Market fragmentation Essay

Custom Student Mr. Teacher ENG 1001-04 29 December 2016

Market fragmentation

Because the PLC (product life cycle) focuses on what is happening to particular product or brand rather than on what is happening to the overall market, it yields a product-oriented picture rather than a market-oriented picture. Firms need to visualize a market’s evolutionary path as it is affected by new needs, competitors, technology, channels, and other developments.

In the course of a product’s or brand’s existence, its positioning must change to keep pace with market developments. Consider the case of Lego.

LEGO Group. Lego Group, the Danish toy company, enjoyed a 72 percent global market share of the construction toy market; but children were spending more of their spare time with video games, computers, and television and less time with traditional toys. So Lego recognized the need to change or expand its market space. It redefined its market space as “family edutainment”, which included toys, education, interactive technology, software, computers, and consumer electronics. All involved exercising the mind and having fun. Part of LEGO Group’s plan is to capture an increasing share of customer spending as children become young adults and then parents.

Stages in Market Evolution

Like products, markets evolve through four stages: emergence, growth, maturity, and decline.

EMERGENCE. Before a market materializes, it exists as a latent market. For example, for centuries people have wanted faster means of calculation. This need was successively satisfied through abacuses, slide rules, and large adding machines. Suppose an entrepreneur recognizes this need and imagines a technological solution in the form of a small, handheld electronic calculator. He now has to determine the product attributes, including physical size and number of mathematical functions.

Because he is market-oriented, he interviews potential buyers. He finds that target customers vary greatly in their preferences. Some want a four-function calculator (adding, subtracting, multiplying, and dividing) and others want more functions (calculating percentages, square roots, and logs). Some want a small hand calculator and others want a large one. This type of market, in which buyer preferences scatter evenly, is called a diffused-preference market.

The entrepreneur’s problem is to design an optimal product for this market. He or she has three options:

1. The new product can be design to meet the preferences of one of the corners of the market (a single-niche strategy). 2. Two or more products can be simultaneously launched to capture two or more parts of the market (a multiple-niche strategy). 3. The new product can be design for the middle of the market (a mass-market strategy).

For small firms, a single-niche strategy makes the most sense. A small firm does not have the resources for capturing and holding the mass-market. A large firm might go after the mass-market by designing a product that is medium in size and number of functions. A product in the center minimizes the sum of the distances of existing preferences from the actual product, thereby minimizing total dissatisfaction. Assume that the pioneer firm is large and designs its product for the mass market. On launching the product, the emergence stage begins.

GROWTH. If the new product sells well, new firms will enter the market, ushering in a market-growth stage. Where will a second firm enter the market, assuming that the first firm established itself in the center? The second firm has three options:

1. It can position its brand in one of the corners (single-niche strategy). 2. It can position its brand next to the first competitor (mass-market strategy). 3. It can launch two or more products in different, unoccupied corners (multiple-niche strategy).

If the second firm is small, it is likely to avoid head-on competition with the pioneer and to launch its brand in one of the market corners. If the second firm is large, it might launch its brand in the center against the pioneer. The two firms can easily end up sharing the mass market; or a large second firm can implement a multiniche strategy and surround and box in the pioneer.

MATURITY. Eventually, the competitors cover and serve all the major market segments and the market enters the maturity stage. In fact, they go further and invade each other’s segments, reducing everyone’s profit in the process. As market growth slows down, the market splits into finer segments and high market fragmentation occurs. This situation is illustrated in figure 11.8(a) where the letters represent different companies supplying various segments. Note that two segments are unserved because they are too small to yield a profit.

Market fragmentation is often followed by a market consolidation caused by the emergence of a new attribute that has strong appeal. Market consolidation took place in the toothpaste market when P&G introduced Crest, which effectively retarded dental decay. Suddenly, toothpaste brands that claimed whitening power, cleaning power, and sex appeal, taste, or mouthwash effectiveness were pushed into the corners because consumers primarily wanted dental protection. Crest won a lion’s share of the market, as shown by the X territory in Figure 11.8(b).

Figure 11.8 (a and b)

Market Fragmentation and Market Consolidation Strategies

However, even a consolidated market condition will not last. Other companies will copy a successful brand, and the market will eventually splinter again. Mature markets swing between fragmentation and consolidation. The fragmentation is brought about by competition, and the consolidation is brought about by innovation.

DECLINE. Eventually, demand for the present products will begin to decrease, and the market will enter the decline stage. Either society’s total need level declines or a new technology replaces the old. Thus an entrepreneur might invent a mouth-rinse liquid that is superior to toothpaste. In this case, the old technology will eventually disappear and a new life cycle will emerge. AN EXAMPLE: THE PAPER-TOWEL MARKET. Consider the evolution of the paper-towel market. Originally, homemakers used cotton and linen dishcloths and towels in their kitchens. A paper company, looking for new markets, developed paper towels. This development crystallized a latent market. Other manufacturers entered the market. The number of brands proliferated and created market fragmentation. Industry overcapacity led manufacturers to search for new features.

One manufacturer, hearing consumers complain that paper towels were not absorbent, introduced “absorbent” towels and increased its market share. This market consolidation did not last long because competitors came out with their own versions of absorbent paper towels. The market fragmented again. Then another manufacturer introduced a “superstrength” towel. It was soon copied. Another manufacturer introduced a “lint-free” paper towel, which was subsequently copied. Thus paper towels evolved from a single product to one with various absorbencies, strengths, and applications. Market evolution was driven by the forces of innovation and competition.

Dynamics of Attribute Competition

Competition produces a continuous round of new product attributes. If a new attribute succeeds, several competitors soon offer it. To the extent that many airlines serve inflight meals, meals are no longer a basis for air-carrier choice. Customer expectations are progressive. This fact underlines the strategic importance of a maintaining the lead in introducing new attributes. Each new attribute, if successful, creates a competitive advantage for the firm, leading to temporarily higher-than-average market share and profits. The market leader must learn to routinize the innovation process.

Can a firm look ahead and anticipate the succession of attributes that are likely to win favour and be technologically feasible? How can the firm discover new attributes? There are four approaches.

1. A customer-survey process: the company asks consumers what benefits they would like added to the product and their desire level for each. The firm also examines the cost of developing each new attribute and likely competitive responses. 2. An intuitive process: entrepreneurs get hunches and undertake product development without much marketing research. Natural selection determines winners and losers. If a manufacturer has intuited an attribute that the market wants, that manufacturer is considered smart or lucky. 3. A dialectical process: innovators should not march with the crowd. Thus blue jeans, starting out as an expensive clothing article, over time became fashionable and more expensive. This unidirectional movement, however, contains the seeds of its own destruction. Eventually, the price falls again or some manufacturer introduces another cheap material for pants. 4. A needs-hierarchy process: (Maslow’s theory).

We would predict that the first automobiles would provide basic transportation and be designed for safety. Later, automobiles would start appealing to social acceptance and status needs. Still later, automobiles would be design to help people “fulfil” themselves. The innovator’s task is to assess when the market is ready to satisfy a higher-order need. The actual unfolding of new attributes in a market is more complex than simple theories suggest. We should not underestimate the role of technology and societal processes. For example, the strong consumer wish for portable computers remained unmet until miniaturization technology was sufficiently developed. Developments such as inflation, shortages, environmentalism, consumerism, and new lifestyles lead consumers to re-evaluate product attributes. Inflation increases the desire for a smaller car, and a desire for car safety increases the desire for a heavier car. The innovator must use marketing research to gauge the demand potency of different attributes in order to determine the company’s best move.

Summary:

* Each stage of the PLC calls for different marketing strategies. The introduction stage is marked by slow growth and minimal profits. If successful, the product enters a growth stage marked by rapid sales growth and increasing profits. There follows a maturity stage in which sales growth slows and profit stabilize. Finally, the product enters a decline stage. The company’s task is to identify the truly weak products; develop a strategy for each one; and finally, phase out weak products in a way minimizes the hardship to company profits, employees, and customers. * Like products, market evolves through four stages: emergence, growth, maturity, and decline.

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