Why Do Executives Segment Markets Counterproductively?

Why Do Executives Segment Markets Counterproductively?

Why Do Executives Segment Markets Counterproductively?

In many ways, what we have said to this point is not news—or at least it shouldn’t be. Good researchers have written persuasively, using their own vocabulary, that a jobs-to-be-done perspective is the only way to see accurately what products and services customers will value in the future, and why.[14] Indeed, all executives would say that they dream of dominating their market with a highly differentiated product. And most marketers will claim that the very purpose of their work is to understand what customers do with their products.

In the face of such desires and beliefs, why do so many managers instead seem to rush headlong in the other direction, basing product improvement trajectories on attribute-based segmentation schemes that lead to undifferentiated, one-size-fits-all products? There are at least four reasons or countervailing forces in established companies that cause managers to target innovations at attribute-based market segments that are not aligned with the way that customers live their lives. The first two reasons—the fear of focus and the demand for crisp quantification—reside in companies’ resource allocation processes. The third reason is that the structure of many retail channels is attribute focused, and the fourth is that advertising economics influence companies to target products at customers rather than circumstances.

Fear of Focus

One reason why it is difficult to create packages of products and services that do particular jobs well is that the more clearly a product is focused on getting a specific job done perfectly, the less appealing it might become when hired for other jobs. Clarifying what job a product should be hired to do, unfortunately, often clarifies what it should not be hired to do. Focus helps and it hurts—and it is easier to quantify the hurt than the help.

This is an especially vexing issue for companies such as RIM, Palm, Nokia, and HP as they chart course into a seemingly uncertain future. Each company is more or less positioned, for now, on a specific job: RIM’s BlackBerry and Nokia in killing time productively, Palm’s Pilot in keeping folks organized, and HP in stripped-down access to computer-based tasks.

If they define their market in terms of the product category, the most tangible growth opportunities are customers and applications that already have been captured by the other companies. So RIM looks to organizer software to help it steal Palm’s customers, even as Palm wrestles with ways to make its Pilot a mobile e-mail device.[15] If these companies frame the market as a product category, then not to pack all these features into the product indeed seems to sacrifice growth potential.

In contrast, a theory of growth that is grounded on circumstance-based categories—jobs to be done—would lead RIM not to copy most features in other handheld devices. This is because the real competition comes from newspapers, mobile phones, CNN Airport Network, and plain old boredom. There is exciting growth potential within this job, if RIM can improve its product so that it does the job better than the real competition. It would grow the size of the product category by stealing share from competitors that are outside the category.

Furthermore, pursuing this trajectory of improvement would enhance, rather than destroy, RIM’s product differentiation and its consequent ability to sustain profit margins.

Focus is scary—until you realize that it only means turning your back on markets you could never have anyway. Sharp focus on jobs that customers are trying to get done holds the promise of greatly improving the odds of success in new-product development.

Senior Executives’ Demand for Quantification of Opportunities

The job that line executives often hire market research to do in the resource allocation process is to define the size of the opportunity, not to understand how customers and markets work.

The information technology (IT) systems in most companies collect, aggregate, and summarize data in various ways to help managers make better decisions. The reports are undoubtedly helpful, but they also lead companies to develop new products and services destined to fail in the marketplace. Almost all corporate IT reports are structured around one of three constructs: products, customers, and organizational units. The data show managers how much of each product is being sold, how profitable each is, which customers are buying which products, and what costs and revenues are associated with servicing each customer. IT systems also report revenues and costs by business units, so that managers can measure the success of the organizations for which they have responsibility.

The odds of developing successful new products begin to tumble when managers collectively begin to assume that the customer’s world is structured in the same way that the data are aggregated. When managers define market segments along the lines for which data are available rather than the jobs that customers need to get done, it becomes impossible to predict whether a product idea will connect with an important customer job. Using these data to define market segments causes managers to aim innovation at phantom targets. When they frame the customer’s world in terms of products, innovators start racing against competitors by proliferating features, functions, and flavors of products that mean little to customers.[16] Framing markets in terms of customer demographics, they average across several different jobs that arise in customers’ lives and develop one-size-fits-all products that rarely leave most customers fully satisfied. And framing markets in terms of an organization’s boundaries further restricts innovators’ abilities to develop products that will truly help their customers get the job done perfectly.

Like it or not, although market researchers often develop a solid understanding of the jobs that customers are trying to do, the primary language through which the nature of the opportunity must be described in the resource allocation process is the language of market size. Asking marketers to understand this concept is not the solution to the problem—because whether it is called “marketing myopia” or jobs-to-be-done, this concept has been taught before.[17] It is a process problem. Because senior managers typically hire market research to quantify the size of opportunities rather than to understand the customer, the resource allocation process systematically and predictably perverts companies’ concept of the structure of their market so that it ultimately conforms to the lines along which data are available.

As a result, corporate IT systems and the CIOs who administer them figure among the most important contributors to failure in innovation. Data purchased from external sources have the same impact, because they are structured by product attributes, not by job. The readily available data actually obfuscate the paths to growth.

The solution is not to use data that are collected for historical performance measurement purposes in the processes of new-product development. Keep such data quarantined: They are the wrong data for the job. The size and nature of job-based or circumstance-based market categories actually can be quantified, but this entails a different research process and statistical methodology than is typically employed in most market quantification efforts.[18]

The Structure of Channels

Many retail and distribution channels are organized by product categories rather than according to the jobs that customers need to get done.[19] This channel structure limits innovators’ flexibility in focusing their products on jobs that need to be done, because products need to be slotted into the product categories to which shelf space has been allocated.

As an illustration of this challenge, a manufacturer of power tools observed that when hanging a door, tradesmen used at least seven different tools, none of which were job specific, and wasted a lot of time picking up these tools and putting them down. The company developed a new tool concept positioned on the job that made it much easier to hang doors accurately. However, it could not be categorized as a plane, a chisel, a screwdriver, a drill, a level, or a hammer. When the company presented the product to the tool buyer of a major retail chain, the buyer responded, “Look. I have a job to do. Here’s the plan-o-gram for my shelf space. I buy drills, sanders, and saws. The vendor that offers the most horsepower at a price point gets the space. Your product doesn’t help me.”

This phenomenon leads many new-market disruptors to seek new channels to the customer—a topic we address in chapter 4. If the product is disruptive to the established retail or wholesale channels because it doesn’t help those institutions make more money in the way they are structured to make money, they won’t sell it. Consequently, successful disruptive innovators often find that their product must enable a new class of retailers, distributors, or value-added resellers to move up-market and disrupt established channels.[20]

Solving this problem by devising a new channel that is structured and motivated to sell the disruptive, job-positioned product seems ludicrous to executives who need innovations to grow very big, very fast. Doesn’t a big established channel promise a much faster ramp to volume? Ironically, it often does not. Finding or building new channels often means turning your back on profits that probably would not have materialized in existing channels anyway.

Advertising Economics and Brand Strategies

The fourth reason why marketing executives tend to segment markets by product or customer attributes is to facilitate communication with customers. It seems easier to devise a communications strategy and to choose the most cost-effective marketing media buys if consumer markets are sliced along dimensions such as age, sex, lifestyle, or product category. The same seems true if marketers slice commercial markets by geography, industry, or size of business. But when communication strategies drive segmentation schemes, the attributes of the targeted customers can confuse the product development process, causing companies to develop products that do several jobs poorly, and none perfectly.

Think back to our example of the quick-service food restaurant’s milkshakes, and consider a member of a demographic segment—a forty-year-old married man with two young sweet-toothed children, who also has a long, boring commute to work and gets hungry at lunchtime. What and how should the chain communicate to this customer? If it tells him that he can quickly buy a viscous, interestingly chunky milkshake from a self-serve machine when he needs something to keep his hands busy during his boring commute, how can the chain also tell him that he should come back to hire a small liquid shake when he needs to capitulate to his children? Or drop by to hire a hamburger when feed-me-fast-at-lunchtime is the job? Sending separate communications about each of these jobs to the same customer is prohibitively expensive, and yet communicating all of them to the customer at once would be confusing. So what’s the chain to do?

The answer is that just as it needs to develop products for the circumstance and not the customer, the chain needs to communicate to the circumstance, and not necessarily to the consumer. It can communicate to the circumstance with a brand, if it employs the right branding strategy. If it does this, then when customers find themselves in the circumstance, they will think instinctively of the brand and know what product to buy in order to get that job done.

Brands are, at the beginning, hollow words into which marketers stuff meaning. If a brand’s meaning is positioned on a job to be done, then when the job arises in a customer’s life, he or she will remember the brand and hire the product. Customers pay significant premiums for brands that do a job well.

Some executives worry that a low-end disruptive product might harm their established brand. They can escape this problem by appending a second word to their corporate brand. We call this word a purpose brand because it communicates to a circumstance—to a job that the disruptive product should be hired to do. If customers hire a disruptive product to do the wrong job, it will disappoint and thereby tarnish the corporation’s brand.[21] If the disruptive product is hired for the job that it was designed to do, it will delight the customer and thereby strengthen the corporate brand—even though the disruptive product’s functionality may not be as good as that of mainstream products. This is because customers define quality within the context of the job to be done.

Let’s examine Kodak’s experience when it launched single-use cameras, which were a classic new-market disruption. Because of their inexpensive plastic lenses, the quality of photographs taken with single-use cameras was not as good as the photos taken by good 35mm cameras. As a result, the proposition to launch a single-use camera business encountered vigorous opposition within Kodak’s film division. The corporation finally gave responsibility for the opportunity to a completely different organizational unit, which launched single-use cameras with a purpose brand—the Kodak Funsaver. This was a product to be hired when customers needed to save memories of fun occasions but had forgotten to bring a camera. The Funsaver camera competed against nonconsumption. Customers whose basis of comparison was to have no photos at all were delighted with the quality of this solution to saving their fun. Creating a purpose brand for a disruptive job differentiated the product, clarified its intended use, delighted the customers, and thereby strengthened the Kodak brand.

Marriott Corporation has done the same thing by developing a brand architecture that is consistent with several different jobs its customers experience in life. This architecture has facilitated the creation of new disruptive businesses, while strengthening the Marriott brand at the same time. Under the endorsement of the Marriott brand, we have been taught to hire a Marriott Hotel when the job is to convene a major business meeting, and to choose a Courtyard by Marriott (“The hotel designed by business travelers for business travelers”) when the job is to get a clean, quiet place to work into the evening. We learned to hire Fairfield Inn by Marriott when the job is finding an inexpensive place to stay as a family, and Residence Inn by Marriott to find a home away from home. The Marriott brand remains unsullied by all of this, because the purpose brands make the job clear.

In contrast, if Marriott marketers had positioned Courtyard hotels in a segment defined by a lower price point—a cheaper, lower-quality solution to the same job that the top-tier Marriott-brand hotels are hired to do—then the disruption could indeed have damaged the Marriott brand. But if a crisply defined purpose brand guides customers to hire the various hotels to do very different jobs, and if the hotel chains each are designed to do their respective jobs perfectly, then they all will be viewed as high-quality hotels, thereby strengthening the endorsing power of the Marriott brand. Brand strategies that make it easy for customers to make the connection between a job that arises and the product they can hire to do the job perfectly can make disruption all the easier.

[14]See, for example, Leonard, Wellsprings of Knowledge; Eric von Hippel, The Sources of Innovation (New York: Oxford University Press, 1988); and Stefan Thomke, Experimentation Matters: Unlocking the Potential of New Technologies for Innovation (Boston: Harvard Business School Press, 2003).

[15]In concept, of course, being able to carry one small device that does everything in a briefcase or purse is something that all customers would say they want. But it is rare that there are no technological trade-offs to adding diverse functionality to a product. Software makes it less expensive to tailor a single physical platform to do a range of focused jobs. Our proposition, however, is that even in this situation, a company would do better by using one single hardware platform to market different software-defined, optimized products that are positioned on different jobs. It is likely that for a long time electronic devices that combine such a wide range of functionality in the interests of doing many jobs simultaneously—organize me, connect me, help me have fun, and so forth—are likely to end up more like a Swiss army knife: a pretty good knife, terrible scissors, a marginal bottle opener, and a crummy screwdriver. As long as the jobs that customers need to get done arise at independent points in time and space, we would expect that most customers will continue to carry multiple devices until a one-size-fits-all omnibus device can do all jobs as well as its focused competitors.

[16]The experience that Intuit had in disrupting the small business accounting software market with its QuickBooks product typifies this situation. Until the early 1990s the only available small business software had been written by accountants for accountants. Because they defined their market in terms of the product, they framed their competitors as other makers of accounting software. The vision that this framing gave them about how to get ahead of their competitors, therefore, was to engage in an arms race of sorts: Be faster adding features and functionality in the form of new reports and analyses that could be run. The industry gradually converged upon undifferentiated, one-size-fits-all products, into which everybody had appended everybody else’s features.
Intuit’s marketers were wont to watch what jobs the customers of Intuit’s Quicken personal financial management software were trying to get done for themselves when using the product. In the course of doing this, they observed to their surprise that a large proportion of Quicken users were employing it to keep track of their small business’s finances. The job, they learned, was basically to keep track of cash. These small business owners had their fingers in every dimension of their business and did not need all of the financial reports and analyses that the prevailing software providers had cobbled into their products. Intuit launched QuickBooks at this job that small business owners needed to get done—“Just help me be sure I don’t run out of cash”—and succeeded spectacularly. Within two years the company had seized 85 percent of the market with a disruptive product that lacked most of the functionality of the competing products.

[17]Theodore Levitt has been a leading proponent of this view among those who research and write about issues in marketing. Christensen remembers that when he was an M.B.A. student he heard Ted Levitt declare, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” In our words, they have a job to do, and they hire something to do the job. Levitt’s best-known explanation of these principles is found in Theodore Levitt, “Marketing Myopia,” Harvard Business Review, September 1975, reprint 75507.

[18]For suggestions on how the magnitude of job-defined market segments can be measured, see Anthony W. Ulwick, “Turn Customer Input into Innovation,” Harvard Business Review, January 2002, 91–98.

[19]We are grateful to Mike Collins, founder and CEO of the Big Idea Group, for his comments that led to many of the ideas in this section. Mike reviewed an early draft of this chapter, and his thoughts were extraordinarily helpful.

[20]One reason that some (but not all) “category killer” retail formats—companies such as Home Depot and Lowe’s—have been able to disrupt established retailers so successfully is that they are organized around jobs to be done.

[21]Because many marketers inadvertently and over time tend to segment their markets along attribute-based categorizations of products and people, it is unfortunate, but not surprising, that they often do to their brands the same thing that they have done to their products. Brands often have become omnibus words that don’t do well any of the jobs that customers need to get done when they hire the brand. Because most advertisers want a brand’s meaning to be flexible enough for a range of products to be housed under its umbrella, many brands have lost their association with a job. When this happens, customers remain confused about what product to buy to get the job done when they find themselves in a particular circumstance.