THE SECOND COMMANDMENT

What Business Are You In?

Define the business of the enterprise in terms of what is to be bought, precisely by whom, and why.

Businesses are organs of society that perform tasks associated with providing most goods and services the public decides it wishes to own and use. Under this capitalistic system, a business can prosper to the extent that it performs its particular tasks effectively and efficiently within the law. The nature of the tasks to be performed usually changes over time as those served change. The people in a successful company predict and respond to their chosen customers’ needs. Customers, therefore, define an enduring business. At all times, some customers are growing in their ability to buy; others are declining. The astute manager ascertains which is which.

Over forty years ago, Ted Levitt published an article, Marketing Myopia that became a classic. His words still ring true. Levitt said that customers buy need satisfactions, not products. He illustrated his point with two famous examples. Why did railroad companies, once very prosperous, decline in importance and value? Because railroad business people persisted too long in defining their businesses as the rail-bound movement of people and goods. They failed to recognize that customers were buying transportation. Transportation was the generic need being satisfied, and as new, non-rail forms became available, e.g., air and highway, there was no reluctance among railroad customers to switch. Had railroad managements been less myopic, they could have led the way into the new forms of transportation. Levitt's second example was from the movie industry.

What did (and do) people buy when they attend theaters? The movie business people of the 1950s assumed the answer was movies, of course. Levitt noted that a more useful view would have been that people were buying entertainment. If movie executives had defined their businesses in terms of the generic need for entertainment, they might have been the first people into the new medium of television when it appeared.

Entrepreneurs face three special hurdles when it comes to defining their businesses in terms of their customers.

First, many new enterprises are started by technical people—engineers, scientists, and inventors—who, almost by definition, are likely to be deeply attached to the initial product or process. In effect, the founders get caught up in the folk lore of building a better mousetrap. The truth is that people don't buy mousetraps, parse, they buy ways to eliminate mice. Think about it.

Second, entrepreneurs are prone to generalize about who their real customers are. They think in terms of serving "companies” and “consumers,” which are extremely vague classes of potential buyers. Finally, entrepreneurs, in their enthusiasm and infectious optimism, sometimes fail to pinpoint concrete reasons why individual decision makers will buy the entrepreneur’s specific new product, service, or experience. In short, the entrepreneur neglects to think through just what will differentiate his or her enterprise in customers' minds, be it price, performance, convenience, or... Following are three short cases to illuminate these hazards to a successful start-up operation.

Think about the answers before proceeding–

Here is a partial list of possible answers to the questions.

Q1. Customers might buy teaching machines to:

Reduce teacher or instructor costs Improve student or trainee retention of material Increase efficiency (teach more people per hour) Improve utilization of facilities Help slow learners

Q2. The buying decision might be made by:

Academic Market Segment Teachers School administrators School boards PTAs Business/Industrial Market Segment Profit center managers Training directors Personnel managers Purchasing agents

Q3. A given buyer might buy in order to:

Improve his or her performance Enhance his or her reputation as an innovator Capture available investment tax credits before they expire Experiment Avoid hiring additional people

There are certainly a lot of possibilities. Effective entrepreneuring requires that the possibilities be reduced in number to the point where rifle-shot marketing and selling becomes possible.

Children Camps Adult Camps What is bought?

1. Tennis skills 1. Social mixing

2. Camp experience 2. Vacation

3. Baby sitting 3. Tennis skills

Who buys? Parents Adults, mostly singles

Why? 1. Child development 1. New experience

2. Social status 2. Physical fitness

3. Free-up time during 3. Athletic prowess school vacation

4. Meet opposite sex In Case E, properly defining the business in terms of its customers would have led the entrepreneur to the conclusion that, in fact, he was dealing with at least two discrete tennis businesses. Each one had its own distinct marketing, sales, and operations requirements for success. Of course, if an entrepreneuring team such as the one in Case F has enough money, it may be able to muddle through the range of alternatives and eventually ferret out one or more solid, profit-making opportunities.

There is almost always going to be some muddling, which is why a young company needs an adequate supply of money up front, i.e., capitalization. But there is a lot to be said for minimizing the muddle factor beforehand with hard thought, market research, field interviews, and actual sales calls. Up to some point short of paralysis by analysis, the respective enterprise should be defined as tightly as possible on paper. This doesn’t preclude later deviations in direction based on new information (see Commandment Ten). Putting things on paper can help founders minimize spending energy and money leading their companies down blind alleys.