You Can't Win Without Mastering the Rules of the Game

Every game has its unique rules, and business is no different. One fundamental rule that companies often misunderstand is accurately defining their business.

Too often, businesses attempt to define themselves in exciting, ambitious terms rather than realistic, economically sensible ones. You've probably heard it before: "We’re not in the ball bearings business; we're in global frictionless mobility solutions." But who decides these boundaries?

Discovering Your True Business Boundaries

The boundaries of a business aren't arbitrary—they are defined by economic realities. Define your business too broadly, and you'll attempt to compete in areas where you’re inevitably disadvantaged. Define it too narrowly, and you'll miss profitable opportunities and essential economies of scale.

Think of your business boundaries as something you discover, not something you merely state. Like Wile E. Coyote realizing gravity exists only after stepping off a cliff, many businesses only realize their actual boundaries after hitting them.

Correctly Defining Your Business

A proper business definition emerges from understanding three critical elements: shared costs, shared capabilities, and shared customers among your products and market segments.

Consider the case of outboard motors. OMC, the Outboard Motor Company, specialized only in manufacturing outboard motors. Yamaha, on the other hand, produced a range of small motors, from lawnmowers to motorcycles. Yamaha quickly scaled up, benefited from cost reductions due to broader experience, and became more profitable. OMC struggled because its definition was too narrow. The lesson? The correct definition wasn't simply outboard motors—it was small motors in general.

Learning from Netflix’s Pivot

Another instructive example is Netflix. Initially successful in the physical DVD rental market, Netflix faced severe setbacks when transitioning to digital streaming. They mistakenly believed that splitting the DVD and digital streaming businesses would streamline operations. However, customer overlap between these services was nearly complete, making separation detrimental.

After losing a million subscribers and two-thirds of their market value, Netflix reversed its decision. They realized the correct approach was to maintain unified customer interaction while operating two distinct logistics chains—one for physical DVDs and another for digital streaming. This pivot ultimately became one of the most successful corporate transformations in history.

Business Definitions Are Not Static

Remember, business definitions are dynamic. They evolve in response to shifting market demands, technological advancements, regulations, competitors, and customer preferences. Staying attuned to these changes ensures your business remains well-defined and strategically competitive.

Why This Matters

Getting your business definition right is foundational to creating an effective strategy. Without a clear understanding of the scope and limits of your business, strategic planning becomes a matter of guesswork. Master this rule first, and you'll set your business up to play—and win—the game.