Market Segmentation: Where Value Hides

Forget what you’ve learned about traditional market segmentation, especially the part where it says that greater market share equals higher profitability.

In his new book Where Value Hides: A New Way to Uncover Profitable Growth for Your Business (Wiley, November 2006), Stuart Jackson, a vice president with L.E.K. Consulting, takes the position that bigger isn’t necessarily better. In many instances, he contends, it can actually be worse. Jackson notes that, as most companies use it, market share can be a misleading and dangerous measure. He writes that the trick lies in being able to identify the right market segments in which to focus efforts and improve one’s Strategic Market Position, or SMP.

While allowing that there are endless ways to segment a market, the author maintains that very few provide the right basis for strategic decision-making. “The key to uncovering one’s true Strategic Market Position in an industry lies in assessing which dimensions of scale or market share contribute to increased profitability and value,” he writes, while adding that successful companies understand where growth will build competitive strength and profitability and where it will not. “They put more of their eggs in fewer, carefully chosen baskets,” says Jackson.

Getting your company’s position right can make a big difference when it comes to creating value for shareholders. L.E.K./Wall Street Journal research has shown that while average shareholder returns for most industries tend to cluster in the 0 percent to 20 percent range with amazing consistency, there can be spectacular differences among companies within almost every industry sector. A top performer in a particular industry sector can be 200, 300, or even 1,000 percent better than the sector’s worst performer. Jackson explains that these high-performance companies have learned the art of strategic market positioning, which involves determining your SMP and then making investments that will increase overall SMP and drive long-term value.

Where Value Hides presents a number of instances of companies—both large and small—that have successfully used strategic market positioning as a decision-making tool that’s shared by management functions throughout an organization and applied to a broad range of situations. Examples cited include prioritizing sales efforts, finding new and profitable markets, improving low-growth or low-margin businesses, and identifying acquisition opportunities.