Defining Your Business Using
Product-Customer Matrices
A n t h o n y E. Boardman and A i d a n R. Vining
The Value of Product-Customer
Matrices
A key strategic issue for each business unit of a firm
concerns which p r o d u c t - c u s t o m e r segments to compete in and how to compete in each specific p r o d u c t customer segment. Many authors suggest that, as a
preliminary step to addressing these questions, the
manager or strategic analyst should develop a 'product-customer' matrix or 'product-market' matrix. 1'2
But the advice usually ends there. In fact, our experience in consulting and teaching Executive MBA students suggests that few managers and analysts know
how to construct and use p r o d u c t - c u s t o m e r matrices
effectively; thus, PCMs are under-utilized. Yet, produ c t - c u s t o m e r matrices are a crucial 'building block'
for a wide variety of descriptive, analytical, and strategic purposes.
The immediate value of a p r o d u c t - c u s t o m e r matrix
(PCM) is that it provides an initial 'snapshot' of both
the company's products and customers and the connection between the two at a given time. Through a
series of matrices, a manager can obtain more information about what the company's products actually
are; who are the company's customers; which produ c t - c u s t o m e r segments the company is currently in;
w h i c h ones it is not in; the business(es) the company
is in, that is, the scope of each business defined in
terms of industry, market, or core competencies; the
competitors within each product-customer segment;
which segments are currently important in terms of
sales or profitability; which ones are growing or
declining; the nature and level of competitiveness in
each segment; how firms compete and key success
factors (KSF) in each segment; the strategic groups in
the industry, and the basis of competition within each
strategic group; the segments the company might exit
~
Pergamon
0024-6301(95)00064-X
or enter-- either new products for existing customers,
or new customers for existing products, or new products for new customers. Also, the matrices alert managers to the possibility that their company can pursue
different competitive strategies in different p r o d u c t customer segments.
These purposes can be achieved in five steps: 1.
construct the basic, firm-specific product-customer
matrix for each business unit; 2. develop a broader,
'Business' (or 'Industry') matrix; 3 3. map segmentspecific key success factors (possibly derived from
industry analysis) onto the Business matrix; 4. use the
Business matrix to construct a strategic group map; 5.
use the matrices to formulate a positioning strategy
Long Range Planning, Vol. 29, No. 1, pp. 38 to 48, 1996
Copyright © 1996 Elsevier Science Ltd
Printed in Great Britain. All rights reserved
0024-6301/96 $15.00+0.00
and a segment-specific competitive strategy. This article describes these five steps in a practical way, presenting examples. The first four steps for developing
and utilizing the matrices are illustrated in Figure 1.
This figure also summarizes some of the guidelines
w h i c h are discussed later.
P r o d u c t - c u s t o m e r matrices are most useful in getting a strategic analysis started. But they can also be
applied throughout a strategic analysis. 4 For example,
they can describe the firm's corporate strategy and
can focus the discussion of competitive level strategies; they are useful for assessing performance in
specific products and customer groups; and they are
valuable for both generating strategic alternatives and
for identifying potential p r o d u c t - c u s t o m e r segments
to enter.
Step 1: The Basic Matrix
A p r o d u c t - c u s t o m e r matrix is a two-dimensional
array with products (or groups of products) on one
axis and customers (or groups of customers) on the
other axis. This results in a matrix. The basic purpose
of this matrix is to force managers to identify the
firm's products, its customers and the explicit linkages between the two, something they might otherwise not do. Although this basic descriptive purpose
may seem obvious, the empirical evidence suggests,
to quote Shakespeare, that it is 'more honor'd in the
breach, than in the observance'. Indeed, David Reid,
for example, found among a survey of 94 Scottish
firms that '[1]ess than half of the companies (46 per
cent) actually made linkages between their products
and the markets [customer groups] in which they have
a presence'. 5
In practice, w h e n constructing a matrix, it is usually
easier to start on the pr oduc t axis, and to differentiate
as much as possible among products. To begin, one
could simply list each product. This is impractical
for companies, such as 3M, which produce tens of
thousands of products. For each business unit of such
companies, products should be categorized into a
manageable number of relatively homogeneous
groups.
Surprisingly, many corporations cannot clearly
articulate what are their products. 6 This sometimes
arises w h e n companies begin to sell components of
existing products in an ad hoc manner without realizing that the components themselves have become
products. Service firms, in particular, are often
unclear about what 'products' they offer to customers
because of this problem. The key guideline here is: a
product is anything that the firm sells separately, i.e.
unbundled. Sometimes service firms with highly differentiated, idiosyncratic products may be unable to
recall all of the products they have sold in the past
and may offer in the future. 7 A problem for retail
companies is that they tend to confuse their suppliers'
products with their own products.
Customers should also be categorized into relatively homogeneous groups. While this advice is frequently given, considerable evidence suggests that
companies under-segment customers. 8 It is often
desirable to segment customers simultaneously on the
basis of multiple variables, such as geographic region
and income. 9 For representational simplicity, we
need to put both region and income on the same axis.l°
For example, if customers are differentiated according to both income (with 3 groups) and geography
(with 2 groups), one can categorize customers in one
of the following 6 ways: high i n c o m e - - N Y city; medium i n c o m e - - N Y city; low income--NY city; high
income--rest of NY state; m e d i u m income--rest of
NY state; low income--rest of NY state. For other
examples of matrices with many variables describing
the customers, see the customer axis of Tables 1, 2, 4
and 5. The use of m a n y customer segment variables
typically results in a matrix with e m p t y "cells' which
is useful in several respects.
Some firms do not update their customer segmentation frequently enough. They tend to continue
to segment on criteria that are appropriate for old
products, but not for their n e w products. One w a y to
counter this tendency is to prepare many matrices
with customers segmented differently in each matrix.
The use of many matrices to segment customers
emphasizes that certain customer variables may be
more appropriate for some products than for others.
In practice, deciding who are the customers is not
always easy. Some firms must distinguish between
final consumers and professional advisors w h o have
the p o w e r to purchase goods or services on behalf of
final consumers. This may be institutionalized, as is
the case of doctors prescribing pharmaceuticals for
sick patients. Patients consume pharmaceuticals, but
their views usually have little influence on doctors'
drug selections. Even so, the characteristics of patients obviously matters, e.g. what diseases they have.
Therefore, patients should be treated as customers in
combination with, or in addition to, their professional
advisors.
Defining customers for non-profit organizations and
public organizations also presents special problems
as the consumer (the recipient of the primary service)
either does not pay for the product or does not pay
enough to cover the average cost. For example, the
revenue from ticket sales for a s y m p h o n y orchestra is
usually insufficient to cover the costs. The difference
is met by 'sponsors'. Sponsors are not the targeted
recipients of the organization's primary products or
services. However, if they provide much (or all) of the
revenue it is very useful to treat them as a type of
customer. 11 Thus, both consumers and sponsors
should be treated as customers.
N o w consider the cell entries of the matrix. Each
Long Range Planning Vol. 29
February 1996
Guideline 3
Your suppliers' products
are not your products
(although in retailling act
as if they are); your
buyers' products are not
your products
Guideline 2
Service/products are
any activity you sell
(or would sell)
unbundled
Guideline 1
Develop firm specific
product-customer matrix
for each business unit
Governments and
Not-For-Profits need
both sponsor 'customers'
and client customers
I
I
I
I
Develop 'Business'
product-customer matrices for
each business unit based on
industry, market and/or
core competency
Data in each cell is
$ sales, unit volume,
margins, profitability or
competitive advantage, etc.
Use multiple variables
if appropriate
Industry usually
defined by supply
(production)
commonalities
or SIC codes
Market usually defined by
demand (customer)
commonalities
I
I
Include information
about competitors
Expand 'basic'
product-customer matrix
if scope of 'business'
is broader than firm
Core competencies based
on complementary functional
activities especially product
and process technology, and
their coordination
Strategic group map based
on industry
product-customer
clusters
O
Analyse competitive forces
and determine key success
factors (A,B,C..)
in each segment
Customers
Products
Residential Concrete Highrise
Office Concrete Highrise
Concrete Lowrise
Concrete Tilt-up (Warehouse, etc.)
Structural Steel Highrise
Structural Steel Lowrise
Woodframe Residential complex
Woodframe Iowrise
Woodframe single residence
Retrofit: All materials/uses
Total
cell may simply indicate whether or not the company
competes in that segment or it may contain information about, for example, company sales, market
share, margins, profitability or competitors, depending on the purpose. A different version of the basic
matrix can be developed for each purpose. Accordingly, the cells of different versions might contain
p r o d u c t - c u s t o m e r specific information on one or
more of the following:
O The presence or absence of sales in this segment,
indicated by the name of the firm, or the name of
the firm's products.
O Unit sales.
O Dollar value of sales (or assets).
O The percentage of dollar sales in each segment to
total company sales.
O Market share: dollar sales in each segment as a
percentage of industry sales in that segment.
O Trend in sales (by unit or dollar value).
Cl Gross margins or profitability.
[3 Whether or not the company has legal m o n o p o l y
(relevant for regulated utilities and not-forprofits).
O Typical type of contract form (e.g. turnkey versus
other).
O Names of dominant or important customers.
It is sometimes useful to provide as m u c h augmenting detail as possible. One can, for example,
include pie charts where the size of the circle represents sales and the pie slices represent current market share or gross margins as a percentage of sales.
Table 1 presents a p r o d u c t - c u s t o m e r matrix for a
Intermediate
Customer
Final Consumer
Private
Developer
Public/
Institutional
Commercial/
Industrial
$4.3
$12
$1.5
$3.2
$24
$3.2
$10
$12
$7
$24
$0.4
$9
$5
$0.9
$7.5
$39.2
$1.5
$0.4
$26
$41
$0.9
$0.4
$3.2
$43.9
Total
$15
$73.2
$4.1
$22.1
$0.4
$3.2
$19.1
$139.2
regional construction company, where intermediate
customers (who 'sell on' to final consumers) are distinguished from final customers (who consume the
products). The cells contain annual product-customer segment sales (in millions of dollars), with segments larger than $5 million bolded. This matrix
highlights the fact that this construction company
receives most of its revenues from public/
institutional customers. Its most important buildings
are structural steel highrise, structural steel lowrise
and office concrete highrise.
A simple version of this PCM can just indicate
whether or not the firm competes in a segment. A
more complex version could include sales growth,
margins, or profitability for each segment. Although
firms generally know whether a product is profitable
or not in aggregate, they may not necessarily know
whether a product-customer segment is more profitable than others, or whether some customer groups
are currently unprofitable and are, in fact, being crosssubsidized by other customers. Analyzing margins
or profitability at the segment level forces firms to
examine such issues. Advanced management
accounting systems can identify profitability at this
level of disaggregation.
Table 2 illustrates a PCM for a company providing
computer software and related consulting services.
Customers are segmented by their industry. Cells contain the names of major customers, i.e. clients who
are expected to be billed more than $200,000 in the
current year. Potential customers with w h o m the
company is currently negotiating contracts are indicated by a 'p'. This company has two products for
which it currently has no customer at all. In service
industries, in particular, it is often useful to include
potential products on the product axis because there
is a high degree of h u m a n capital substitutability (the
Long Range Planning Vol. 29
February 1996
Customers
Public Sector
Private Sector
Government
Department
Government
Utilities
Professional
Firms
Financial
Institutions
Strategic MIS planning
Audit and Control
SDE; SDH
S&G; S & W
Western Savings Pigment Paper
Computer Programming
Project Management
SDE
X-Gas
X-Gas; YElectrical
Y-Electrical
X-Gas; YElectrical
Data Base Administration
Training Programs
Systems Configuration and
Installation
Business Systems Analysis
SDH
Products
Pigment Paper
(P)
X-Gas (p)
X-Gas
Request for Proposals
Key:
SDE = State Dept. of Education
SDH = State Dept. of Health
(p) =potential customers
Northern Bank
Manufacturing
X-Gas; YElectrical
S&G; S & W
Western Savings
(P)
Northern Bank
S & G = Sue & Grabbit and Partners
S &W= Smith &Western, and Partners
Customers
Products
Building Materials
Lumber
Plywood
Waferboard
Particleboard
Pulp & Paper
Newsprint
Market Pulp
Recycled Products
Container Board
Linerboard
Corrugating Medium
Corrugated Containers
Total
Canada
USA
Japan
7.64
5.02
4.21
0.82
20.93
2.74
3.94
4.13
0.06
1.91
0.28
0.27
12.95
1.29
2.89
0.04
1.50
4.12
2.20
5.34
56.4
21.69
Total
3.44
0.90
36.14
8.72
8.15
0.83
1.85
2.46
2.02
5.49
18.73
9.52
3.16
0.08
1.07
0.37
8.59
13.29
5.23
4.15
5.34
100.00
0.01
key input) among different products. Specific
products can be 'once-off'.
Normally, it is desirable to derive a separate
p r o d u c t - c u s t o m e r matrix for each business unit.
However, it is sometimes also useful to construct a
corporate PCM that 'merges' the firm's basic matrices
across all (or a sub-group) of its business units. Table
3 presents a corporate PCM for an integrated forest
products company with three business units: building
materials, pulp and paper, and container board. The
cells contain p r o d u c t - c u s t o m e r segment sales as a
Defining Your Business Using Product-Customer Matrices
UK
percentage of total corporate sales. Segments with
more than 10 per cent of total sales are in bold type.
The advantage of a corporate PCM is that it provides
a broad overview of all major corporate activities and
a summary of the relative importance of each product-customer segment and of each business unit.
However, one should rarely use only a corporate PCM.
Corporate aggregation tends to obscure the fact that
different businesses generally have different bases for
competitive strategy. For example, Walt Disney Corporation is in at least four quite different business
Customers
Environmental
Protection
Products
Bulk Oxygen
Oxygen in
Cylinders
On-site Oxygen
Bulk Nitrogen
Specialty Gases
Fuel Gases
Carbon Dioxide
& Dry Ice
Welding Products
Pulp &
Paper
Chemical/
Petrochemical
B,D
A,B,C,D
B,D
B,D
B,C,D
B,C,D
B,C
B,C,D
A,B,D
A,B,D
Refining, Cutting and
Binding Metals
Other Industries
'Heavy'
'Light'
Industries Industries
Medical
Medical
Food
Institutions Home Care Processing
B,D
B,C,D
B,C,D
A,B,C,D
B,C,D
A
B
B,D
B,C,D
B,D
A,B,D
B,C,D
B,C,D
B,C,D
B,C,D
Beverage
B,D
A,B,D
B,C
B,C,D
B
B,C
Key: A = client firm; B,C,D= competitors; B,C,D = companies in the largest product-customer segments
units: movie production and distribution, theme park
operations, land development, and consumer products. Competitors and the basis of competition differ
substantially across these business units. Normally,
then, one has to analyse each business unit separately,
w h i c h is presumed in Figure 1.
Step 2: Constructing a Business
Matrix
After constructing and analyzing a firm-specific produ c t - c u s t o m e r matrix, one should construct a Business
PCM (or Industry PCM) that includes information
about 'competitors'. A crucial aspect of strategy is
knowing who are competitors. Surprisingly, many
firms do not really k n o w w h o are their competitors in
each of their p r o d u c t - c u s t o m e r segments. 12 Firms
that define the set of competitors incorrectly or too
narrowly may be blind-sided by unexpected competition. To avoid this, firms must define their competitors broadly.
The inclusion of competitors almost always
requires expansion of the matrix through the addition
of n e w rows (product categories) and sometimes
through the addition of n e w columns (customer categories). An illustrative Business PCM is presented
in Table 4. Firm A has five product types and sells to
five customer groups; consequently, a firm-specific
matrix for firm A w o u l d contain only the first five
rows and the first five columns of Table 4 (boxed-in).
To obtain the Business matrix, three product groups
and three customer groups should to be added to the
basic matrix.
The Business PCM should be very similar whether
one started with firm A or a close competitor. Indeed,
managers will define competitors more broadly if they
construct industry matrices starting from the basic
firm-specific matrix for each of their major competitors. Of course, the rows and columns might be in
different orders in different Business PCMs, but they
can always be rearranged later.
A firm's definition of its competitors defines what
it thinks its business is, which, in turn, determines
much of its strategy. Of course, an incompletely
defined set of competitors does not stop omitted firms
from competing against it. This emphasizes that a firm
is in the same business as those who compete against
it, not only those it thinks it competes against. Consider the US automobile manufacturers in the 1960s
and early 1970s. Ford, G.M., Chrysler and American
Motors acted as if they competed against only each
other (and a few European manufactures). They did
not consider Japanese car manufacturers as their competitors, although the Japanese did consider the
Americans as their competitors. One potential reason
US producers made this almost fatal mistake is that
they did not put sub-compact cars on the product axis
of their Business PCMs.
One way to ensure that managers define competitors broadlyis to define the business through multiple perspectives. The term 'competitors' usually
refers to firms that are in the same industry, i.e. firms
with similar production technologies. But firms can
also be thought of as 'competing' if they serve the
same market, that is on the basis of customer perceptions of product substitutability. In addition, firms
can be thought of as 'competing' on the basis of core
competencies, even though they do not appear to be
in the same industry or market. Thus, the firm-specific
matrix can be expanded to obtain a Business PCM
that includes competitors based on industry-oriented
Long Range Planning Vol. 29
February 1996
characteristics, market-oriented characteristics, or
core competencies. To really understand who competitors are, and to really know what business the
firm is in, it may be useful to construct all three business PCMs.
Industry Orientation
When managers think about what business the are in,
they tend to think about products and services with
similar production technologies and processes, i.e.
industries such as the 'paint industry', the 'automobile industry', the 'banking industry'. In effect they
focus on close supply substitutes, firms that produce
goods or services with high cross-elasticity of supply.
An industry perspective defines competitors, and
therefore defines the business, as a set of close supply
substitutes. With this way of defining a business, firms
that produce products with a cross-elasticity of supply near zero should be considered as operating in
different businesses.
offer supply substitutes and compete with each other,
even though they are currently not in the same industry or market as traditionally defined. 17
Analysts now recognize that both actual competitors and potential competitors (i.e. potential
entrants) can have important effects on the nature of
competition. 18 A Business PCM based on traditional
industry and market perspectives may not identify
actual or potential competitors that are related via
core competencies, because they would be 'offmatrix'. One purpose of a Business matrix based on
core competencies is to become more aware of potential competitors. This is likely to be particularly
important in service businesses and in rapidly changing environments. 19Also, a Business matrix based on
core competencies may identify potential p r o d u c t customer segments that would not be apparent from
a conventional Business PCM based on industry or
market, again because they would be 'off-matrix'.
Multiple Lenses
Market Orientation
There are obvious dangers in adopting solely an
industry or production orientation. ~3 Customers do
not care about industries per se. When they think
about buying a product they consider how its consumption w o u l d satisfy their needs or wants. In effect,
customers focus on close demand substitutes: goods
or services with a high cross price elasticity of
demand. A market perspective defines competitors,
and therefore the business, as a set of close d e m a n d
substitutes. ~4 With this way of defining a business,
firms that produce products with a cross price elasticity of d e m a n d near zero should be considered as
operating in different businesses.
There is inevitably tension between the production
versus consumption, and industry versus market,
orientations. For example, one could place printers
of academic journals and printers of Readers Digest
in the same industry (because the production technology is similar), but in different markets (because
customers' needs are very different). While paper
wrap and plastic wrap are produced by different
industries, they are sold in the same market. Along
the same lines, John Kay has observed, 'there is a
domestic appliance industry but there is no domestic
appliance market. There is a market for methods of
cleaning clothes but there is no clothes care
industry'. 15 It is useful to use such tensions between
the industry and market definitions to identify abroad
set of competitors.
None of the above ways to define a Business matrix
is ideal. Each perspective can be useful in particular
circumstances. For example, an industry perspective
is particularly useful w h e n there are substantial economies of scope. A core-competency approach is often
useful for R&D-intensive companies. As Figure 1
emphasizes, managers can define Business PCMs in
one or more of the above ways; indeed, it is often
useful to take a multiple matrix perspective. Actual
or potential competitors not identified by one perspective, because they would be 'off-matrix', may be
identified using another perspective.
Constructing a Business matrix for one business
unit might lead to the realization that the business
unit is really in more than one business. Furthermore,
constructing Business PCMs for more than one business unit might lead to the realization that two or
more different business units are, in fact, in the same
business. In these circumstances, it might make sense
to reorganize business units.
Step 3: Linking the Matrix to
Industry Analysis
A key purpose of strategic analysis is to analyse the
competitive forces that drive a business (however
defined) and to determine the KSFs. 2° Managers have
a tendency to conduct such analysis at a fairly high
level of aggregation; specifically, they often conduct it
at the corporate level (even though there are multiple
businesses in the company) or at the business level
Core Competencies
A core competency is something a firm does (even though there are a large number of quite difespecially well. Typically, it involves two or more ferent product-customer segments). When managers
complementary, functional activities, including coor- perform strategic analysis informally, this tendency
dination and integration of other activities or skills. 16 becomes an inevitability. If managers perform the
Firms with similar core competencies can potentially analysis at this aggregated level rather than at the
Defining Your Business Using Product-Customer Matrices
p r o d u c t - c u s t o m e r segment level, it can lead to
dangerous oversimplification of strategic issues.
This tendency to oversimplify has been reinforced
by the strategic literature's (especially Porter's) focus
on generic strategies at the corporate level and the
business level. While Michael Porter has stressed the
importance of p r o d u c t - c u s t o m e r segments in more
recent w o r k , 21 he has not explicitly linked this to his
previous work on generic strategies. Indeed, some
critics have claimed that Porter has been internally
inconsistent on this i s s u e . 22
One w a y to interpret Porter's generic strategies is
as statements about p r o d u c t - c u s t o m e r segment positioning. 23 Firms w h i c h are positioned in segments
corresponding to lower quality products that are
bought by lower income customers tend to pursue a
low cost producer strategy. Gallo Wineries is a classic
example. On the other hand, firms that are positioned
in segments corresponding to high quality products
w h i c h are bought by high income customers tend to
pursue differentiation strategies. Mercedes-Benz is a
classic example of a broad differentiation strategy.
An alternative interpretation of Porter's generic
strategies is that they pertain to each product-customer segment of a business (Porter calls this an
industry). In other words, within the same p r o d u c t customer segment, one firm may pursue a low cost
producer strategy while another firm may pursue a
differentiation strategy. Where products are segmented on the basis of quality or price and customers
are segmented on the basis of wealth or income, this
interpretation is almost impossible. However, it is
possible for different firms to pursue different generic
strategies in the same p r o d u c t - c u s t o m e r segment
where the product and customer dimensions of the
PCM are defined in other ways. Consider, for example,
Table 3 and treat it as if it were a Business matrix and
ignore the cell contents. In the segment for newsprint
products for Canadian customers, MacMillan Bloedel
is the low cost producer, while Abitibi-Price pursues
a differentiation strategy. In general, where the product axis of the PCM is defined so that there are fairly
large quality or price differences within each product
category, and where the customer axis is defined so
that there are fairly large income or wealth differences
within each customer category, then different firms
may pursue different generic strategies within the
same p r o d u c t - c u s t o m e r segment.
Another manifestation of the confusion surrounding the level of aggregation issue is apparent
in the discussion of 'combination' strategies, that is,
strategies that combine elements from some or all of
Porter's generic strategies. 24Given that Porter initially
suggested that his generic strategies were mutually
exclusive within a firm, the question has been raised
as to whether the idea of combination strategies is
intellectually coherent. If analysis is performed at the
p r o d u c t - c u s t o m e r segment level, and KSFs vary
across these segments, it is possible for firms to adopt
a low cost producer strategy in one segment (or group
of segments) and a differentiation strategy in a different segment (or group of segments) or in a different
business. Thus, at the corporate level or business level
of aggregation it appears as though the firm is pursuing a combination strategy, while at the more micro
p r o d u c t - c u s t o m e r segment level it is not.
P r o d u c t - c u s t o m e r matrices provide a method of
clarifying which generic strategy (or generic strategies) the firm is pursuing and they assist in the
identification and sharpening of segment-specific
strategies where appropriate. Key success factors and
the appropriate competitive strategies can be summarized and compared using a PCM. Table 5, for
example, contains a corporate PCM for a environmental consulting and clean-up company which
operates in five related businesses. Cell entries indicate the KSFs in each segment. Analysis suggests the
KSFs in the consulting and testing businesses (audits,
investigation) are reputation and experience (demonstrated track record) or meeting standards requirements, while in the clean-up businesses (regulatory
management and waste treatment) the KSFs are price
and experience. In the waste treatment business having the right machinery and equipment is also necessary. Different customer segments have different KSFs.
Reputation is most important for law firms, property
developers, waste, and transportation companies.
In contrast, for chemical companies, reputation
is not critical; instead, quality of finish and nationality are key. Price is most important for resource
industries (sawmills and mining) where customers
want to meet m i n i m u m threshold standards only.
This analysis supports the use of segment-specific
strategic analysis and the idea that a generic strategy
can be specific to one or to a few product-customer
segments.
Step 4: Using a Business Matrix to
Construct a Strategic Group Map
After constructing a Business matrix, managers can
attempt to map competitors into strategic groups
(firms that compete in similar ways). 25 We emphasize
attempt because it may not be possible to define strategic groups from only a scan of the location of competitors on a Business PCM. Competitors that cluster
in the same part of the matrix quite naturally constitute a strategic group. But competitors that are
widely dispersed throughout the matrix may also
form a strategic group. Information on other competitor characteristics may be required before strategic groups can be defined with confidence.
Essentially, a strategic group is a set or cluster of
firms that compete against each other directly via the
pursuit of similar strategies. While firms compete on
Long Range Planning Vol. 29
February 1996
Customers
Professional
Resource
Industrial
Property
Products
Legal
Developer
Audits
Historic
Regulatory
Operational
RSP
RSQ
RSQ
REP
REP
REP
Investigation
Remedial
Risk Assessment
RSQ
RSQ
REP
REP
RSQI
EIP
PER
EIP
REQ
PRM
Sawmills
Mining
Petroleum Waste
PER
ERP
Chemical
REP
REP
REP
Transportation
RQ
REQ
REQ
QEIN
QERN
EIQ
EQ
EIRP
QEIN
REQ
PEI
EIRP
REQ
EP
EP
QEIN
QEIN
PIENM
PER
EQS
PIEM
PIEM
REP
Remediation
Option Evaluation
& Costing
Remedial Plan
Project Management
Technical Operations
Regulatory Management
Spill Response
Contingency Planning
Waste management
EP
EP
EIP
EQ
PIE
REIQ
Waste Treatment
Testing
Technical operations
PIEM
PIEM
IP
PIEM
PIEM
Key to key successfactors: R = reputation; P = price; E = experience; Q = quality; S = meet defensible standards; I = innovation, creativity;
N = nationality (native); M = machinery.
many dimensions, in practice strategic group maps
are usually defined in terms of only two variables. Of
course, there is nothing magical about 'two' except
that a two dimensional map is easy to construct and
to interpret.
One dimension of a strategic group map is often
price or quality. If the product axis of the Business
PCM is segmented by either of these variables, then
the position of competitors on this axis of a strategic
group map can be obtained immediately. Product line
breadth (i.e. scope)- is frequently used on the other
axis of a strategic group map. This can be measured
easily by counting on the Business PCM the number
of product group categories each competitor is in.
Thus, a strategic group matrix can be constructed
quite easily from a Business matrix.
Once the strategic groups have been identified, they
can be used for a variety of strategic purposes. In
effect, strategic groups o c c u p y a middle ground
b e t w e e n the macro, business level of analysis and
the more micro, p r o d u c t - c u s t o m e r segment level of
analysis. Thus, for example, analysis of evolution and
growth, the structure-performance linkage, patterns
Defining Your Business Using Product-Customer Matrices
of rivalry, contestability, and barriers to entry and
exit can be performed at the strategic group level.
Step 5: Using Matrices for Strategic
Purposes
Authors have suggested previously that firm-specific
p r o d u c t - c u s t o m e r matrices can be used for formulating alternative growth directions: n e w products
for existing customers (product line expansion), or
n e w customers for existing products, or n e w products
for n e w customers (diversification), or growth in
existing p r o d u c t - c u s t o m e r segments. 26 But, by also
constructing Business PCMs and linking them to
industry analysis, key success factors and strategic
group analysis, managers are much more likely to
make more informed decisions about which p r o d u c t customer segments to compete in. Also, after performing the steps we outlined above, managers may
make more informed decisions about h o w to compete
in each segment. Box A illustrates briefly h o w an
insulation installation company followed the steps
Box A
U s i n g PCMs f o r D i v e r s i f i c a t i o n :
An Example from InsulPro Industries
InsulPro Industries is currently the largest insulation contractor in Canada and among the top ten in North America.
In 1994, InsulPro performed a strategic analysis to review their overall strategic position and to assess new opportunities. As a part of the analysis, they developed a series of PCMs. Products were divided into five main categories:
fibreglass batts, loose fill, spray on, blow in blanket and rigid insulation. InsulPro also developed PCMs where
products were categorized on the basis of service quality. Customers were segmented into intermediate customers
(residential builders or commercial builders) and final customers (individual homeowners-'retrofit' customers); they
were also segmented on the basis of geographic region.
The analysis included an examination for each product-customer segment of company sales, margins, key success
factors and assessment of current competitors and potential competitors. It also included a strategic group map. As
a result of the analysis, InsulPro decided to expand and to allocate more resources to Retrofit customers (focussing
initially on those in older, Vancouver homes), where there was a large potential market, margins were higher,
competition was more fragmented, InsulPro possessed the requisite core competencies, and the work could be
performed in the winter (complementing work for residential builders which peaked in the summer). They would
pursue similar competitive strategies to those they currently employed for new residential customers. At the same
time, they decided not to enter the commercial building market where they did not possess the core competencies
to compete effectively.
outlined here and used the analysis to expand its
scope.
Conclusion
P r o d u c t - c u s t o m e r matrices force managers to be segment specific in their discussions about a variety of
strategic issues including competitors, competitive
forces, key success factors, and competitive strategy.
Constructing the matrices is only a relatively small
part of a comprehensive strategic analysis, but it can
be vital. The importance of these matrices stems from
the fact that they can be used early in an analysis to
get it started and to clarify some key strategic issues.
Although it is easy to think of the process of producing matrices as primarily a matter of data gathering and description, it may be a key driver of the
rest of the analysis. Inevitably, constructing useful
matrices means going considerably b e y o n d 'description'. If done well it becomes the 'mold' into which
the rest of the analysis tends to flow.
References
1. See, for example, D.F. Abell, Defining the Business: The Starting Point of Strategic
Planning, Prentice-Hall Inc., Englewood Cliffs (1980); D.A. Aaker, Developing
Business Strategies (2nd edn), especially pp. 39-50, John Wiley and Sons, New York
(1988); R. Brown, Making the product portfolio a basis for action, Long Range Planning 24 (1),
102-110 (1991); and R. McTavish, One more time: what business are you in? Long Range
Planning28 (2), 49-60 (1995). Also see C.J. Clarke and K. Brennan, Building synergy in the
diversified business, Long Range Planning 23 (2), 9-16 (1990).
2. We use the term 'product-customer' matrix and avoid the term 'product-market' matrix.
Companies do not serve markets; they serve customers in markets. A market is where buyers
and sellers interact, not a synonym for buyers or customers. Thus, to clarify our
terminology, we use a 'product-customer' matrix to segment a product market.
3. The term 'business' is almost synonymous with the term 'industry'. However, we prefer
the term 'Business' because it is broader; it includes firms with products similar in customer
substitutability or firms with similar core competencies, in addition to including firms
with similar production technologies. We discuss this issue in depth later in the
section on constructing a Business PCM.
4. Most frameworks for strategy formulation contain an analysis of the current situation
(analysis of the external environment, description of the organization's current strategies, and
the organization's internal characteristics and current performance), an assessment of
the current situation or strategic gap analysis, and generation and evaluation of
alternatives leading to a strategic plan; see, for example, Figure 1 in N.B. Zabriskie and
A.B. Huellmantel, Marketing research as a strategic tool, Long Range Planning 27
(1), 107-118 (1994) at p. 109 or Figure 2-5 in A.A. Thompson, Jr. and A.J. Strickland, III,
Crafting and Implementing Strategy: Text and Readings, (6th edition), Irwin, Chicago (1995)
at p. 47.
Long Range Planning Vol. 29
February 1996
5. D.M. Reid, Where planning fails in practice, Long Range Planning23 (2), 85-93 (1990), at
p. 90.
6. See, for example, J. Hillidge, Planning for growth in a small company, Long Range
Planning 2:3 (3), 76-81 (1990).
7. V.A. Zeithaml, A. Parasuraman and L.L. Berry, Delivery Quality Service: Balancing
Customer Perceptions and Expectations, The Free Press, New York (1990).
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74-84 (1989).
9. J. Lidstone, Market segmentation for pharmaceuticals, Long Range Planning 22 (2), 5462 (1989).
10. Of course, one could construct a three-dimensional PCM with one product axis and two
customer axes, but such matrices are hard to 'read' and are usually more trouble than they
are worth.
11. Of course, sponsors contribute to the organization in exchange for some benefit, such as
'networking'. The non-profit organization's contribution to this beneficial product or service
should be treated as a type of product on the product axis of a PCM.
12. For a case study on how Sun Microsystems recognized the need to engage in a more
formal strategic planning process and to map competitors more effectively see S. Kukalis and
B. Kanazawa, Sun Microsystems reorganizes for growth, Long Range Planning 26 (5), 4248 (1993).
13. T. Levitt, Marketing myopia, Harvard Business Review38 (4), 45-56 (1960).
14. G. Stigler, Monopolistic Competition Revisited, reprinted in The Organization of Industry,
Richard D. Irwin, Homewood (1968).
15. J.A. Kay, Identifying the strategic market, Business Strategy Review I (1), 2-24 (1990), at
p. 12.
16. C.K. Prahalad, and G. Hamel, The core competence of the corporation, Harvard Business
Review, 79-87 (1990).
17. See, for example, P. Very, Success in diversification: building on core competencies, Long
Range Planning 26 (5), 80-92 (1993).
18. Potential entrants make the market 'contestable'; see R.J. Gilbert, The role of potential
competition in industrial organization, Journal of Economic Perspectives 3 (3), 107127 (1989); and, for an interesting practical discussion, F.M. Fisher, J.J. McGowan and
J.E. Greenwood, Folded, Spindled, and Mutilated: Economic Analysis and U.S. v. IBM, MIT
Press, Cambridge, Mass (1983).
19. See, for example, J.B. Quinn, T.L. Dooley and P.C. Pacquette, Technology in services:
rethinking strategic focus, Sloan Management Review31 (2), 79-87 (1990) and M.H.
Meyer and J.M. Utterback, The product family and the dynamics of core capability, Sloan
Management Review34 (3), 29-47 (1993).
20. M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors,
The Free Press, New York (1980).
21. See, M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance,
especially pp. 234-236, The Free Press, New York (1985).
22. A. Miller and G.G. Dess, Assessing Porter's (1980) model in terms of its generalizeability,
accu racy and simplicity, Journal of Management Studies 30 (4), 553-585 (1993).
23. See Porter (1980), op. cit., especially pp. 34-46.
24. For evidence that firms do engage in combination strategies see L. Kim and Y. Lira,
Environment, generic strategies, and performance in a rapidly developing country: a
taxonomic approach, Academy of Management Journal 31 (4), 802-827 (1988); and P.
Wright, M. Kroll, H. Tu and M. Helms, Generic strategies and business performance: an
empirical study of the screw machine products industry, British Journal of Management
2, 1-9 (1991).
25. See J. McGee and H. Thomas, Strategic groups: theory, research and taxonomy, Strategic
Management Journal 7 (2),141-160 (1986); K.J. Hatten and M.L. Hatten, Strategic
groups, asymmetrical mobility barriers and contestability, Strategic Management Journal
8 (4), 329-342 (1987); D.F. Amel and S.A. Rhoades, Strategic Groups in Banking, Review of
Economics and Statistics 70 (4), 685-689 (1988); P. Nayyar, Strategic Groups: A comment,
Strategic Management Journal 10, 101-103 (1989); J.B. Barney and R.E. Hoskisson,
Strategic groups: untested assertions and research proposals, Managerial and Decision
Economics 11,187-198 (1990).
26. H.I. Ansoff, Strategies for diversification, Harvard Business Review, September-October,
113-124 (1957).
Defining Your Business Using Product-Customer Matrices