Chapter 6 Business Definition Copyright © 1999 by Harcourt Brace & Company All rights reserved. Requests for permission to make copies of any part of the

Chapter 6Chapter 6

Business DefinitionBusiness DefinitionChapter 6Chapter 6

Business DefinitionBusiness DefinitionCopyright © 1999 by Harcourt Brace & Company

All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Bourgeois, Duhaime,

& Stimpert

Copyright © 1999 by Harcourt Brace & CompanyAll rights reserved

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives Define the concept of business definition and

emphasize both the importance and the creative nature of business definition.

Describe the ways in which business definition can be a source or contribute to the development of sustained competitive advantage.

Illustrate some effective business definitions. Emphasize the importance of redefinition, while also

illustrating the challenges associated with redefinition.


IntroductionIntroductionIntroductionIntroduction

Business definition as strategy content: It describes which customers the firm will serve, what

products/services will be offered, and what technologies the firm will employ.

Business definition is also a strategy process: The process by which the firm selects its position in

its industry environment.


Exhibit 6.1:Exhibit 6.1: Model of Model of Strategic ManagementStrategic ManagementExhibit 6.1:Exhibit 6.1: Model of Model of Strategic ManagementStrategic Management

Feedbackreinforces or

suggests changes

in managers'

mental models

Managers' Mental Models

+ Industry environments + How to compete

+ Appropriate size/diversity,

how businesses are related,

how diversification should

be managed

+ How to organize

Decisions about

Business Definition

Decisions about

Organizational

Structure

Decisions about

Business Strategy

Decisions about

Corporate Strategy

and Diversification

Market Position,Resources, and

Capabilities

Performanceand

CompetitiveAdvantage


Introduction (cont.)Introduction (cont.)Introduction (cont.)Introduction (cont.)

Major challenge associated with business definition: Requires an on-going process of redefinition.

• Over time, industry changes occur -- shifts in customer demographics and preferences.

Diversified businesses need to define each of their different businesses.


New TechnologiesNew Technologies

Current Competitive Space

Exhibit 6.2:Exhibit 6.2: Processes of Processes of Business Definition and Business Definition and RedefinitionRedefinition

Exhibit 6.2:Exhibit 6.2: Processes of Processes of Business Definition and Business Definition and RedefinitionRedefinition

Time

New CustomersNew Customers

New Products New Products

& Services& Services

Future Competitive Space


Business Definition Business Definition as a Creative Processas a Creative ProcessBusiness Definition Business Definition as a Creative Processas a Creative Process

Five characteristics of the business definition process:1. It is fundamentally a creative process.

• Few business schools offer courses in creativity.– Business world seeks to quantify everything.

– Creative process is not well-understood.

• Rollo May: “Need for creativity is in direct proportion to degree of change the profession is undergoing.”


Business Definition Business Definition as a Creative Process as a Creative Process (cont.)(cont.)


2. Effective business definitions rarely emerge without an extensive knowledge of the competitive landscape.

• Rarely the result of luck or whims -- instead, are outcome of expertise and hard work.

• Examples: Head skis, Goodyear’s vulcanized rubber, and PC products from Wozniak and Jobs.




3. Effective business definition will not only answer the Who, What, and How questions, but it will also be much more creative and unique than any corporate mission statement.

• Truly distinctive definitions unlikely to emerge from committees.

– Usually the inspiration of a key entrepreneurial thinker.




4. The business definition process implies that firms will engage in some activities and not engage in others.

• Business definitions can sometimes result from not deciding or maintaining the status quo.

• However, most business definitions are redefined over time in order to maintain alignment with the larger competitive environment.

– Example of Ziebart evolving from rustproofing to supplying window tinting, sunroof installations, auto detailing, and security systems.




5. Final characteristic of business definition process is its fleeting nature.

• Many business definitions quickly become dated or irrelevant due to changes in competitive environment or actions by managers.

– Examples: transistor technology vs. vacuum tubes and Coors’ national marketing strategy vs. their previous Rocky Mountain area focus.


Business Definition and Business Definition and Competitive AdvantageCompetitive AdvantageBusiness Definition and Business Definition and Competitive AdvantageCompetitive Advantage

Business definition “positions” a firm or business in its competitive space or industry environment. Almost all industries have various strategic groups --

groups of firms pursuing similar strategies.• In brewing industry, Anheuser-Busch, Miller, and

Coors all pursue national strategies.– Microbreweries serve only small, local markets.

Examples of effective definition and positioning: Smucker jams and jellies, and Gerber baby food.

• Both aggressively defend against imitators.


Business Definition and Business Definition and Competitive AdvantageCompetitive Advantage (cont.)(cont.)


Business definition helps to focus management attention on the firm’s key objectives, the firm’s most significant strategic issues, and the firm’s most important rivals. Where are we now? Where are we taking the

business? How are we going to position our business vis-à-vis

the competition and the marketplace?




Business definition influences other strategic decisions. Usually precedes other strategic decisions.

• Example of Williams Companies and their decision to enter fiber optic cable business.




Business definition provides meaning and can be very motivational. Firms that have strong business definitions (vision

statement or organizational identity) provide employees with sense of meaning, purpose, and excitement.

• Can be more tangible and motivational than financial objectives.

– Motorola’s quality improvements, HP’s technical contributions, and Nordstrom’s exemplary customer service.


General Motors in 1921 Had 7 different car lines that lacked clear identities

and vigorously competed against each other.• CEO Sloan decided that each GM car line should

serve different, but overlapping price points (see illustration on following slide).

Illustrations of Effective Illustrations of Effective Business DefinitionsBusiness DefinitionsIllustrations of Effective Illustrations of Effective Business DefinitionsBusiness Definitions


Illustrations of Effective Illustrations of Effective Business Definitions Business Definitions (cont.)(cont.)


Chevrolet

$450 - $600

Oakland

$600 - $900

Buick, 4 cyl

$900 - $1200

Buick, 6 cyl

$1200 - $1700

Oldsmobile

$1700 - $2500

Cadillac

$2500 - $3500




GM’s strategy counted on drawing customers away from Ford’s Model T (priced at $355 and with a 60% market share).

Each higher echelon of GM car prices offered slightly higher quality than the preceding level.

This concept of differentiated products selling at different price points was so successful that GM quickly overtook Ford as market share leader.




Example 2: Cooper Tire and Rubber Company Has always performed well in an unattractive

industry.• Most success results from their positioning…selling

only replacement tires, while most competitors try to serve the OEM tire market as well.

– Does not have to offer technological advances for OEM market, thus saving R&D outlays.

• Sells only though independent dealers, avoiding distribution overhead costs.

SeeExhibit 6.3


Characteristics of Characteristics of Effective Business Effective Business DefinitionsDefinitions

Characteristics of Characteristics of Effective Business Effective Business DefinitionsDefinitions

Distinctiveness Can be competitive advantage if firm’s business

definitions are not only unique, but also difficult for competitors to imitate.

Timely and appropriate given the industry environment. Must continually redefine your business.

Clear and readily understandable. Smucker’s labels let customers know that they are

purchasing a high-quality product.


The Need for The Need for Continuous Continuous RedefinitionRedefinition

The Need for The Need for Continuous Continuous RedefinitionRedefinition

An outstanding business definition at one point in time is not sufficient. Firms must quickly respond to industry changes if

they hope to remain viable. Important to examine several firms that have

struggled or are currently struggling with the redefinition process.


Continuous Continuous Redefinition Redefinition (cont.)(cont.)


Eastman Kodak and changing photography market. Kodak and Fuji are battling for global superiority

in silver halide film market. Kodak must cope with emerging digital technologies

that might make silver halide film technology irrelevant.

• Digital cameras are becoming more affordable and capable of producing high resolution pictures.

• In order to remain competitive, Kodak has sold off non-core businesses.




• Kodak's managers have begun pursuing ways of integrating digital technologies into their products.

• Hired Motorola’s ex-CEO, George Fisher, to run company.

Kodak has not yet made its digital products profitable.

• New technologies are very different from old photography technologies.

• Company also must refrain from fighting against adopting new technologies.




Seagram and Sons Long known for its scotch, whiskey,and bourbon,

Seagram encountered dramatic decline in consumption of these beverages in 1980s and 1990s.

• In response, it sought to diversify into unrelated businesses: Conoco, Universal Studios, PolyGram.

• Also acquired makers of natural soda and orange juice beverages.


Exhibit 6.4:Exhibit 6.4: Declining Declining Market for Distilled Spirits, Market for Distilled Spirits, 1970-19951970-1995

Exhibit 6.4:Exhibit 6.4: Declining Declining Market for Distilled Spirits, Market for Distilled Spirits, 1970-19951970-1995

0

0.5

1

1.5

2

2.5

3

3.5

Ga

llo

ns c

on

su

me

d

pe

r c

ap

ita

1970 1975 1980 1985 1990 1995


Exhibit 6.5:Exhibit 6.5: Seagram’s Seagram’s Corporate History since Corporate History since 19801980

Exhibit 6.5:Exhibit 6.5: Seagram’s Seagram’s Corporate History since Corporate History since 19801980

1981: Company attempted to acquire Conoco, but acquired nearly 25% of DuPont in bidding war.

1983: Paid Coca-Cola $238-million for Wine Spectrum.

1985: Launches line of wine coolers.

1987: Sold Paul Masson, California Cellars, and Taylor.

1988: Bought Tropicana for $1.2-billion.

1993: Acquired 5.7% of Time-Warner.

1994: Acquired marketing rights for Absolut vodka.

1995: Sold interest in DuPont to finance acquisition of MCA, Inc. from Matsushita.

1998: Acquired PolyGram, the world’s largest sound recording company, from Philips Electronics.




On the negative side, Seagram’s business definitions appear to be unclear.

On the positive side, the firm has been proactive in dealing with the major market decline.




Redefinition at Steinway and Sons Long known for its excellent pianos, troubles began

when company was sold to CBS.• Firm became lost inside giant conglomerate.

• Management changes were frequent.

• Quality declined. Firm was then sold to Birmingham Brothers, non-

musicians who sought to automate the production process.

• Pianos lost their individual distinctiveness.




Redefinition at Brooks Brothers Known for its conservative (and expensive)

business attire, the firm tried to shift towards more casual clothes in order to attract more customers.

• Market research showed, however, that while customers liked the casual clothes, the BB salespeople were not selling them aggressively.

– One response: “It isn’t what we do.”

Entire organization must “buy into” the redefinition of the firm's business.




Gallo Wine Had traditionally defined itself as producer of low-

cost table wine. They now sought to enter the higher-priced varietal

market.• In spite of major advertising outlays, the firm had little

success.• Secret for success: attack new market using new name.

– Nissan/Infiniti, Toyota/Lexus, etc. had success doing this.




Monsanto Has always been proactive in changing its business

definition. Decided to aggressively invest in use of

biotechnology for agricultural applications.• Company split into two separate businesses:

– Monsanto: for the new biotech applications.

– Solutia: for its traditional commodity chemical businesses.


Exhibit 6.6:Exhibit 6.6: Monsanto’s Monsanto’s Investments in BiotechnologyInvestments in BiotechnologyExhibit 6.6:Exhibit 6.6: Monsanto’s Monsanto’s Investments in BiotechnologyInvestments in Biotechnology

June, 1995 Acquires 49.9% of Calgene, a biotechnology company.

November, 1995 Pays $25-million for rights to Ecogen’s plant gene technology.

February, 1996 Acquires large stake in Dekalb Genetics, a corn seed producer.

April, 1996 Pays $150-million for Agracetus, a company that pioneered use of “gene gun” technology.

September, 1996 Acquires Asgrow Seed, a major producer of soybean seeds.

December, 1996 Announces that it will spin-off chemicals business.

May, 1998 Agrees to acquire Dekalb Genetics and Delta Pine & Land, a cotton seed producer.




Challenges associated with redefinition. Business definition and redefinition must be

creative and on-going processes. Decisions about business definition and

redefinition must be made only after managers know a good deal about their firm’s future direction.

Sooner is better than later -- once you make the decision, move quickly.




Firm must be prepared to make sizeable investment in redefined business.

Redefinition is rarely easy.• The degree of difficulty associated with business

redefinition will be directly related to level of recognition and distinctiveness which a firm’s definition has enjoyed in the past.


Conclusions: Conclusions: Managers Managers and Their Role in Business and Their Role in Business DefinitionDefinition

Conclusions: Conclusions: Managers Managers and Their Role in Business and Their Role in Business DefinitionDefinition

Top managers should place much emphasis on business definition and redefinition.

Business definition is not strategic planning -- it provides firms with visions.

Business definitions allow managers to focus on smaller portion of competitive environment. Should shorten time required to formulate and

implement strategy. Continuous redefinition necessary to avoid market

decline.


Key Points Introduced Key Points Introduced in in Chapter 6Chapter 6Key Points Introduced Key Points Introduced in in Chapter 6Chapter 6

Business definition is a fundamental, perhaps the most fundamental, business decision that managers can make.

Good business definitions reflect creative exploitation of developments in firms’ competitive environments.

Effective business definitions share the following characteristics: They are distinctive and set companies apart from

their competitors.


Key Points Introduced Key Points Introduced in in Chapter 6Chapter 6 (cont.)(cont.)


An effective business definition can help to focus management attention on a firm’s key objectives, its most strategic issues, and its most important rivals.

An effective business definition does not answer other strategic questions, but it does make those questions more obvious and should improve strategic decision making and the implementation of strategies.

An effective business definition provides managers and employees with a sense of meaning and purpose which can be very motivational.




Firms that are defined and then continuously redefined are much more likely to keep pace with changes in their competitive environments and they are also much more likely to have clearer understandings of how resources should be allocated.

Yet redefinition poses many challenges. Firms must frequently make significant investments

in new markets and technologies without clear evidence that those investments will “pay-off.”




They are timely and appropriate given the industry environments in which companies are competing.

They are clear and really understandable by customers, as well as employees, suppliers, and other constituencies.

Business definition can contribute to the development of competitive advantage in at least 4 ways: An effective business definition can uniquely position a

firm in its industry.




Furthermore, redefinition often requires companies to radically alter the perceptions and beliefs of customers and employees.

Documents

Chapter 6 Business Definition Copyright © 1999 by Harcourt Brace & Company All rights reserved. Requests for permission to make copies of any part of the