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A matter of definition

Updated Monday 9th February 2009

Dr Brian Smith looks at what a market is and why it matters.

Amid all the gloomy stories of lay-offs and losses, it’s hard to find any positive news. Some stories stand out not because they are good or bad, but because they are counter-intuitive, not what you would expect in the current conditions. For example, Harley Davidson has just received a cash injection from Warren Buffet, by many counts the world’s richest man, often known as the “Sage of Omaha”. Now Buffet didn’t get his nickname or his wealth from throwing money at lost causes and one might expect gas-guzzling Harleys to suffer the same fates as SUVs and other big cars, so what’s going on here? And how does management theory throw light on the situation?

Harley Davidson [image by Eduardo Mueses, some rights reserved] Creative commons image Icon by Eduardo Mueses, some rights reserved under Creative-Commons license

Harley Davidson

It turns out that the answer lies in how we choose to define markets. In common parlance, we might talk about the motorbike market, or the holiday market or whatever but this, it turns out, is a handy but misleading shorthand. In a seminal paper almost 50 years ago, Ted Levitt pointed to the fact that we confuse markets with products. Motorbikes and holidays are products by his definition. Markets, on the other hand, are groups of people trying to satisfy a need. Motorbikes are a way of satisfying the transport market, for example, and holidays are way of meeting the relaxation market’s needs.

When I first read this, my healthy Geordie scepticism crept in and I saw it as academic semantics. It wasn’t until years later, when I ran a marketing department, that it dawned on me how useful Levitt’s ideas were, how needs-based definitions of markets help us to explain the competition and why some firms succeed and others don’t. For example, I once advised a large regional development agency on how to grow the embryonic science park they had next to their new University. Situated in the affluent South-East of England, they struggled against heavily subsidised competitors in Eastern Europe and even Northern England. They couldn’t uproot and move to some deprived, de-industrialising region, so what could they do?

The answer lay in market definition. Their rivals were selling space and labour but my client couldn’t compete in either of those markets. But it did have a great University, several world leading research centres and, as a result, the highest concentration of PhDs (in a certain field) in the world. They weren’t in the labour or space market, they were in the knowledge market. This insight made a huge difference to which firms they targeted, how they designed their offer and who they competed against. I’m proud to say that they are now thriving.

It’s market definition that helps explain why Buffet invested in Harley Davidson. They’re not in the ailing motorcycle market, they’re in the “big boys’ toys” market which, whilst not immune to the credit crunch, has much better long term prospects than thirsty bikes. And market definition can have big implications for most other firms too. For example, the market for video recording is actually about “enabling viewing management”, hence the impact of Sky + and other on-demand services. In almost every market, defining the market as customers with needs, not products to be sold, helps firms to understand what they have to do.

Don’t take my word for it; try it for the organisation you work for. What market is it in, if you think of customer needs rather than products? How does that definition help explain what’s happening in the market and who is competing with you? If you’re clever about it, market definition might just help you see your way out of the credit crunch.

Find out more

‘Marketing Myopia’ by Ted Levitt

published in Harvard Business Review, 38, 45-56

Marketing in practice


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