Why companies should focus

Why Market Segment Focus and Profitability in B2B should be an important decision criteria for customers.

The diagram, from Michael Porter, shows how a company adds value at a functional level to the products and services it produces, thus enabling the company to serve customers and generate a margin. The greater the added value, the higher the potential margin, which in theory allows the company to invest more into R&D and thereby increase value to its′ customer base. It should be noted that many other factors affect a companies margin, not least the industry attractiveness. However, the market focus is within the company′s own control.

If a company tries to cover too many different market segments or too broad a range of different customer types within a single segment, then there is the risk that internal resources lose focus and the friction costs between the different functions within the value adding chain increase. This can lead to both a reduction in margin to the supplier and value to the customer. This is one of the reasons why large corporations separate their activities into different divisions, although some support functions can be kept centralised.

Of course there are some industries, where the products and services are sufficiently commoditised, that it makes little difference which customer segments are being serviced. After all, a widget is a widget irrespective if the customer is a small business or a large multinational, although the ordering and delivery may be somewhat different for each customer type.

However, there are value added services and products, which do require specific market segment focus. With these services, it is important to assess the supplier′s market focus, it′s level of profitability and how this will develop over time, as these factors are interlinked. Focus and profitability will provide the platform for adding value to both the supplier and it′s customers during the lifetime of the relationship.

The ultimate value which a customer can gain from a service or product is derived, in part, from the market segment strategy of the supplier and as such a company′s market strategy should be a significant factor in the decision making process.?#addingvalue