The analysis of â€œthe businessâ€ is not yet complete and Management still has to ask: â€œAre we in the right business or should we change our business?
Of course, many companies get into a new business by accident; they stumble into it rather than steer into it. But the decision to shift major energies and resources to new products and away from old ones, the decisions, in other words, to make a business out of an accident always based on the analysis: What is our business and what should it be?
A successful Midwestern insurance company analyzing the needs of their customers came up with the conclusion that traditional life insurance leaves unsatisfied a major want of the customer: a guarantee of the purchasing power of his dollars. Life insurance and annuities, in other words, need to be supplemented by equity investment by means of a â€œpackageâ€ containing both standard life insurance, or pension in dollars, and an equity investment. To fulfill this want the life insurance company bought a small but well managed investment trust and now offers its certificates to the holders of its insurance policies and pension contracts as well as to new customers. The company has not only gone into the business of managing equity investments; it has gone into the business of merchandising investment trust certificates.
Another example is the shift from sales focus to service focus recently made by a business publisher. This company, which publishes reports for businessmen on economic conditions, taxes, labor relations and government regulation, underwent tremendous expansion during World War II; and the expansion continued at first in the postwar period. But while new sales continued to rise year after, total business volume began to stagnate around 1949; and profits began actually to go down. Analysis showed that low renewal rate was to blame. Not only did the sales force have to sell ever harder to keep total volume from slipping; the high cost of selling renewals threatened to eat up the profits from new sales. What was needed was actually a complete shift in managementâ€™s concept of the nature of the business from one of selling new customers to one of keeping old customers. This required a change in objectives; where new sales quotas had formerly been dramatized, emphasis is now on renewal quotas. It required a shift in major from selling the customer to servicing him. It required a change in organization structure; the regional sales managers were converted into managers primarily charged with renewal responsibility and with both a sales and a service manager reporting to them. It required a complete change in salesman compensation, in the criteria of selection and in the methods of training salesman. It required changes in the editorial content of the publications with more space given to long range economic trends and long range business planning.
Changes in the nature of the business arising out of innovation are too well known to require much documentation. All major enterprises in the engineering and chemical fields have largely grown by projecting innovation into new businesses. The same is true of insurance companies; the growth of the successful ones is largely traceable to their ability to develop new business on the basis of innovations in insurance coverage. The recent almost explosive growth of health, hospitalization and medical expense insurance is an example. Productivity considerations, too, may demand a change in the nature of the business.
A small wholesaler of Christmas toys added an entirely different business, the wholesaling of beachwear, to employ all year round his major economic resource: his trained sales force. Here utilization of time demanded adding a new business.
To improve the productive utilization of his resources another small manufacturer decided to give up making machine tool parts entirely and instead confined himself to being a consultant on welding problems and techniques. His manufacturing, while profitable, was no more so than that of hundreds of other small companies.