External Contextual Factors Encouraging Market Segmentation

Discuss about the importance of market segmentation in the global corporate scenario.

The aim of the paper is study the environmental factors which have led to firms segmenting their markets and the developing new products. The paper would also study the benefits the firms gain by segmenting their products and markets. The researcher has chosen the beauty products market which at present spans almost the whole world for the study. Unilever, the company which owns beauty brands like Lakme and Axe would provide the ideal background to study the various aspects related to market segmentation which the paper would encompass.

Unilever is one of the largest manufacturers and marketers of skin products all over the world. The multinational company has its headquarters in Rotterdam, Netherlands and London, the United Kingdom. The company is present in more than a hundred countries in the world in North America, Asia, South America and Australia. Unilever is a public limited company listed on the largest stock exchanges in the world like London Stock Exchange and New York Stock Exchange (londonstockexchange.com, 2017). The company functions in its host countries through subsidiary companies which are mostly public limited companies. This renders the company with immense financial power to operate and cater to markets all round the world. Unilever is one of the world’s largest manufacturers and marketers of skin care products in the world. It segments its customer bases of beauty products primarily into men and women. The market is also segments on the basis of other grounds like income and age. Unilever is the owner of beauty brands like Axe and Brut for men and Dove and Lux for women (unilever.com, 2017).

The context analysis would cover the external environmental factors and the internal environmental factors which encourage multinational companies like Unilever to segment their markets.

External environmental factors:

The following are the external contextual factors which encourage the business firm to adopt segmentation strategy and benefit by it

Political context:

The political factors consist of government policies, legal frameworks and international relationships between countries. The leading skin care products manufacturing companies today function in several countries. For example, Unilever has its headquarters in London and Netherlands and has branches in more than a hundred countries. Thus, the company has to function as per the British laws and the laws of the host countries. The international treaties between countries allow them to share goods, resources and services (Manova, Wei & Zhang, 2015). For example, Unilever has its headquarters in both Netherlands and the United Kingdom. Netherland is a member of the European Union. The company can use this EU membership of Netherlands to market its products throughout the Europe at low costs. Again, the company can use the international ties of Britain to market skin care products in Asia, North America, South America and Australia (Baylis, Owens & Smith, 2017). This availability of markets all round the world has led to the skin care companies to diversify their business.

Economic factors:

Political Factors

The economic factors play significant roles in encouraging the skin care manufacturing companies adopt segmentation strategy. The international treaties as pointed above allow countries to share resources like raw materials, finished goods, human resources and financial capital. The multinational companies are able to acquire raw materials available in other countries using the international relationships of their home countries with these countries. For example, the bilateral relationship between the United Kingdom and the Asian countries allow Unilever to acquire raw materials from Asia (Poole, 2017). This availability of a wide range of raw materials from diverse markets like shea butter from Africa, olives form Europe and coconuts from Asia has led the multinational skin care products manufacturing companies manufacture diverse range of finished products. They are as result able to segment their markets according to this wide range of finished products. The multinational companies today are able to source capital funding from all the main markets. They enter into tie-ups with all the big banking institutions which provide them with the financial capital. They can use this immense financial capital to manufacture diverse range products to cater to the different market segments (Manova, Wei & Zhang, 2015). The third economic factor which has fuelled segmentation in the multinational companies is sharing of human resources. The multinational skin care manufacturing companies are global employers acquiring and maintaining talents from all round the world making use of the international labour treaties between countries. For example, the European Union enables the countries to share human resources (ec.europa.eu, 2017). This means that beauty product manufacturing companies like Unilever based in the European countries can share employees between their branches in different European countries. For example, TRESemmé is a brand of shampoo based of the US owed by Unilever which targets the female customer segments (tresemme.com, 2017). Unilever is able to transfer the employees who specialise in manufacturing of the product to different markets like Asia and Europe. Thus, inter-branch sharing of employees enables multinational companies segment their product line to suit the needs of diverse customer preferences in different markets. This analysis points out to three economic factors namely; availability of raw materials from other countries, availability of financial capital and sharing of employees between geographically dispersed branches which encourage segmentation of products and markets by the multinational companies.

Social:

The social factors play strong roles in leading the multinational companies to segment their skin care products’ markets globally. The attributes of the customers like their culture, gender, age, psychology, life style, personal perception about products and educational background are some of the factors which users take into account while using skin care products. The skin care products manufacturers use these attributes to segment their customer base (Parlett, Calafat & Swan, 2013). For example, Elle 18 targets the young women segment while Lakme is the premium beauty brand owned by Unilever which targets the upper class segments. Elle 18 products are cheaper and target the young and lower and middle class customers. Lakme on the contrary is a brand of high end cosmetics which are expensive and are status symbols. Again, Dove deodorant products target the women segment while Axe targets male segments. This analysis shows that social factors like income, age and psychology function as the bases of segmentation of the product line of the multinational skin care product manufacturing companies (Johnson, Lennon & Rudd, 2014)

Economic Factors

Technology:

The advancements in technology act as powerful catalysts of segmentation of markets and products in the multinational skin care products marketing companies. The multinational companies can use technology to manufacture diverse products which help to cater to different segments of customers (Hatheway, Kwan & Zheng, 2017). Moreover, the advancements in communication and information technology like cloud computing and video conferencing enable the geographically dispersed business units of these multinational companies to share knowledge and information about the customer preferences and changing market conditions. They as a result can manufacture a wide range of products to cater to these changing consumer preferences (Dey, Lahiri & Zhang, 2014). This analysis shows that technology encourages the multinational companies to segment their products.

Internal environmental factors:

The external environmental factors influence the internal environments of the multinational corporations which encourage segmentation strategies in these companies. The following are the internal environmental factors which encourage segmentation in these organisations:

Internal communication:

The strong internal communication between the different branches, business units and research laboratories encourage aggressive product strategy in the beauty products manufacturing companies. The advancements in technology like cloud computing enable these business units to exchange information regarding customer preferences which enable them manufacturing appropriate products to suit the need of the customers. This analysis shows that strong internal communication fuelled by advancement in technology promotes segmentation of product line of product line in the companies (Karanges et al., 2015). However, the need to establish strong internal communication adds to the expenditure of the multinational companies. The multinational companies today share information within their geographically dispersed business units which exposes them to risk of data thefts and frauds.  This in fact, leads them to incurring heavy expenditure to prevent data theft (Mazzei, 2014). This strong internal communication within the multinational companies encourages segmentation of their market. However, it also attracts issues like data threats which increase the expenditure of these multinational companies.

Organisational structure:

The change in the organisational structure is also responsible for adoption of segmentation of products and markets in the multinational skin care manufacturing companies. The segmentation of skin care products requires the companies to take prompt decisions according to the changing market conditions. The multinational companies in response to the need facilitate prompt decision making, are changing their organisational structures from tall to flat structures. The multinational companies like Unilever today emphasise on empowering their subsidiaries to take important decisions (Hatheway, Kwan & Zheng, 2017). This results in prompt recognition of market segments and introduction of appropriate skin care products to serve their needs. Thus changes in organisational structure of the multinational companies encourage segmentation strategy which renders these companies their high position in the international market and generation of huge revenue (Wirtz & Tang, 2016). However, flattening of organisational structure and empowering of branch offices leads to increase in the operation costs. Moreover, it exposes the company to the risk of wrong decision making by the branch offices.

Rationale:

The discussion above shows that the contextual factors contribute to the segmentation of products and markets of the multinational companies. The analysis shows that segmentation strategies benefit the multinational by earning them high international position and immense revenue base. However, this need to adopt segmentation strategy exposes the companies to issues like high costs, risks of wrong decisions and risks of data theft. These benefits and issues would form the base of the further research.

Social Factors

The literature review would explore the concept of market segmentation theory. It would also emphasise on the advantages or benefits and issues adoption segmentation strategies create for the multinational skin care products manufacturing companies.

Market segmentation theory:

The theory of market segmentation refers to dividing the customer base on grounds like age, culture, behaviour, income, social status and life style to market appropriate products. Rezaei (2015) states that appropriate segmentation leads to companies offering right products to right customer segments which leads to generation of high revenue. This important role segmentation plays in the revenue generation and market leadership of companies leads the multinational companies adopt it as an important marketing strategy to market their products.

Benefits of market segmentation:

The following are the benefits which multinational companies derive from the market segmentation which has led to increase in their interest in the strategy:

Revenue generation:

Asiedu (2016) states that segmentation of market leads to generation of immense revenue which contributes to the robust financial base of the multinational companies. Bosomworth (2015) states that the demands for beauty products are dependent on factors like customer preferences, education qualification and gender. For example, the younger customers like beauty products of bright colours and wear perfumes having strong fragrances. The men prefer beauty products like shampoos, hair gels and shaving accessories. Again aged customers normally prefer using minimum beauty products. This shows that marketing beauty products to any one segment would expose the company to risk of losses due to fall in demand for the beauty product among the target consumers. Urde, Baumgarth and Merrilees (2013) states that segmentation results in personal care manufacturing multinational companies offer products to multiple segments of customers and earn huge profits. Liao and Cheng (2014), contradict this benefit of revenue generation which multinational companies manufacturing beauty products earn from segmentation of their customer base. According to their views, the segmentation requires companies to invest huge capital into manufacturing of products. All the products segments do not succeed in generating huge revenue. This results in huge losses to the companies marketing those failed brands. This analysis shows that segmentation allows the companies to market large number of beauty products and earn huge profits. However, it also exposes the companies to the risk of incurring huge losses due to failed product segments.

International leadership:

De Mooij (2015) points out that market segmentation benefits the multinational companies by rendering them global leadership. The multinational companies manufacturing beauty products segment their customer bases geographically, economically and demographically. Baker and Saren (2016), support this view. They say that this segmentation of market leads them to serve a large customer base and generate huge revenue in more than a hundred countries in the world. They as a result are able to acquire leadership in the global market. Wirtz & Tang (2016) however contradicts this benefit of international leadership and opine that market segmentation leads the multinational companies invest immense capital into manufacturing of different types of products. They point out that the intense competition to acquire global leadership often lead to companies to spend huge amount of capital to promote their brands instead to boosting their production of goods. This analysis shows that though market segmentation leads to global leadership of companies in the market, it often leads to superficial expenditure to promote products at the cost of production of goods.

Technological Advancements

Niche marketing:

Akbar et al. (2017) state niche is a more detailed market segmentation which involves offering products to a smaller group of customers within a recognised customer segments. For example, the multinational offer fragrances like musk and lime to men using deodorants. Here, the customer segment is the male customer segment using fragrances while musk and lime variants target smaller groups within the customer segments as a part of the niche marketing strategies of the company. Toften and Hammervoll (2013), mention that niche marketing allows the beauty products manufacturing companies to serve large number of customers. Lubik and Garnsey (2016) point out multinational companies adopt niche marketing strategy as a part of their market segmentation strategy which leads them to more innovative products. This results in generation of huge revenue but the companies have to face a serious issue due to niche marketing. Jetzek, Avital and Bjorn-Andersen (2014) mentions that niche marketing requires multinational companies to partner with third party laboratories. This exposes the companies to risk of data theft which requires them to spend immense amount of money to prevent data theft.

The above discussion brings to light several benefits which lead the multinational companies like Unilever to adopt segmentation strategy market their products globally. The favourable external and internal environment factors fuel more aggressive adoption of this strategy as a global competitive strategy. Segmentation enables the multinational companies to earn immense revenue and global leadership. However, adoption of segmentation also lead to these multinational companies facing issues like increase in production cost. The companies also expose themselves to immense losses due to failed segmentation strategies and data thefts.

Conclusion

It can be concluded from the discussion that market segmentation is beneficial to multinational companies like Unilever. It renders them their immense revenue generation and global leadership power. However, the companies are exposed to risk of data thefts and losses due to failed market segmentation strategies. The following recommendations can be made to Unilever especially pertaining to its segmentation strategy of its personal care customer base:

1. Unilever must market its beauty products more aggressively among its customer segments. This will result in deeper market penetration and help it to generate more profits. This will help the company deal with the issue of increase in production cost. Moreover, the successful brands would sell in the market and earn super normal profit. This would in turn help the company deal with losses it would incur if segmentation of some of its customer base fails.
2. Adoption of market segment strategy would require the company to partner with research laboratories. The company should establish a stringent data management policy to prevent. This would prevent the research laboratories from misusing the data of the company

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