Segment Attractiveness

The eompany must first collect and analyze data on current sales value, projected sales-growth rates and expected profit margins for the various segments.39 Segments with the right size and growth characteristics are interesting. But 'right size and growth' are relative matters. Some companies will want to target segments with large current sales, a high growth rate and a high profit margin. However, the largest, fastest-growing segments are not always the most attractive ones for every company. Smaller companies may find that they lack the skills and resources needed to serve the larger segments, or that these segments are too competitive. Such companies may select segments that are smaller and less attractive, in an absolute sense, but that are potentially more profitable for them.

A segment might have desirable size and growth and still not be attractive from a profitability point of view. The company must examine several significant structural factors that affect long-run segment attractiveness,4" For example, the company should assess current and potential competitors. A segment is less attractive if it already contains many strong and aggressive competitors. Marketers also should consider the threat of substitute products. A segment is less attractive i! actual or potential substitutes for the product already exist. Substitutes limit the potential prices and profits from segments. The relative power of buyers also affects segment attractiveness. If the buyers in a segment possess strong or increasing bargaining power relative to sellers, they will try to force prices down, demand more quality or services, and set competitors against one another. All these actions will reduce the sellers' profitability. Finally, segment attractiveness depends on the relative power of suppliers, A segment is less attractive if the suppliers of raw materials, equipment, labour and services in the segment are powerful enough to raise prices or reduce the Duality or quantity of ordered goods and services. Suppliers tend to be powerful when they are large and concentrated, when few substitutes exist, or when the supplied product is an important input.

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