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1、Gisele GarrawaySusan Caraviello,Paul DiPaola,andTodd Senturia bcBusiness DefinitionMarch 1998Author:Contributors:Todd SenturiaReviewer:Copyright 1998 Bain&Company,Inc.1CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness defi
2、nition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways2CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey ta
3、keaways3CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionWhat is Business Definition?Indicates whether two business segments should be operated as one business or as separate businessesHelps identify what drives superior profitability in an industryServes as the foundation for st
4、rategic analysis and sound decision makingBusiness definition delineates the economic boundaries within which companies should compete.4CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionOne Business vs.Separate Businesses Same customersSame cost structureSame competitorsDifferent
5、customersDifferent cost structureDifferent competitorsIf two business segments have the same customers,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 businessSeparate businessesCompete in both s
6、egments to take advantage of synergiesDo not compete in both segments5CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionWhy Bain Uses Business DefinitionStrategic insightsTactical insights with strategic importanceShould we buy or sell the restaurant business?Should we expand into
7、 China?Are we vulnerable to Japanese competitors?Should we vertically integrate into growing vegetables?Should we drop this product line?Should we cross-train our salesforce?How should we group purchases forVMRs(value managed relationships?How should we configure our manufacturing plants?The correct
8、 business definition can lead to case-cracking insights.6CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionConsequences of Incorrect Business Definition Companies that define their businesses incorrectly make poor strategic decisions.CostsCompetitorsIncur unnecessary costsForgo op
9、portunities to capture synergiesDo not transfer experienceUnderinvest in important R&D initiativesOverlook relevant competitive threatsMiscalculate“market share”Set inappropriate performance targetsOverlook relevant capacity changesMisjudge true cost positionCustomersNeglect profitable customer segm
10、entsOver-invest in unprofitable customersForgo opportunities to capture synergiesMisjudge relevant market trendsOverlook relevant geographies7CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Examples of Incorrect Business Definition Business DefinitionSome respected companies have missed profit opp
11、ortunities or suffered unnecessary losses because they did not define their businesses correctly.American ExpressAllegisSaatchi&SaatchiCharge cards and credit cards are separateCharge cards and credit cards are one business-plastic moneyCharge card division lost money due to poor cost position and m
12、isguided marketing effortsAirlines,hotels and rental cars are one business-caring for travelers worldwide Airlines,rental cars and hotels are three separate businessesThe combination provided little value to customers:Allegis was split up Advertising and consulting are one business-service to global
13、 business executivesAdvertising and consulting are separate businessesCompany suffered severe losses due to inability to transfer experience,lack of focus,and tainted imageCompanyA better business definitionConsequences of incorrect business definitionHow management defined the business8CU7121997ECA
14、bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAnalytic Consequences of Incorrect Business Definition(p.1)Business definition must be the starting point of any Bain case because defining a business incorrectly can adversely affect strategic analysis and decision making.If we definea busine
15、ss incorrectly.Incorrect Business DefinitionCorrect Business DefinitionThe underlying normative band will not emergeA business may look deceptively attractive or unattractiveROS/RMSGrowth/Share9CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAnalytic Consequences of Incorrect Bu
16、siness Definition(p.2)Defining a business incorrectly can lead to problems in conducting E-Curve and RCP analysis.If we definea business incorrectly.Incorrect Business DefinitionCorrect Business DefinitionWe may ignore relevant experienceWe may benchmark the wrong competitors$1$2$5125102050100 Cost
17、per TransactionNow AccountsSlope=70.1%R=0.98$1$2$51020501002005001,000 Cost per TransactionNow+Savings AccountsSlope=57.2%R=1.00Experience CurveRCP10CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionComplexity of Business Definition A simple catalog of logical arguments is not rob
18、ust enough to delineate the competitive battlefields for our clients.Is it one business or not?One BusinessSeparate BusinessesTouring quality microphones and speakersMadonna and rappers use bothSimilar distribution channelsDifferent manufacturers(Audio Technica vs.Bose)Little manufacturing process k
19、nowledge is transferableLimited direct cost sharingCross pens and BIC pensBeer and distilled spiritsBoth used for same function,writingSimilar raw materialsSome manufacturing steps sharedBrand name sharing opportunitiesSame distribution channelsSold by same salesforceHigh perceptual barriers to cust
20、omersLimited customer base overlapLimited benefits of shared R&DKey manufacturing processes are differentDifferent raw materials 11CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business Definition Business Definition MatrixBain uses the business definition matrix to delineate economic boundaries
21、.Cost sharing and customer sharing are the primary determinants of defining a business.HighCost SharingLowLowHighCustomer SharingOne 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
22、 cost leadership(oil and refinery by-products)Separate businesses(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)12CU7121997ECAbcBOS Copyright 1998 Ba
23、in&Company,Inc.Business DefinitionDynamics of Business Definition Business definition is dynamic.Temporary barriers,such as price premiums and technology advantages,will erode unless they are consistently reinforced.Business DefinitionTechnologyGovernment regulationInput pricesProduct innovationChan
24、nel economicsCustomer needs13CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionLocal vs.Regional vs.National vs.Global Businesses Global scaleNational scaleRegional scaleLocal scaleProfessional online financial data Overnight package deliveryBanking-lendingHospital textile launder
25、ingBanking-deposit gatheringResidential laundromatsBarber shopsClients often cite the need for national or global participation.However,in many businesses,local or regional scale drives profitability.Driver of ProfitabilityExample14CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business Definitio
26、nExamples of Changes in Business Definition There are several examples of companies that have gained significant competitive advantage by changing the definition of a business.Federal Express revolutionized the package delivery business by introducing an overnight delivery serviceCharles Schwab dram
27、atically altered the mutual funds business by introducing a no-fee service whereby customers could purchase many companies mutual funds through SchwabCalyx&Corolla transformed the flower distribution business by using information technology to cut out traditional distributors and ship flowers direct
28、ly from growers to customersStarbucks redefined the coffee shop business from providing coffee to providing a social experienceThe Body Shop revolutionized the cosmetics business by merging the ideas of beauty,health,and environmental consciousnessStaples,by adapting the business model of a differen
29、t industry(grocery stores)and taking advantage of economies of scale in purchasing,changed the office supplies business from a local one to a national one15CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness definition steps
30、Client examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways16CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionApplications Financial ServicesElectrical and ElectronicsA large residential realty company was considering entering the commercial real estate market and
31、 wanted to evaluate the attractiveness of the marketAn electronics company had the opportunity to outsource its electronics testing service but was unsure if test outsourcing would define a viable new businessBain has used business definition in hundreds of cases and dozens of industries.Some exampl
32、es 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,requiring vastly different competencies and economics.Client accepted recommendation to stay out of commercial businessBain determined t
33、hat 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 the few specific entry strategies which might be successful.Client ultimately agreed that critical entry barriers were too highSituation
34、:Result:TextilesA 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 textile laundering-there are three separate businesses:healthcare,industrial and linen.All three are regional,not national.Client sold two business
35、es in New York and made two acquisitions in the Southeast17CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways18CU7121997ECAbcBOS Co
36、pyright 1998 Bain&Company,Inc.Business DefinitionBusiness Definition Steps To appropriately define a business,Bain uses an iterative approach that is both qualitative and quantitative and relies heavily upon data external to the client.The process starts with an hypothesis that is tested along three
37、 dimensions.Degree of emphasisLessimportantMoreimportantIs there substantial cost sharing?Is there substantial customer sharing?Does business definition pass the competitor acid tests?Cost sharingCustomer sharingCompetitor acidtests19CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business Definit
38、ionBusiness Definition Steps Degree of emphasisIs there substantial cost sharing?Is there substantial direct cost sharing?Are there substantial opportunities for experience transfer?Less importantMoreimportantCost sharingCustomer sharingCompetitor acidtests20CU7121997ECAbcBOS Copyright 1998 Bain&Com
39、pany,Inc.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 transfer.Probably separate businessesOne business
40、*Separate businesses*Probably one businessHighExperience transferLowLowHighDirect cost sharing21CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionHow Businesses Share Costs Businesses can share costs in a variety of ways.Value Chain StepsHow Direct Costs Can Be SharedExamplesR&DPr
41、ocurementManufacturingDistributionSales and MarketingAdministrative SupportMultiple applications of some R&D effortsShared raw materialsShared inbound logisticsSimilar manufacturingfacilitiesprocessesSame distribution channelsBrand name sharingSame sales forceShared info systemsTape and Post-it Note
42、s(3M)Gasoline and petrochemicalsVitreous china toilets and sinks(Kohler)Cigarettes and candy(Philip Morris)Healthy Choice dinners and cerealSoda and orange juice(Coca-Cola)BankBoston NOW accounts and savings accounts22CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionExperience Tr
43、ansfer Product AProduct BLessons learned from product A can improve manufacture of product BProcessor CForgeGrindPaintDistributor YCustomersSupplier AProcessor DForge GrindPaintDistributor ZCustomersSupplier B(Raw materials)(Semi-finished product)(Finished product)Firms can benefit from experience t
44、ransfer when two products share similar high volume,value-added processes.23CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionBusiness Definition Steps Degree of emphasisLess importantMoreimportantCost sharingCustomer sharingCompetitor acidtestsIs there substantial customer sharin
45、g?How great is the degree of functional substitution?How great is the degree of customer base overlap?How high are customers perceptual barriers?24CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business Definition Customer Sharing(p.1)Customer sharing analysis includes measuring the customer base
46、 overlap and degree 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 analysiscross-elasticity analysisDo the suppliers of the different products share many of the same
47、 customers?who makes the purchase decision?who uses the product?what else is purchased with the product?Functional substitutionCustomer base overlapPerceptual barriersDo customers perceive significant differences among the products?25CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business Definit
48、ionCustomer Sharing(p.2)Customer base overlapFunctional substitutionPerceptual barriersLowLowLowHighHighHighHighLowProbably separate businessesProbably one businessCustomer sharingGenerally,high customer base overlap,high functional substitution and low perceptual barriers suggest one business.26CU7
49、121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionCustomer Base Overlap Customer base overlap can be determined by comparing purchasers or decision makers for the two products.Common Customer Base Overlap CriteriaUsed by same organization or customersPurchased by same individual or g
50、roupPurchase decision made by sameindividual or groupLimited customer base overlap27CU7121997ECAbcBOS Copyright 1998 Bain&Company,Inc.Business Definition Functional SubstitutionThere are two ways to evaluate whether products are substitutes.Product utility analysisCross-elasticity analysisDo product