Target markets, customer segments, and offering: choosing the right playing field

What is competitive focus?

The decision about which customer segments you serve in which target markets, and with what offering. Three variables in one commitment, because none of them can be answered sensibly on its own.

On first reading, this sounds trivial. In practice, it's the decision leadership teams argue over the longest, and for good reason: it affects every part of the company.

Typical points of contention are market entries and exits, a lack of focus on customer segments, and a portfolio with thousands of items where hardly anyone knows which ones actually make money.

The decisions made here affect every part of the company. That's why they shouldn't be made in an executive offsite alone: the people who have to execute them should have heard how they came about.

Competitive focus defines the playing field. Everything that comes after, meaning fields of action, goals, and initiatives, follows from it. That's why it comes third in the target picture and not at the beginning.

How do you derive it?

In three steps, worked through in plenary with everyone in the room. The starting point is the table of changed value attributes from the previous module.

The scales stay coarse on purpose. Rating to two decimal places creates a precision the data can't support and shifts the discussion to the method.

Work row by row and resist the urge to rate right away. First write down all the implications, then estimate. If you mix the two, you'll rate the early rows more strictly than the later ones, because patience runs out.

The result tells you which markets and segments you'll expand, which you'll adjust, and which you'll exit. Only then is competitive focus a decision rather than a statement of intent.

Which rules help you choose?

Six, which the book distills from the work of Lafley and Martin. They read like common sense and get violated all the time.

• Decide explicitly where you play and where you don't. And prioritize those decisions.
• Check unattractive markets for attractive sub-segments before you write them off.
• Don't pursue a strategy without concrete priorities. You can't play in every market, so don't even try.
• Watch for attacks from unexpected directions, and read that both ways.
• Don't start a war on multiple fronts. Anticipate how competitors will respond, and keep enough room to see it through.
• Be skeptical of empty markets. If no one seems to be there yet, check whether you simply haven't spotted the first mover.

The second rule pays off most often in mid-sized companies. A market that's shrinking as a whole often contains a segment that's growing, and competition there is thinner because everyone else is looking at the market overall.

The sixth sounds cynical and isn't. A market where no one seems to be active usually has a reason: demand is too small, entry costs are too high, or there's a provider you don't know about yet. Check all three before you celebrate the open space.

The fifth rule is the one that costs the most when it's ignored. Two simultaneous market entries tie up leadership attention, and that's scarcer than capital.

How many segments make sense?

Few enough that you can make a separate decision about offering, price, and channel for each one. In mid-sized companies, that's usually two to four.

The real test is the reverse question: which segment does your value proposition explicitly not apply to? If you have no answer, your segmentation is still just a sorting exercise.

Segment by need and behavior, not by revenue size. Sorting customers into A, B and C tells you who buys a lot. It tells you nothing about who buys for the same reasons, and that is the only thing you can serve strategically.

Here is what that looks like in B2B: a manufacturer sorts its customers by revenue and then discovers in conversation that its largest and its smallest customers have similar needs, because both put on-time delivery above everything else. The middle buys differently. Three size classes become two need-based groups, and those two groups become two offerings.

What are the most common mistakes?

Three, and all three show the same symptom: the decision never shows up in day-to-day work.

• Nothing gets dropped. New markets are added, old ones stay. Resources spread thinner and nobody notices until lead times start to climb.
• The decision stays in the workshop. If sales keeps taking every order, the segmentation was an exercise.
• Sunk costs get a vote. A market is kept because a lot was invested in it six years ago. That investment has no bearing on today's decision.

The second mistake deserves its own countermeasure. For every segment you drop, write down how sales will handle an inquiry from it going forward. Without that rule, the decision stays a slide.

The third mistake often shows up disguised as a factual argument. "We've built up know-how there" is a statement about the past. The question is whether that know-how is needed for the future, and you can answer that regardless of what it cost.

And name a person for every decision. A target market without an owner is a wish, and that becomes obvious by the second quarter at the latest.

What comes next?

Goals. Once target markets, segments and offering are set, you can say how you measure progress. Not before.

In between there is a step that is easy to overlook: the impact on the organization. Choosing a new segment affects sales, production, service and often IT as well. Those consequences belong in the next process step, translated into fields of action.

Document the decision in writing, including the reasoning. Twelve months from now, someone will ask why a particular market is no longer served, and the answer should not depend on what the people in the room remember.

Making decisions is also not enough. They have to be accepted and executed, and that takes the people who weren't in the first workshop. That is exactly why the second workshop follows, with the extended leadership group.