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1、Gisele GarrawaySusan Caraviello, Paul DiPaola, andTodd Senturia bcBusiness DefinitionMarch 1998Author:Contributors:Todd SenturiaReviewer:Copyright 1998 Bain & Company, Inc. 1bcBOS Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill
2、 Door SystemsJJR Industrial CoatingsKey takeaways2bcBOS Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways3bcBOS Business DefinitionWhat is Business Definition? Indicates whether tw
3、o 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 companies shoul
4、d compete.4bcBOS Business 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, they are one
5、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 segments5bcBOS Business DefinitionWhy Bain Uses Business DefinitionStrategic insightsTactical insights
6、 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 group purchases for
7、VMRs (value managed relationships?How should we configure our manufacturing plants?The correct business definition can lead to case-cracking insights.6bcBOS Business DefinitionConsequences of Incorrect Business Definition Companies that define their businesses incorrectly make poor strategic decisio
8、ns.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 changesMisjudge true co
9、st positionCustomersNeglect profitable customer segmentsOver-invest in unprofitable customersForgo opportunities to capture synergiesMisjudge relevant market trendsOverlook relevant geographies7bcBOS Examples of Incorrect Business Definition Business DefinitionSome respected companies have missed pr
10、ofit opportunities 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
11、 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 are one busine
12、ss -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 defined th
13、e business8bcBOS 0%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 any Bain case because
14、 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%0.10.20.512510CommercialResidentialMarket GrowthRMSThe under
15、lying normative band will not emergeA business may look deceptively attractive or unattractiveROS/RMSGrowth/Share9bcBOS 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 de
16、finea 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$1.76$0.0$0.5$1.0$1.5$2.0Cost per Account$1$2$5125102050100 Cost p
17、er TransactionNow AccountsSlope = 70.1%R = 0.98$1$2$51020501002005001,000 Cost per TransactionNow + Savings AccountsSlope =57.2%R = 1.00Experience CurveRCP10bcBOS Business DefinitionComplexity of Business Definition A simple catalog of logical arguments is not robust enough to delineate the competit
18、ive 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 knowledge is transferableLimited di
19、rect 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 customersLimited customer base overla
20、pLimited benefits of shared R&DKey manufacturing processes are differentDifferent raw materials 11bcBOS Business Definition Business Definition MatrixBain uses the business definition matrix to delineate economic boundaries. Cost sharing and customer sharing are the primary determinants of defining
21、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 and
22、 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 Business DefinitionDynamics of Business Definition Business definition is dynamic. Temporary barriers
23、, such as price premiums and technology advantages, will erode unless they are consistently reinforced.Business DefinitionTechnologyGovernment regulationInput pricesProduct innovationChannel economicsCustomer needs13bcBOS Business DefinitionLocal vs. Regional vs. National vs. Global Businesses Globa
24、l scaleNational scaleRegional scaleLocal 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 busi
25、nesses, local or regional scale drives profitability.Driver of ProfitabilityExample14bcBOS Business 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
26、 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 purchase many companies mutual funds through SchwabCalyx & Corolla transformed the flower di
27、stribution 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 providing a social experienceThe Body Shop revolutionized the cosmetics business by merging
28、 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 supplies business from a local one to a national one15bcBOS Business DefinitionAg
29、enda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways16bcBOS Business DefinitionApplications Financial ServicesElectrical and ElectronicsA large residential realty company was considering entering the comm
30、ercial 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 definition in hundreds of cases and doz
31、ens 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 recommendation to stay out of com
32、mercial 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 ultimately agreed that critical e
33、ntry 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 linen. All three are re
34、gional, not national. Client sold two businesses in New York and made two acquisitions in the Southeast17bcBOS Business DefinitionAgenda The business definition conceptApplicationsBusiness definition stepsClient examplesBunker Hill Door SystemsJJR Industrial CoatingsKey takeaways18bcBOS Business Def
35、initionBusiness 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 dimensions.Degree of emphasisLessimport
36、antMoreimportantIs there substantial cost sharing?Is there substantial customer sharing?Does business definition pass the competitor acid tests?Cost sharingCustomer sharingCompetitor acidtests19bcBOS Business DefinitionBusiness Definition Steps Degree of emphasisIs there substantial cost sharing?Is
37、there substantial direct cost sharing?Are there substantial opportunities for experience transfer?Less importantMoreimportantCost sharingCustomer sharingCompetitor acidtests20bcBOS Business Definition *On a cost basis only, we must also look at customers and competitors to determine whether the busi
38、nesses are one or separate.Cost Sharing An assessment of cost sharing involves examining direct cost sharing and experience transfer.Probably separate businessesOne business*Separate businesses*Probably one businessHighExperience transferLowLowHighDirect cost sharing21bcBOS Business DefinitionHow Bu
39、sinesses Share Costs 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 man
40、ufacturingfacilitiesprocessesSame 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-
41、Cola)BankBoston NOW accounts and savings accounts22bcBOS Business DefinitionExperience Transfer Product AProduct BLessons learned from product A can improve manufacture of product BProcessor CForgeGrindPaintDistributor YCustomersSupplier AProcessor DForge GrindPaintDistributor ZCustomersSupplier B(R
42、aw materials)(Semi-finished product)(Finished product)Firms can benefit from experience transfer when two products share similar high volume, value-added processes. 23bcBOS Business DefinitionBusiness Definition Steps Degree of emphasisLess importantMoreimportantCost sharingCustomer sharingCompetito
43、r 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 Business Definition Customer Sharing (p.1)Customer sharing analysis includes measuring the customer
44、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 the suppliers of the different products share many of t
45、he 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?25bcBOS Business DefinitionCustomer Sharing (p.2) Customer ba
46、se overlapFunctional substitutionPerceptual barriersLowLowLowHighHighHighHighLowProbably separate businessesProbably one businessCustomer sharingGenerally, high customer base overlap, high functional substitution and low perceptual barriers suggest one business. 26bcBOS Business DefinitionCustomer B
47、ase Overlap CorporationsIndividualsGovernmentsPartnershipsCorporationsInstitutionsResidentialcustomersCommercialCustomers0%20%40%60%80%100%Percent of Total CustomersCustomer base overlap can be determined by comparing purchasers or decision makers for the two products. Common Customer Base Overlap C
48、riteriaUsed by same organization or customersPurchased by same individual or groupPurchase decision made by sameindividual or groupLimited customer base overlap27bcBOS Business Definition Functional SubstitutionThere are two ways to evaluate whether products are substitutes.Product utility analysisC
49、ross-elasticity analysisDo products offer similar value along non-price attributes (e.g., scissors and knives cut cloth well)?Is product bundled 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 cu
50、stomers buy knives as a substitute?28bcBOS Business Definition Functional Substitution - Product Utility Cuts miscellaneous objectsCuts clothCan be used as a screwdriverCuts foodCuts fur/hairCuts clothCuts miscellaneous objectsCuts PaperKnivesScissors0%20%40%60%80%100%Percent of Products UtilityIf p