of course dependant also on how your current profitability in the segments are (size of the segment circles).

There may of course be other factors influencing your strategic decisions for each of the customer segments and before you decide you may want to look at the possibilities of making some "Blue Oceans" - I will discuss this in a later post.

PETER SØRENSEN