Business Definition
Over the next several weeks and months, I’ll be offering thoughts and ideas on selected strategic and analytic aspects of business and finance, where I have spent my professional career. Topics covered will include: business strategy, value-based finance, performance measurement and capital investment.
I will begin with business strategy, since all management activity and financial analysis should support the strategy for the business. The notion that strategy “drives” the investment and operations for any business and establishes the framework for measuring performance against specified goals is a centerpiece for these articles.
At its core, business strategy entails the resolution of four basic questions:
§ What business are we in?
§ Who is the customer?
§ How does the customer define value?
§ How do we deliver that value?
The first question, the topic for this article, relates to Business Definition. As simple as it may seem, some (perhaps many) companies – especially those that have grown and diversified – either have not defined their core business or have a definition that is not clear. This can be detrimental, especially if large public shareholders are the ones who lack clarity. In support of this statement, I’d like to offer a quote from one of the most influential management experts of the 20th century, Peter Drucker, who stated (in his famous text, Management: Tasks, Responsibilities, Practices) that … “Nothing may seem simpler or more obvious than to know what a company’s business is. A steel mill makes steel, a railroad runs trains to carry freight and passengers, an insurance company underwrites risk, a bank lends money. Actually, ‘what is our business’ is almost always a difficult question and the right answer is usually anything but obvious. Common vision, common understanding, and unity of direction and effort of the entire organization require definition of what our business is and what it should be.”
Business definition should be developed from the perspective of customers who have needs and for which the marketplace provides solutions. While we can not provide diagrams in these articles, I would suggest drawing one by starting with an arrow labeled ‘customers’ that goes horizontally from left to right. Then another arrow labeled ‘needs’ is drawn vertically upward (with the bottom touching the beginning point of the first arrow). A third arrow labeled ‘solutions’ starts at this intersection and goes downward diagonally (45 degrees) to the left. This is a basic construct for viewing the first question – what business are we in? Now, start to write in who the major customers are, their key needs and the solutions your company provides. Upon completion, write a brief descriptive phrase that captures the essence of the business. This is your current business definition. Let’s call it Point A. If you repeat the process looking forward, you’ll define the future business. Let’s call this Point B – what you want to be. A key question for the future is whether you’re going to expand the business beyond the current served market. Performance goals and objectives, in conjunction with the opportunities within the current served market, influence the answer and, thus, the future business definition. The CEO should lead the effort, with senior management involvement.
Another way to approach this challenge is to write a newspaper headline article (say, a paragraph that you would be proud to read) to be published at some future time and stating what the company has accomplished over the past number of years and where it is in terms of the factors stated above. For a conglomerate or diversified company, this approach is a practical way to accomplish the task, because defining customers, needs and solutions for the entire corporation is difficult, if not impossible. For the individual business units, the approach and construct discussed above is recommended.
Point B is called Vision. It’s what you want the business to be. To get an appreciation of the effort involved, it’s typically an intensive one or two day work session, depending on the size and scope of the business. This work should set the stage for strategy development, galvanize the employees and help direct their work efforts.
Currently dba Corporate Strategy, a consulting practice, my forty-year career has encompassed management, consulting, educational and entrepreneurial positions, with either deep experience in or exposure to most areas of financial planning and analysis. Think of me as a strategic and analytic partner for the CFO. Much of the material I plan to cover is taken from my book, Shareholder Value – A Business Experience, along with articles published in business journals. My contact information is:
Roy E. Johnson
(203) 438-1240
r.e.johnson@sbcglobal.net
