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...take advantage of opportunities. It can hurt profitability. In addition to providing guidelines for defining a domain, this article shows the impact of domain choice and definition on the bottom line through a study of 25 Belgian electrical wholesalers.
Introduction
Scholars and practitioners agree that a sound business definition is important. By explicitly considering their business domain, firms may improve their competitor analysis and streamline their competitor intelligence. Furthermore, significant threats and opportunities will be detected on a more timely basis, and the formulation of appropriate short-term tactics and long-term strategy will have a better foundation (Sidhu, 2004). Delineating market boundaries is also a prerequisite for determining a firm's market share (Curran and Goodfellow, 1989). Business definition can affect the perception of strategic choices or options, and ultimately the bottom line.
Despite its importance, only a few studies discuss how firms determine their business domain and the performance implications of that (implicit or explicit) choice. One purpose of this paper is to help fill that gap. The first section elaborates on the concepts of business domain and business definition. The second summarizes prior research and how thin it appears to be. The third section describes the Belgian electrical wholesale sector. A fourth section presents the analytical framework, and the final section presents research results and some conclusions. The paper is written mainly from the viewpoint of a single business firm or a business unit within a multi-business company.
The Conceptual Framework
Though many companies define their competitive arena rather by accident than design (Weinstein, 1994), we may--from an outsider research viewpoint--measure the competitive positioning of a firm objectively with hard data (cf. infra). A firm's competitive arena is determined at first by the borders of the industry itself. Drawing industry boundaries is always a matter of degree. In fact, in the case of the Belgian electrical wholesale sector, this paper's research setting, we accepted the comprehensive list of firms provided by the union of Belgian electrical wholesalers. This "long list" is in fact a classification based on product similarity: all wholesalers selling "electronic material" in Belgium are included. The degree to which these firms are direct competitors or not depends on the types of products they sell (e.g., cables or lighting material, etc.), and also on the customer types they target, the geographic reach or location, and their degree of vertical integration. So, at the level of the industry ("the long list"), there is still a lot of heterogeneity. Further partitioning the industry into several business domains, if any, according to the business definition variables (cf. infra) is warranted. This implies the partitioning of that long list into several short lists of firms competing within different domains within the sector (one "short list" per domain).
Just as the average performance differs among industries, it is likely that average performance differs among business domains within an industry. The intensity of the rivalry within a domain can be further explained by the structural characteristics of that domain or with a five forces analysis applied to that domain (Porter, 1980). By considering the business domain instead of the industry as the primary unit of observation, researchers may perhaps gain a more in-depth knowledge of rivalry patterns between firms. Structural characteristics at domain level are the concentration ratio (the number and size distribution of firms active in that domain), the height of mobility barriers and the degree of product differentiation, growth of demand within that domain, the number of buyers, technology, and the degree of vertical integration. These are very much the same structural characteristics operating at industry level and have implications for the average profitability of firms operating within that industry (Scherer, 1980, p. 4). Differences in structural characteristics between domains should explain with more precision the rivalry of firms and the performance differences, if any, between firms active in different domains.
In this paper, we investigate (1) if differences between firms do exist to such a degree that we can speak of business domains as subsets of industries, (2) if performance differs between business domains within an industry, and, if so, (3) if the supplier-wholesaler-buyer relationships (a subset of the five forces) may help to explain these performance differences. But first, we start with a discussion on the partitioning of an industry in business domains.
As in Houthoofd and Heene (1997), a business domain is conceptualized to be a four-dimensional "strategic space" constituting the arena within which firms can position themselves to compete successfully. Obviously, the decisive dimensions that shape the competitive environment of a firm constitute (1) the buyer types...
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