1、Gisele Garraway,Susan Caraviello, Paul DiPaola, and Todd Senturia,bc,Business Definition,March 1998,Author:,Contributors:,Todd Senturia,Reviewer:,Copyright 1998 Bain & Company, Inc.,2,CU7121997ECA,Business Definition,Agenda,The business definition concept Applications Business definition steps Clien
2、t examples Bunker Hill Door Systems JJR Industrial Coatings Key takeaways,3,CU7121997ECA,Business Definition,Agenda,The business definition concept Applications Business definition steps Client examples Bunker Hill Door Systems JJR Industrial Coatings Key takeaways,4,CU7121997ECA,Business Definition
3、,What is Business Definition?,Indicates whether two business segments should be operated as one business or as separate businesses Helps identify what drives superior profitability in an industry Serves as the foundation for strategic analysis and sound decision making,Business definition delineates
4、 the economic boundaries within which companies should compete.,5,CU7121997ECA,Business Definition,One Business vs. Separate Businesses,Same customers Same cost structure Same competitors,Different customers Different cost structure Different competitors,If two business segments have the same custom
5、ers, the same cost structure, and the same competitors, they are one business. If they are different on all of these dimensions, they are separate businesses.,One business,Separate businesses,Compete in both segments to take advantage of synergies,Do not compete in both segments,6,CU7121997ECA,Busin
6、ess Definition,Why Bain Uses Business Definition,Strategic insights,Tactical insights with strategic importance,Should we buy or sell the restaurant business? Should we expand into China? Are we vulnerable to Japanese competitors? Should we vertically integrate into growing vegetables?,Should we dro
7、p this product line? Should we cross-train our salesforce? How should we group purchases for VMRs (value managed relationships? How should we configure our manufacturing plants?,The correct business definition can lead to case-cracking insights.,7,CU7121997ECA,Business Definition,Consequences of Inc
8、orrect Business Definition,Companies that define their businesses incorrectly make poor strategic decisions.,Costs,Competitors,Incur unnecessary costs Forgo opportunities to capture synergies Do not transfer experience Underinvest in important R&D initiatives,Overlook relevant competitive threats Mi
9、scalculate “market share” Set inappropriate performance targets Overlook relevant capacity changes Misjudge true cost position,Customers,Neglect profitable customer segments Over-invest in unprofitable customers Forgo opportunities to capture synergies Misjudge relevant market trends Overlook releva
10、nt geographies,8,CU7121997ECA,Examples of Incorrect Business Definition,Business Definition,Some respected companies have missed profit opportunities or suffered unnecessary losses because they did not define their businesses correctly.,American Express,Allegis,Saatchi & Saatchi,Charge cards and cre
11、dit cards are separate,Charge cards and credit cards are one business - plastic money,Charge card division lost money due to poor cost position and misguided marketing efforts,Airlines, hotels and rental cars are one business - caring for travelers worldwide,Airlines, rental cars and hotels are thre
12、e separate businesses,The combination provided little value to customers: Allegis was split up,Advertising and consulting are one business -service to global business executives,Advertising and consulting are separate businesses,Company suffered severe losses due to inability to transfer experience,
13、 lack of focus, and tainted image,Company,A better business definition,Consequences of incorrect business definition,How management defined the business,9,CU7121997ECA,Business Definition,Analytic Consequences of Incorrect Business Definition (p.1),Business definition must be the starting point of a
14、ny Bain case because defining a business incorrectly can adversely affect strategic analysis and decision making.,If we define a business incorrectly.,Incorrect Business Definition,Correct Business Definition,The underlying normative band will not emerge,A business may look deceptively attractive or
15、 unattractive,ROS/RMS,Growth/Share,10,CU7121997ECA,Business Definition,Analytic Consequences of Incorrect Business Definition (p.2),Defining a business incorrectly can lead to problems in conducting E-Curve and RCP analysis.,If we define a business incorrectly.,Incorrect Business Definition,Correct
16、Business Definition,We may ignore relevant experience,We may benchmark the wrong competitors,Experience Curve,RCP,11,CU7121997ECA,Business Definition,Complexity of Business Definition,A simple catalog of logical arguments is not robust enough to delineate the competitive battlefields for our clients
17、.,Is it one business or not?,One Business,Separate Businesses,Touring quality microphones and speakers,Madonna and rappers use both Similar distribution channels,Different manufacturers (Audio Technica vs. Bose) Little manufacturing process knowledge is transferable Limited direct cost sharing,Cross
18、 pens and BIC pens,Beer and distilled spirits,Both used for same function, writing Similar raw materials Some manufacturing steps shared,Brand name sharing opportunities Same distribution channels Sold by same salesforce,High perceptual barriers to customers Limited customer base overlap,Limited ben
19、efits of shared R&D Key manufacturing processes are different Different raw materials,12,CU7121997ECA,Business Definition,Business Definition Matrix,Bain uses the business definition matrix to delineate economic boundaries. Cost sharing and customer sharing are the primary determinants of defining a
20、 business.,High,Cost Sharing,Low,Low,High,Customer Sharing,One business (charge cards and credit cards),One business with potential for differentiation or niche position (Cross pens and BIC pens),Separate businesses with potential for cost leadership (oil and refinery by-products),Separate businesse
21、s (beer and distilled spirits),Separate businesses with potential for bundling (touring quality microphones and speakers),One business with potential for substitution (milk cartons and glass milk bottles),13,CU7121997ECA,Business Definition,Dynamics of Business Definition,Business definition is dyna
22、mic. Temporary barriers, such as price premiums and technology advantages, will erode unless they are consistently reinforced.,Business Definition,Technology,Government regulation,Input prices,Product innovation,Channel economics,Customer needs,14,CU7121997ECA,Business Definition,Local vs. Regional
23、vs. National vs. Global Businesses,Global scale,National scale,Regional scale,Local scale,Professional online financial data,Overnight package delivery Banking - lending,Hospital textile laundering Banking - deposit gathering,Residential laundromats Barber shops,Clients often cite the need for natio
24、nal or global participation. However, in many businesses, local or regional scale drives profitability.,Driver of Profitability,Example,15,CU7121997ECA,Business Definition,Examples of Changes in Business Definition,There are several examples of companies that have gained significant competitive adva
25、ntage by changing the definition of a business.,Federal Express revolutionized the package delivery business by introducing an overnight delivery service Charles Schwab dramatically altered the mutual funds business by introducing a no-fee service whereby customers could purchase many companies mutu
26、al funds through Schwab Calyx & Corolla transformed the flower distribution business by using information technology to cut out traditional distributors and ship flowers directly from growers to customers Starbucks redefined the coffee shop business from providing coffee to providing a social experi
27、ence The Body Shop revolutionized the cosmetics business by merging the ideas of beauty, health, and environmental consciousness Staples, by adapting the business model of a different industry (grocery stores) and taking advantage of economies of scale in purchasing, changed the office supplies busi
28、ness from a local one to a national one,16,CU7121997ECA,Business Definition,Agenda,The business definition concept Applications Business definition steps Client examples Bunker Hill Door Systems JJR Industrial Coatings Key takeaways,17,CU7121997ECA,Business Definition,Applications,Financial Services
29、,Electrical and Electronics,A large residential realty company was considering entering the commercial real estate market and wanted to evaluate the attractiveness of the market,An electronics company had the opportunity to outsource its electronics testing service but was unsure if test outsourcing
30、 would define a viable new business,Bain has used business definition in hundreds of cases and dozens of industries. Some examples of our work are:,Bain developed a business definition for commercial real estate services which identified it as a separate business from residential real estate, requir
31、ing vastly different competencies and economics. Client accepted recommendation to stay out of commercial business,Bain determined that the test outsourcing business was not a single business with high cost and customer sharing, but rather six separate business which could be bundled, and defined th
32、e few specific entry strategies which might be successful. Client ultimately agreed that critical entry barriers were too high,Situation:,Result:,Textiles,A large U.K. textile launderer with 23% ROS enters the U.S. market and earns only 5%,Bain found that the business definition is not national text
33、ile laundering - there are three separate businesses: healthcare, industrial and linen. All three are regional, not national. Client sold two businesses in New York and made two acquisitions in the Southeast,18,CU7121997ECA,Business Definition,Agenda,The business definition concept Applications Busi
34、ness definition steps Client examples Bunker Hill Door Systems JJR Industrial Coatings Key takeaways,19,CU7121997ECA,Business Definition,Business Definition Steps,To appropriately define a business, Bain uses an iterative approach that is both qualitative and quantitative and relies heavily upon dat
35、a external to the client. The process starts with an hypothesis that is tested along three dimensions.,Degree of emphasis,Less important,More important,Is there substantial cost sharing?,Is there substantial customer sharing?,Does business definition pass the competitor acid tests?,Cost sharing,Cust
36、omer sharing,Competitor acid tests,20,CU7121997ECA,Business Definition,Business Definition Steps,Degree of emphasis,Is there substantial cost sharing? Is there substantial direct cost sharing? Are there substantial opportunities for experience transfer?,Less important,More important,Cost sharing,Cus
37、tomer sharing,Competitor acid tests,21,CU7121997ECA,Business Definition,*On a cost basis only, we must also look at customers and competitors to determine whether the businesses are one or separate.,Cost Sharing,An assessment of cost sharing involves examining direct cost sharing and experience tran
38、sfer.,Probably separate businesses,One business*,Separate businesses*,Probably one business,High,Experience transfer,Low,Low,High,Direct cost sharing,22,CU7121997ECA,Business Definition,How Businesses Share Costs,Businesses can share costs in a variety of ways.,Value Chain Steps,How Direct Costs Can
39、 Be Shared,Examples,R&D,Procurement,Manufacturing,Distribution,Sales and Marketing,Administrative Support,Multiple applications of some R&D efforts,Shared raw materials Shared inbound logistics,Similar manufacturing facilities processes,Same distribution channels,Brand name sharing Same sales force,
40、Shared info systems,Tape and Post-it Notes (3M),Gasoline and petrochemicals,Vitreous china toilets and sinks (Kohler),Cigarettes and candy (Philip Morris),Healthy Choice dinners and cereal Soda and orange juice (Coca-Cola),BankBoston NOW accounts and savings accounts,23,CU7121997ECA,Business Definit
41、ion,Experience Transfer,Product A,Product B,Lessons learned from product A can improve manufacture of product B,Processor C,Forge,Grind,Paint,Distributor Y,Customers,Supplier A,Processor D,Forge,Grind,Paint,Distributor Z,Customers,Supplier B,(Raw materials),(Semi-finished product),(Finished product)
42、,Firms can benefit from experience transfer when two products share similar high volume, value-added processes.,24,CU7121997ECA,Business Definition,Business Definition Steps,Degree of emphasis,Less important,More important,Cost sharing,Customer sharing,Competitor acid tests,Is there substantial cust
43、omer sharing?,How great is the degree of functional substitution? How great is the degree of customer base overlap? How high are customers perceptual barriers?,25,CU7121997ECA,Business Definition,Customer Sharing (p.1),Customer sharing analysis includes measuring the customer base overlap and degree
44、 of functional substitution, and, to a lesser extent, looking at perceptual barriers.,Do different products currently or potentially fulfill the same customer usage needs? product utility analysis cross-elasticity analysis,Do the suppliers of the different products share many of the same customers?
45、who makes the purchase decision? who uses the product? what else is purchased with the product?,Functional substitution,Customer base overlap,Perceptual barriers,Do customers perceive significant differences among the products?,26,CU7121997ECA,Business Definition,Customer Sharing (p.2),Customer base
46、 overlap Functional substitution Perceptual barriers,Low Low Low High,High High High Low,Probably separate businesses,Probably one business,Customer sharing,Generally, high customer base overlap, high functional substitution and low perceptual barriers suggest one business.,27,CU7121997ECA,Business
47、Definition,Customer Base Overlap,Customer base overlap can be determined by comparing purchasers or decision makers for the two products.,Common Customer Base Overlap Criteria,Used by same organization or customers Purchased by same individual or group Purchase decision made by same individual or gr
48、oup,Limited customer base overlap,28,CU7121997ECA,Business Definition,Functional Substitution,There are two ways to evaluate whether products are substitutes.,Product utility analysis,Cross-elasticity analysis,Do products offer similar value along non-price attributes (e.g., scissors and knives cut
49、cloth well)? Is product bundled with other products (e.g., razors and blades)?,How much does share change between the two products as relative prices change? If scissor prices go up will customers buy knives as a substitute?,29,CU7121997ECA,Business Definition,Functional Substitution - Product Utili
50、ty,If products offer very similar non-price attributes or functional benefits, they are potential substitutes.,30,CU7121997ECA,Business Definition,Functional Substitution - Cross Elasticity,If a price increase in one product increases the demand for another, the two products are probably substitutes.,
