Development and implementation of a segment selection procedure for industrial product markets

The purpose of this paper is to develop and illustrate a systematic segment selection procedure that models the tradeoffs among evaluation criteria an d organizational resource constraints. The target audience for this paper i s both managers and academic researchers. For managers, our segment selecti on procedure provides assistance in formulating new product strategy by cre ating a common structured framework for understanding and resolving tradeof fs among segment evaluation criteria. For researchers, the procedure addres ses an important gap in past segmentation research. The state-of-the-art in segmentation methods provides sophisticated analytic techniques for identi fying homogenous groups of customers based on their preferences and optimal ly allocating resources to any subset of these segments. However, the inter mediate decisions, involving how to evaluate the attractiveness of each seg ment and how to select the appropriate segments to serve such that long-run profitability is maximized subject to firm constraints, continue to be tre ated in an ad hoc manner. Segment selection is the critical link between th e segment formation and resource allocation processes. Organizations are made up of people who represent different functional area s that are measured against different goals and performance requirements. T hus, the real challenge in segment selection is developing a model that coo rdinates resource competitive goals across the functional areas of an organ ization. Effective segment selection requires integration of the various de cision criteria that play interrelated roles in determining product profita bility, marketability, and manufacturability. Our research objective is to develop and illustrate a structured segment selection procedure that balanc es multiple decision criteria, thereby managing organizational diversity of views among key decision makers. The segment selection procedure provides a more structured approach to elic iting and explicitly modeling the tradeoffs among the multiple decision cri teria. The segment selection procedure is a system of methodologies that id entifies and selects market segments and product portfolios such that custo mer preferences, organizational objectives, and resource constraints are si multaneously satisfied. We employ a multistage research methodology incorpo rating conjoint analysis, cluster analysis, a product design optimization s imulation, and a multiobjective integer programming (MOIP) model. Developme nt of the MOIP model requires balancing the science of mathematical optimiz ation against the art of problem definition and the reality of the implemen tation context. Our procedure facilitates management involvement in model d evelopment and blends managerial intuition with the model solution so that the final solution is optimal for the organization's situation. The segment selection procedure provides a structured method for balancing divergent p erformance metrics and normatively allocating resources to serve selected s egments. Overall, the segment selection procedure combines mathematical mod eling methods and managerial wisdom to design a total marketing plan for se gmentation. Through an illustration in the automotive supply industry, we show that our procedure is an effective approach for integrating marketing, manufacturin g, and financial performance information in the segment selection decision process. The segment selection procedure provides a framework for extensive sensitivity analysis of tradeoffs among alternative decision criteria so m anagement can resolve how best to balance its short and long-term goals. Th is procedure is a generalizable process for systematic planning and winnowi ng down market opportunities according to carefully defined criteria. Succe ssful implementation of the procedure requires managerial involvement and a blend of science and art. In our illustration, the final solution was a bl end that leveraged the structure of the modeling process against the subtle ty of the implementation context.