The Resource-Based View and Market Segmentation
The Resource-Based View of a company is an economic analysis tool that enables one to assess the performance of a company, by analyzing its resources. This process of assessing a firm's performance is extremely useful in the sense that it allows the management board to conceive and implement a strategy, based upon a firm's strengths and weaknesses on a given market, resulting in the increase of the firm's earnings and in its economic expansion.
Segmentation is the process of segregating the “market cake” into “wedge-shaped pieces” (Smith, 1956). Through market segmentation, a company is able to produce items focused on a group of people, sharing similar preferences. Thus, the demand is kept high, resulting, again, in the increase in revenue of the company.
In this essay, I shall explain the concepts of Resource-Based View (RBV), in the first part and of Segmentation in the second part. I shall then apply them to Dell, one of the all-time most successful PC companies. I shall present the results of a competent Resource-Based Analysis and its effects upon the company. In the second part of this essay, I shall define the marketing concept of Segmentation and analyze the same company from this point of view. I shall then compare the marketing strategy of Dell with that of IBM and end with the presentation of the main drawbacks of this marketing concept.
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The Resource-Based View (RBV) of a company “takes as its unit of analysis the firm” (Barney, 2001). It is in fact a framework for assessing a firm's performance, by considering the resources at the firm's disposal, including non-current and current assets, human resources, information, knowledge, brand name, trade contacts, efficient procedures, employment of skilled personnel etc. (Wernfelt, 1984).
The purpose of any company is to make profit. A firm's profit cannot be replicated by other firms when the former company possesses competitive advantage on the market. As explained by Barney (1991), a company possesses competitive advantage when “it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors”. Furthermore, a firm possesses sustained competitive advantage when, in addition to the criteria above, other players on the market “are unable to duplicate the benefits of this strategy” (ibid.). In other words, a firm develops sustained competitive advantage “when it is improving its efficiency and effectiveness in ways that competing firms are not” (Barney, 2001).
Resources are strengths and weaknesses of a company (Wernfelt, 1984), “internal competences and values” (Porter, 1981) that the company possesses and uses, in order to gain competitive advantage and elaborate a corresponding business strategy. Resources include tangible and intangible assets, organizational processes, information, knowledge, technology, human resources etc., possessed and controlled by the company, which facilitate the implementation of new strategies and the increase in efficiency of the given firm (Barney, 1991). Furthermore, Barney (1991) claims that, in order to build sustained competitive advantage for a given firm, resources must meet the “VRIN” criteria: they must be valuable (i.e. they enable a firm to create a strategy that improves its efficiency and effectiveness), rare (i.e. the firm owns resources not available to its competitors), imperfectly imitable (i.e. the firm's resources cannot be imitated or replicated, due to patents, copyrights, etc., by its competitors) and non-substitutable (i.e. the firm's competitors cannot gain possession of a resource - similar to or different from the firm's original resource - that generates sustained competitive advantage). Resources lead to the development of strategic capabilities (Robertson, 2009). In other words, capabilities are “know-how's” of using resources with maximum efficiency and effectiveness, thus resulting in the correct implementation of the given strategy and in the increase in the firm's turnover.
Dell Computer Corporation was founded in 1984, by Michael Dell and has, since then, become one of the leading PC companies, due to the development of competitive and innovative strategic capabilities, such as the company's Operations and Supply division. In 1994, Dell implemented a new business model: instead of ordering components in advance, like all its competitors, Dell began a build-to-order process, directly selling PCs to customers. This ingenious step forward brought a return on invested capital of 217% and $1.8 billion in cash, in 1998 (Byrnes, 2003).
Always on Time
Marked to Standard
This process of directly selling PCs to customers enabled Dell to liaise with its customers, “to understand their needs and efficiently provide the most effective computing solutions to meet those needs” (Dell Computer Corporation, 2010). Dell “developed a core competence in targeting customers” (Byrnes, 2003) and kept a database containing information on this matter. Michael Dell's business was mainly aiming at customers with “relatively predictable purchasing patterns and low service costs” (ibid.), providing them with PCs suited to their needs. This process of knowing the buyer - his needs and his buying power - enabled Dell to keep the demand for its products stable. By the end of the 1980s, customers buying their second or third PC were experienced technology users, and thus they did not require personal selling by salespeople. Corporate customers ordered PCs directly from the company.
Dell learned that the more workers were involved in the process of assembling a PC, the more this process took and the greater the probability that the product had defects. Thus, Dell reduced the number of workers involved in the process of assembling a PC. The company bought the components, assembled them and shipped the PC to customers, eliminating middlemen. Customers received the wanted configuration and Dell greatly reduced its costs. Thus, Dell “turned a product business into a service industry” (Achtmeyer, 2002). This capability, of a very efficient Operations and Supply division, constitutes the main advantage that segregates Dell from its competitors.
Furthermore, enjoying such a good business relationship with its customers, Dell has developed another capability, of an intangible nature: reputation. The company's quality PCs have built a strong reputation over the years, which cannot be ignored by its competitors. Dell's reputation is the result of intensive market research, resulting in the assembling of the optimum PC for every class of buyers.
Being a “technology-intensive” (Helfat & Raubitschek, 2000) company, one of Dell's fundamental resources is its technology foundation. Its state-of-the-art PCs are made, using complex technological processes. Thus, one of Dell's capabilities is this usage of the knowledge it possesses, creating innovative systems, suited to the needs of every buyer, be it a student or a high-profile executive.
However, the Resource Based View is not the only tool to consider and use when analyzing a company. Resources are not the only triggers of sustained competitive advantages for the simple reason that they are not always heterogeneous and in-imitable. In many cases, a visionary management board triggers the implementation of a new strategy, using homogenous and imitable resources, resulting in the development of sustained competitive advantage.
Market segmentation is “a strategy designed to allocate marketing resources to defined segments” (Assael, 1987), considering different criteria, such as buyer needs and preferences, competitor situation, the size, growth and durability of the market, market key successful factors, entry and exit barriers, strategic partners, key driver profits, cost to serve, etc. (Hu, 2009). In a more condensed definition, segmentation is the process of segregating the market, in accordance with the developments on the demand side, resulting in the “adjustment of product and marketing effort to consumer or user requirements” (Smith, 1956). Through segmentation, a company can focus its products on a specific category of people, classified according to demographic (age, gender, income, occupation), geographic (country, region, city, climate), psychographic (lifestyle, personality) and behavioral (occasions, benefits, use, status, usage rate) criteria (Hu, 2009).
Dell, as a PC manufacturing company, is interested in conducting marketing analyses resulting in a competent and accurate segmentation of the market. In 1995, for instance, Dell focused on expanding the business on the mid-business market, after having conquered the large business and the home consumer markets. In order to expand on the mid-business market, Dell promoted itself as being a company that has learned from its past experiences and, backed by concrete sustainability, it is able to go further and guarantee flawless services to this market sector. It managed to prove that it is able to offer long-term help and support services to the mid-size business that bought computers from it. This efficient focus on a market segment brought Dell an increase in earnings of over 160% (Kellogg School of Management website, accessed 2010).
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Today, Dell markets its products on four main behavioral market segments: Home, Small and Medium Business, Public Sector and Large Enterprise. For instance, Dell is selling the Inspiron and Studio laptops for home-users, the Vostro laptop for small and mid-size businesses and the Precision workstation for large enterprises.
Moreover, in order to further enhance their impact on the market, Dell also focuses its sales on pre-defined age groups, through demographic segmentation. Thus, they market their Inspiron laptop model for adolescent first-time laptop buyers and media-oriented consumers, looking for a distinctive, “funky” look when buying a laptop (Dell TV advertisement, 2009). The Alienware PCs are clearly marketed towards a young public enjoying High-Definition computer gaming. The Dell Latitude is targeted to a more mature audience, consisting in executives and business persons, travelling a lot and , therefore, requiring mobility and autonomy.
One of Dell's main competitors on the market is IBM. The marketing approaches of these two PC companies substantially differ because they did not segment the market in the same manner. IBM focuses primarily on business buyers, as compared to Dell, which markets its products to more categories of buyers. Demographically, IBM focuses on middle-aged buyers. From a psychographic point of view, they focus on business persons and executives, in need of reliability and increased autonomy. Dell, on the other hand, “covers” more buyer segments, ranging from adolescents to executives. Furthermore, IBM's customers are not first-time PC buyers, are experienced users and look for a sober, almost Spartan design for their PCs, whereas Dell's customers are often looking for creativity, color and innovation when buying their PCs. Contrasting with Dell's customizable, all-new PCs, IBM also offers “slightly blemished” (IBM Products and Services - Used Notebooks - United States, 2010) computers. In other words, IBM aims at a market segment that is looking for the quality and reliability that has made the company famous, but at a lesser price (first-time business owners, first-time business-oriented PC buyers, etc.).
However, market segmentation has its risks. If the marketer does not establish concrete target market selection criteria, such as buyer needs and preferences, competitor situation, cost to serve, entry and exit barriers, etc., or if he conducts insufficient market analysis, the product might not have the forecasted impact on the market and may be a total failure. Furthermore, the segments considered for the implementation of the new strategy might not respond affirmatively, when confronted with the newly-launched product.
The Resource-Based View of a company and Segmentation are two concepts that have to be treated at the same time, when conceiving and implementing a firm's strategy. An individual analysis of the two would lead to serious inconsistencies, resulting in a definite failure of the implemented strategy. A company should be involved in market segments in which it could attain sustained competitive advantage, through the rational exploitation of its resources, resulting in profit increases and constant economic growth.
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