Profitability, desired features, desired channel

7. Organizing around Customer Segments

From the above analysis, it is clear that in large, team-managed companies, the marketing and
sales functions must organize special, cross-functional teams to manage the most important and
most profitable accounts either individually or as segments. It is also clear that a second set of
special teams need to be formed to manage campaigns directed at customers who appear to be hot
prospects and have high growth and profitability potential. Many organizations also first focus
their efforts on retention: retaining their most profitable customers. Companies use customer
relations management to predict defection and mitigate this risk, as described in the module on
Selling.
The third set of cross-functional teams focuses on unprofitable customers who are dead beats. The
mission of this type of team is to develop and implement debt collection processes, special crossselling initiatives, campaigns to improve profitability or redirect customers to less costly service
support sites, and all as graciously as possible. The goal is to lose some of the customers in this
segment. This goal and its means of achievement is so different from the goal of gaining customer
business and its means of achievement, that it is best that their management be separated
organizationally from the teams that manage profitable segments or potentially profitable
segments. They are focusing on different ends of the customer profitability distribution.
What this implies is that within an organizations management culture, politics and chain of
command structure, there should somehow be three discernible cross-functional teams focused on
the very profitable customers, the high potential customers and the very unprofitable customers.
Within each of these target segments will be created distinctive brand/feature teams that focus on
products that deliver the desired features and benefits. Separately, there will be channel
management teams that line-manage say, the Internet, and view the customers they interact with as
their target contact segment. The point is that a company must not just position its products and
services to target market segments. It must also position its organization.
The result should be the creation of the following centers of organization team and individual
skills, firm capabilities and competitive advantage:
1. Expertise in retaining highly profitable customers and growing the business
2. Expertise in prospecting for, incubating and growing new highly profitable business
3. Expertise in selecting and culling resource draining, highly unprofitable customers
4. Expertise in feature technologies and designs that fit a desired customer benefit
5. Expertise in managing trading relationships with channel specific customers (e.g., Internet
customers.)
It is not nearly as important how such a set of teams is put together, and who reports to whom, as it
is to have such a set of teams in the organization that is well led. This is a very important principle
and it is marketings responsibility to see that this somehow happens within the political
constraints of the organization.
According to McDonald and Dunbar, who have written a recommended handbook on market
segmentation, segment thinking must be embedded in organization processes and teams where

1.

Profitability, desired features, desired channel

everyone knows and can even picture the segment. 18 To achieve this is not easy; it requires quite a
lot of political skill. This political skill is described at the end of the What is Marketing module:
The biggest obstacle to implementing a segmented approach to marketing successfully can often be
the company itself, because of a reluctance to change. Early anticipation of potential difficulties,
along with the development and implementation of counter measures designed to win over the
hearts and minds of key decision-makers in the organization, will be time well spent. In most cases,
this can often be achieved by engaging them in the project, preferably as a member of the overall
team, or at least by seeking their view and keeping them up to date with progress. (McDonald and
Dunbar 2004, p. 55). The active interest of the chief executive and top management is vital if any
formalized approach to segmentation is to be successful. (p. 424).

Accepting political realities

In natural evolution, there is a principle of cumulative design which says that each evolutionary
adaptation is a change of the previous design that was created by all previous adaptations. Design
is cumulative in natural evolution. Design is also cumulative in the evolution of an organization, as
it changes from one organizational form to another. Seldom is a complete organization swept aside
by senior management who then start from scratch. Rather, change management is incremental,
slow, often bogged down in personal and inter-silo politics. When this happens, the result can be
that all the air is sucked out of the balloon and change comes to a halt.
Thus, the goal is team-based reorganization of the marketing function with high quality datamining support, but it is an ideal for firms to move toward. If the firm is salesdominated, then
have sales lead each segment team and then integrate the campaigns with sales management. Sales
cannot then say they were not brought in early enough, as they will lead the segmentation
initiative.
If the current marketing organization is product and brand driven, then encourage product
managers to become product-segment team leaders. This way, R&D and engineering will be able
to work closely with the segment teams. Segment teams effectively replace or morph from product
teams and these segment teams direct product development and new service development toward
groups of customers with similar product or service feature needs. The leading market strategy
scholar of the last two decades, Professor George Day, recommends such re-organization. 19 The
point is that a firm should change by building on its current organization strengths and its most
capable teams and people, as execution skills are crucial.
The goal is for each team to focus on a segment of customers and a set of brands and services
designed to meet the needs of this segment. Of much more importance than making the cosmetic
name shift from a product team to a segment team is that the management is really and truly team
management. The team behaves as if it is running its own little business. A senior manager should
be assigned to each team as a champion. His or her job is to provide support and talk to other
senior managers to make sure the team gets the resources and collaboration from functions it
needs. The role of senior management should be to make team management work and not to jerk
chains and encourage budgeting quarrels between teams and functions.

18
19

Malcolm McDonald and Ian Dunbar, Market Segmentation, Amsterdam, Elsevier, 2004.
George S. Day, The Market Driven Organization, New York, The Free Press, 1999; George S. Day, Managing Market
Relationships, Journal of the Academy of Marketing Science, 28.1, 2000: 24-30.

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Profitability, desired features, desired channel

In small family businesses, from the times of the great Italian merchant families to today, team
management around the breakfast table, lunch table and dinner table is a given. Yes, there is a
team leader, a strong-man or woman, but over many years of mentoring and shared experiences,
the team members possess and understand each-others specific labor specialties and skills and
they trust each other. Team membership is not turning over every 3-5 years as managers are
promoted, fired or move on to other firms as often happens as a matter of human resource policy in
many large companies. This is disastrous for team management. There is a depth of solidarity,
loyalty and trust in a family business that is seldom matched in large firms. The team management
abilities of small firms give them huge advantages over larger firms. It is one of the best reasons
for working in a small firm, until a major family succession fight breaks out.

Geographical segmentation and organization

The global market is always going to be segmented into country or regional markets. Some of the
reasons are historical (affected by the principle of cumulative design). Others reasons are
associated with the merger and acquisition of companies that remain decentralized in their
distribution, marketing and sales operations. Yet other reasons are related to national chauvinism,
language use and dramatic differences between country markets in terms of prosperity,
development and culture.
Locals know their own markets best (most of the time) and it is also (most of the time) less
expensive to service the markets locally rather than centrally. It thus makes sense that regional
marketing managers take the lead on advertising and distribution decisions, and global product
managers take the lead on product and price with extensive consultation with the regional
managers.
If you think about it, these same reasons often explain how sales territories are created within a
country and why such territory organizations tend to have very strong self-protection, territorial
instincts. A successful medium to large sized company is therefore likely to evolve
organizationally with powerful product/brand managers who understand the technology used and
operational/manufacturing processes and a separate set of powerful sales managers who have a
deep understanding of operating in a regional market.
If an organization is to be reorganized around segments, how is this to be achieved in the presence
of powerfully entrenched product/brand based and region/sales based organizations? Not easily.
One answer is to treat each sales region as a sub-market within which there are micro-segments
identified by their profitability, product features desired, and their contact and supply features
desired. The profitable/unprofitable customers are identified, and then each is identified as
belonging to a benefit-feature segment and a trading channel segment. Everyone is then made
aware of the customers categorization. The major, most profitable and high growth AA
customers (often called accounts) are managed directly by senior management or special account
teams that include experts in their preferred supply chain and experts in the product technology
and features they desire (see the Selling module). Similar teams of sales reps, service reps and
marketing campaign managers are put together to service industries with particular product feature
needs associated with their production processes or to service retail channels with similar end
customers. These teams direct both product development and the marketing campaigns designed to
support the sales efforts in the country or territory. Separate analytical skill teams are created to
support these line management teams.

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Profitability, desired features, desired channel

If such integration between product production managers, sales managers and segment managers is
not made organizationally, then resources will surely be ineffectively deployed as a result of
political in-fights for resources between product and brand managers, between sales regions and
countries, between customer benefit segment managers and between product managers and sales
managers, between product managers and segment managers, and between sales managers and
segment managers. The potential political combinations that can produce conflict,
misunderstanding and coordination failures are numerous. For senior management to suggest that
such friendly rivalry between these groups in the budgeting and resource deployment process is
good and an effective way of allocating resources has no rationality in economic theory.
So finally, we arrive at the last principle of customer focus and market segmentation. It is not
enough to reorganize around teams, each with a different customer focus. Senior management and
Boards of Directors must also change the way they deploy resources and make budgeting
decisions. They must change the budgeting processes they require their operating divisions and
middle management to follow. Changing these how-the-money-is-spent processes in a firm can be
often extremely difficult. But it is a crucial organizational goal of a market segmentation strategy
that focuses on the most profitable customers.

Study Questions 5.7

1.

_____ types of special, cross-functional teams need to be discernable in an

organizations structure and processes.
a) Two
b) Three
c) Four
d) Five

2.

To serve its target segments, a business must position its ____________.

a) Products
b) Products and services
c) Products, services and prices
d) Products, services and organization

3.

What is most important in organizing around segments?

a) Creating the teams and having them well led
b) How the teams are put together
c) Who reports to whom
d) The size of the team

4.

The active interest of ____________is vital if any formalized approach to segmentation

is to be successful.
a) The salesforce
b) The chief executive and top management
c) The chief marketing officer
d) The chief financial officer

5.

Design is ____________ in the evolution of an organization.

a) Important
b) Dynamic
c) Incremental
d) Cumulative

4.

Profitability, desired features, desired channel

6.

The role of senior management team champions is to:

a) Knock heads together
b) Encourage budgeting quarrels between the team and the business functions
c) Ensure that other senior managers and their functions support the team
d) Lead the team

7.

The advantage of small business team management is that:

a) Disputes can be settled more readily
b) Team politics are less
c) Very low team membership turnover
d) All of the above

8.

In export markets, local managers take the lead on:

a) Pricing
b) Advertising and distribution
c) Distribution and product positioning
d) Product positioning, distribution, pricing and advertising

9.

Powerful product managers and powerful sales managers:

a) Naturally emerge in a successful company
b) Cannot exist together
c) Should be encouraged to compete for resources
d) Is a recipe for disaster

10. A crucial organization goal of a segmentation strategy that focuses on most profitable
customers is _________________________.
a) To measure customer profitability
b) To minimize politics
c) To maximize management expertise
d) To change how-the-money- is-spent (budgeting) processes in the firm

5.