3 3/ Industry and Markets

Industry adapted from Fundamentals of Business: Canadian Edition by Pamplin College of Business and Virginia Tech Libraries is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Markets adapted from Principles of Marketing is distributed under a Creative Commons license (CC BY-NC-SA) and this adapted edition is produced by the University of Minnesota Libraries Publishing through the eLearning Support Initiative.

SOURCE: Chevanon Photography.

Industries by Sector

Let us define an industry as a group of companies that compete with one another to sell similar products. We will focus on the relationship between a small business and the industry in which it operates, dividing businesses into two broad types of industries, or sectors: the goods-producing sector and the service-producing sector.

• Goods-producing sector includes all businesses that produce tangible goods, often in the manufacturing, construction, and agriculture sectors.
• Service-producing sector includes all businesses that provide services but do not make tangible goods. Sectors include retail and wholesale trade, transportation, finance, entertainment, recreation, accommodations, food service, among others.

About 20% of small businesses in the United States are in the goods-producing sector. The remaining 80% are in the service sector.³² The high concentration of small businesses in the service-producing sector reflects the makeup of the overall United States (U.S.) economy. Over the past 50 years, the service-producing sector has been growing at an impressive rate. In 1960, for example, the goods-producing sector accounted for 38% of gross domestic product (GDP), the service-producing sector for 62%. By 2015, the balance had shifted dramatically, with the goods-producing sector accounting for only about 21% of GDP.³³

Goods-Producing Sector

The largest areas of the goods-producing sector are construction and manufacturing. Skilled workers, often start construction businesses such as electricians, painters, plumbers, and home builders, and they work on local projects. Though manufacturing is primarily the domain of large businesses, there are exceptions. BTIO/Realityworks, for example, is a manufacturing enterprise (components come from Ohio and China, and assembly is in Wisconsin).

How about making something out of trash?

Daniel Blake never followed his mother’s advice at dinner when she told him to eat everything on his plate. When he served as a missionary in Puerto Rico, Aruba, Bonaire, and Curacao after his first year in college, he noticed that the families he stayed with did not either. But they did not throw their uneaten food into the trash. Instead, they put it on a compost pile and used the mulch to nourish their vegetable gardens and fruit trees. While eating at an all-you-can-eat breakfast buffet back home at Brigham Young University, Blake was amazed to see volumes of uneaten food in the trash. This triggered an idea: why not turn the trash into money? Two years later, he was running his company, EcoScraps, collecting 40 tons of food scraps a day from 75 grocers and turning it into high-quality potting soil that he sells online and to nurseries, profiting almost $500,000.³⁴

Service-Producing Sector

Many small businesses in this sector are retailers, they buy goods from other firms and sell them to consumers, in stores, by phone, through direct mailings, or over the Internet. In fact, entrepreneurs are turning increasingly to the Internet as a venue for startup ventures. Take Tony Roeder, for example, who had a fascination with the red Radio Flyer wagons that many of today’s adults had owned as children. In 1998, he started an online store through Yahoo! to sell red wagons from his home. In three years, he turned his online store into a $1 million business.³⁵

Other small business owners in this sector are wholesalers, they sell products to businesses that buy them for resale or for company use. For instance, a local bakery, for example, is acting as a wholesaler when it sells desserts to a restaurant which then resells them to its customers. Small businesses that buy flowers from a local grower (the manufacturer) and resell them to a retail store is another example of wholesalers.

A high proportion of small businesses in this sector provide professional, business, or personal services. Doctors and dentists are part of the service industry, as are insurance agents, accountants, and lawyers. So are businesses that provide personal services, such as dry cleaning and hairdressing.

David Marcks, for example, entered the service industry about 14 years ago when he learned that his border collie enjoyed chasing geese at the golf course where he worked. While geese are lovely to look at, they can make a mess of tees, fairways, and greens. That is where Marcks’ company, Geese Police, comes in: Marcks employs specially trained dogs to chase the geese away. He now has 27 trucks, 32 border collies, and five offices. Golf courses account for only about 5% of his business, as his dogs now patrol corporate parks and playgrounds as well.³⁶

External Forces that Influence Business Activities

Apple and other businesses do not operate in a vacuum, several external factors influence them. These include the economy, government, consumer trends, technological developments, public pressure to act as good corporate citizens, and other factors. Collectively, these forces make up the “macro environment,” essentially the big picture world outside over which the business exerts very little if any control.

Figure 1. Impacting Environmental Forces

SOURCE: All icons from the Noun Project. The company surrounded by its environmental forces: demographic, natural, economic, political, cultural, and technological.

“Business and Its Environment” sums up the relationship between a business and the external forces that influence its activities. One industry that is clearly affected by all these factors is the fast food industry.

Companies such as Taco Bell, McDonald’s, Tim Hortons, and others all compete in this industry. Here are a few statements to show the way external factors impact business. For instance, a robust economy means people have more money to eat out. A government agency, the Canadian Food and Drug Inspection Agency at federal, provincial, and municipal levels monitor food standards. Customer trends and preferences influence types of foods (fast food companies now offering healthy menus).

This example shows the large-scale impact of external forces. The Ministry of Health and Long-Term Care’s Newsroom on December 30, 2016:

“Starting January 1, 2017 Ontario will be the first province in Canada to require food service providers with 20 or more locations in the province — such as restaurants, coffee shops, convenience stores, grocery stores, and movie theatres — to include the number of calories for each food and beverage item on their menus, labels, or tags.”

Several decisions made by the industry result from its desire to be a good corporate citizen. Several fast food chains have responded to environmental concerns by eliminating Styrofoam containers.³⁷

An interactive or media element has been excluded from this version of the text. You can view it online here: Link.

Of course, external factors impact all industries, not just the food industry. As people have become more conscious of the environment, they have chosen new technologies, like all-electric cars to replace those that burn fossil fuels. Both established companies, like Nissan with its Nissan Leaf, and brand-new companies like Tesla have entered the market for all-electric vehicles. While the market is still small, they expect it to grow at a compound annual growth rate of 19.2% between 2013 and 2019.³⁸

Markets

Sellers can choose to pursue consumer markets, business-to-business (B2B) markets, or both. One obvious way to begin the segmentation process is to segment markets into these two types of groups.

Different factors influence consumers to buy certain things. Many of the same factors can also segment customers. A firm will often use multiple segmentation bases, or criteria to classify buyers, to get a fuller picture of its customers and create actual value for them. Each variable adds a layer of information, like how your professor builds a PowerPoint slide so you can understand the material being presented.

Types of Segmentation Bases

The table below “Common Ways of Segmenting Buyers” shows some of the different buyer characteristics used to segment markets. Notice that the characteristics fall into one of four segmentation categories: behavioural, demographic, geographic, or psychographic. You can get a rough idea of what the categories comprise by looking at them in terms of how marketing professionals might answer the following questions:

SOURCE: Kaique Rocha.

• Behavioural segmentation. What benefits do customers want, and how do they use our product?
• Demographic segmentation. How do the ages, races, and ethnic backgrounds of our customers affect what they buy?
• Geographic segmentation. Where are our customers located, and how can we reach them? What products do they buy based on their locations?
• Psychographic segmentation. What do our customers think about and value? How do they live their lives?

Table 1. Common Ways of Segmenting Buyers

Segmenting by Behaviour

Behavioural segmentation divides people and organization into groups according to how they behave with or act toward products. Benefits segmentation, segmenting buyers by the benefits they want from products, is very common. Take toothpaste, for example. Which benefit is most important to you when you buy a toothpaste: The toothpaste’s price, ability to whiten your teeth, fight tooth decay, freshen your breath, or something else? Perhaps it is a combination of two or more benefits. If marketing professionals know what those benefits are, they can then tailor different toothpaste offerings to you (and other people like you). For example, Colgate 2-in-1 Toothpaste & Mouthwash, Whitening Icy Blast aims to people who want the benefits of both fresher breath and whiter teeth.

Video 1. Vintage 1952 Colgate Toothpaste Commercial

(Video Link)

Watch the YouTube video to see a vintage Colgate toothpaste advertisement that describes the product’s various benefits to consumers (On-screen kissing was evidently too racy for the times). Another way in which businesses segment buyers is by their usage rates—that is, how often, if ever, they use certain products. Harrah’s, an entertainment, and gaming company, gathers information about the people who gamble at its casinos. High rollers, or people who spend a lot of money known as “VIPs – very important people.” VIPs get special treatment, including a personal “host” who looks after their needs during their casino visits. Companies are interested in frequent users because they want to reach people like them.

How people use products is also a basis for segmentation. Avon Skin So Soft was originally a beauty product, but after Avon discovered some people were using it as a mosquito repellant, the company began marketing it for that purpose. Eventually, Avon created a separate product called Skin So Soft Bug Guard, which competes with repellents like Off! Similarly, Glad, the company that makes plastic wrap and bags, found out customers were using its Press’n Seal wrap in ways the company could never have imagined. The personnel in Glad’s marketing department subsequently launched a Web site called 1000uses.com that contains both the company’s and consumers’ use tips. How people use the product is unusual, as evidenced by the following comment posted on the site:

“I have a hedgehog who likes to run on his wheel a lot. After quite a while of cleaning a gross wheel every morning, I got the tip to use ‘Press’n Seal wrap’ on his wheel, making clean up much easier! My hedgie can run all he wants, and I do not have to think about the cleanup. Now we’re both GLAD!”

Segmenting by Demographics

Segmenting buyers by personal characteristics such as age, income, ethnicity, and nationality, education, occupation, religion, social class, and family size, known as demographic segmentation. Demographics help segment markets because the information is publicly available in databases around the world. You can get a great deal of demographic information from the U.S. Census Bureau’s Web site (http://www.census.gov) or Statistics Canada (https://www.statcan.gc.ca/eng/start). The World Factbook (http://www.cia.gov/cia/publications/factbook) contains statistics about countries around the world, including forecasts of demographic trends like population growth expectations.

Age

At this point in your life, you are probably more likely to buy a car than a funeral plot. Marketing professionals know this. That is why they try to segment consumers by their ages. You are probably familiar with some of the age groups most segmented (see Table below “U.S. Generations and Characteristics”) in the United States. Into which category do you fall?

Today’s college-age students (Generation Y) compose the largest generation. The baby boomer generation is the second-largest, and over the course of the last 30 years, has been a very attractive market for sellers. Retro brands, old brands, or products that companies “bring back” for a period, aimed at baby boomers during the recent economic downturn. Pepsi Throwback and Mountain Dew Throwback, which are made with cane sugar, like they were “back in the good old days” instead of corn syrup (Schlacter, 2009). Marketing professionals believe they appealed to baby boomers because they reminded them of better times, times when they did not have to worry about being laid off, about losing their homes, or about their retirement funds and pensions drying up.

Baby boomers are ageing, and the size of the group will eventually decline. The members of Generation Y have a lifetime of buying still ahead of them, which translates to a lot of potential Customer Lifetime Value (CLV), the amount a customer will spend on a particular brand over their lifetime, for marketers if they can capture this group of buyers. However, a recent survey found that the latest recession had forced teens to change their spending habits and college plans and that roughly half of older Generation Y reported they had no savings.³⁹

Although it is hard to be all things to all people, many companies try to broaden their customer bases by appealing to multiple generations, so they do not lose market share when demographics change. Several companies have introduced lower-cost brands targeting Generation X, who have less spending power than boomers. For example, Williams-Sonoma opened the Elm Street chain, a less-pricey version of the Pottery Barn franchise (Miller, 2009). The video game market is very proud of the fact that along with Generation X and Y, many older Americans still play video games (traditional platforms or online). Products and services in the spa market used to be aimed squarely at adults, but now tweens get facials, pedicures, and other pampering in numbers no one in years past could have imagined.

Video 2. Evian The Baby Bare Necessities

(Video Link) Watch the video to see a fun generational type of advertisement.

U.S. Generations and Characteristics

As early as the 1970s, U.S. automakers found themselves in trouble because of changing demographic trends. Many of the companies’ buyers were older Americans inclined to “buy American.” These people had not forgotten that Japan bombed Pearl Harbour during World War II and were not about to buy Japanese vehicles, but younger Americans were. Plus, Japanese cars had developed a better reputation. Despite the challenges U.S. automakers face today, they have taken great pains to cater to the “younger” generation, today’s baby boomers do not think of themselves as being old.

Companies must develop new products designed to appeal to Generation X and Y and find alternative ways to reach them. People in these generations not only tend to ignore traditional advertising but also are downright annoyed by it. To market to Scion drivers, who are generally younger, Toyota created Scion Speak, a social networking site where they can communicate, socialize, and view cool new models of the car. Trends now have shifted to more sustainable options, such as Tesla Motors (see video below).

Video 3. TESLA Model 3 Commercial “Feel It”

(Video Link) Tesla Motors.

Income

Tweens might appear to be a very attractive market when you consider they will buy products for years to come. But would you change your mind if you knew baby boomers account for 50% of all consumer spending in the United States? Americans over 65 now control nearly three-quarters of the net worth of U.S. households; this group spends $200 billion a year on major “discretionary” (optional) purchases such as luxury cars, alcohol, vacations, and financial products (Reisenwitz, 2007).

Income as a segmentation variable shows a group’s buying power and may partially reflect their education levels, occupation, and social classes. Higher education levels usually result in higher paying jobs and greater social status. The makers of upscale products such as Rolex and Lamborghini aim their products at high-income groups. However, a growing number of firms today are aiming their products at lower-income consumers.

SOURCE: Kelderreisen.

The fastest growing product in the financial services sector is prepaid debit cards, most of which are being bought and used by people who do not have bank accounts. Firms find that this group is a large, untapped pool of customers who tend to be more brand loyal than most. If you capture enough of them, you can earn a profit (von Hoffman, 2006). Based on the targeted market, businesses can determine the location and type of stores where they want to sell their products.

Sometimes income is not always indicative of who will buy your product. Companies know that many consumers wish to be in higher income groups and behave like they are already part of them. Mercedes Benz’s cheaper line of “C” class vehicles appeals to these consumers.

Gender

Gender is another way to segment consumers. Men, women, and non-binary people have different needs and shop differently. These groups are often, but not always, segmented and targeted differently. Marketing professionals do not stop there, though. For example, because women make many of the purchases for their households, market researchers sometimes try to further divide them into subsegments (Men are also often sub-segmental). For women, companies may create segments such as stay-at-home, plan-to-work, working.

SOURCE: Dani Hart.

Besides segmenting by gender, market researchers might couple gender with marital status and other demographic characteristics. For, example, if more women in America than ever before (i.e. 51%) now live without spouses, can you think of any marketing opportunities this might present?

Family Life Cycle

Family life cycle refers to the stage’s families go through over time and how it affects buying behaviour. For example, if you have no children, your demand for pediatric services (medical care for children) is likely to be slim to none, but if you have children, your demand might be very high because children frequently get sick. You may be part of the target market not only for pediatric services but also for a host of other products, such as diapers, daycare, children’s clothing, entertainment services, and educational products. A secondary segment of interested consumers might be grandparents who are likely to spend less on day-to-day childcare items but more on special occasion gifts for children. We segment many markets based on the special events in people’s lives. Think about brides (and hopeful brides) and all the products targeted at them, including Web sites and television shows such as Say Yes to the Dress, My Fair Wedding, Platinum Weddings, and Bridezillas.

Resorts also segment vacationers depending on where they are in their family life cycles. When you think of family vacations, you probably think of Disney resorts. Some vacation properties, such as Sandals, exclude children from some of their resorts. Perhaps they do so because some studies show that the market segment with greatest financial potential is married couples without children (Hill et al., 1990).

SOURCE: Asad Photos.

Keep in mind that although you might isolate a segment in the marketplace, including one based on family life cycle, you cannot make assumptions about what the people in it will want. Just like people’s demographics change, so do their tastes. For example, over the past few decades U.S. families have been getting smaller. Households with a single occupant are more commonplace than ever, but until recently, that has not stopped people from demanding bigger cars (and more of them) as well as larger houses, or what some people jokingly refer to as “McMansions.”

The trends toward larger cars and larger houses appear to be reversing. High energy costs, the credit crunch, and concern for the environment are leading people to demand smaller houses. To attract people such as these, D. R. Horton, the nation’s leading homebuilder, and other construction firms are now building smaller homes.

Ethnicity

People’s ethnic backgrounds have a big impact on what they buy. The United States is becoming, and will continue to become, more diverse. Hispanic Americans are the largest and the fastest growing minority in the United States. Companies are going to great lengths to court this once overlooked group. In California, the health care provider Kaiser Permanente runs television ads letting members of this segment know they can request Spanish-speaking physicians and that Spanish-speaking nurses, telephone operators, and translators are available at all its clinics (Berkowitz, 2006).

SOURCE: Andrea Piacquadio.

African Americans are the second-largest ethnic group in America. Collectively, they have the most buying power of any ethnic group in America. We know many people of Asian descent to be early adapters of new technology and have above-average incomes. As a result, companies that sell electronic products, such as AT&T, spend more money segmenting and targeting the Asian community.⁴² The table below contains information about the number of people in these groups and their buying power.

Table 2. Major U.S. Ethnic Segments and Their Spending

SOURCE: New American Dimensions, LLC.

As you can guess, even within various ethnic groups there are many differences in terms of the goods and services buyers choose. Painting each group with a broad brush would leave you with an incomplete picture of your buyers. For example, although the common ancestral language among the Hispanic segment is Spanish, Hispanics trace their lineages to different countries. Nearly 70% of Hispanics in the United States trace their lineage to Mexico; others trace theirs to Central America, South America, and the Caribbean.

All Asians share is race. Chinese, Japanese, and Korean immigrants do not share the same language². Both the Asian and Hispanic market segments include new immigrants, people who immigrated to the United States years ago, and native-born Americans. How (language) will you communicate your offerings to these people, and where?

Sub-segmenting the markets might help you. New American Dimension, a multicultural research firm, has further divided the Hispanic market into the following subsegments:

• Just moved in’rs. Recent arrivals, Spanish dependent, struggling but optimistic.
• FOBrs (fashionistas on a budget). Spanish dominant, traditional, but striving for trendy.
• Accidental explorers. Spanish preferred, not in a rush to embrace U.S. culture.
• The englightened. Bilingual, technology savvy, driven, educated, modern.
• Doubting Tomáses. Bilingual, independent, skeptical, inactive, shopping uninvolved.
• Latin flavoured. English preferred, reconnecting with Hispanic traditions.
• SYLrs (single, young latinos). English dominant, free thinkers, multicultural.

You could break down segments to the individual level, which is the goal behind one-to-one marketing. However, doing so would be dreadfully expensive, notes Juan Guillermo Tornoe, a marketing expert who specializes in Hispanic marketing issues. After all, are you really going to develop different products and different marketing campaigns and communications for each group? Probably not, but “You need to perform your due diligence and understand where most of the people you are trying to reach land on this matrix, modifying your message according to this insight” (Tornoe, 2008).

Segmenting by Geography

Suppose your great new product or service idea involves opening a local store. Before you open the store, you will probably want to do some research to determine which geographical areas have the best potential. For instance, if your business is a high-end restaurant, should it be near the local college or country club? If you sell ski equipment, you probably will want to locate your shop somewhere near a mountain range where there is skiing. You might see a snowboard shop in the same area but probably not a surfboard shop. A surfboard shop is likely to be along the coast, but you probably would not find a snowboard shop on the beach.

Geographic segmentation divides the market into areas based on location and explains why the checkout clerks at stores sometimes ask for your zip code. It is also why businesses print codes on coupons that correspond to zip codes. When customers redeem the coupons, the store can find out where its customers are located (or not located). Geocoding is a process that takes data such as this and plots it on a map. Geocoding can help businesses see where prospective customers might cluster and target them with various ad campaigns, including direct mail. One of the most popular geocoding software programs is PRIZM NE, which is produced by a company called Claritas. PRIZM NE uses zip codes and demographic information to classify the American population into segments. The idea behind PRIZM is that you are where you live and combining both demographic and geographic information is geodemographics or neighbourhood geography. Housing areas in different zip codes typically attract certain types of buyers with certain income levels.

The State of Michigan tourism bureau identifies and targets different customer profiles using PRIZM. Michigan’s biggest travel segment are Chicagoans in certain zip codes comprising upper-middle-class households with children, or the “kids in cul-de-sacs” group, as Claritas puts it. The bureau could also identify segments significantly different from the Chicago segment, including blue-collar adults in the Cleveland area who vacation without their children. The organization then created significantly different marketing campaigns to appeal to each group.

Segmentation also includes city size and population density (the number of people per square mile) For instance, McDonald’s generally will not put a store in a town of fewer than 5,000 people. However, this is prime turf for the “DQ” because it does not have to compete with bigger franchises like McDonald’s.

Proximity marketing is an interesting new technology firms are using to segment and target buyers geographically through geofencing, beacons, NFC tags, and QR codes. For example, geofences are geographical boundaries that recognize a smartphone in range and sends a notification to that phone, which attract customers near their business or competitor locations⁴³.

Besides figuring out where to locate stores and advertise to customers in that area, geographic segmentation helps firms tailor their products. Chances are you cannot find the same heavy winter coat you see at a Walmart in Montana at a Walmart in Florida because of the climate differences between the two places. Market researchers also look at migration patterns to evaluate opportunities. TexMex restaurants are more commonly found in the southwestern United States. However, northern states are now seeing more of them as more people of Hispanic descent move northward.

Figure 2. Proximity Marketing

SOURCE: beaconstac.

Segmenting by Psychographics

If your offering fulfills the needs of a specific demographic group, then the demographic can be an important basis for identifying groups of consumers interested in your product. What if your product crosses several market segments? For example, the group of potential consumers for cereal could be “almost” everyone, although groups of people may have different needs regarding their cereal. Some consumers might be interested in the fibre, some consumers (especially children) may be interested in the prize that comes in the box, other consumers may be interested in the added vitamins, and still other consumers may be interested in the type of grains. Associating these specific needs with consumers in a particular demographic group could be difficult. Marketing professionals want to know why consumers behave the way they do, what is of top priority to them, or how they rank the importance of specific buying criteria. Think about some of your friends who seem a lot like you. Have you ever gone to their homes and been shocked by their lifestyles and how vastly different they are from yours? Why are their families so much different from yours?

Psychographic segmentation. Psychographic information is frequently gathered via extensive surveys that ask people about their activities, interests, opinion, attitudes, values, and lifestyles. One of the most well-known psychographic surveys is VALS (which originally stood for “Values, Attitudes, and Lifestyles”) and was developed by a company called SRI International in the late 1980s. SRI asked thousands of Americans the extent to which they agreed or disagreed with questions similar to: “My idea of fun at a national park would be to stay at an expensive lodge and dress up for dinner” and “I could stand to skin a dead animal” (Donnelly, 2002). Based on their responses to different questions, you divide customers into categories, each characterized by certain buying behaviours.

Innovators. Innovators are successful, sophisticated, take-charge people with high self-esteem. Because they have such abundant resources, they exhibit all three primary motivations in varying degrees. They are change leaders and are the most receptive to new ideas and technologies. Innovators are very active consumers, and their purchases reflect cultivated tastes for upscale, niche products and services. Image is important to Innovators, not as evidence of status or power but as an expression of their taste, independence, and personality. Innovators are among the established and emerging leaders in business and government, yet they continue to seek challenges. Their possessions and recreation reflect a cultivated taste for the finer things in life.

Thinkers. Thinkers are motivated by ideals, mature, satisfied, comfortable, and reflective people who value order, knowledge, and responsibility. They tend to be well-educated and actively seek information in the decision-making process. Thinkers are well-informed about world and national events and are alert for opportunities that can broaden their knowledge. These people have a moderate respect for the status quo institutions of authority and social decorum but are open to consider new ideas. Although their incomes allow them many choices, Thinkers are conservative, practical consumers; they look for durability, functionality, and value in the products they buy.

Achievers. Motivated by the desire for achievement, Achievers have goal-oriented lifestyles and a deep commitment to career and family. Their social lives reflect this focus and are structured around family, their place of worship, and work. Achievers live conventional lives, are politically conservative, and respect authority and the status quo. They value consensus, predictability, and stability over risk, intimacy, and self-discovery. With many wants and needs, Achievers are active in the consumer marketplace. Image is important to Achievers; they favour established prestige products and services that show success to their peers. Because of their busy lives, they are often interested in a variety of timesaving devices.

Experiencers. Experiencers are motivated by self-expression as young, enthusiastic, and impulsive consumers, they quickly become enthusiastic about new possibilities but are equally quick to cool. These people seek variety and excitement, savouring the new, the offbeat, and the risky. Their energy finds an outlet in exercise, sports, outdoor recreation, and social activities. Experiencers are avid consumers and spend a comparatively high proportion of their income on fashion, entertainment, and socializing. Their purchases reflect the emphasis they place on looking good and having “cool” stuff.

Believers. Like Thinkers, Believers are motivated by ideals that are conservative, conventional with concrete beliefs based on traditional, established codes (family, religion, community, nation). Many Believers express moral codes that are deeply rooted and literally interpreted by following established routines, organized around home, family, community, and social or religious organizations they belong. As consumers, they are certain because they choose familiar products, established brands and are generally loyal.

Strivers. Strivers are trendy and fun loving because they are driven by achievement with the concern about the opinions/approval of others. Money defines their success as they favour stylish products that emulate the purchases of people with greater material wealth. Many see themselves as having a job rather than a career, and a lack of skills and focus often prevents them from moving ahead. Strivers are active consumers because shopping is both a social activity and an opportunity to show to peers their ability to buy. As consumers, they are as impulsive as their financial circumstance will allow.

Makers. Like Experiencers, Makers are motivated by self-expression and experience the world by working on it (building a house, raising children, fixing a car, or canning vegetables). Makers are practical people who have constructive skills and value self-sufficiency. They live within a traditional context of family, practical work, and physical recreation and have little interest in what lies outside that context. Makers suspect new ideas and large institutions such as big business. They are respectful of government authority and organized labour but resentful of government intrusion on individual rights. They are unimpressed by material possessions other than those with a practical or functional purpose because they prefer value to luxury.

Survivors. Survivors live narrowly focused lives because they often believe that the world is changing too quickly and are comfortable with the familiar, safety, and security. Their focus on meeting needs rather than fulfilling desires drives Survivors to not show a strong primary motivation, resulting as cautious consumers. They represent a very modest market for most products and services, and loyal to favourite brands (especially if it is discounted).⁴⁴

To find out which category you are in, take a VALS survey at http://www.sric-bi.com/vals/surveynew.shtml.

The VALS surveys are adapted and used to study buying behaviour in other countries, too. Note that the basis for both VALS and PRIZM group buyers are their values and lifestyles, but PRIZM also overlays the information with geographic data. As a result, you can gauge what the buying habits of people in certain zip codes are, which can be helpful if you are trying to figure out where to locate stores and retail outlets.

The segmenting techniques we have discussed so far in this section require gathering quantitative information and data. Quantitative information can improve with the qualitative information you gather by talking to your customers and getting to know them (this is how Healthy Choice frozen dinners were created.) Consumer insight is a result of using both types of information. You want to answer the following questions:

• Do I see consumers the way they see themselves?
• Am I looking at life from their point of view?

Best Buy asked store employees to develop insight about local consumer groups to create special programs and processes for them. Employees in one location invited a group of retirees to their store to explain how to make the switch to digital television. The store sold $350,000 worth of equipment and televisions in just two hours’ time. How much did it cost? The total cost included $99 dollars in labour costs plus coffee and donuts.

Intuit, the company that makes the tax software Quicken, has a “follow me home” program. Teams of engineers from Intuit visit people’s homes and spend a couple of hours watching consumers use Quicken. Then they use the insights they gain to improve the next version of Quicken. Contrast this story with that of a competing firm. When a representative of the firm asked if they had ever observed consumers installing or using his company’s product, they responded, “I’m not sure I’d want to be around when they were trying to use it” (Nee, 2003). This company is now struggling to stay in business.

Segmentation in B2B Markets

Many of the same bases used to segment consumer markets are also used to segment B2B markets. For example, Goya Foods is a U.S. food company that sells different ethnic products to grocery stores, depending on the demographic groups the stores serve—Hispanic, Mexican, or Spanish. Likewise, B2B sellers often divide their customers by geographic areas and tailor their products to them accordingly. Segmenting by behaviour is common as well. B2B sellers frequently divide their customers based on their product usage rates. Customers that order many goods and services from a seller often receive special deals and served by salespeople who call on them in person. Smaller customers are more likely to have to rely on a firm’s Web site, customer service people, and salespeople who call on them by telephone.

Researchers Matthew Harrison, Paul Hague, and Nick Hague have theorized that there are fewer behavioural and needs-based segments in B2B markets than in business-to-consumer (B2C) markets for two reasons: (1) business markets have a few hundred customers whereas consumer markets can be hundreds of thousands of customers, and (2) businesses are not as fickle as consumers. Unlike consumers, they are unconcerned about their social standing or influenced by their families and peers. Instead, businesses are anxious with buying products that will ultimately increase their profits. According to Harrison, Hague, and Hague, the behavioural, or needs-based, segments in B2B markets include:

• Price-focused segment: small companies that have low profit margins and regard the good or service being sold as not being strategically important to their operations.
• Quality and brand-focused segment: firms that want the best possible products and are prepared to pay for them.
• Service-focused segment: businesses that demand high-quality products and have top-notch delivery and service requirements.
• Partnership-focused segment: firms that seek trust and reliability by their suppliers and see them as strategic partners (Harrison et al., 2010).

B2B sellers, like B2C sellers, are exploring new ways to reach their target markets. Trade shows and direct mail campaigns are two traditional ways of reaching B2B markets. Now, however, firms are finding they can target their B2B customers more cost-effectively via email campaigns, search-engine marketing, and “fan pages” on social networking sites like Facebook. Companies are also creating blogs with innovative content about new products and business trends of interest to their customers. For a fraction of the cost of attending a trade show to exhibit their products, B2B sellers are holding Webcasts and conducting online product demonstrations for potential customers.

PESTEL Analysis

Adapted from Mastering Strategic Management is (c) 2012 Dave Ketchen, Jeremy Short. The textbook content was produced by Dave Ketchen, Jeremy Short and is licensed under a Creative Commons Attribution-NonCommercial–ShareAlike 3.0 Unported License, except for the following changes and additions, which are (c)2014 Janice Edwards, and are licensed under a Creative Commons Attribution 4.0 International License.

An organization’s environment includes factors it can readily affect and factors that lay beyond its influence. The latter set of factors are said to exist within the general environment. Because the general environment often has a substantial influence on an organization’s level of success, executives must track trends and events as they develop and try to expect the implications of these trends and events.

PESTEL analysis⁴⁵ is one important tool that executives can rely on to organize factors within the general environment and to identify how these factors influence industries and the firms within them. PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six segments to identify major opportunities and threats and then adjust their firms’ strategies accordingly (see Table below “PESTEL”).

Table 3. PESTEL Analysis Table

P is for “Political”

The political segment⁴⁶ centres on the role of governments in shaping business. This segment includes elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments. Immigration policy is an aspect of the political segment of the general environment that offers important implications for many organizations. The United States, Mexico (and Canada), have argued the best approach to take to illegal immigration. Some hospital executives have noted that illegal immigrants put a strain on the health care system because they can seldom pay for services and hospitals cannot by law turn them away from emergency rooms. Political campaigns provide proposals to support businesses in political campaigns.

Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers rely heavily on cheap labour provided by illegal immigrants. If farmers were forced to employ only legal workers, this would substantially increase the cost of vegetables. Restaurant chains such as Subway would then pay higher prices for lettuce, tomatoes, and other perishables. Subway would then have to decide whether to absorb these costs or pass them along to customers by charging more for subs. Overall, any changes in immigration policy will have implications for hospitals, farmers, restaurants, and many other organizations.

SOURCE: Quang.

E is for “Economic”

The economic segment⁴⁷ centres on the economic conditions within which organizations operate. It includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy. The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential goods such as automobiles and television sets. Bank failures during the economic crisis led to a dramatic tightening of credit markets. This dealt a tremendous blow to home builders, for example, who saw demand for new houses plummet because mortgages were extremely difficult to get.

Some businesses, however, prospered during the crisis. Retailers that offer deep discounts, such as Dollarama and Walmart, enjoyed an increase in their customer base as consumers sought to economize. Similarly, restaurants such as Subway that charge relatively low prices gained customers, while high-end restaurants such as The Keg worked hard to keep their clientele.

S is for “Social”

A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United States. This change reflects the social segment⁴⁸ of the general environment. Social factors include trends in demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes toward obesity and consumer activism. The exploding popularity of salsa reflects the increasing number of Latinos in the United States over time, as well as the growing acceptance of Latino food by other ethnic groups.

Sometimes changes in the social segment arise from unexpected sources. Before World War II, the American workforce was overwhelmingly male. When millions of men went to Europe and Asia to fight in the war, however, organizations had no choice but to rely heavily on female employees. The attitudes of many executives toward women were appalling. Consider, for example, some of the advice provided to male supervisors of female workers in the July 1943 issue of Transportation Magazine:

• Older women who have never contacted the public have a hard time adapting themselves to be cantankerous and fussy. It is always well to impress upon older women the importance of friendliness and courtesy.
• General experience shows that “husky” girls, those who are just a little on the heavy side, are more even tempered and efficient than their underweight sisters.
• Give every girl enough rest periods during the day. You must make some allowances for feminine psychology. A girl has more confidence and is more efficient if she can keep her hair tidied, apply fresh lipstick, and wash her hands several times a day.

The tremendous contributions of female workers during the war contradicted these awful stereotypes. The key role for women who assembled airplanes, ships, and other war materials was to support the military, of course, but their efforts also changed a lot of male executives’ minds about what females could accomplish within organizations if provided with opportunities. Inequities in the workplace still exist today, but modern attitudes among men toward women in the workplace are much more enlightened than in 1943.

Beyond being a positive social change, the widespread acceptance of women into the workforce has created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual-income families to purchase takeout meals rather than cook.

SOURCE: Ketut Subiyanto.

T is for “Technological”

The technological segment⁴⁹ centres on improvements in products and services that are provided by science. Relevant factors include, for example, changes in the rate of new product development, increases in automation, and advancements in service industry delivery. One key feature of the modern era is the ever-increasing pace of technological innovation. In 1965, Intel cofounder Gordon E. Moore offered an idea that is now known as Moore’s law. Moore’s law suggests that performing microcircuit technology roughly doubles every two years. This law has been very accurate in the decades since its offering.

One implication of Moore’s law is that over time electronic devices can become smaller but also more powerful. This creates important opportunities and threats in a variety of settings. For example, just a decade ago, digital cameras were relatively large, and they produced mediocre images. With each passing year, however, digital cameras have become smaller, lighter, and better. Today, digital cameras are minicomputers, and electronics firms such as Panasonic have been able to establish sound positions in the market. Meanwhile, Kodak has abandoned products that had been successful for decades. In 2005, the firm announced it would stop producing black and white photographic paper and in 2009, Kodachrome colour film phased out.

SOURCE: Lisa.

Successful technologies are also being embraced at a much faster rate than in earlier generations. The Internet reached 50 million users in only four years. In contrast, television reached the same number of users in 13 years while it took radio 38 years. This trend creates great opportunities for organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other tablet devices, for example, can target a fast-growing population of users. Organizations that are technologically dependent being displaced must know consumers could abandon them rapidly. As more and more Internet users rely on Wi-Fi service (i.e. demand for cable modems may plummet).

Although the influence of the technological segment on technology-based companies such as Panasonic and Apple are clear, technological trends, and events help to shape low-tech businesses too. In 2009, Subway started a service called Subway Now. This service allows customers to place their orders in advance using text messages and avoid standing in line at the store. Offering customers this service, Subway is also responding to a trend in the general environment’s social segment: the need to save time in today’s fast-paced society.

E is for “Environmental”

The environmental segment⁵⁰ involves the physical conditions within which organizations operate. It includes factors such as natural disasters, pollution levels, and weather patterns. The threat of pollution, for example, has forced municipalities to treat water supplies with chemicals. These chemicals increase the safety of the water but detract from its taste. This has created opportunities for businesses that provide better-tasting water, where many consumers purchase bottled water. According to the Agriculture and Agri-Foods Canada, bottled water amounts to 10.9% of the market share of Canadian non-alcoholic beverage market.

SOURCE: Mali Maeder.

Bottled water producers have benefited from the general environment but also are threatened by it. Some estimates are that 80% of plastic bottles end up in landfills. This has led some socially conscious consumers to become hostile to bottled water. Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to get clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to cut personal expenses because of economic conditions. In sum, bottled water producers have been provided opportunities by the environmental segment of the general environment (specifically, the spread of poor-tasting water to combat pollution) but face threats from the social segment (the social conscience of some consumers) and the economic segment (the financial concerns of other consumers).

L is for “Legal”

The legal segment⁵¹ centres on how the courts influence business activity. Examples of important legal factors include employment laws, health, and safety regulations, discrimination laws, and antitrust laws. Intellectual property rights⁵² are a daunting aspect of the legal segment for many organizations. When a studio such as Pixar produces a movie, a software firm such as Adobe revises a program, or a video game company such as Activision devises a new game, these firms are creating intellectual property. Such firms attempt to make profits by selling copies of their movies, programs, and games to individuals. Piracy of intellectual property (a process wherein illegal copies are made and sold by others) poses a serious threat to such profits. Law enforcement agencies and courts in many countries provide organizations with the legal mechanisms to protect their intellectual property from piracy.

Footnotes