What is Market Segmentation?

Marketers use a wide variety of tools to come up with a marketing stratgey for the organization. The types of products available and introduced, the advertisements, distribution channels and customer touch points are all part of the game. However, a major area where companies fail to recognize is the different needs of the customers.

Categorizing similar needs of customers into clusters is called segmenting the market. The segments can be broken down in terms of customer income, unique needs, geographical conditions, social statuses, education, religion, ethnicity and the list goes on.

There are no rules set in stone to segment a market. As long as you are able to cluster a group of people with similar needs and wants, it can be called a market segment. Once you have segmented the market, the business can cater to each segement based on their unique needs.

Some popular market segments are as follows:

1) Geographic Segmentation

This is a scenario where the market is divided based on the geographical location of the customers. Global marketing heavily relies on this segmentation as they consider one nation to be a unique market. However, it is not mandatory to assume that one nation is one unique market. For an example; although India and Sri Lanka can be considered as very unique markets even though they are situated in close proximity, Denmark and Norway could be clustered together. But depending on the sensitivity of the product to cultural factors these segmentations could change.

2) Demographic Segmentation

This segmentation focuses on factors such as age, gender, education level, income level, religion, ethnicity etc. Age group is a popular segmentation method, for an example, in the confectionary, toys and education businesses. Gender plays a major role in the fashion industry. For an example if a business is looking at opening a clothing store in a city, it should conducted a census and find out the percentage of men and women in the area so it can better cater to the target market.

Likewise, a market can be segmented to any number of manageable sectors and then a business can better focus on one segment.

Depending on the needs of the segments a business can;
- provide one product to the entire market,
- provide one product to several like-minded segments, or
- provide a unique product to all segements of the market.

Importance of Market Segmentation

- better identify the unique and varying needs of a market
- can better cater to the unique needs of the market
- personalized products give more value to customers, hence more customer satisfaction
- easier to handle a smaller segment than handling the entire market
- chances of a product failing in a segment is less
- can focus the business's marketing more effectively to a segment

If you have further questions regarding market segmentation please comment them below.

What is DMAIC and It's Uses

DMAIC is a popular model used for problem solving in organizations. This tool has been adopted by many Kaizen gurus due to the methodical approach used in DMAIC tool. This is also a prominent tool used in Six Sigma processes.

This tool can be used to identify problems within the organization and resolve them in a systematic manner.

In Kaizen, DMAIC tool is used a lot since it can deliver change in a standardized manner. And DMAIC can be used in a cyclical manner for problem solving and improvement, which is a core concept of Kaizen.

What does DMAIC stand for?

1. Define
2. Measure
3. Analyse
4. Improve
5. Control

Define

First step of this process is to identify the problem that you need to tackle. This is called 'defining' your problem. There is no strict guidelines as to how this can be done. You can write a few sentences about the problem at hand and the current situation of it.

Measure

The second step of the DMAIC process is to quantify your problem. By this way, you always have supporting evidence to backup your problem statement as well as objectives of your DMAIC project.

Also measuring helps you evaluate the before and after results so you can identify if your DMAIC project was fruitful.

Measuring criteria largely depends on the issue you are tackling. For an example: if you are trying to identify the reasons for loss of productivity in a production line, you could probably start by measuring the times taken by each activity and determine the lagging indicators.

It is important to know that measuring doesn't necessarily mean collecting numbers. It could be any type of qualitative data too.

Analyse

Analyse essentially has to do with crunching the numbers you gathered before. Do not mistake that it is just numbers that you can analyse. You can analyse qualitative data too.

Analyse step should be used to derrive at a plausible solution to your problem. Since your problem and solution is backed by extensive data and numbers, there is little chance that your solution will fail.

Improve

The fourth step of the DMAIC model is to implement your solution that is going to improve the current context of the problem. Notice the word "improve" being used as opposed to "solving." This is to mean that DMAIC model should be used to provide an improvement over the current problem. The solution that you derive might not eliminate the problem. Instead DMAIC focuses on continuously improving from the current status to a better status. This is why DMAIC is also identified as a cyclical process.

Control

The final step of DMAIC model is to ensure that the achieved improvement is sustained. For this you can implement one or more control mechanisms or points. These control points will ensure that the process does not slide back to its original status.

After one cycle of DMAIC is completed you can start working on your next project starting from the achieved and sustained improvement. So any shortcomings that were overlooked in the first cycle can be improved in the second cycle. Likewise, DMAIC can be used in turns to achieve the optimum result for any problem at work place.

What is Activity Based Budgeting (ABB) or Activity Based Costing (ABC)?

Activity Based Budgeting (ABB) is a form of budgeting based on allocating costs to each and every cost that occurs within the business to produce the product. 

A business organization has a variety of departments. Eg: procurement, production, human resources, sales and marketing and so on. Each of these departments incur costs in order to produce the product. Every cost occurred within the business is directly or indirectly related to the output. So it is only fair to consider all these costs in preparing budgets. 

When conducting a budget based on the activities of the business, the business should identify cost centers and allocate predicted budgets to each cost center. By breaking down the departments and process into smaller cost centers, the business is able to identify clearly where the unnecessary costs are being occurred. This is a big advantage of ABB. 

Examples of activities are; bringing in raw materials (fuel and salaries for drivers), each machinery costs, supervisor salary, cost of hiring new employees, lay off costs, transportation cost of finished goods and so on.

Activity Based Budgeting or Costing is a tedious process, as there could literally be thousands of activities in a production business. So it is quite impractical to implement ABB or ABC into large organizations. It also takes a lot of time to prepare budgets based on this approach. These are a few disadvantages of ABC. 

If you have further questions about Activity Based Costing or Activity Based Budgeting comment below.

Hofstede's Cultural Dimensions Explained

Geert Hofstede was a pioneer in research on culture and different types of cultures on an international scale. When he was working at IBM back in 1960s he conducted a research across 66 nations (Wikipedia says 50) to analyse the different cultures existing in the world. He came up with 5 cultural dimensions.

1. Power Distance
2. Uncertainty Avoidance
3. Masculinity vs Femininity
4. Individualism vs Collectivism
5. Long Term Orientation

01) Power Distance

The gap between different hierarchy levels within the society or a workplace. More or less people's acceptance of the unequal distribution of power and authority within the culture. High Power Distance means people are tolerant of the vast gap between lower and higher hierarchical figures of the society. 

02) Uncertainty Avoidance

This refers to the degree of acceptance of 'uncertainty' in their lives. This could also be interpreted as how well or not people perceive or accept the uncertainties and ambiguities in the society or the workplace. High Uncertainty Avoidance cultures tend to have strict and precise rules to minimize uncertainties. 

03) Masculinity vs Femininity 

This refers to the people's perception of gender roles within the culture. Masculine cultures tend to have clear cut roles assigned to both men and women. Masculinity is associated with assertiveness, competitiveness, achievement oriented, ambition and power. However Femininity is associated with quality of life. A Feminine culture will have interwoven gender roles. Both genders will be performing same roles in the society.

04) Individualism vs Collectivism 

This cultural dimension refers to the level of individual integration to groups within societies. Individualist cultures consist of people who put themselves before the group's needs. They like to work alone and achieve their personal objectives. In Collectivist cultures people put the group's needs in front of theirs'. They work towards the good of the group rather than their personal benefit. 

05) Long-term Orientation

This dimension focuses on a culture's time focus. If a culture is long term oriented, it necessarily means they are focusing on the future. They will be sacrificing short term benefits in pursuit of long terms benefits.

Hofstede's Cultural dimensions allow us to identify different traits and personalities existing within different cultures.

Leave a comment if you found this article helpful.

What is "Culture"? Definition by Edgar Schein and Simple Explanation

"a set of basic assumptions – shared solutions to universal problems of external adaptation (how to survive) and internal integration (how to stay together) - which have evolved over time and are handed down from one generation to the next"

(Schein, 2004: 14) 

According to Schein people fundamentally search for two solutions--'how to survive' and 'how to stay together'. Put these two in to day to day context and a lot of things will start to make sense. Anyway according to Schein, Culture that we live in is all about survival and staying together. 

'Culture' is believed to be 'learnt' rather than 'inherited'. People are not born with a culture--people are born into a culture. With time people will adjust to the culture to stay together (since humans are a collective type of animals) and to survive among the other cultures. This is why the definition says the 'culture' is handed down from generation to generation.

Culture obviously evolves over time. Nothing stays permanent--that is the universal law of everything. And so does culture. With different forces, internal and external, acting upon the culture we live in, it changes it's nature, it's norms, values, beliefs, behavior etc. People of a culture must adapt to the change it undergoes. Or else he will be an outcast--he will not 'stay together' with the group.

A simple yet powerful and comprehensive definition to the vague term 'Culture' is provided by Edgar Schein. 

There are many more definitions and explanations to Culture and it's actors and how it affects businesses. So we will be back with more articles on how Culture affects businesses in the future. 

If you have any questions, comment below.

What is Porter's Diamond Theory? (Simple explanation with examples)

Michael E. Porter has developed many theories in his lifetime and Diamond Theory or National Diamond is amongst the best of those theories. 

What is Diamond Theory?

In a nutshell The Diamond Theory determines what factors gives a firm a comparative advantage over the other firms. On a national scale it determines what factors give a country a comparative advantage on an international market. So Diamond Theory can be applied on a both micro and a macro level.

Diamond Theory diagram

As the above diagram depicts, there are four main factors influencing a firm to gain a competitive edge over the other firms. You may also notice that all the arrows connect all the four factors - meaning that all four factors affect and support each other and the firm to create comparative advantages. If not for even one factor, the model fails.

(01) Factor Conditions

One of the most crucial aspects for a country or a firm to gain a comparative advantage is the 'factor conditions'. This means that a firm or a nation should possess some unique or rare factor (or a resource) that other firms or nations do not have (or have limited) access to. Or even easier access to a resource than another firm or country could give a firm a significant advantage too. These 'factors' could mean a raw material, machinery and tools, technology, unique labor and such.

Eg: Middle East has a natural endowment of oil deposits, hence Middle East (and it's firms) possess a significant competitive advantage over the other oil producing firms and countries.

(02) Demand Conditions

This means that there should be 'sufficient' demand for a product of the firm locally. Locally means the country the firm originated in. A sufficient demand for the product locally is necessary for a firm to grow beyond the geographical boundaries of the country and gain a comparative advantage. 

Eg: Sri Lanka is world famous for Tea production. Originally this specialization began as a result of heavy local demand for tea.

(03) Related and Supporting Industries

No firm or nation is able to survive on it's won in this globalized world. And what supportive industries a firms possesses affects the development of that firm to a great extent. Supporting industries are which provides additional services to a firm. For an example transportation for a manufacturing firm is a supporting industry. Communication in general is a supportive industry for all the firms. These supporting and related industries help a firm minimize it's costs and allows a firm to focus on it's core business activities - thus giving them a competitive advantage over their core business activities.

Eg:  Amazon.com uses DHL courier services to deliver high value products across the world. DHL is a supporting service.

(04) Strategy, Structure and Rivalry

Strategy means the strategy of the firm it uses to deal with the operations of the business. A sound strategy (incorporating flexibility) is vital for an organization to deliver a world class product and gain a competitive advantage. Structure is the setting within the firm - where organizational goals, culture, strategy and line of authority is enforced. Rivalry is also a crucial factor, because it gives incentives for a competing organization to be competitive and better than its competitor, by means of product, service and productivity. All these factors affect towards the competitive edge of a country or a firm.

However, as mentioned earlier, one or two of these factors will not be sufficient for a firm or a country to gain a significant comparative advantage over another firm or a country. 

Why Does Marginal Revenue (MR) Equals Marginal Cost (MC) Equals Price (P) in a Perfectly Competitive Market?

You may have heard, seen and written the formula MR = MC = P countless occasions. But have you even wondered what's the logic behind this? Well, let me explain...

First of all we will glance through what MR, MC and P means. 

• MR - Marginal Revenue - additional revenue generated by selling one additional unit of a product
• MC - Marginal Cost - additional cost to produce one additional unit of product
• P - Price - price of the product, selling price

So how does the price of a product (P) equals marginal revenue(MR) of that product? Well, it's pretty simple...

MR = MC = P condition only occurs in a perfectly competitive market, meaning there are a large number of suppliers in the market and none of them are large enough to influence the market price. All they can do is sell their product at the prevailing market price.

So in a perfectly competitive market, the firms engage in high competition and ultimately drive the price to a very low level. This is so low that practically there is no profits in the sales price (P). Hence the product will be sold at the same price as the cost of producing the product (MC). Since the price is market given, the firms are unable to sell at a higher price either. So P = MC...

When the firm is producing the product at a specific cost, in a perfectly competitive market, they can only sell the product covering the cost of production. Since they cannot force a profit on the selling price, they will be forced to sell the product merely covering their production cost so that they can survive in the market. So any revenue generated by selling one unit of product (MR) will be more or less equal to the cost of producing the same unit (MC). Hence we can deduct that MR = MC.

Since P = MC and MR = MC, we can derive that P = MR = MC formula...

However this situation is unique to a perfect competition, which, in a real world is difficult to find. But the logic holds true.