Knowledge clip: the playing field (1)
1. Understand what a company’s playing field/relevant market is
2. Recognize that the relevant market must be chosen – it does not
automatically exist
3. Learn how to segment the relevant market to identify attractive
target groups.
Structuring strategic analysis of the playing field (2 steps):
1. Step 1 – define the relevant market
o Who are your true competitors and what alternatives
(substitutes) do customers consider.
2. Step 2 – segment the market
o Markets are heterogeneous, meaning that customers differ in
needs, price sensitivity, and preferences. a one-size-fits all
strategy rarely works!
Two dimensions matter when segmenting a market:
1. Market reaction measurement (differences in how segments
respond to the marketing mix)
2. Market cultivation (the company’s capability to serve or develop
those segments)
key idea: the market you compete in is not fixed – it is a strategic choice,
so choose a market aligned with your strengths.
Example: Mister Spex
Mister Spex entered online eyewear when:
- Glasses were not yet commonly sold online
- Inventory management was low effort
- Margins were high
- Consumer base was large
They chose their playing field strategically at the right time when
others overlooked the opportunity.
Why relevant market definitions matter:
Defining your market too narrowly:
You risk ignoring real competition
E.g., Railways (in the past) considered themselves in the railroad
business instead of in the transportation business they ignored
cars, trucks and aviation.
Defining your market too broadly:
, The definition becomes meaningless
E.g., Sony once said it was in the “happiness” business implies
competing with alcohol, drugs and entertainment
A deliberate choice in the middle of the two is required, neither extreme is
useful.
The Porsche 911 example:
Possible market definitions:
- Luxury sports cars
- Luxury cars
- All cars
- All transportation
- All luxury goods (if price is the dimension)
Which is correct? this depends on two factors:
1. Substitutability (determined by the customer)
Customer asks: “do I buy a Porsche 911, or do I buy X”
Anything that is considered a real alternative is part of the
substitute set.
This varies subjectively between individuals.
2. Market boundary choice (determined by the firm)
The company decides where to “cut off” the relevant market:
Understanding substitutability
Substitutability is subjective and must be measured empirically/
A typical method for this would be:
- If I raise the price, do customers switch to alternatives?
o If yes substitutes exist
o If no substitutes are limited
(demand elasticity)
Approaches to defining the relevant market.
There are two main approaches:
a) Demand-based approach
Focuses on customer substitution patterns:
o What do customers view as alternatives?
o How does demand shift with price changes?
b) Supply-based:
Focuses on producers’ capabilities:
o Which firms could easily enter or switch into this market?
o Who can realistically compete based on resources and
capabilities
Both approaches help determine who belongs inside or outside the
relevant playing field.
,Two-step logic for market definition.
Step 1: measure the subjective substitutability
This is outside the firm’s control; determined by customer
perceptions and trade-offs.
Step 2: Decide where to cutoff the market (market boundary
choice)
This is IN the firm’s control. Strategic decision: narrow vs
broad competition set.
, Knowledge clip: the playing field (2)
Where to compete?
After defining the relevant market out of the total market where the
company will compete.
The relevant market is still pretty big; lots of potential competitors, large
number of potential customers.
This heterogeneity on the market makes it better to slice the market
into different market segment.
Market segmentation:
- Market segmentation aims to reduce heterogeneity within the
relevant market by slicing it into different groups(segments) which
are internally homogenous, and externally heterogenous (you can
segment both customers and competitors).
- Goal: The goal is to find segments that the company can cater
better to than competitors (finding suitable target groups), and to
see if the company can distinguish its activities based on the
segments they target (segment specific marketing)
Two steps of market segmentation:
1. Market reaction measurement: separating market in smaller pieces
2. Market cultivation: which to address and how
Market reaction measurement:
- Customer segmentation: substitutable need fulfilment
(homogenous customer behaviour)
- Competitor segmentation: strategic groups (homogenous
competitor behaviour)
o Where is competition toughest etc
1. Customer segmentation:
“Segmentation means the identification of customers groups that
respond differently from other groups to competitive offers. A
segmentation strategy couples the identified segments with a
programme to deliver an offering to those segments”
Segment first, then develop programs to each of these
segments to exploit this knowledge.
1. Understand what a company’s playing field/relevant market is
2. Recognize that the relevant market must be chosen – it does not
automatically exist
3. Learn how to segment the relevant market to identify attractive
target groups.
Structuring strategic analysis of the playing field (2 steps):
1. Step 1 – define the relevant market
o Who are your true competitors and what alternatives
(substitutes) do customers consider.
2. Step 2 – segment the market
o Markets are heterogeneous, meaning that customers differ in
needs, price sensitivity, and preferences. a one-size-fits all
strategy rarely works!
Two dimensions matter when segmenting a market:
1. Market reaction measurement (differences in how segments
respond to the marketing mix)
2. Market cultivation (the company’s capability to serve or develop
those segments)
key idea: the market you compete in is not fixed – it is a strategic choice,
so choose a market aligned with your strengths.
Example: Mister Spex
Mister Spex entered online eyewear when:
- Glasses were not yet commonly sold online
- Inventory management was low effort
- Margins were high
- Consumer base was large
They chose their playing field strategically at the right time when
others overlooked the opportunity.
Why relevant market definitions matter:
Defining your market too narrowly:
You risk ignoring real competition
E.g., Railways (in the past) considered themselves in the railroad
business instead of in the transportation business they ignored
cars, trucks and aviation.
Defining your market too broadly:
, The definition becomes meaningless
E.g., Sony once said it was in the “happiness” business implies
competing with alcohol, drugs and entertainment
A deliberate choice in the middle of the two is required, neither extreme is
useful.
The Porsche 911 example:
Possible market definitions:
- Luxury sports cars
- Luxury cars
- All cars
- All transportation
- All luxury goods (if price is the dimension)
Which is correct? this depends on two factors:
1. Substitutability (determined by the customer)
Customer asks: “do I buy a Porsche 911, or do I buy X”
Anything that is considered a real alternative is part of the
substitute set.
This varies subjectively between individuals.
2. Market boundary choice (determined by the firm)
The company decides where to “cut off” the relevant market:
Understanding substitutability
Substitutability is subjective and must be measured empirically/
A typical method for this would be:
- If I raise the price, do customers switch to alternatives?
o If yes substitutes exist
o If no substitutes are limited
(demand elasticity)
Approaches to defining the relevant market.
There are two main approaches:
a) Demand-based approach
Focuses on customer substitution patterns:
o What do customers view as alternatives?
o How does demand shift with price changes?
b) Supply-based:
Focuses on producers’ capabilities:
o Which firms could easily enter or switch into this market?
o Who can realistically compete based on resources and
capabilities
Both approaches help determine who belongs inside or outside the
relevant playing field.
,Two-step logic for market definition.
Step 1: measure the subjective substitutability
This is outside the firm’s control; determined by customer
perceptions and trade-offs.
Step 2: Decide where to cutoff the market (market boundary
choice)
This is IN the firm’s control. Strategic decision: narrow vs
broad competition set.
, Knowledge clip: the playing field (2)
Where to compete?
After defining the relevant market out of the total market where the
company will compete.
The relevant market is still pretty big; lots of potential competitors, large
number of potential customers.
This heterogeneity on the market makes it better to slice the market
into different market segment.
Market segmentation:
- Market segmentation aims to reduce heterogeneity within the
relevant market by slicing it into different groups(segments) which
are internally homogenous, and externally heterogenous (you can
segment both customers and competitors).
- Goal: The goal is to find segments that the company can cater
better to than competitors (finding suitable target groups), and to
see if the company can distinguish its activities based on the
segments they target (segment specific marketing)
Two steps of market segmentation:
1. Market reaction measurement: separating market in smaller pieces
2. Market cultivation: which to address and how
Market reaction measurement:
- Customer segmentation: substitutable need fulfilment
(homogenous customer behaviour)
- Competitor segmentation: strategic groups (homogenous
competitor behaviour)
o Where is competition toughest etc
1. Customer segmentation:
“Segmentation means the identification of customers groups that
respond differently from other groups to competitive offers. A
segmentation strategy couples the identified segments with a
programme to deliver an offering to those segments”
Segment first, then develop programs to each of these
segments to exploit this knowledge.
