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,Business Definition,Agenda,The business definition concept Applications Business definition steps Client examples Bunker Hill Door Systems JJR Industrial Coatings Key takeaways,3,Business Definition,Agenda,The business definition concept Applications Business definition steps Client examples Bunker Hill Door Systems JJR Industrial Coatings Key takeaways,4,Business Definition,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 the economic boundaries within which companies should compete.,5,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 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 business,Separate businesses,Compete in both segments to take advantage of synergies,Do not compete in both segments,6,Business 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 drop 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,Business Definition,Consequences of Incorrect 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 Miscalculate “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 relevant geographies,8,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 credit 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 three 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, lack of focus, and tainted image,Company,A better business definition,Consequences of incorrect business definition,How management defined the business,9,Business Definition,Analytic 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 define a business incorrectly.,Incorrect Business Definition,Correct Business Definition,The underlying normative band will not emerge,A business may look deceptively attractive or unattractive,ROS/RMS,Growth/Share,10,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 Business Definition,We may ignore relevant experience,We may benchmark the wrong competitors,Experience Curve,RCP,11,Business Definition,Complexity of Business 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 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 pens and BIC