It is at the heart of strategy – the question that Peter Drucker described as the fundamental decision. What business are you in?

One of the most important questions of any business strategy – perhaps the most important – is deciding what business you are in. Peter Drucker described this as the fundamental decision in business. While it is, at first look, a simple question, answering it is not always an easy task; nor is the essential next step, putting the decision into practice.

Limited resources demand focus

The demands on any business’s resources, including the time of its people, are potentially endless. Part of a leader’s job is determining whether an innovation, new idea, invention, or other attraction is an important opportunity, or a distraction that will require an investment in time, resources, effort and money that could damage the business’s future. All activities outside the fundamental purpose must be examined closely for both positive and negative business impacts before they are implemented.

Management experts are fond of pointing out what can go amiss when businesses fail to define properly what business they are in. One example harks back to the era when the railroads dominated transportation in the US. Those companies missed an important opportunity because they self-defined as railroad companies, rather than defining themselves more broadly as transportation companies. As airplane technology developed, it came to be used for operations which had been performed only by locomotives. Had the rail companies incorporated airplanes as a transport vehicle along with their locomotives, they might have come to dominate the new market. Instead, many of them disappeared as airplane technology developed and offered advantages which locomotives could not duplicate.

The wrong solutions

A company also needs to be careful of pursuing solutions to a problem which will damage their organization. It is another risk of failing to answer clearly the question of what business you are in.

One company which developed and manufactured helmets for military aviators faced periodic losses due to the US government’s purchasing policies, which were based on annual approval of funding. Its workload was a continuous cycle of peaks and valleys in sales, and the company regularly had machinery and workers sitting idle awaiting contract approval.

The company decided that a possible solution was to fill that downtime by focusing on consumer needs. Helmets for motorcyclists appeared to be a solution. Aviator’s protective helmets could also protect motorcyclists; they could be made with the same machinery and by the same workers. However, the two markets were different. For example, the government bought aviator helmets once a year in large quantities. Motorcyclists bought a single helmet, which not only required different standards of protection but a fundamentally different product, with different marketing and advertising, pricing and distribution systems. It was not just a question of packaging or giving the helmets a different name.

As a result, the company found it necessary to make many modifications, requiring changes in product design and manufacturing, and other additional investments. The company invested several million dollars; it ended up producing a more protective but much heavier and higher-priced motorcycle helmet than users wanted or could afford. The company almost went bankrupt.

Information not to be taken lightly

Determining what business you are in is the most important factor in creating an organization’s operational strategy. Peter Drucker taught that this was the responsibility of every business manager. Once defined, other considerations and strategies can be more readily determined. Accurately defining the business and its fundamental purpose will save time, money and other resources that can be used elsewhere to add value. At the same time, it will assist in focusing on those opportunities and possibilities that are important to building the business for the future.

Until you recognize what business you are in, your organization will commit errors, no matter how effective operations are in other ways. And since resources of all types are limited, selecting and concentrating these limited resources, and how they will be most effective and provide the most benefit, is critical.

This can only be accomplished after the answer to the fundamental question is determined. Without this important information, different parts of the company may be working on activities that are counterproductive and may harm rather than help the business perform profitably. Time, money and resources will be wasted and lead to wrong actions.

Answering the question

To answer the question, “What is our business?”, leaders can ask a series of questions. Critically, you must see the business from the customer’s point of view. As Drucker noted: “In reality it is the customer who defines your business.” So, it’s a good idea to question customers, as well as employees, to determine the answers to the key set of questions.

  • Who is the customer?
  • Where is the customer located?
  • What does the customer buy?
  • What does the customer consider to be valuable?
  • Who and what does the customer consult in making the decision to buy?

Unfortunately, these questions are often only considered when a company is in trouble – by which point it may be too late. A smart executive will ask these questions when the business is formed and then periodically afterwards, not waiting until he is forced to act.

Arriving at the correct fundamental decision can make the difference between success and failure – and will benefit employees, workers, managers and customers, too.