The strategic marketing planning process flows from a mission and vision statement to the selection of target markets, and the formulation of specific marketing mix and positioning objective for each product or service the organization will offer. Leading authors like Kotler present the organization as a value creation and delivery sequence.
In its first phase, choosing the value, the strategist “proceeds to segment the market, select the appropriate market target, and develop the offer’s value positioning. The formula – segmentation, targeting, positioning (STP) – is the essence of strategic marketing.” (Kotler, 1994, p. 93).
Market segmentation is an adaptive strategy. It consists of the partition of the market with the purpose of selecting one or more market segments which the organization can target through the development of specific marketing mixes that adapt to particular market needs. But market segmentation need not be a purely adaptive strategy: The process of market segmentation can also consist of the selection of those segments for which a firm might be particularly well suited to serve by having competitive advantages relative to competitors in the segment, reducing the cost of adaptation in order to gain a niche. This application of market segmentation serves the purpose of developing competitive scope, which can have a “powerful effect on competitive advantage because it shapes the configuration of the value chain.” (Porter, 1985, p. 53).
According to Porter, the fact that segments differ widely in structural attractiveness and their requirements for competitive advantage brings about two crucial strategic questions: the determination of (a) where in an industry to compete and (b) in which segments would focus strategies be sustainable by building barriers between segments (Porter, 1985, p. 231).
Through market segmentation the firm can provide higher value to customers by developing a market mix that addresses the specific needs and concerns of the selected segment. Stated in economic terms, the firm creates monopolistic or oligopolistic market conditions through the utilization of various curves of demand for a specific product category (Ferstman, C., & Muller, E., 1993).
Segmentation as a process consists of segment identification, segment selection and the creation of marketing mixes for target segments. The outcome of the segmentation process should yield “true market segments” which meet three criteria:
(a) Group identity: true segments must be groupings that are homogeneous within segments and heterogeneous across groups.
(b) Systematic behaviors: a true segment must meet the practical requirement of reacting similarly to a particular marketing mix.
(c) The third criteria refers to efficiency potential in terms of feasibility and cost of reaching a segment (Wilkie, 1990). In addition, Gunter (1992) recommends considering the stability of market segments over time and different market conditions.