1、Gisele GarrawaySusan Caraviello,Paul DiPaola,andTodd Senturia bcBusiness DefinitionMarch 1998Author:Contributors:Todd SenturiaReviewer:Copyright 1998 Bain&Company,Inc.bcBOS Copyright 1998 Bain&Company,Inc.2CU7121997ECABusiness DefinitionAgenda The business definition conceptApplicationsBusiness defi
2、nition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeawaysbcBOS Copyright 1998 Bain&Company,Inc.3CU7121997ECABusiness DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey ta
3、keawaysbcBOS Copyright 1998 Bain&Company,Inc.4CU7121997ECABusiness 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.bcBOS Copyright 1998 Bain&Company,Inc.5CU7121997ECABusiness 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 segmentsbcBOS Copyright 1998 Bain&Company,Inc.6CU7121997ECABusiness 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.bcBOS Copyright 1998 Bain&Company,Inc.7CU7121997ECABusiness 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 geographiesbcBOS Copyright 1998 Bain&Company,Inc.8CU7121997ECAExamples 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 Express Allegis Saatchi&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
12、 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 are one business-service to glob
13、al 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 businessbcBOS Copyr
14、ight 1998 Bain&Company,Inc.9CU7121997ECA0%2%4%6%0.10.20.512510CiderFizzDrinksRed AleROSBeer and Distilled Spirits0%1%2%3%4%0.10.20.512510CiderFizzRed AleDrinksROSBeer only Business DefinitionAnalytic Consequences of Incorrect Business Definition(p.1)Business definition must be the starting point of
15、any Bain case because defining a business incorrectly can adversely affect strategic analysis and decision making.If we definea business incorrectly.Incorrect Business DefinitionCorrect Business Definition0%10%20%0.10.20.512510RealEstateMarket GrowthRMS0%10%20%0.10.20.512510CommercialResidentialMark
16、et GrowthRMSThe underlying normative band will not emergeA business may look deceptively attractive or unattractiveROS/RMSGrowth/SharebcBOS Copyright 1998 Bain&Company,Inc.10CU7121997ECABusiness DefinitionAnalytic Consequences of Incorrect Business Definition(p.2)Defining a business incorrectly can
17、lead to problems in conducting E-Curve and RCP analysis.If we definea business incorrectly.Incorrect Business DefinitionCorrect Business DefinitionAlphaOmegaBeta$1.89$1.76$1.51$0.0$0.5$1.0$1.5$2.0Cost per AccountWe may ignore relevant experienceWe may benchmark the wrong competitorsAlphaOmega$1.89$1
18、.76$0.0$0.5$1.0$1.5$2.0Cost per Account$1$2$5125102050100 Cost per TransactionNow AccountsSlope=70.1%R=0.98$1$2$51020501002005001,000 Cost per TransactionNow+Savings AccountsSlope=57.2%R=1.00Experience CurveRCPbcBOS Copyright 1998 Bain&Company,Inc.11CU7121997ECABusiness DefinitionComplexity of Busin
19、ess Definition A simple catalog of logical arguments is not robust 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 manu
20、facturers(Audio Technica vs.Bose)Little manufacturing process knowledge 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
21、channelsSold by same salesforceHigh perceptual barriers to customersLimited customer base overlapLimited benefits of shared R&DKey manufacturing processes are differentDifferent raw materials bcBOS Copyright 1998 Bain&Company,Inc.12CU7121997ECABusiness Definition Business Definition MatrixBain uses
22、the business definition matrix to delineate economic boundaries.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
23、(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 potential for bundling(touring quality microphones and speakers)One business with potential for substitution(milk carto
24、ns and glass milk bottles)bcBOS Copyright 1998 Bain&Company,Inc.13CU7121997ECABusiness 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 DefinitionTe
25、chnologyGovernment regulationInput pricesProduct innovationChannel economicsCustomer needsbcBOS Copyright 1998 Bain&Company,Inc.14CU7121997ECABusiness DefinitionLocal vs.Regional vs.National vs.Global Businesses Global scaleNational scaleRegional scaleLocal scaleProfessional online financial data Ov
26、ernight 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 profitability.Driver of ProfitabilityExamplebcBOS C
27、opyright 1998 Bain&Company,Inc.15CU7121997ECABusiness 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 business
28、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 technol
29、ogy 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 environmental co
30、nsciousnessStaples,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 onebcBOS Copyright 1998 Bain&Company,Inc.16CU7121997ECABusiness DefinitionAgenda The b
31、usiness definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeawaysbcBOS Copyright 1998 Bain&Company,Inc.17CU7121997ECABusiness DefinitionApplications Financial ServicesElectrical and ElectronicsA large residential realty company
32、 was considering entering the commercial real estate market and 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 defin
33、ition 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,requiring vastly different competencies and economics.Client accepted rec
34、ommendation to stay out of commercial businessBain 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 the few specific entry strategies which might be successful.Client ultima
35、tely agreed that critical entry barriers were too highSituation: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 lin
36、en.All three are regional,not national.Client sold two businesses in New York and made two acquisitions in the SoutheastbcBOS Copyright 1998 Bain&Company,Inc.18CU7121997ECABusiness DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door Sy
37、stemsJJR Industrial CoatingsKey takeawaysbcBOS Copyright 1998 Bain&Company,Inc.19CU7121997ECABusiness 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.T
38、he process starts with an hypothesis that is tested along three dimensions.Degree of emphasisLessimportantMoreimportantIs there substantial cost sharing?Is there substantial customer sharing?Does business definition pass the competitor acid tests?Cost sharingCustomer sharingCompetitor acidtestsbcBOS
39、 Copyright 1998 Bain&Company,Inc.20CU7121997ECABusiness DefinitionBusiness 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 sharing
40、Competitor acidtestsbcBOS Copyright 1998 Bain&Company,Inc.21CU7121997ECABusiness 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 a
41、nd experience transfer.Probably separate businessesOne business*Separate businesses*Probably one businessHighExperience transferLowLowHighDirect cost sharingbcBOS Copyright 1998 Bain&Company,Inc.22CU7121997ECABusiness DefinitionHow Businesses Share Costs Businesses can share costs in a variety of wa
42、ys.Value Chain StepsHow Direct Costs Can Be SharedExamplesR&DProcurementManufacturingDistributionSales and MarketingAdministrative SupportMultiple applications of some R&D effortsShared raw materialsShared inbound logisticsSimilar manufacturingfacilitiesprocessesSame distribution channelsBrand name
43、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 and savings accountsbcBOS Copyright 1998
44、Bain&Company,Inc.23CU7121997ECABusiness 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-finishe
45、d product)(Finished product)Firms can benefit from experience transfer when two products share similar high volume,value-added processes.bcBOS Copyright 1998 Bain&Company,Inc.24CU7121997ECABusiness DefinitionBusiness Definition Steps Degree of emphasisLess importantMoreimportantCost sharingCustomer
46、sharingCompetitor acidtestsIs there substantial 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?bcBOS Copyright 1998 Bain&Company,Inc.25CU7121997ECABusiness Definition Customer Sharing(p.1
47、)Customer sharing analysis includes measuring the customer base 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
48、 the suppliers of the different products share many of the same 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?bcBOS
49、 Copyright 1998 Bain&Company,Inc.26CU7121997ECABusiness DefinitionCustomer Sharing(p.2)Customer base overlapFunctional substitutionPerceptual barriersLowLowLowHighHighHighHighLowProbably separate businessesProbably one businessCustomer sharingGenerally,high customer base overlap,high functional subs
50、titution and low perceptual barriers suggest one business.bcBOS Copyright 1998 Bain&Company,Inc.27CU7121997ECABusiness DefinitionCustomer Base Overlap CorporationsIndividualsGovernmentsPartnershipsCorporationsInstitutionsResidentialcustomersCommercialCustomers0%20%40%60%80%100%Percent of Total Custo
