Business Definition Author: Gisele Garraway Contributors:

Business Definition Author: Gisele Garraway Contributors:
bc Business Definition Author: Gisele Garraway Contributors: Susan Caraviello, Paul DiPaola, and Todd Senturia Reviewer: Todd Senturia March 1998 Copyright© 1998 Bain & Company, Inc.

Business Definition Agenda The business definition concept
Applications Business definition steps Client examples Bunker Hill Door Systems JJR Industrial Coatings Key takeaways CU ECA

What is Business Definition?
Business definition delineates the economic boundaries within which companies should compete. 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 CU ECA

One Business vs. Separate Businesses
Business Definition One Business vs. Separate Businesses 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. Same customers Same cost structure Same competitors Different customers Different cost structure Different competitors One business Separate businesses Compete in both segments to take advantage of synergies Do not compete in both segments CU ECA

Tactical insights with strategic importance
Business Definition Why Bain Uses Business Definition The correct business definition can lead to case-cracking insights. 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? CU ECA

Consequences of Incorrect Business Definition
Companies that define their businesses incorrectly make poor strategic decisions. Costs Customers Competitors Incur unnecessary costs Forgo opportunities to capture synergies Do not transfer experience Underinvest in important R&D initiatives Neglect profitable customer segments Over-invest in unprofitable customers Forgo opportunities to capture synergies Misjudge relevant market trends Overlook relevant geographies Overlook relevant competitive threats Miscalculate “market share” Set inappropriate performance targets Overlook relevant capacity changes Misjudge true cost position CU ECA

Examples of Incorrect Business Definition
Some respected companies have missed profit opportunities or suffered unnecessary losses because they did not define their businesses correctly. Company How management defined the business A better business definition Consequences of incorrect business definition American Express 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 Allegis 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 Saatchi & Saatchi 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 CU ECA

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 ROS/RMS The underlying normative band will not emerge Growth/Share A business may look deceptively attractive or unattractive CU ECA

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 $1 $2 $5 1 2 5 10 20 50 100 Cost per Transaction Now Accounts Slope = 70.1% R² = 0.98 $1 $2 $5 10 20 50 100 200 500 1,000 Cost per Transaction Now + Savings Accounts Slope =57.2% R² = 1.00 Experience Curve We may ignore relevant experience RCP We may benchmark the wrong competitors CU ECA

Complexity of Business Definition
A simple catalog of logical arguments is not robust enough to delineate the competitive battlefields for our clients. One Business Separate Businesses Is it one business or not? 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 pens Both used for same function, writing Similar raw materials Some manufacturing steps shared High perceptual barriers to customers Limited customer base overlap Beer and distilled spirits Brand name sharing opportunities Same distribution channels Sold by same salesforce Limited benefits of shared R&D Key manufacturing processes are different Different raw materials CU ECA

Business Definition Matrix
Bain uses the business definition matrix to delineate economic boundaries. Cost sharing and customer sharing are the primary determinants of defining a business. High One business with potential for differentiation or niche position (Cross pens and BIC pens) One business (charge cards and credit cards) Separate businesses with potential for cost leadership (oil and refinery by-products) Cost Sharing Separate businesses (beer 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) Low Low Customer Sharing High CU ECA

Government regulation
Business Definition Dynamics of Business Definition Business definition is dynamic. Temporary barriers, such as price premiums and technology advantages, will erode unless they are consistently reinforced. Customer needs Technology Channel economics Business Definition Input prices Product innovation Government regulation CU ECA

Local vs. Regional vs. National vs. Global Businesses
Business Definition Local vs. Regional vs. National vs. Global Businesses Clients often cite the need for national or global participation. However, in many businesses, local or regional scale drives profitability. Driver of Profitability Example Local scale Residential laundromats Barber shops Regional scale Hospital textile laundering Banking - deposit gathering National scale Overnight package delivery Banking - lending Global scale Professional online financial data CU ECA

Examples 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 revolutionized the package delivery business by introducing an overnight delivery service Charles Schwab dramatically altered the mutual funds business by introducing a no-fee service whereby customers could purchase many companies’ mutual funds through Schwab Calyx & Corolla transformed the flower distribution business by using information technology to cut out traditional distributors and ship flowers directly from growers to customers Starbucks redefined the coffee shop business from providing coffee to providing a social experience The Body Shop revolutionized the cosmetics business by merging the ideas of beauty, health, and environmental consciousness Staples, 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 one CU ECA

Electrical and Electronics
Business Definition Applications Bain has used business definition in hundreds of cases and dozens of industries. Some examples of our work are: Financial Services Textiles Electrical and Electronics Situation: A large residential realty company was considering entering the commercial real estate market and wanted to evaluate the attractiveness of the market A large U.K. textile launderer with 23% ROS enters the U.S. market and earns only 5% An electronics company had the opportunity to outsource its electronics testing service but was unsure if test outsourcing would define a viable new business Result: 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 commercial business Bain found that the business definition 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 Southeast Bain 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 entry barriers were too high CU ECA

Business 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. More important Cost sharing Is there substantial cost sharing? Customer sharing Degree of emphasis Is there substantial customer sharing? Competitor acid tests Does business definition pass the competitor acid tests? Less important CU ECA

Cost sharing Is there substantial cost sharing? Is there substantial direct cost sharing? Are there substantial opportunities for experience transfer? More important Customer sharing Degree of emphasis Competitor acid tests Less important CU ECA

Business Definition Cost Sharing
An assessment of cost sharing involves examining direct cost sharing and experience transfer. High Probably separate businesses One business* Experience transfer Probably one business Separate businesses* Low Low Direct cost sharing High *On a cost basis only, we must also look at customers and competitors to determine whether the businesses are one or separate. CU ECA

How Direct Costs Can Be Shared
Business Definition How Businesses Share Costs Businesses can share costs in a variety of ways. How Direct Costs Can Be Shared Value Chain Steps Examples Multiple applications of some R&D efforts Tape and Post-it Notes (3M) R&D Shared raw materials Shared inbound logistics Gasoline and petrochemicals Procurement Similar manufacturing facilities processes Vitreous china toilets and sinks (Kohler) Manufacturing Same distribution channels Cigarettes and candy (Philip Morris) Distribution Brand name sharing Same sales force Healthy Choice dinners and cereal Soda and orange juice (Coca-Cola) Sales and Marketing Shared info systems BankBoston NOW accounts and savings accounts Administrative Support CU ECA

(Semi-finished product)
Business Definition Experience Transfer Firms can benefit from experience transfer when two products share similar high volume, value-added processes. Product A Product B Supplier A Supplier B (Raw materials) Processor C Processor D (Semi-finished product) Forge Forge Grind Grind Paint Paint (Finished product) Distributor Y Distributor Z Customers Customers Lessons learned from product A can improve manufacture of product B CU ECA

Cost sharing More important Is there substantial customer sharing? 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? Degree of emphasis Competitor acid tests Less important CU ECA

Functional substitution
Business Definition Customer 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. Customer base overlap Functional substitution Perceptual barriers Do 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? Do different products currently or potentially fulfill the same customer usage needs? product utility analysis cross-elasticity analysis Do customers perceive significant differences among the products? CU ECA

Probably separate businesses
Business Definition Customer Sharing (p.2) Generally, high customer base overlap, high functional substitution and low perceptual barriers suggest one business. Customer sharing Low High High Low Customer base overlap Functional substitution Perceptual barriers Probably separate businesses Probably one business CU ECA

Common Customer Base Overlap Criteria
Business Definition Customer Base Overlap Customer base overlap can be determined by comparing purchasers or decision makers for the two products. Common Customer Base Overlap Criteria Used by same organization or customers Purchased by same individual or group Purchase decision made by same individual or group Limited customer base overlap CU ECA

Functional Substitution
Business Definition Functional Substitution There are two ways to evaluate whether products are substitutes. Product utility analysis Cross-elasticity analysis Do 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 customers buy knives as a substitute? CU ECA

Functional Substitution - Product Utility
Business Definition Functional Substitution - Product Utility If products offer very similar non-price attributes or functional benefits, they are potential substitutes. CU ECA

Functional Substitution - Cross Elasticity
Business Definition Functional Substitution - Cross Elasticity If a price increase in one product increases the demand for another, the two products are probably substitutes. High elasticity Demand for Butter Price of Margarine CU ECA

Business Definition Perceptual Barriers
Customer’s perceptions can be indicators of business definition; however, what customers perceive can often conflict with the economic boundaries. Perceptual barriers Low High Customers’ view : Products are similar Products serve different functions Examples: Wooden canoes and aluminum canoes Women’s fragrances and men’s aftershave CU ECA

Cost sharing More important Customer sharing Degree of emphasis Does business definition pass the competitor acid tests? Do competitors offer similar products and serve similar customers and channels? Does profitability correlate with definition of market share? Do decisions a competitor makes in one business affect the decisions that a competitor makes in another business? Competitor acid tests Less important CU ECA

Business Definition Competitor Acid Tests
To validate our business definition hypothesis, we use three competitor acid tests. Consistency Profit explanation Independent actions What products do individual competitors offer? Which customers/channels do competitors service? 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? pricing investment CU ECA

Business Definition Steps - Summary
Cost sharing Is there substantial cost sharing? Is there substantial direct cost sharing? Are there substantial opportunities for experience transfer? More important Customer sharing Is 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? Degree of emphasis Does business definition pass the competitor acid tests? Do competitors offer similar products and serve similar customer/channels? 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? Competitor acid tests Less important CU ECA

Bunker Hill Door Systems* - Background
Business Definition Bunker 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: Bunker Hill is a $400MM division of Hills Worldwide. This division manufactures entry doors, garage doors (GDS), and garage door openers (GDOs). Hills Worldwide has set aggressive growth targets for all divisions Complication: Bunker 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 of well-established, low-cost competitors Question: How can Bunker Hill grow profitably? Assertion 1 Assertion 2 Assertion 3 GD, GDO and entry doors are separate businesses and therefore require different strategies for profitable growth CU ECA *Disguised client case

Bunker Hill - Direct Cost Sharing (p.1)
Business Definition Bunker Hill - Direct Cost Sharing (p.1) Costs Customers The Bain team found that materials accounted for a substantial proportion of Bunker Hill’s costs in all three business segments. Compet- itors CU ECA Source: Bunker Hill Financials

Bunker Hill - Direct Cost Sharing (p.2)
Business Definition Bunker Hill - Direct Cost Sharing (p.2) Costs However, in peeling the onion, the team discovered very little material cost sharing, suggesting that on a cost basis there were 3 separate businesses. Customers Compet- itors CU ECA *Includes gates and electronics Source: Purchase Price Variance Report

Experience transfer potential with entry doors
Business Definition Bunker Hill - Experience Transfer Costs Using entry doors as a baseline, the Bain team found limited opportunities for experience transfer. Customers Compet- itors Experience transfer potential with entry doors High Medium Low Garage Door Garage Door Openers R & D Procurement Manufacturing Distribution CU ECA Source: Management Manufacturing Interviews

Bunker Hill - Customer Base Overlap
Business Definition Bunker Hill - Customer Base Overlap Costs The Bain team found limited customer base overlap between garage doors and entry doors, and between garage doors and garage door openers. Customers Compet- itors CU ECA Source: Bunker Hill Customer Database

Bunker Hill - GD and GDO Customer Sharing
Business Definition Bunker Hill - GD and GDO Customer Sharing Costs Customers Most Bunker Hill customers bought openers when they bought Bunker Hill doors. Compet- itors CU ECA Source: Door Systems Customer Interviews

Bunker Hill - Perceptual Barriers
Business Definition Bunker Hill - Perceptual Barriers Costs Customer feedback revealed low barriers between garage doors and openers. However, customers viewed entry doors as separate from garage doors and openers. Customers Compet- itors Low Perceptual Barriers High Garage doors and garage door openers Garage doors and entry doors Entry doors and garage door openers “I like to buy my garage door and the opener from the same manufacturer. It’s the same as with TVs. I wouldn’t buy the remote control from one company and the TV from another.” -Garage door customer “Garage doors need to be made of steel and be strong. Entry doors should be well crafted and be attractive.” -Garage door customer “Garage door openers should be bought from a reputable electronics type company.” -Garage door opener customer Source: Customer Interviews CU ECA

Bunker Hill - Competitor Acid Test
Business Definition Bunker Hill - Competitor Acid Test Costs Customers A competitor acid test validated the team’s findings. Bunker Hill is the only player who participates in all three segments. All other players make and sell only entry doors or only garage doors and garage door openers. Compet- itors Company Garage Door Openers Garage Doors Entry Doors Bunker Hill Chamberlain Overhead door Wayne-Dalton Clopay Castlegate/Premdor Peachtree Pease Therma-Tru Source: Competitor Annual Reports and Web Sites CU ECA

Bunker Hill - Customer and Cost Summary
Business Definition Bunker Hill - Customer and Cost Summary Based on its analysis, the Bain team classified Bunker Hill’s businesses as follows: High One business with potential for differentiation or niche position One business Entry doors and garage doors Separate businesses with potential for cost leadership Cost Sharing Garage doors and garage door openers Entry doors and garage door openers Separate businesses with potential for bundling One business with potential for substitution Separate businesses Low Low High Customer Sharing CU ECA

JJR* - U.S. Industrial Coatings Market
Business Definition JJR* - U.S. Industrial Coatings Market JJR defined its business as the 13 end-use segments of the non-auto industrial coatings market. Many clients will define their business in this way. $14,433MM $5,380MM $4,297MM CU ECA *Disguised client case Source: Skeist, U.S. Census, Frost & Sullivan, Freedonia, Literature Searches, Industry Interviews

JJR - Coatings Products
Business Definition JJR - Coatings Products There are five types of industrial coatings: solvent-based, water-based, ultra violet cure, E-coat, and powder. Description Uses Solvent-based (SB): Most common spray-on industrial paint Used by OEMs Highly toxic Paint on tractors, cars, metal office furniture, toys, etc. Water-based (WB): Common OEM spray-on paint Environmentally friendly Ultra violet cure (UV): Specialized application for curing or drying final clear coat Dries under UV light for better appearance Clear coat on hardwood floors, food cartons and containers (e.g., orange juice cartons) Electra-coat (E-coat): Anti-corrosive primer coat Items are dipped into tanks Electric current passes through paint tank to apply color Limited colors Anti-rust undercoating on cars Powder: Newer, more environmentally friendly Applied in spray booth Easy to collect excess and recycle Similar to solvent based CU ECA

Business Definition JJR - Coatings Usage
The usage of the five coating types varies significantly across the end-use segments. $403 $209 $206 $149 $170 $164 $284 $257 $57 $47 $67 $52 $42 $91 $36 $201 $193 Total sales = $2,578MM CU ECA Source: Skeist; Frost & Sullivan; Freedonia; U.S. Census; Chemical Marketing Reporter; Bain Analysis

JJR - Direct Cost Sharing
Business Definition JJR - Direct Cost Sharing Costs Customers Using SB as a baseline, the team used limited cost data along with qualitative assessments from manufacturing and industry experts to determine that the only significant direct cost sharing was between solvent-based and water-based. Overlap with SB Competi- tors High Medium Low (raw materials) COGS (other) Water-based Powder Ultra-violet Electra-coat CU ECA

E-coat vs. non e-coat leveragability
Business Definition JJR - Experience Transfer Costs Customers In analyzing the value chain steps, the Bain team found that the opportunities for experience transfer between E-coat and non-E-coat were low. Competi- tors E-coat vs. non e-coat leveragability High Medium Low Solvent Pigment Resin Additive Finished mat’l handling Resin R&D Coating R&D Raw mat’l QC Raw mat’l handling Resin prod Pre-batch QC Grinding Blending/ mixing Post-batch QC Packing Selling Field Application CU ECA

potential substitutability
Business Definition JJR - Functional Substitution Costs Customers The case team found that the only substitutability was among solvent-based, water-based and powder. Competi- tors Degree of current/ potential substitutability Solvent- based Low Medium High Water-based Powder E-coat EB/UV Solvent- based Water-based Powder E-coat UV CU ECA

Business Definition JJR - Customer Sharing
The team found little customer sharing between E-coat and other technologies. Customer overlap CU ECA

JJR - Competitor Acid Test
Business Definition JJR - Competitor Acid Test Costs JJR’s was the only competitor to compete in E-coat to a significant degree. This helped to explain its above average profitability. Customers Competi- tors Percentage of revenue from E-coat: 55% 35% 10% 0% 5% 5% 0% 0% CU ECA

A single business with some segment barriers
Business Definition JJR - Business Definition Summary The Bain team’s analysis demonstrated that JJR was not in only one business. Solvent-based Water-based Powder UV E-coat Separate business with opportunities to use as door opener for SB/WB/Powder business A single business A single business with some segment barriers Rationale: High cost sharing between SB and WB High customer sharing and high degree of product substitution between SB and WB Moderate cost sharing between SB/WB and powder High customer sharing and high degree of product substitution between SB/WB and powder Moderate cost sharing between SB/WB and UV Moderate customer sharing and low degree of product substitution between SB/WB and UV Lower cost sharing with other businesses High customer sharing, but moderate degree of substitution with other businesses CU ECA

Business Definition JJR - Implications
JJR’s industrial coatings business consists of at least two separate businesses E-coat: technology business with distinct resins, R&D and field technical support pursued across multiple vertical industry segments non-E-coat: multiple technologies (solvent, water-based, powder, UV) with some unique R&D pursued on a vertical industry basis with unique field technical support and sales often required for large verticals JJR’s competitive positions in the two businesses are very different very strong position in high margin, moderate growth E-coat business wide range of profit, growth and competitive positions in non-E-coat businesses that require unique strategies The rules of competition for the two businesses are very different and distinct strategies are required maintain position through technological innovation differentiate on technology and specific technical services expand broadly across new verticals build scale position in individual industries differentiate on vertical expertise and product breadth in mature segments, focus on low cost position CU ECA

(Specialized by Industry) Low Tech Small Batch Distribution Business
Business Definition JJR - Follow-On Work In further work on industrial coatings, Bain identified two distinct non-E-coat businesses. Non-E-coat High Tech (E-Coat) Lower Tech (Specialized by Industry) Low Tech Small Batch Distribution Business Cost Drivers: Technology-specific R&D Technology-specific sales/service Unique patented formulations Vertical industry-specific R&D Vertical industry-specific sales/services Specialized formulations without patents General coatings R&D Distributed mixing/delivery site General sales/service Customers: Specialized E-coaters Auto parts suppliers Large OEMs Large manufacturers in select vertical industries (e.g., appliances, furniture, containers, construction, auto) Wide range of generally smaller coatings customers (i.e., coating job shops, machine shops, small parts manufacturers) Competitors: Technology-focused coating manufacturers Coatings manufacturers specialized by vertical industry Regional and national coatings manufacturers with local distribution networks shared across industries and some architectural paints Rules of competition: Compete on technology innovation Compete on vertical service and lowest systems cost to large customers Compete on regional distribution service (e.g., economy deliveries, frequent deliveries, rapid turnaround) CU ECA

Business Definition Key Takeaways The Basic Concept
Business definition delineates the economic boundaries within which companies should compete If two segments have the same customers, the same cost structure, and the same competitors, they are one business Business Definition Steps Bain uses the business definition matrix to delineate economic boundaries Cost sharing and customer sharing are the primary determinants of defining a business Business definition is not an exact science Cost sharing An assessment of cost sharing involves examining direct cost sharing and experience transfer Businesses can share costs in a variety of ways Customer Sharing Customer sharing analysis includes measuring the customer base overlap, functional substitution and, to a lesser degree, looking at perceptual barriers Generally, high customer base overlap, high functional substitution, and low perceptual barriers suggest one business Competitor Acid Tests To validate a business definition hypothesis, we use three competitor acid tests: consistency, profit explanation, and independent actions CU ECA

Business Definition Takeaway Slides (p.1) What is Business Definition?
One Business vs. Separate Businesses Same customers Same cost structure Same competitors Different customers Different cost structure Different competitors 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 One business Separate businesses Compete in both segments to take advantage of synergies Do not compete in both segments Business Definition Steps Summary Business Definition Matrix High One business with potential for differentiation or niche position (cross pens and BIC pens) Cost sharing One business (charge cards and credit cards) Is there substantial cost sharing? Is there substantial direct cost sharing? Are there substantial opportunities for experience transfer? More important Separate businesses with potential for cost leadership (oil and refinery by-products) Customer sharing Is 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? Degree of emphasis Cost Sharing Competitor acid tests Separate businesses (beer 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) Does business definition pass the competitor acid tests? Do competitors offer similar products and serve similar customer/channels? 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? Less important Low Low Customer sharing High CU ECA

Probably separate businesses
Business Definition Takeaway Slides (p.2) Customer Sharing Cost Sharing Customer base overlap Functional substitution Perceptual barriers Probably separate businesses Probably one business Customer sharing Low High High Probably separate businesses One business Experience transfer Separate businesses Probably one business Low Low Direct cost sharing High Competitor Acid Tests Dynamics of Business Definition 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? pricing investment What products do individual competitors offer? Which customers/ channels do competitors service? Consistency Profit explanation Independent actions Customer needs Technology Channel economics Business Definition Input prices Product innovation Government regulation CU ECA

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