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232 PART 3 CONNECTING WITH CUSTOMERS

• Differentiable. The segments are conceptually distinguishable and respond differently to
different marketing-mix elements and programs. If married and unmarried women respond
similarly to a sale on perfume, they do not constitute separate segments.
• Actionable. Effective programs can be formulated for attracting and serving the segments.
Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of
a market or market segment: industry competitors, potential entrants, substitutes, buyers, and
suppliers. The threats these forces pose are as follows:
1. Threat of intense segment rivalry—A segment is unattractive if it already contains numerous,
strong, or aggressive competitors. It’s even more unattractive if it’s stable or declining, if plant
capacity must be added in large increments, if fixed costs or exit barriers are high, or if com-
petitors have high stakes in staying in the segment. These conditions will lead to frequent price
wars, advertising battles, and new-product introductions and will make it expensive to com-
pete. The cellular phone market has seen fierce competition due to segment rivalry.
2. Threat of new entrants—The most attractive segment is one in which entry barriers are high
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and exit barriers are low. Few new firms can enter the industry, and poorly performing firms
can easily exit. When both entry and exit barriers are high, profit potential is high, but firms
face more risk because poorer-performing firms stay in and fight it out. When both entry and
exit barriers are low, firms easily enter and leave the industry, and returns are stable but low.
The worst case is when entry barriers are low and exit barriers are high: Here firms enter dur-
ing good times but find it hard to leave during bad times. The result is chronic overcapacity
and depressed earnings for all. The airline industry has low entry barriers but high exit barriers,
leaving all carriers struggling during economic downturns.
3. Threat of substitute products—A segment is unattractive when there are actual or potential
substitutes for the product. Substitutes place a limit on prices and on profits. If technology
advances or competition increases in these substitute industries, prices and profits are likely to
fall. Air travel has severely challenged profitability for Greyhound and Amtrak.
4. Threat of buyers’ growing bargaining power—A segment is unattractive if buyers possess strong
or growing bargaining power. The rise of retail giants such as Walmart has led some analysts to
conclude that the potential profitability of packaged-goods companies will become curtailed.
Buyers’ bargaining power grows when they become more concentrated or organized, when the
product represents a significant fraction of their costs, when the product is undifferentiated,
when buyers’ switching costs are low, when buyers are price-sensitive because of low profits, or
when they can integrate upstream. To protect themselves, sellers might select buyers who have
the least power to negotiate or switch suppliers. A better defense is developing superior offers
that strong buyers cannot refuse.
5. Threat of suppliers’ growing bargaining power—A segment is unattractive if the company’s
suppliers are able to raise prices or reduce quantity supplied. Suppliers tend to be powerful
when they are concentrated or organized, when they can integrate downstream, when there
are few substitutes, when the supplied product is an important input, and when the costs of
switching suppliers are high. The best defenses are to build win-win relationships with suppliers
or use multiple supply sources.

Evaluating and Selecting the Market Segments
In evaluating different market segments, the firm must look at two factors: the segment’s overall
attractiveness and the company’s objectives and resources. How well does a potential segment
score on the five criteria? Does it have characteristics that make it generally attractive, such as
size, growth, profitability, scale economies, and low risk? Does investing in the segment make
sense given the firm’s objectives, competencies, and resources? Some attractive segments may not
mesh with the company’s long-run objectives, or the company may lack one or more necessary
competencies to offer superior value.
Marketers have a range or continuum of possible levels of segmentation that can guide their
target market decisions. As Figure 8.4 shows, at one end is a mass market of essentially one
segment; at the other are individuals or segments of one person. Between lie multiple segments
and single segments. We describe each of the four approaches next.
FULL MARKET COVERAGE With full market coverage, a firm attempts to serve all customer
groups with all the products they might need. Only very large firms such as Microsoft (software