【正文】 on 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 petitors? ?Should we vertically integrate into growing vegetables? ?Should we drop this product line? ?Should we crosstrain 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 casecracking insights. 6 CU7121997ECA Business Definition Consequences of Incorrect Business Definition Companies that define their businesses incorrectly make poor strategic decisions. Costs Competitors ?Incur unnecessary costs ?Fo opportunities to capture synergies ?Do not transfer experience ?Underinvest in important RD initiatives ?Overlook relevant petitive threats ?Miscalculate “market share” ?Set inappropriate performance targets ?Overlook relevant capacity changes ?Misjudge true cost position Customers ?Neglect profitable customer segments ?Overinvest in unprofitable customers ?Fo opportunities to capture synergies ?Misjudge relevant market trends ?Overlook relevant geographies 7 CU7121997ECA Examples of Incorrect Business Definition Business Definition Some respected panies 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 bination 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 8 CU7121997ECA 0%2%4%6% 1 2 5 10C i d e rFiz zDr i nks Re d Al eROSBeer and Dis ti l l ed Spi rits0%1%2%3%4% 1 2 5 10Cide rFiz zRe d Al eDr i nksROSBeer only Business Definition Analytic Consequences of Incorrect Business Definition () 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 0%10 %20 %RealEs tateMarket GrowthRMS0%10 %20 %Commerci alR esid entia lMarket GrowthRMS? The underlying normative band will not emerge ? A business may look deceptively attractive or unattractive ROS/RMS Growth/Share 9 CU7121997ECA Business Definition Analytic Consequences of Incorrect Business Definition () Defining a business incorrectly can lead to problems in conducting ECurve and RCP analysis. If we define a business incorrectly... Incorrect Business Definition Correct Business Definition Alpha O mega Beta$1 .89 $1 .76$1 .51$ $ $ $ $ Cost per Account? We may ignore relevant experience ? We may benchmark the wrong petitors Alpha O mega$1 .89$1 .76$ $ $ $ $ Cost per Account$1 $2 $5 1 2 5 10 20 50 100 Cost per Transaction Now Accounts Slope = % R178。 = $1 $2 $5 10 20 50 100 200 500 1,000 Cost per Transaction Now + Savings Accounts Slope =% R178。 Frost Sullivan。 Bain Analysis E co a tS B / W BP o w d e rE co a tS B / W BE c o a tP o w d e rS B / W BE c o a tP o w d e rSB / W BPowderE c o a tSB/WBSB/WBE c o a tSB / W BSB/WBUVE c o a tS B / W BUVSB/WBS B / W BPowderSB/WBUVSB/WBUVS B / W BSB/WBEcoatPowderUVS B / W BUVSB/WBG e n .m e ta l /o th e rEl e c.e q u i p .M F FIM / A C EA u t op a r t sMillworkTruck/bus/RRAircraftC o n ta i n e rOverprint C o i lAlum. extru.Comp. boardW o o dF FAppliancePl a st i cElectronics0%2 0 %4 0 %6 0 %8 0 %1 0 0 %Percent of Total$403 $206 $209 $149 $170 $52 $164 $42 $284 $91 $257 $36 $57 $201 $47 $193 $67 Total sales = $2,578MM JJR Coatings UsageThe usage of the five coating types varies significantly across the enduse segments. 48 CU7121997ECA Business Definition JJR Direct Cost Sharing Using SB as a baseline, the team used。 . Census。s UtilityIf products offer very similar nonprice attributes or functional benefits, they are potential substitutes. 29 CU7121997ECA Business Definition Functional Substitution Cross Elasticity If a price increase in one product increases the demand for another, the two products are probably substitutes. Demand for Butter High elasticity Price of Margarine 30 CU7121997ECA Business Definition Perceptual Barriers Customer’s perceptions can be indicators of business