slide1 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Business Definition 3C Penetration Curve (S-Curve) Ratio Analysis Product Line Profitability PowerPoint Presentation
Download Presentation
Business Definition 3C Penetration Curve (S-Curve) Ratio Analysis Product Line Profitability

Loading in 2 Seconds...

play fullscreen
1 / 467
niles

Business Definition 3C Penetration Curve (S-Curve) Ratio Analysis Product Line Profitability - PowerPoint PPT Presentation

384 Views
Download Presentation
Business Definition 3C Penetration Curve (S-Curve) Ratio Analysis Product Line Profitability
An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. Table of Content • Business Definition • 3C • Penetration Curve (S-Curve) • Ratio Analysis • Product Line Profitability • Profit Pool • Relative Cost Position • Relative Market Share • Value Chain • BDP (Best Demonstrated Process) • Reengineering • Variance Analysis

  2. Business Definition

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

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

  5. Business Definition 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

  6. 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 Separate businesses One business Compete in both segments to take advantage of synergies Do not compete in both segments

  7. Business Definition Why ABC Consulting 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 forVMRs (value managed relationships? • How should we configure our manufacturing plants?

  8. Business Definition 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

  9. Business Definition 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

  10. Business Definition Analytic Consequences of Incorrect Business Definition (p.1) Business definition must be the starting point of any ABC Consulting case because defining a business incorrectly can adversely affect strategic analysis and decision making. If we definea 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

  11. Business Definition $5 $5 Slope = 70.1% $2 Cost per Transaction $2 Cost per Transaction Slope =57.2% R² = 0.98 R² = 1.00 $1 $1 1 2 5 10 20 50 100 10 20 50 100 200 500 1,000 Now + Savings Accounts Now Accounts 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 definea business incorrectly... Incorrect Business Definition Correct Business Definition Experience Curve • We may ignore relevant experience RCP • We may benchmark the wrong competitors

  12. Business Definition 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

  13. Business Definition Business Definition Matrix ABC Consulting 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

  14. 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

  15. 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

  16. Business Definition 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

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

  18. Business Definition Applications ABC Consulting 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: • ABC Consulting 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 • ABC Consulting 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 • ABC Consulting 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

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

  20. Business Definition Business Definition Steps To appropriately define a business, ABC Consulting 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 acidtests • Does business definition pass the competitor acid tests? Less important

  21. Business Definition Business Definition Steps 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 acidtests Less important

  22. 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.

  23. Business Definition How Businesses Share Costs Businesses can share costs in a variety of ways. How Direct CostsCan 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

  24. 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

  25. Business Definition Business Definition Steps 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 acidtests Less important

  26. 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?

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

  28. 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 sameindividual or group Limited customer base overlap

  29. 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?

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

  31. 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

  32. 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

  33. Business Definition Business Definition Steps 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 acidtests Less important

  34. Business Definition Competitor Acid Tests To validate our business definition hypothesis, we use three competitor acid tests. Independent actions Consistency Profit explanation • 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

  35. Business Definition Business Definition Steps - Summary Cost sharing More important • Is there substantial cost sharing? • Is there substantial direct cost sharing? • Are there substantial opportunities for experience transfer? 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 Competitor acidtests • 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

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

  37. Business Definition Bunker Hill Door Systems* - Background ABC Consulting 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 *Disguised client case

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

  39. 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 *Includes gates and electronics Source: Purchase Price Variance Report

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

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

  42. 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 Source: Door Systems Customer Interviews

  43. 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

  44. Business Definition Bunker Hill - Competitor Acid Test Costs 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. Customers 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

  45. Business Definition Bunker Hill - Customer and Cost Summary Based on its analysis, the ABC Consulting 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

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

  47. 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 *Disguised client case Source: Skeist, U.S. Census, Frost & Sullivan, Freedonia, Literature Searches, Industry Interviews

  48. 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

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

  50. Business Definition COGS (other) (raw materials) JJR - Direct Cost Sharing Costs 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. Customers Overlap with SB Competi- tors High Medium Low Water-based Powder Ultra-violet Electra-coat