Product Diff.

8/6/2019 Product Diff.

http://slidepdf.com/reader/full/product-diff 1/7

PRODUCT DIFFERENTIATION AND MARKET

SEGMENTATION AS ALTERNATIVE

MARKETING STRATEGIES

WENDELL R. SMITHAlderson & Sessions

DURING th e de cad e of th e 1930's, th ework of Robinson and Chamberlin

resulted in a revitalization of economictheory. While classical and neoclassical

theory provided a useful framework foreconomic analysis, the theories of perfectcompet i t ion and pure monopoly had be-come inadequate as explanations of thecontempo rary business scene. T h e theoryof perfect competition assumes homoge-neity among the components of both thedemand and supply sides of the market,but diversity or heterogeneity had cometo be the rule rather than the exception.This analysis reviews major marketing

strategy alternatives that are available toplanners and merchandisers of productsin an environment characterized by im-perfect competition.

Diversity in Supply

That there is a lack of homogeneityor close sim ilarity am on g th e items of-fered to the market by individual manu-facturers of various products is obviousin any variety store, department store, orshopping center. In many cases the im-pact of this diversity is amplified by ad-vertis ing and promotional activit ies . To-day's advertis ing and p rom otion tends toemphasize appeals to selective ra therthan primary buying motives and topoint out the distinctive or differentiat-ing features of the advertiser's productor service offer.

The presence of differences in the salesoffers made by competing suppliers pro-

duces a diversity in supply that is incon-sistent with the assumptions of earlier

theory. T h e reasons for the presence of di-versity in specific markets are many and

include the following:1. Variations in the production equipment

and methods or processes used by differ-ent manufacturers of products designedfor the same or similar uses.

2. Specialized or superior resources en-joyed by favorably situated manufac-facturers.

3. Unequal progress among competitors indesign, development, and improvementof products.

4. The inability of manufacturers in someindustries to eliminate product varia-tions even through the application ofquality control techniques.

5. Variations in producers' estimates of thenature of market demand with referenceto such matters as price sensitivity, color,material, or package size.

Because of these and other factors,both planned and uncontrollable differ-

ences exist in the prod ucts of an indu stry.As a result, sellers make different ap-peals in support of their marketing ef-forts.

Diversity or Variations in Consumer De-m,and

Under present-day conditions of im-perfect com petit ion, marketing managersare generally responsible for selecting the

over-all marketing strategy or combina-tion of strategies best suited to a firm's



THE JOURNAL OF MARKETING July 1956

requirements at any particular point int ime. The strategy selected may consistof a program designed to bring ab out the

convergence of individual market de-mands for a variety of products upon asingle or limited offering to the market.This is often accomplished by theachievement of product differentiationthrough advertis ing and promotion. Inthis way, variations in the demands ofindividual consumers are minimized orbrought into line by means of effectiveuse of appealing product claims designedto make a satisfactory volu me of d em and

converge upon the product or productline being promoted. This s trategy wasonce believed to be essential as the mar-keting counterpart to standardizationand mass prod uction in man ufacturingbecause of the rigidities imposed by pro-duction cost considerations.

In some cases, however, the marketermay determine that it is better to acceptdivergent demand as a market character-

istic and to adjust product lines and mar-keting strategy accordingly. This impliesability to merchandise to a heterogene-ous market by emphasizing the precisionwith which a firm's products can satisfythe requirements of one or more distin-guishable market segments. The strategyof product differentiation here gives wayto marketing p rograms based upo n meas-urement and definition of market differ-

ences.Lack of homogeneity on the demand

side may be based upon different cus-toms, desire for variety, or desire for ex-clusiveness or may arise from basic dif-ferences in user needs. Some divergencein dem and is the result of shopp ing errorsin the market. Not all consumers havethe desire or the ability to shop in a suf-ficiently efficient or rational manner as

to bring about selection of the mostneed ed or mo st wa nted goods or services.

Diversity on the demand side of themarket is nothing new to sales manage-ment. It has always been accepted as a

fact to be dealt with in industrial mar-kets where production to order ratherthan for the market is common. Here,however, the loss of precision in the sat-isfying of customer requirements thatwould be necessitated by attempts tobring about convergence of demand isoften impractical and, in some cases, im-possible. However, even in industrialmarketing, the strategy of product differ-entiation should be considered in caseswhere products are applicable to severalindustries and may have horizontal mar-kets of substantial size.

Long-Term Implications

While contemporary economic theorydeals with the nature of product differ-entiation and its effects upon the opera-tion of the total economy, the alternativestrategies of product differentiation andmarket segmentation have received lessattention. Empirical analysis of contem-porary marketing activity supports thehypothesis that, while product differen-tiation and market segmentation areclosely related (perhaps even insepara-ble) concepts, attempts to distinguish be-tween these approaches may be produc-tive of clarity in theory as well as greaterprecision in the planning of marketing

operations. Not only do strategies of dif-ferentiation and segmentation call fordiffering systems of action at any point int ime, but the dynamics of markets andmarketing underscore the importance ofvarying degrees of diversity through timeand suggest that the rational selection ofmarketing strategies is a requirement forthe achievement of max imu m functionaleffectiveness in the economy as a whole.

If a rational selection of strategies isto be made, an integrated approach to



PRODUCT DIFFERENTIATION AND MARKET SEGMENTATION

the minimizing of total costs must takeprecedence over separate approaches tominimization of production costs on theone hand and marketing costs on the

other. Strategy determination must beregarded as an over-all management de-cision which will infiuence and requirefacilitating policies affecting both pro-duction and marketing activities.

Differences Between Strategies of Dif-ferentiation and Segmentation

Product differentiation and market

segmentation are both consistent withthe framework of imperfect competi-tion.^ In its simplest terms, product dif-ferentiation is concerned with the bend-ing of demand to the will of supply. Itis an attempt to shift or to change theslope of the dem and curve for the marketoffering of an individual supplier. Thisstrategy may also be employed by a groupof suppliers such as a farm cooperative,the members of which have agreed to act

together. It results from the desire toestablish a kind of equilibrium in themarket by bringing about adjustment ofmarket demand to supply conditions fa-vorable to the seller.

Segmentation is based upon develop-ments on the demand side of the marketand represents a rational and more pre-cise adjustment of product and market-ing effort to consumer or user require-

ments. In the language of the economist,segmentation is disaggregative in its ef-fects and tends to bring about recogni-tion of several demand schedules whereonly one was recognized before.

Attention has been drawn to this areaof analysis by the increasing number ofcases in which business problems have

^ Imperfect competition assumes lack o£ uniforni-ity in the size and influence of the firms or individ-

uals that comprise the demand or supply sides ofa market.

become soluble by doing somethingabout marketing programs and productpolicies that overgeneralize both marketsand marketing effort. These are situa-

tions where intensive promotion de-signed to differentiate the company'sproducts was not accomplishing its objec-tive—cases where failure to recognizethe reality of market segments was re-sulting in loss of market position.

While successful product differentia-tion will result in giving the marketer ahorizontal share of a broad and general-ized market, equally successful applica-

tion of the strategy of market segmenta-tion tends to produce depth of marketposition in the segments that are effec-tively defined and penetrated. The dif-ferentiator seeks to secure a layer of themarket cake, whereas one who employsmarket segmentation strives to secureone or more wedge-shaped pieces.

Many examples of market segmenta-tion can be cited; the cigarette and auto-

mobile industries are well-known illus-trations. Similar developments exist ingreater or lesser degree in almost allproduct areas. Recent introduction of arefrigerator w ith no storage compartmentfor frozen foods was in response to thedistinguishable preferences of the seg-ment of the refrigerator market made upof home freezer owners whose frozenfood storage needs had already been met.

Strategies of segmentation and differ-entiation may be employed simultane-ously, but more commonly they are ap-plied in sequence in response to chang-ing market conditions. In one sense, seg-mentation is a momentary or short-termphenomenon in that effective use of thisstrategy may lead to more formal recog-nition of the reality of market segmentsthrough redefinition of the segments asindividual m arkets. Redefinition may re-sult in a swing back to differentiation.



THE JOURNAL OF MARKETING July 1956

The literature of both economics andmarketing abounds in formal definitionsof product differentiation. From a strat-egy viewpoint, product differentiation is

securing a measure of control over thedemand for a product by advertising orpromoting differences between a productand the products of competing sellers.It is basically the result of sellers' desiresto establish firm market positions a nd /orto insulate their businesses against pricecompetition. Differentiation tends to becharacterized by heavy use of advertisingand promotion and to result in prices

that are somewhat above the equ ilibriumlevels associated with perfectly competi-tive market conditions. It may be classi-fied as a promotional strategy or ap-proach to marketing.

Market segmentation, on the otherhand, consists of viewing a heterogeneousmarket (one characterized by divergentdemand) as a num ber of smaller homoge-neous markets in response to differing

product preferences among importantmarket segments. It is attribu table to thedesires of consumers or users for moreprecise satisfaction of their varyingwants. Like differentiation, segmenta-tion often involves substantial use of ad-vertising and promotion. This is to in-form market segments of the availabilityof goods or services produced for or pre-sented as meeting their needs with pre-cision. Under these circumstances, pricestend to be somewhat closer to perfectlycompetitive equilibrium. Market seg-mentation is essentially a merchandisingstrategy, merchandising being used herein its technical sense as representing theadjustment of market offerings to con-sumer or user requirements.

The Emergence of the SegmentationStrategy

To a certain extent, market segmenta-

market that will not be denied. It mayresult from trial and error in the sensethat generalized programs of productdifferentiation may turn out to be ef-

fective in some segments of the marketand ineffective in others. Recognition of,and intelligent response to, such a situa-tion necessarily involves a shift in em-phasis. On the other hand , it may developthat products involved in marketingprograms designed for particular marketsegments may achieve a broader accept-ance than originally planned, thus re-vealing a basis for convergence of de-

mand and a more generalized marketingapproach. The challenge to planningarises from the importance of determin-ing, preferably in advance, the level ordegree of segmentation that can be ex-ploited with profit.

There appear to be many reasons whyformal recognition of market segmenta-tion as a strategy is beginning to emerge.One of the most important of these is de-

crease in the size of the minimum effi-cient producing or manufacturing unitrequired in some product areas. Amer-ican industry has also established thetechnical base for product diversity bygaining release from some of the rigidi-ties imposed by earlier approaches tomass production. Hence, there is lessneed today for generalization of marketsin response to the necessity for long pro-duction runs of identical items.

Present emphasis upon the minimiz-ing of marketing costs through self-serv-ice and similar developments tends toimpose a requirement for better adjust-ment of products to consumer demand.The retailing structure, in its efforts toachieve improved efficiency, is providingless and less sales push at point of sale.This increases the premium placed byretailers upon products that are presoldby their producers and are readily rec-ognized by consumers as meeting their



PRODU CT DIEEERENTIATION AND MARKET SEGM ENTATION

requirements as measured by satisfactoryrates of stock turnover.

It has been suggested that the presentievel of discretionary buying power is

productive of sharper shopping compari-sons, particiilarly for items that are abovethe need level. General prosperity alsocreates increased willingness "to pay alittle more" to get "just what I wanted."

Attention to market segmentation hasalso been enhanced by the recent ascend-ancy of product competition to a posi-tion of great economic importance. Anexpanded array of goods and services is

competing for the consumer's dollar.More specifically, advancing technologyis creating competition between new andtraditional materials with reference tometals, construction materials, textileproduc ts, and in many other areas. W hilesuch competition is confusing and dif-ficult to analyze in its early stages, ittends to achieve a kind of balance asvarious competing materials find their

markets of maximum potential as a re-sult of recognition of differences in therequirements of market segments.

Many companies are reaching the stagein their development where attention tomarket segmentation may be regarded asa condition or cost of growth. Th ei r coremarkets have already been developed ona generalized basis to the point where ad-ditional advertising and selling expendi-tures are yielding diminishing returns.Attention to smaller or fringe mLarketsegments, which may have small poten-tials individually but are of crucial im-portance in the aggregate, may be indi-cated.

Finally, some business firms are be-ginning to regard an increasing share oftheir total costs of operation as beingfixed in character. The higher costs of

maintaining market position in th e chan-nels of distrib ution illustrate this change.To tal reliance upo n a strategy of product

differentiation under such circumstancesis undesirable, since market share avail-able as a result of such a promotion-oriented approach tends to be variable

over time. Much may hinge, for example,upon week-to-week audience ratings ofthe television shows of competitors whoseek to outdifferentiate each other . Ex-ploitation of market segments, whichprovides for grea ter m aximization of con-sumer or user satisfactions, tends to b uilda more secure raarket position and tolead to greater over-all stability. Whiletraditionally, high fixed costs (regarded

primarily from the production view-point) have created pressures for ex-panded sale of standardized items throughdifferentiation, the possible shifting ofcertain marketing costs into the fixedarea of the total cost structure tends tominimize this pressure.

Conclusion

Success in planning marketing activi-

ties requires precise utilization of bothproduct differentiation and market seg-mentation as components of marketingstrategy. It is fortunate that availabletechniques of marketing research makeunplanned market exploration largelyunnecessary. It is the obligation of thoseresponsible for sales and marketing ad-miinistration to keep the strategy mix inadjustment with market structure at any

point in time and to produce in market-ing strategy at least as mu ch dynamism asis present in the market. The ability ofbusiness to p lan in this way is dependentupon the maintenance of a flow of mar-ket information that can be provided bymarketing research as well as the full uti-lization of available techniques of costaccounting and cost analysis.

Cost inform ation is critical because the

upper limiit to which market segmenta-tion can be carried is largely defined byproduction cost considerations. There is



THE JOURNAL OE MARKETING July 1956

a limit to which diversity in market of-ferings can be carried without drivingproduction costs beyond practical limits.Similarly, the employment of product

differentiation as a strategy tends to berestricted by the achievement of levels ofmarketing cost that are untenable. Thesecost factors tend to define the limits ofthe zone within which the employmentof marketing strategies or a strategy mixdictated by the nature of the market ispermissive.

It should be emphasized tha t while wehave here been concerned with the differ-

ences between product differentiationand market segmentation as marketingstrategies, they are closely related con-cepts in the se tting of an imperfectly com-

petitive market. The differences havebeen highlighted in the interest of en-hancing clarity in theory and precisionin practice. The emergence of marketsegmentation as a strategy once againprovides evidence of the consumer's pre-eminence in the contemporary Americaneconomy and the richness of the rewardsthat can result from the application ofscience to m arketing problems.

Product Diff.

Documents

Transcript of Product Diff.