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1、Gisele GarrawaySusan Caraviello,Paul DiPaola,andTodd Senturia bcBusiness DefinitionMarch 1998Author:Contributors:Todd SenturiaReviewer:Copyright 1998 Bain&Company,Inc.1bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness definition steps

2、Client examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways2bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways3bcBOS Copyright

3、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 strategic analysis and sound decision

4、makingBusiness definition delineates the economic boundaries within which companies should compete.4bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionOne Business vs.Separate Businesses Same customersSame cost structureSame competitorsDifferent customersDifferent cost structureDifferent compe

5、titorsIf 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 segments to take advantage of synergiesDo not com

6、pete in both segments5bcBOS 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 China?Are we vulnerable to Japanese competitors?Should we v

7、ertically 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 business definition can lead to case-cracking insights.6bcB

8、OS Copyright 1998 Bain&Company,Inc.Business DefinitionConsequences of Incorrect Business Definition Companies that define their businesses incorrectly make poor strategic decisions.CostsCompetitorsIncur unnecessary costsForgo opportunities to capture synergiesDo not transfer experienceUnderinvest in

9、 important R&D initiativesOverlook relevant competitive threatsMiscalculate“market share”Set inappropriate performance targetsOverlook relevant capacity changesMisjudge true cost positionCustomersNeglect profitable customer segmentsOver-invest in unprofitable customersForgo opportunities to capture

10、synergiesMisjudge relevant market trendsOverlook relevant geographies7bcBOS Copyright 1998 Bain&Company,Inc.Examples of Incorrect Business Definition Business DefinitionSome respected companies have missed profit opportunities or suffered unnecessary losses because they did not define their business

11、es 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 misguided marketing effortsAirlines,hotels and rental cars are one business-caring

12、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 business executivesAdvertising and consulting are separate businessesCompany suff

13、ered severe losses due to inability to transfer experience,lack of focus,and tainted imageCompanyA better business definitionConsequences of incorrect business definitionHow management defined the business8bcBOS Copyright 1998 Bain&Company,Inc.0%2%4%6%0.10.20.512510CiderFizzDrinksRed AleROSBeer and

14、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 any Bain case because defining a business incorrectly can adversely affect strategic analysis an

15、d decision making.If we definea business incorrectly.Incorrect Business DefinitionCorrect Business Definition0%10%20%0.10.20.512510RealEstateMarket GrowthRMS0%10%20%0.10.20.512510CommercialResidentialMarket GrowthRMSThe underlying normative band will not emergeA business may look deceptively attract

16、ive or unattractiveROS/RMSGrowth/Share9bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAnalytic Consequences of Incorrect Business 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

17、 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$1.76$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

18、$2$51020501002005001,000 Cost per TransactionNow+Savings AccountsSlope=57.2%R=1.00Experience CurveRCP10bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionComplexity of Business Definition A simple catalog of logical arguments is not robust enough to delineate the competitive battlefields for o

19、ur 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 knowledge is transferableLimited direct cost sharingCross p

20、ens 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 customersLimited customer base overlapLimited benefits of shar

21、ed R&DKey manufacturing processes are differentDifferent raw materials 11bcBOS Copyright 1998 Bain&Company,Inc.Business Definition Business Definition MatrixBain uses the business definition matrix to delineate economic boundaries.Cost sharing and customer sharing are the primary determinants of def

22、ining 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 cost leadership(oil and refinery by-products)Separate businesses(beer

23、 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)12bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionDynamics of Business Definition Business definit

24、ion is dynamic.Temporary barriers,such as price premiums and technology advantages,will erode unless they are consistently reinforced.Business DefinitionTechnologyGovernment regulationInput pricesProduct innovationChannel economicsCustomer needs13bcBOS Copyright 1998 Bain&Company,Inc.Business Defini

25、tionLocal vs.Regional vs.National vs.Global Businesses Global scaleNational scaleRegional scaleLocal scaleProfessional online financial data Overnight package deliveryBanking-lendingHospital textile launderingBanking-deposit gatheringResidential laundromatsBarber shopsClients often cite the need for

26、 national or global participation.However,in many businesses,local or regional scale drives profitability.Driver of ProfitabilityExample14bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionExamples of Changes in Business Definition There are several examples of companies that have gained signi

27、ficant competitive advantage by changing the definition of a business.Federal Express revolutionized the package delivery business by introducing an overnight delivery serviceCharles Schwab dramatically altered the mutual funds business by introducing a no-fee service whereby customers could purchas

28、e many companies mutual funds through SchwabCalyx&Corolla transformed the flower distribution business by using information technology to cut out traditional distributors and ship flowers directly from growers to customersStarbucks redefined the coffee shop business from providing coffee to providin

29、g 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 different industry(grocery stores)and taking advantage of economies of scale in purchasing,changed the office supp

30、lies business from a local one to a national one15bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways16bcBOS Copyright 1998 Bain&Company,Inc.Bus

31、iness DefinitionApplications Financial ServicesElectrical and ElectronicsA large residential realty company 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 testin

32、g 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 our work are:Bain developed a business definition for commercial real estate services which identified it as a separate busi

33、ness from residential real estate,requiring vastly different competencies and economics.Client accepted recommendation 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 w

34、hich 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:TextilesA large U.K.textile launderer with 23%ROS enters the U.S.market and earns only 5%Bain found that the business defi

35、nition 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 New York and made two acquisitions in the Southeast17bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The bus

36、iness definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways18bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionBusiness Definition Steps To appropriately define a business,Bain uses an iterative approach that is both

37、 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 sharing?Is there substantial customer sharing?Does business definition p

38、ass the competitor acid tests?Cost sharingCustomer sharingCompetitor acidtests19bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionBusiness Definition Steps Degree of emphasisIs there substantial cost sharing?Is there substantial direct cost sharing?Are there substantial opportunities for expe

39、rience transfer?Less importantMoreimportantCost sharingCustomer sharingCompetitor acidtests20bcBOS Copyright 1998 Bain&Company,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 assessme

40、nt of cost sharing involves examining direct cost sharing and experience transfer.Probably separate businessesOne business*Separate businesses*Probably one businessHighExperience transferLowLowHighDirect cost sharing21bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionHow Businesses Share Cost

41、s Businesses 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 manufacturingfacilitie

42、sprocessesSame 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 acc

43、ounts and savings accounts22bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionExperience Transfer Product AProduct BLessons learned from product A can improve manufacture of product BProcessor CForgeGrindPaintDistributor YCustomersSupplier AProcessor DForge GrindPaintDistributor ZCustomersSup

44、plier B(Raw materials)(Semi-finished product)(Finished product)Firms can benefit from experience transfer when two products share similar high volume,value-added processes.23bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionBusiness Definition Steps Degree of emphasisLess importantMoreimporta

45、ntCost sharingCustomer 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?24bcBOS Copyright 1998 Bain&Company,Inc.Business Definition Customer

46、Sharing(p.1)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

47、 analysisDo 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 pro

48、ducts?25bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionCustomer Sharing(p.2)Customer base overlapFunctional substitutionPerceptual barriersLowLowLowHighHighHighHighLowProbably separate businessesProbably one businessCustomer sharingGenerally,high customer base overlap,high functional subst

49、itution and low perceptual barriers suggest one business.26bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionCustomer Base Overlap CorporationsIndividualsGovernmentsPartnershipsCorporationsInstitutionsResidentialcustomersCommercialCustomers0%20%40%60%80%100%Percent of Total CustomersCustomer

50、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 overlap27bcBOS Copyrig

51、ht 1998 Bain&Company,Inc.Business 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

52、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?28bcBOS Copyright 1998 Bain&Company,Inc.Business Definition Functional Substitution-Product Utility Cuts miscell

53、aneous objectsCuts clothCan be used as a screwdriverCuts foodCuts fur/hairCuts clothCuts miscellaneous objectsCuts PaperKnivesScissors0%20%40%60%80%100%Percent of Products UtilityIf products offer very similar non-price attributes or functional benefits,they are potential substitutes.29bcBOS Copyrig

54、ht 1998 Bain&Company,Inc.Business 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 Margarine30bcBOS Copyright 1998 Bain&Company,Inc.Business Defini

55、tionPerceptual 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 and aluminum ca

56、noesWomens fragrances and mens aftershave31bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionBusiness Definition Steps Degree of emphasisDoes business definition pass the competitor acid tests?Do competitors offer similar products and serve similar customers and channels?Does profitability co

57、rrelate with definition of market share?Do decisions a competitor makes in one business affect the decisions that a competitor makes in another business?Less importantMoreimportantCost sharingCustomer sharingCompetitor acidtests32bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionCompetitor Ac

58、id Tests Does business profitability correlate with market share as implied by the business definition hypothesis?What impact do decisions made in one business have on another?pricinginvestmentWhat products do individual competitors offer?Which customers/channels do competitors service?ConsistencyPr

59、ofit explanationIndependent actionsTo validate our business definition hypothesis,we use three competitor acid tests.33bcBOS Copyright 1998 Bain&Company,Inc.Is there substantial customer sharing?How great is the degree of functional substitution?How great is the degree of customer base overlap?How h

60、igh are customers perceptual barriers?Is there substantial cost sharing?Is there substantial direct cost sharing?Are there substantial opportunities for experience transfer?Does business definition pass the competitor acid tests?Do competitors offer similar products and serve similar customer/channe

61、ls?Does profitability correlate with the definition of market share?Do decisions a competitor makes in one business affect the decisions that a competitor makes in another business?Degree of emphasisLess importantMoreimportantCost sharingCustomer sharingCompetitor acidtestsBusiness DefinitionBusines

62、s Definition Steps-Summary 34bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways35bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionBunke

63、r Hill Door Systems*-Background Bain used business definition to set a strategic foundation for Bunker Hill Door Systems.The team started with a hypothesis that there were three separate businesses.Situation:Complication:Question:Bunker Hill is a$400MM division of Hills Worldwide.This division manuf

64、actures entry doors,garage doors(GDS),and garage door openers(GDOs).Hills Worldwide has set aggressive growth targets for all divisionsBunker Hill has suffered a continued financial decline in recent years and performance varies widely across the product lines.Moreover,Bunker Hill faces a strong set

65、 of well-established,low-cost competitorsHow can Bunker Hill grow profitably?Assertion 1Assertion 2Assertion 3GD,GDO and entry doors are separate businesses and therefore require different strategies for profitable growth*Disguised client case36bcBOS Copyright 1998 Bain&Company,Inc.Business Definiti

66、onBunker Hill-Direct Cost Sharing(p.1)Source:Bunker Hill FinancialsOtherEngineeringDistributionLaborAdminis trationSales and marketingManufacturingoverheadMaterialsEntry doorsGarage doorsGarage door openers$265.4M$57.0M$78.2M0%20%40%60%80%100%Percent of Total CostsThe Bain team found that materials accounted for a substantial proportion of Bunker Hills costs in all three business segments.CostsCustomersCompet-itors37bcBOS Copyright 1998 Bain&Company,Inc.Business DefinitionBunker Hill-Direct Cost