Strategic Management: Formulation and Implementation

How To Segment Industrial Markets

Many industrial firms do not distinguish between industry and market segments within an industry.

An industry is a wide group of manufactures producing a wide range of products. An industrial market segment is a much more distinct group of customers that similar requirements. With the distinction made between and industry and a market, manufacturer can better identify target segments.

There are a number of essential and more advanced approaches to segmenting industrial markets: segment by OEM and aftermarket, segment by SICs (standard industrial classification), by customer use (also called application), by common buying factors, and by buyer size.

Segment by OEM and Aftermarkets. The OEM sale is usually a direct sale and if there is an aftermarket for the product, it often is served through distributors. The aftermarket or end user is sometimes called the maintenance, repair, and overhaul market (MRO). There are three industrial or high-tech product categories that have some distinct properties and uses that determine whether an OEM and aftermarket segments can be carved out:

Components
These are parts or items that are used to build and repair machinery and equipment (e.g., switches, integrated circuits, machine tool parts, connectors, and pistons).
Systems and equipment
These are end products used by those in industrial companies (e.g., machine tools, bulldozers, computers, laboratory instruments, and lasers).
Materials
These are consumed in the user's production process (e.g., chemicals, coolants, metals, herbicides, and adhesives).

Segment by SICs. The industrial producer should further segment his OEM and/or aftermarket customers by SIC. The U.S. Government Office of Management and Budget publishes a standard industrial classification manual that categorize all business firms by a the type of product or services they manufacturer or sell. The four-digit SIC system, coupled with the County Business Patterns, helps the industrial producer identify and assess the size and location of more specific market segments.