In evaluation different market segments, the firm must look at three factors, namely segment size and growth, segment structural attractiveness and company objectives and resources.
1. Segment size and growth:
The first question that a company should ask is whether a potential segment has the right size and growth Large companies prefer segments with large sales volumes and overlook small segments. Small companies in turn avoid large segments because they would require too many resources. Segment growth is a desirable characteristic since companies generally want growing sales and profits.
2. Segment structural attractiveness:
A segment might have desirable size and growth and still not be attractive from a profitability point of view.
The five threats that a company might face are:
- Threat from industry competitors: A segment is unattractive if it already contains numerous and aggressive competitors. This condition may lead to frequent price
- Threats from potential entrants: i.e. from new competitors who, if enter the segment at a later stage, bring in new capacity, substantial resources and would soon steal a part of the market
- Threat of substitute products: A segment is unattractive if there exists too many substitutive products because it would result in brand switching, price wars, low profits
- Threat of growing bargaining power of buyers: A segment is unattractive if the buyers possess strong bargaining power. Buyers will try to force price down, demand more quality or services, all at the expense of the seller's
- Threat of growing bargaining power of suppliers: A segment is unattractive if the company's suppliers of raw materials, equipment, finance etc., are able to raise prices or reduce the quality or quantity of ordered
3. Company objectives and resources:
Even if a segment has positive size and growth and is structurally attractive, the company needs to consider its own objectives and resources in relation to that segment.
Some attractive segments could be dismissed because they do not match with the company's long-run objectives. Even if the segment fits the company's objectives, the company has to consider whether it possesses the requisite skills and resources to succeed in that segment.
The segment should be dismissed if the company lacks one or more necessary competences needed to develop superior competitive