Cranfield University Adina Poenaru Market segmentation capability and business performance: A reconceptualisation and empirical validation School of Management PhD Dissertation Academic year 2010-2011 1 Cranfield University Adina Poenaru Market segmentation capability and business performance: A reconceptualisation and empirical validation School of Management PhD Dissertation Supervisor: Dr. Paul Baines 30th September 2011 This thesis is submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy © Cranfield University, 2011. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder. 2 ABSTRACT Recent developments in marketing and technological fields have raised concerns about the usefulness of market segmentation as an effective marketing practice. Furthermore, the segmentation literature has highlighted significant implementation problems, due to a gap between academics’ focus on the research methodology involved in identifying segments and practitioners’ concerns for impactful and implementable segmentation strategies. Consequently, research providing quantifiable evidence of the impact of segmentation has been identified as a priority. This research addresses this issue by reconceptualising market segmentation as a dynamic capability, identifying the components of a firm’s segmentation capability and determining its influence on business performance. The research is conducted within the critical realism paradigm and adopts a sequential qualitative-quantitative methodology. Through 24 in-depth interviews with marketing managers and segmentation experts, the processes, mechanisms and structures affecting segmentation implementation and its outcomes are identified. Based on the qualitative findings and extant literature, market segmentation capability is delineated and a model of the relationships between market segmentation capability and business performance is developed and tested empirically with survey data from a sample of 205 marketing directors from eight industries. The quantitative findings support a process of analysis- integration-execution of segmentation schemes and also suggest three additional pathways of influence from segmentation analysis to business performance. These pathways are found to depend on the market growth rate and firm’s marketing resources. This research bridges the gap between market segmentation theory and practice by broadening the segmentation field to include the study of managerial practices and performance implications of segmentation. The main theoretical contribution relates to the delineation of market segmentation as a dynamic capability, providing new insights into market segmentation as a managerial practice. Significant contributions are also generated by the confirmation of a significant relationship between segmentation capabilities and business performance and the identification of pathways of influence between them, explained by the development of segmentation execution capability and generic marketing capabilities. i ACKNOWLEDGEMENTS I would like to thank Dr. Paul Baines, for unwavering trust, friendship and support throughout the last four years. He has given me the courage to find and follow my own path through the PhD process and has supported my decisions and provided guidance whenever I needed it. I would also like to thank all the PhD panel members (Dr Colin Pilbeam, Professor Hugh Wilson, Dr Stan Maklan, Professor Mark Jenkins), who have provided constructive feedback at every review, feedback which was instrumental in advancing my thinking on the topic and methodology of research. My colleagues at ESCP Europe Business School (among which: Dr. Patrick Gougeon, Dr. Marie Taillard, Dr. Minas Kastanakis, Chris Halliburton) deserve thanks for their words of encouragement and their support, both in terms of time and financial resources, to undertake and disseminate my research. I also thank my parents, Mariana and Marian, for the inspiration to start my PhD studies, unconditional support through the process and their gentle pressure to encourage me to keep a steady progress. Last, but not least, I would like to thank my boyfriend, Patrick Kilbane, for his tough but gentle approach of keeping me on track, his understanding of the long periods of study and for removing any distractions in order to provide a conducive environment for my studies. ii Table of Contents Table of Contents ............................................................................................................ iii 1. INTRODUCTION .................................................................................................... 1 1.1. Purpose of Chapter ............................................................................................. 1 1.2. Research Context ............................................................................................... 1 1.3. Research Aim and Questions ............................................................................. 2 1.4. Research Methodology ...................................................................................... 3 1.5. Key Findings ...................................................................................................... 4 1.6. Key Contributions and Limitations .................................................................... 5 1.7. Dissemination .................................................................................................... 6 1.8. Structure of Thesis ............................................................................................. 7 1.9. Motivations to Undertake This Research ........................................................... 8 2. PERSPECTIVES, IMPLEMENTATION AND PERFORMANCE OF MARKET SEGMENTATION ........................................................................................................... 9 2.1. Introduction ........................................................................................................ 9 2.2. Schools of Thought on Market Segmentation ................................................. 10 2.3. Perspectives on Market Segmentation ............................................................. 11 2.3.1. Market segmentation as a research technique .............................................. 11 2.3.2. Market segmentation as a decision making tool ........................................... 13 2.3.3. Market segmentation as a competitive strategy ............................................ 14 2.4. Market Segmentation Implementation ............................................................. 16 2.4.1. Implementation as adoption of normative models ................................... 16 2.4.2. Implementation as (marketing) planning .................................................. 17 2.4.3. Implementation as execution of plans ...................................................... 19 2.4.4. Marketing implementation ....................................................................... 20 2.4.5. Managerial recommendations for segmentation implementation ............ 21 2.5. Market Segmentation and Firm Performance .................................................. 22 2.5.1. Performance outcomes of market segmentation ....................................... 22 2.5.2. The research technique explanations ........................................................ 24 2.5.3. The decision making tool explanations .................................................... 24 2.5.4. The competitive strategy explanations ..................................................... 25 2.5.5. Shortcomings of extant explanations ........................................................ 26 2.5.6. When is segmentation most appropriate? ................................................. 29 2.6. Summary of Research Gaps ............................................................................. 30 2.6.1. Market segmentation and business performance ...................................... 30 2.6.2. Market segmentation implementation ...................................................... 31 2.6.3. Alternative segmentation strategies and contextual influences ................ 32 2.7. Conclusion ....................................................................................................... 32 3. RECONCEPTUALISING MARKET SEGMENTATION AS DYNAMIC CAPABILITY ................................................................................................................ 34 3.1. Introduction ...................................................................................................... 34 3.2. Dynamic Capabilities Theory .......................................................................... 34 3.2.1. Definition and characteristics of dynamic capabilities ............................. 34 3.2.2. Dynamic versus operational capabilities .................................................. 36 3.2.3. Development of capabilities ..................................................................... 37 3.3. Marketing Capabilities ..................................................................................... 38 3.3.1. Definitions and foundation ....................................................................... 38 iii 3.3.2. Marketing capabilities and performance .................................................. 40 3.4. Market Segmentation as Dynamic Capability ................................................. 41 3.1. Conceptual Model of Market Segmentation