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1、Gisele GarrawaySusan Caraviello,Paul DiPaola,andTodd Senturia bcBusiness DefinitionMarch 1998Author:Contributors:Todd SenturiaReviewer:Copyright 1998 Bain&Company,Inc.1CU7121997ECABusiness DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill
2、 Door SystemsJJR Industrial CoatingsKey takeaways2CU7121997ECABusiness DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways3CU7121997ECABusiness DefinitionWhat is Business Definition?Indicates
3、 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 strategic analysis and sound decision makingBusiness definition delineates the economic boundaries within which comp
4、anies should compete.4CU7121997ECABusiness DefinitionOne Business vs.Separate Businesses Same customersSame cost structureSame competitorsDifferent customersDifferent cost structureDifferent competitorsIf two business segments have the same customers,the same cost structure,and the same competitors,
5、they are one business.If they are different on all of these dimensions,they are separate businesses.One businessSeparate businessesCompete in both segments to take advantage of synergiesDo not compete in both segments5CU7121997ECABusiness DefinitionWhy Bain Uses Business DefinitionStrategic insights
6、Tactical insights with strategic importanceShould 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 drop this product line?Should we cross-train our salesforce?How should we gr
7、oup purchases forVMRs(value managed relationships?How should we configure our manufacturing plants?The correct business definition can lead to case-cracking insights.6CU7121997ECABusiness DefinitionConsequences of Incorrect Business Definition Companies that define their businesses incorrectly make
8、poor strategic decisions.CostsCompetitorsIncur unnecessary costsForgo opportunities to capture synergiesDo not transfer experienceUnderinvest in important R&D initiativesOverlook relevant competitive threatsMiscalculate“market share”Set inappropriate performance targetsOverlook relevant capacity cha
9、ngesMisjudge true cost positionCustomersNeglect profitable customer segmentsOver-invest in unprofitable customersForgo opportunities to capture synergiesMisjudge relevant market trendsOverlook relevant geographies7CU7121997ECAExamples of Incorrect Business Definition Business DefinitionSome respecte
10、d companies have missed profit opportunities 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 mon
11、ey due to poor cost position and misguided 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
12、are one business-service to global 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
13、 defined the business8CU7121997ECABusiness 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 business i
14、ncorrectly.Incorrect Business DefinitionCorrect Business DefinitionThe underlying normative band will not emergeA business may look deceptively attractive or unattractiveROS/RMSGrowth/Share9CU7121997ECABusiness DefinitionAnalytic Consequences of Incorrect Business Definition(p.2)Defining a business
15、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 per TransactionNow AccountsSlope=70.1%R=0.
16、98$1$2$51020501002005001,000 Cost per TransactionNow+Savings AccountsSlope=57.2%R=1.00Experience CurveRCP10CU7121997ECABusiness DefinitionComplexity of Business Definition A simple catalog of logical arguments is not robust enough to delineate the competitive battlefields for our clients.Is it one b
17、usiness or not?One BusinessSeparate BusinessesTouring quality microphones and speakersMadonna and rappers use bothSimilar distribution channelsDifferent manufacturers(Audio Technica vs.Bose)Little manufacturing process knowledge is transferableLimited direct cost sharingCross pens and BIC pensBeer a
18、nd distilled spiritsBoth used for same function,writingSimilar raw materialsSome manufacturing steps sharedBrand name sharing opportunitiesSame distribution channelsSold by same salesforceHigh perceptual barriers to customersLimited customer base overlapLimited benefits of shared R&DKey manufacturin
19、g processes are differentDifferent raw materials 11CU7121997ECABusiness Definition Business Definition MatrixBain uses the business definition matrix to delineate economic boundaries.Cost sharing and customer sharing are the primary determinants of defining a business.HighCost SharingLowLowHighCusto
20、mer 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 cost leadership(oil and refinery by-products)Separate businesses(beer and distilled spirits)Separate businesses with
21、potential for bundling(touring quality microphones and speakers)One business with potential for substitution(milk cartons and glass milk bottles)12CU7121997ECABusiness DefinitionDynamics of Business Definition Business definition is dynamic.Temporary barriers,such as price premiums and technology ad
22、vantages,will erode unless they are consistently reinforced.Business DefinitionTechnologyGovernment regulationInput pricesProduct innovationChannel economicsCustomer needs13CU7121997ECABusiness DefinitionLocal vs.Regional vs.National vs.Global Businesses Global scaleNational scaleRegional scaleLocal
23、 scaleProfessional online financial data Overnight package deliveryBanking-lendingHospital textile launderingBanking-deposit gatheringResidential laundromatsBarber shopsClients often cite the need for national or global participation.However,in many businesses,local or regional scale drives profitab
24、ility.Driver of ProfitabilityExample14CU7121997ECABusiness DefinitionExamples 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 busi
25、ness by introducing an overnight delivery serviceCharles Schwab dramatically 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 te
26、chnology to cut out traditional distributors and ship flowers directly 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 environment
27、al consciousnessStaples,by adapting the business model of a different industry(grocery stores)and taking advantage of economies of scale in purchasing,changed the office supplies business from a local one to a national one15CU7121997ECABusiness DefinitionAgenda The business definition conceptApplica
28、tionsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways16CU7121997ECABusiness DefinitionApplications Financial ServicesElectrical and ElectronicsA large residential realty company was considering entering the commercial real estate market and wanted
29、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 examples of ou
30、r 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 that the
31、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:Result:
32、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 businesses in Ne
33、w York and made two acquisitions in the Southeast17CU7121997ECABusiness DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways18CU7121997ECABusiness DefinitionBusiness Definition Steps To approp
34、riately 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 dimensions.Degree of emphasisLessimportantMoreimportantIs there substantial cost sh
35、aring?Is there substantial customer sharing?Does business definition pass the competitor acid tests?Cost sharingCustomer sharingCompetitor acidtests19CU7121997ECABusiness DefinitionBusiness Definition Steps Degree of emphasisIs there substantial cost sharing?Is there substantial direct cost sharing?
36、Are there substantial opportunities for experience transfer?Less importantMoreimportantCost sharingCustomer sharingCompetitor acidtests20CU7121997ECABusiness Definition *On a cost basis only,we must also look at customers and competitors to determine whether the businesses are one or separate.Cost S
37、haring An assessment of cost sharing involves examining direct cost sharing and experience transfer.Probably separate businessesOne business*Separate businesses*Probably one businessHighExperience transferLowLowHighDirect cost sharing21CU7121997ECABusiness DefinitionHow Businesses Share Costs Busine
38、sses can share costs in a variety of ways.Value Chain StepsHow Direct Costs Can Be SharedExamplesR&DProcurementManufacturingDistributionSales and MarketingAdministrative SupportMultiple applications of some R&D effortsShared raw materialsShared inbound logisticsSimilar manufacturingfacilitiesprocess
39、esSame distribution channelsBrand name sharingSame sales forceShared info systemsTape and Post-it Notes(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 an
40、d savings accounts22CU7121997ECABusiness DefinitionExperience Transfer Product AProduct BLessons learned from product A can improve manufacture of product BProcessor CForgeGrindPaintDistributor YCustomersSupplier AProcessor DForge GrindPaintDistributor ZCustomersSupplier B(Raw materials)(Semi-finish
41、ed product)(Finished product)Firms can benefit from experience transfer when two products share similar high volume,value-added processes.23CU7121997ECABusiness DefinitionBusiness Definition Steps Degree of emphasisLess importantMoreimportantCost sharingCustomer sharingCompetitor acidtestsIs there s
42、ubstantial customer sharing?How great is the degree of functional substitution?How great is the degree of customer base overlap?How high are customers perceptual barriers?24CU7121997ECABusiness Definition Customer Sharing(p.1)Customer sharing analysis includes measuring the customer base overlap and
43、 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 customers?w
44、ho 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?25CU7121997ECABusiness DefinitionCustomer Sharing(p.2)Customer base overlapFunct
45、ional substitutionPerceptual barriersLowLowLowHighHighHighHighLowProbably separate businessesProbably one businessCustomer sharingGenerally,high customer base overlap,high functional substitution and low perceptual barriers suggest one business.26CU7121997ECABusiness DefinitionCustomer Base Overlap
46、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 groupPurchase decision made by sameindividual or groupLimited customer base overlap27CU71
47、21997ECABusiness Definition Functional SubstitutionThere are two ways to evaluate whether products are substitutes.Product utility analysisCross-elasticity analysisDo products offer similar value along non-price attributes(e.g.,scissors and knives cut cloth well)?Is product bundled with other produc
48、ts(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?28CU7121997ECABusiness Definition Functional Substitution-Product Utility If products offer very similar non-price attributes or
49、functional benefits,they are potential substitutes.29CU7121997ECABusiness DefinitionFunctional Substitution-Cross Elasticity If a price increase in one product increases the demand for another,the two products are probably substitutes.Demand for ButterHigh elasticityPrice of Margarine30CU7121997ECAB
50、usiness DefinitionPerceptual Barriers Customers perceptions can be indicators of business definition;however,what customers perceive can often conflict with the economic boundaries.Perceptual barriersLowHighCustomers view:Examples:Products are similarProducts serve different functionsWooden canoes a