The Most Important Strategic Question To Ask: What Business Are You In? -

The Most Important Strategic Question To Ask: What Business Are You In?

As I write this, I’m resting in an elegant second-floor hotel lobby overlooking the cobblestone streets of a pedestrian shopping district in Dublin, Ireland. Over the past 48 hours, I’ve delivered nine hours of speeches and workshops, conducted three podcasts and radio show interviews, and come to appreciate the remarkable advances Northern Europe has made to become a vibrant technology innovation hub.

Consider, for example, Ambu, a Danish medical technology company that sees itself as something entirely different.

My first trip to Ireland, a few years ago, was to celebrate the wedding of the current CEO of Ambu. He is my best friend. I was his best man

After a flourishing career at Johnson & Johnson where he rose to run a significant business, he decided to take the helm of Ambu in part because he recognized a powerful strategic principle at play: defining what business you are in.

What is our business?

This principle is at the source of numerous breakthrough businesses including Starbucks, Zappos, and, a lesser known but equally impressive company, Hartford Steam Boiler. If you understand it, you might, with a bit of luck and execution, build a business of similar success and longevity. If you overlook it, you risk being disrupted by someone who hasn’t ignored it.

Peter Drucker pointed to this strategic principle when he said “Actually ‘what is our business’ is almost always a difficult question which can be answered only after hard thinking and studying. And the right answer is usually anything but obvious.” Strategy, he argues, really comes down to deciding, and making decisions consistent with, what business you are in.

Push past the obvious

The former president of Starbucks, Howard Behar, told me a few months ago that the most important decision Starbucks made, that led to many of the disruptive choices this category-defining company made, was their decision to be “in the people business serving coffee” rather than the “coffee business serving people”.

In other words, Starbucks decided to view their “customer” as the worker in their store serving coffee. Their purpose was to create great jobs and lives for them.

Tony Hsieh, CEO of Zappos, said, “We were going pretty well as a shoe company but our growth really took off when we realized were a customer service company that happened to sell shoes.”

Hartford Steam Boiler, whose strategy I will dig into in a later post, seems to be an insurance company but actually sees itself as and, more importantly, acts as an engineering company that happens to monetize through insurance.

More than a medical device company

So, back to Ambu. On the exterior, they look like a medical device company that produces and sells endoscopes, cameras on flexible rods that doctors insert directly into patients’ organs to examine the inside of their body. But take a look inside Ambu itself (no endoscope required!) and you will see a company that views itself as a consumer electronics company.

The difference may seem subtle, but the strategic power it unlocks is profound because numerous decisions that seem completely natural to a consumer electronics company would seem heretical to a medical device company. Here are just a few:

  1. While Ambu’s medical device competitors like Olympus or Boston Scientific are oriented toward building one expensive device that can be reused over and over, a consumer electronics company views its products as more disposable. Apple doesn’t mind if you replace your iPhone every few years. Ambu doesn’t mind if you replace their product every time you use it. Indeed, their product is “single use” … no expensive sanitation and maintenance required, just pull out a new one.
  2. Ambu’s medical device competitors are keenly interested in using only their own technology because the view controlling such IP as the central source of competitive advantage. Ambu, by contrast, sees value in configuring third-party components in novel ways. Its cameras are produced by the same manufacturers that produce Apple’s iPhone cameras.
  3. While medical device companies are geared toward building specialized systems in which each component is designed precisely for one specific product version, Ambu, like many consumer electronics companies, follows the kind of platform strategy that automakers prefer. They create one modular platform on which they can install numerous components to create a variety of products.
  4. As a result of these three choices, medical device companies innovate more slowly. They introduce a new product every 5-10 years while Ambu launches a new product every 1-2 years. Every time Apple launches an iPhone with a better camera, for example, Ambu can launch a new product.
  5. Finally, while medical device companies dedicate their R&D investment toward improving their hardware, Ambu directs more to improving their software, which means they introduce improvement more rapidly. This is similar to Tesla being able to improve its cars (considered computers on wheels more than mechanical cars) overnight, while traditional carmakers, focused on physical advances, only improve their vehicles once per year.

As you see, in each case Ambu makes a choice that seems entirely obvious to a consumer electronics company but that would make a medical device company’s head spin.

Conclusion

The jury is still out on whether Ambu will become the Starbucks or Zappos of endoscopy. But at $30B in size – only 30% less than the coffee market – it’s worth giving it a shot. Today, Ambu is growing revenue at 25% annually and enjoys one of the highest price-to-revenue ratios in the market.

So, ask yourself two questions:

  1. What is our actual business (e.g., consumer electronics and not medical devices)?
  2. How does that kind of company behave differently?

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