When it comes to market segmentation, some companies classify their customers into predefined categories such as a vertical industry or SIC code classification or into a small, medium or large business classification. Others classify their customers into groups depending on their geographic location, age or the price point at which they buy. Segmenting customers into these or other predefined classifications is a common practice that often goes unchallenged. Firms routinely accept this approach to market segmentation simply because of convenience and the lack of alternative segmentation solutions. What is often overlooked, however, are the ramifications of making such a decision, as the implications are subtle but far-reaching. When a company adopts a segmentation scheme it is not only defining its market perspective but also forming the foundation upon which the company's culture is shaped.

According to Harvard Business School Professor, Clayton Christensen 1, a company's culture is the culmination of its resources, processes and values. Within this framework, we can describe the impact a company's segmentation scheme has on the firm. The impact undoubtedly affects the very fiber of the organization.

Once a company adopts a segmentation scheme, it sets into motion a series of events that ultimately determine the resources it hires, the skills it obtains and the processes it executes - defining company values and its culture. As an example, let's say a company segments its market into vertical industry classifications such as public services, construction, transportation, manufacturing and other SIC code classifications. When staffing, the company will likely seek out individuals who have knowledge of these vertical markets as they will bring forward the requirements and mindset deemed important to success. Their knowledge will then be used to create and position products sold into these markets. Employees will be hired to represent each of the vertical segments culminating in a set of resources that have a vertical segment perspective, focus and mentality. These employees will develop the processes and skills needed to address the needs of the vertical markets. Sales teams, marketing campaigns and communication programs will be devised for these segments. Engineers and designers will think about the markets from a vertical segment perspective and attempts will be made to fine-tune product offerings to meet segment specific needs. Most importantly, priorities will be set, and decisions will be made - framed around the vertical market mindset - i.e., "we will add this feature into this product because it appeals to the public services segment, and we need to gain market share in that area."

The way employees think, and act define a company's culture - and culture is highly influenced - if not dictated - by the segmentation scheme the company has adopted for its market. It brings a mindset that controls the company's actions. This is good news, of course, if that scheme is technically sound, aligned with customer outcomes and capable of bringing the company a unique and lasting competitive advantage. When a company’s culture is influenced by a properly defined segmentation scheme, employee efforts are aligned with the market and the company prospers by this uniformity. But what if the segmentation scheme is faulty? What if the segmentation scheme is technically deficient or ambiguous - making it difficult for employees to take action? What if it reflects the company's perspective of the market - not the customer's? Employee efforts may be aligned in the same direction – but the direction may be questionable. Confusion may cause executives' opinions to differ over which products to offer - slowing the company and placing it in jeopardy. Unfortunately, this is often the case when markets are segmented into predefined, convenient statistical classifications.

From a theoretical standpoint, the ideal market segmentation scheme consists of groups of customers with similar needs - each containing a homogeneous population that values the same outcomes and therefore the same solutions. The ideal segmentation scheme reflects the markets natural order of segmentation - it uncovers customers with similar outcomes and groups them together - forming market segments. These ideally defined segments react in unison to a given set of marketing stimuli and are easy to reach with marketing communications. They represent a large portion of the market and remain stable over time. A segmentation scheme aligned with the market's natural order provides an organization with solid, unwavering focus - and confidence in knowing its market perspective is customer-driven, forming the basis for a solid cultural alignment with the market.

Traditional segmentation schemes - based on industry classification, business size, geography, age group or some other convenient statistical classification - rarely meet the criteria for an ideal segmentation scheme. The reason for this is simple – traditional segmentation schemes are defined independent of customer outcomes. Companies holding such a market perspective often recognize that customers within a predefined segment undeniably have different outcomes and needs - and therefore value different solutions. By definition a segment is supposed to contain individuals that have similar outcomes - these predefined segments often fail to meet that criteria - defeating the purpose for segmenting. This understanding explains the difficulty, frustration and disagreement that often arises when a firm formulates its product plans, marketing plans and overall company strategy. When engaged in these important activities, the segmentation scheme is expected to explain customer behavior - but it rarely does - in fact, it often leads to confusion. Formulating any strategy around a scheme that is disparate and unpredictable - especially when it is expected to be uniform and dependable - can have disastrous consequences. Employees may end up spending countless hours trying to rationalize inconsistencies that cannot be rationalized - leading to paralysis and inaction. Traditional segmentation schemes are plagued with inconsistencies, exposing a problem that is just the tip of the iceberg.

Below the surface, companies have cast their resources, processes and values around a market perspective that is inherently flawed - sending the company in a questionable direction. Companies adopting a traditional market perspective often set loose a contaminant within their culture, a mindset that is not aligned with the realities of the market. Within such an environment it is difficult to formulate effective strategies and nearly impossible to detect and respond to changes in the market as it naturally exists. If a firm's resources, processes and values are focused around a vertical industry segment classification, for example, it will not have the resources, processes and values it needs to quickly detect and react to market changes that do not fit its market perspective or cultural framework. This is often the cause of missed opportunity and lost market share. E-trade recognized that a certain segment of customers valued day-trade outcomes - a recognition that Merrill Lynch and others failed to make. Obviously, the day-trade segment existed before E-Trade, but it went undetected, as companies had adopted a perspective that was focused on traditional market classifications. This perspective prevented Merrill Lynch and others from detecting a new opportunity and reacting appropriately.

Companies would benefit from adopting a segmentation scheme that consists of groups of customers with common outcomes. Do such segments exist? Yes they do, but they are rarely uncovered and targeted because the means for discovery are not obvious. It is, however, the company's responsibility to discover these segments, as they exist. Markets are naturally segmented into groups of customers that value the same outcomes - the challenge is to discover that natural order of segmentation. The benefits of making such a discovery are far-reaching.

The natural order of segmentation enables a firm to look at its market in a new light and quickly discover a world of new markets and new market opportunities - a world that others cannot see until it is created. The effects are deep rooted as it infuses a company with newfound intelligence, agility and speed. Organizing a company's resources, skills and values around that natural order brings alignment and focus to the organization. Such a perspective enables a firm to see markets that were previously obscure. It builds a culture that will not succumb to changes in the market - in fact it will be the first to detect them, enabling the firm to proactively lead disruption.

Many companies have built their cultures around a less than optimal market perspective. They are often content to use predefined or artificial classifications of the market as the foundation for their actions because they are unaware of the alternatives or consequences. Unfortunately, this common practice often clouds a company's vision and stagnates its culture. With an outcome- based perspective, a firm can uncover its markets' natural order of segmentation. It can then use this valuable insight to ensure its culture is aligned with its customer's outcomes.

1 - Clayton Christensen, Meeting the Challenge of Disruptive Change, Harvard Business Review, March 2000