The virtue and risk of segmentation
We have heard of the saying, “Divide and Rule.” In Marketing, we call it segmentation, wherein we break up our target market by Demographics (who we are), Attitudes (What we think and believe) and Behaviour (What we do).
Segmentation is risky and expensive. We need to ensure that we have created the right target segments, and we need to ensure that we are hitting each segment with the right marketing message.
A marketing message has two parts.
- Identification of an existing need or creation of a need leading to a dissatisfaction with the current state
- That this need can be satisfied by purchasing our product.
When the British segmented India, they fomented competition between various rulers. They catered to a need of one-up-man-ship, playing on the self esteem of the rulers and and their need to feel superior to others. The recognition and reward system (Raya-bahadurs etc., supply of guns, cannons, soldiers, training, preferred customer status) was used to foment dissatisfaction.
After 1857, the princely states were downplayed and there was a need for another segmentation strategy. This was done by using the caste system, the religions and by the promotion of a new ruling class like the Zamindars.
Look at the trend. The cost of creating and maintaining the earlier segmentation of 500 odd princely states was exorbitant and therefore control was inadequate. Each state had different problems and therefore different needs. The French, the Dutch and the Portuguese, therefore, were able to maintain a stronghold in certain parts of India. The 1857 revolt happened because of this lack of control.
After 1857, the segmentation method was pan-India. Demographics using religion, caste and class was more cost effective, as the needs were more homogenised, and the cost of creating the right marketing message was easier. Penetration into these segments by outsiders was difficult as these segments were not open to outside influences. The religious leaders determined the actions of their flock. A Brahmin did not listen to any one but a more superior Brahmin. Although the cost of maintaining a segment was low, the effectiveness of the segment was also low.
The cost of creating a new segment like “class” was high. The British originally created a ruling class and a ruled class. The focus was on the ruling class, and it was hoped that the ruling class could determine the behaviour and buying pattern of the ruled class. This did not happen.
Homogenisation of a market (de-segmentation)
The management dilemma is evident. Segmentation allows for better penetration, but the cost of segmentation is higher.
This is where Thomas Babington Macaulay came up with a masterpiece of marketing strategy of creating a large segment that:
- Could be controlled in terms of behaviour
- Has a common communication strategy so that the marketing message is not lost in translation
- Is large enough to impact revenues and profits.
His strategy is called Macaulayism. Wikipedia says, “The English form of educational instruction was directly imported to India under Macaulay’s watchful eye and the English language was established as the main vehicle of instruction. It was hoped to establish a new cultural elite in the colony and that the ideas of this new English-speaking and British-educated group would refine the vernacular dialects of the country, enrich those dialects with terms of science borrowed from the Western nomenclature and render them fit vehicles for conveying knowledge to the great mass of the population.”
Look at the underlined phrases and you will realise that all the 3 needs mentioned above are fulfilled.
- By creating the English speaking middle class, the British created a market for products of Industrial Britain.
- The British created a society mirroring its own social norms and therefore gained acceptability in India. To penetrate religious strongholds, it created reformers from the middle class that over-emphasised the evils of religion and therefore promote a milder and more “enlightened” form of religion and society.
- The common language allowed the British to use their superior command over the English language to control knowledge dissemination and the marketing messages. It allowed other Britishers to communicate directly with the masses.
- By creating a need to strive towards British ideals and norms, a new dissatisfaction was created, which could only be satisfied by British products, British rewards and recognition ((Knighthood, Rayabahadurs, inclusion in the Indian Civil Service).
In one shot, Macaulay created economic and political control by controlling the attitude and behaviour of an influential mass that cut across most demographics.
Where is the value-add in the Indian IT Industry
Much has been touted about the success of the Indian IT industry, especially for establishing itself as an IT and BPO outsourcing hub. The mantra for success has been ‘cost and quality’. However, as customers get used to outsourcing to India and as competition increases within India and from countries like Canada, Philippines and China, a question arises:
“Quality and cost are given. All Indian companies provide identical services, with the same quality and comparable cost. What is the value-add that an outsourcing company provides to the customer, specially after so many years of existence?”
The Current situation
A typical investment bank would have the same functionality duplicated across multiple systems, primarily due to mergers or acquisitions of business and resultant technology or due to consolidation across geographies.
An outsourcing vendor would happily service all these applications because it is paid to do so, and the customer-side Chief Information Officer (CIO) would allow it because he would get commensurate budgets.
However, in the present times, a CIO is under pressure to reduce costs. He would, typically, renegotiate rates and Service Level Agreements (SLAs) to get a better deal. The CIO might compare the vendor with other similar vendors who are eager to get a marquee account, even at cost.
If the hapless vendor gets sucked into a price negotiation, he would be at the mercy of the CIO each year, when the same exercise is repeated. He may have to compromise on quality (and quantity) in order to retain his margins. This compromise would cause a downward spiral next year in terms of negative customer perception, reduced prices as well as penalties for not meeting SLAs.
A win-win situation
If however, the vendor is able to provide value-add which provides a bigger bang for the same buck, and is able to demonstrate the same pro-actively, the CIO would be able to prove to his board the justification of budgets and retention of the existing vendors. A win-win situation.
Here is how does the vendor does it.
An IT organisation has insight into the business processes of its customer because it is supporting the existing technical applications and it has direct or indirect access to the business users.
If an outsourcing vendor controls of all business applications of the customer, and sometimes, applications of multiple customers of the same vertical industry, then the vendor can compare and analyse systems to find commonality in processes in order to reduce the total cost of ownership of these applications without sacrificing the customer’s competitive advantage.
An example of Value-Add: Application Rationalisation
An analysis of Back Office Systems in an Investment Bank would reveal that Trade Capture is done by multiple systems in multiple geographies, exchanges and financial products. These represent the same business process in different systems and therefore add to the cost of the business process.
This situation is ideal for performing an application rationalisation that will:
- Reduce the cost of maintenance and therefore cost of ownership of the application
- Create positive feedback within the client organisation that would improve marketing exposure and generate additional business
- Provide application development revenue to the IT organisation
- Improve morale in the IT organisation because of new systems development instead of monotonous maintenance
A reasonable negotiation, augmented with this goodwill, can lead to business compensating for the loss of revenue due to decrease in applications to be maintained.
Business Processes is a common thread across IT, BPO and Business
Although Business Process Outsourcing is looked down upon by project managers as being non-IT focused and having a low-end repetitive job profile, there is a common thread that runs between Application Outsourcing, Business Process Outsourcing and the Business Value add that the customer demands. That thread is business process.
What is required is an ability to link IT processes and business processes in such a way that IT processes can be modified based on changes in business processes. Further, it would be beneficial if the business users can control and redesign the business processes without IT processes hampering either the redesign or the implementation of the processes.
Benefits of Being Business Process Centric
The focus on business processes also creates a link between IT application maintenance as well as Business Process Outsourcing. In case an IT organisation is doing Application Maintenance, it can now:
- Present a case why it is the ideal candidate for BP outsourcing
- Use business process modelling to help create a common business-oriented help desk
- Help in business process rationalisation
- Help in the creation of SLAs that are related to business, not just IT
- Focus on highlighting value-add that is more apparent to the business users, who ultimately control the purse strings.
It is therefore important for the IT industry to create a formal representation of business processes and its link to IT processes. A new model of business process modelling needs to emerge that would combine the traditional methodologies of process representation in the IT world with
- Operations Research techniques,
- Cost-accounting concepts of value chains and
- AI techniques for rationalising business rules.
This needs to be represented in a formal mathematical notation similar to pi-calculus so that in future, computer-aided tools would be available to optimise the processes, identify bottlenecks in terms of time, throughput and costs.
This article was originally posted in The Tribune on August 23, 2003 and has been updated for this blog post.
Josh Kaufman says:
“Year after year, surveys show that “owning my own business” is a goal for over half of the working adult population. Despite that, very few people actually muster the courage to actually start a business. That’s a shame: starting and running a business can be much easier than you think.
The premise of Go It Alone is simple: you can create a profitable business all by yourself, without employees, loans, or venture capital funding. Even better, your new business doesn’t have to be “small”: with some smart thinking and advance planning, there’s no limit to your potential profitability.
The major trend shift that makes this possible is technology: it’s now possible to make use of business services that used to cost tens of thousands of dollars for a few dollars a month. Combined with the ability to hire outsourced help from all over the world in lieu of hiring employees, smart entrepreneurs can make more money, set their own schedule, and choose their own projects. Comparative advantage works.
Go It Alone changed the way I run my business, and I refer to it constantly. If you’ve been wondering whether or not entrepreneurship is for you, read this book.”
Here is the link to the book.
In my coaching sessions, I ask executives to behave as if they are the CEO of their lives. As a CEO you need to:
1. Develop yourself as a product or service that people desire
You are multiple products to multiple markets depending on the role you play. When you act as a subordinate, you need to convince your boss that you are an ideal product and he should keep you. When you act as a boss, you need to convince your subordinates that you are the best boss. Being the best means being the best product or delivering the best service.
2. Market yourself to all customers, internal and external to the organisation
3. Run your finances i.e. reduce costs and increase revenue to more than costs
4. Create your own motivation and recruit people to help you (network)
5. Use technology to make their processes more efficient
You need to improve all the above processes by using the right technology – be it blogs, a rudimentary CRM system, a list of birthdays in your calendar and your to-do list.
I typically do not differentiate between personal and professional life.
This article by Gibson talks about the same thing with reference to empowering employees to act as CEOs.
To quote Gibson, “Giving everyone the responsibility to set their own agenda, prioritize resources, and pull in the right people has also made our office more efficient.”
This word has been bandied around a lot, and many companies, colleges and people pay lip service to it. http://en.wikipedia.org/wiki/Social_entrepreneurship
- How do we create a sustainable enterprise that makes profits and fulfills social obligations?
- Can we help uplift the stature of the small town that we came from, where we were nurtured, before the city lights seduced us to the big city?
- How can we make more money that by having a job in the city?
- How can we have more stature and recognition than being a factory worker in a big corporation?
- Can we take the unemployed youth of our town, the girls who are prevented from having a career in another city and make something that will create wealth for the young people of our town?
How I wish that some more mentees used this example, and created a sustainable enterprise in their home towns.
Take a hypothetical example of a road accident that I am involved in. I am being very careful, driving under the speed limit and being responsible. But the driver of the bus that barrels into me was speeding, had a few drinks and thought he had the right of way. Further, he was trying to overtake another bus, competing with that driver to pick up passengers first. The driver of the other bus too wanted to win. Neither wins, but I lose a limb.
What should I believe?
- That it was God’s will, that he has some plans for me or some lessons that I have to learn? Is it karma, or consequence of something that I did in my past or current life?
- That it was a random/ unpredictable/ maybe explicable act, which happened due to a set of mental models created in the drivers who were therefore competing, coupled with their low self esteem which was compensated by the false bravado of a few drinks.
How should I react?
Based on either of the above, should I
- be inert or
- actively forgive the driver? or
- actively avenge my loss of limb by suing the truck company, or
- get the driver beaten up or any such reaction?
Are events random, or are they fated to happen?
If I look at a continuum of fate vs. deliberate action:
I could have, on one end, 100% dependency on God’s Will and the philosophy that everything is preordained.
Whatever happens to me, whether good or bad, is not of my making but “that of our stars,” as Shakespeare would say. I may explain my actions by saying that God put this decision in my mind, and at an extreme, Gods talks to me and tells me what to do – whether it is of positive consequences like Joan of Arc or negative like Charles Manson.
On the other end, I could believe that when I react to an event, I do so on the basis of my mental models and my beliefs.
These beliefs have been created based on my previous interactions with the world and my interpretation or learning from past events.
When I react, it is like throwing a stone into the water, and the ripples of my action impact a myriad of people in different ways. All these people react in different ways to my action based on their mental models and beliefs. Since I do not know their beliefs and how they were formed, it is not possible to predict what is the sum total of all their reactions and what will be the final impact of these actions.
It is sort of a Brownian motion, where random molecules collide with each other and therefore change their path. How people interact or react is based on their beliefs and since we cannot see into their mind, we cannot predict the course of action.
Hence, we would seem like a random event. These are inexplicable/ random/ unpredictable events which have a major impact on life as we know it. These random events are called “Outliers” by Malcolm Gladwell or “Black Swans” by Nissim Nicholas Taleb.
The last such random event was 9/11 according to the Western world.
In the middle of this continuum would be the 50 percent belief, that there is a grand scheme of things, and there is a randomness of nature.
We have to try our best to understand how people would react, but because we cannot be 100% certain, there will be an element of randomness, coupled with an incomprehensible hand of God. We have a tendency, after the event, to try and explain it rationally. If we cannot explain it rationally, we try to explain it as God’s Will, His Grand Plan about us.
The Impact of either fate or randomness
This entire continuum can lead to a belief that:
- we should not attempt anything either because God will take care of us, or
- the randomness of events will anyway render intended consequences of any of our actions futile.
So we can justify our inaction, our procrastination and laziness.
We have Indian philosophy from the Bhagwad Gita – of our right to action, but not to results. We have a piquant situation where we have a right to action, which (based on where you are on the continuum, has an element of pre-ordained) and no control on results (which is random or unpredictable at best).
Sort of drives the final nail into the coffin of inactivity and inertness.
If things are random or pre-ordained, how will I be motivated?
Motivation is based on
- the needs of a person, and
- the probability that the effort the person makes would lead to the fulfilment of the need.
If we say that we cannot predict the impact of the effort, why would we make the effort?
So forget about consequences?
Shall we follow the philosophy of existentialism, live for the moment, with no thought of either the past or the future? I am here and now, and only this is real? So there is no such thing as strategy or long term consequences? If I cannot control, why think about pollution, leaving this world a better place etc. Or it is God’s will?