Now the segments in your market have been defined, it is essential that you determine how attractive each segment is to your company. This, along with an analysis of your competitiveness in each segment (Chapter 10), will help you decide how best to distribute your financial and managerial resources between them. The position of this stage in the segmentation process is illustrated in Figure 9.1.
Stages 1-3: Developing segments
r:----------, IL Steps 1-7 - Mapping; customers; I __ transactions; _ _ _ _segments ____ ....J
Stage 4: Segment attractiveness
Step 8 - Attractiveness criteria Your company's criteria
Step 9 - Weighting the criteria
Relative importance of criteria
Step 10 - Criteria parameters
High, medium, low scores
Step 11 - Scoring the segments
Calculating attractiveness
Figure 9.1 The process of segmentation - Steps 8-11
In this chapter, we start by suggesting some attractiveness factors you may
wish to consider and then move on to attach weightings to your selected factors in order to gauge their relative importance to each other. 'High', 'medium' and 'low' parameters are then defined for each attractiveness factor, with each segment finally scored against the selected factors. The
chapter starts, however, with a summary of portfolio analysis, followed by
a brief discussion about the planning period over which you should be assessing the segments.
Portfolio analysis Portfolio analysis, for the purposes of this book, is simply a means of assessing a number of different segments, first of all according to the poten- tial of each in terms of achieving an organisation's objectives, and second according to the organisation's ability to take advantage of the identified opportunities. The idea of a portfolio is for a company to meet its objectives by balancing sales growth, cash flow and risk. As individual segments grow or shrink, then the overall nature of the company's portfolio will change. It is, there- fore, essential that the whole portfolio is reviewed regularly and that an active policy towards the move into new segments and the exiting of old segments is pursued. Widely referred to as the Directional Policy Matrix (DPM), portfolio analysis offers a detailed framework which can be used to classify possible competitive environments and their strategy requirements. It uses several indicators to measure the dimensions of 'segment attractiveness' on the one hand, and 'company competitiveness' on the other. These indicators can be altered by management to suit the operating conditions of partic- ular markets. The purpose of the matrix is to diagnose an organisation's strategy options in relation to the two composite dimensions outlined above. However, before describing in detail how to use the DPM, it is worth considering its antecedents. Portfolio analysis initially came out of the work of the Boston Consulting Group, began in the 1960s, and it has had a profound effect on the way management think about their market and their activity within it. There are basically two parts to the thinking behind the work of the Boston Consulting Group. One is concerned with market share and the other with market growth , which we would translate into segment share and segmentgrowth. These are brought together into a single matrix (the Boston matrix), which has important implications for the firm, especially in respect of cash flow. Cash is a key determinant of a company's ability to develop its segment portfolio. The Boston matrix can be used to classify a firm's position in each segment found in the market according to their cash usage and their cash generation along the two dimensions described above, namely relative segment share and rate of segment growth. This is summarised in Figure 9.2.
