Dear All ,
Inspired by whole Rodinhood community, I thought to give it a try and share some of my learnings. I come from stock market background, so here is small write on how I as a stock market analyst view Business Model.
Alok sir sorry for delay in posting.
What is Business Model?
Given long experience Analyst has of working in doing financial research, loosing & making money by investing, meeting tons of CEOs & fund manager, he has understood that its ultimately business model of a company that determines success of industry and company, finally stock investment. So everybody keeps asking what this business model exactly is?
Let’s try to understand this with help of a case of a company that sells toothpaste (FMCG industry). As such there are number of process involved in doing it, but basic ones are –manufacturing, marketing, and distribution. Other departments exit and landing helping hand, like HR, finance, R&D etc.
So if one was to this business there is number of way it can be done
1) Do R&D to come up with new toothpaste
2) Source raw material
3) Setup plant and manufacture
4) Create distribution – setup ware house, buy trucks
5) Make marketing plan
So as one starts doing above activity, he would require HR to hire right people, finance dept to raise & deploy money, people who can run manufacturing plant, people who can design marketing strategy…etc etc.
It seems there are whole host of activity company needs to carry out in order to succeed (or make profit). It’s here where its gets interesting, businessman/entrepreneur can choose activity he wants to do and design business process as per it, like
Formula of toothpaste is not secret, a fact that is easy to prove if one observes number of brands available in market that eliminates need of R&D dept. If formula of making toothpaste is not secret, then making is also not, one can easily outsource manufacturing of toothpaste to 3rd party vendor (simple case of outsourcing). Rather than buying warehouse and truck to set up distribution network, one can take warehouse & truck on rent/lease or one can appointment distributors who would buy goods and supply it to retailer for a very small & fixed margin. One can outsource HR & payroll functions too. So on & so forth, crux of the matter is what activities businessman / entrepreneur chooses to keep himself, as all of the above decision would impact financials (read Profit) of company.
Someone like HUL & Colgate would definitely be doing outsourcing of their final product, while company owns right to brand, so their focus on marketing and distribution. They ability to understand consumers need or rather design marketing message that stimulates consumers mind to buy their brand is their key strength. Hence their key spend is marketing & advertising.
One might recall some years back Big Bazaar (BB) launched “Sach” brand of toothpaste in association with Sachin Tendulkar. BB would have launched given their strong distribution network (number of stores) and star power of Sachin. Company choose to capitalise on exiting distribution network and star power, hence one never saw TV ads or any out of the store promotion of product. Analyst doubt if it worked.
Amway is another company that sells toothpaste. They rely on network distribution, direct marketing as they call it. Amway is globally huge organisation and makes pretty good money. They model is completely different from HUL & Colgate and even Big Bazaar.
So there is no single model that’s best, however businessman/entrepreneur chose his business model that seem fit to him/her, its market that decides whether that will succeed or not. Hence business model are also constantly evolving process. HUL or Colgate didn’t start outsourcing on very first day of their business, its evolving process. Just like nature, business model keep changing and improving as new & old player try to grow, during this time one would find right business model that suits him/her and that market appreciates.
Another simple example, let’s assume there is a company that manufacturers photocopying machine (generic name – Xerox), simplest way without getting in too many details, one can carry out this business is by selling machine to buyer. What if instead of outright selling machine, company installed it at customers place and billed on number of copies, let say Rs1/- for every copy (all machines these days come with system to keep count). Both business models are drastically different from each other, one sells product while another solution.
Imagine you are running fast food restaurant and wish to expand nationwide, one way is you can yourself open it at new place or appoint franchisee, or let say you divided country in 4 region and appoint different franchisee for each region or let say you invited everybody to apply for franchisee and appoint 4 regional manager on your payroll who would evaluate who is fit or not. One business but it can be done in many different ways as one chooses to be.
To put it in nutshell, business model is a way of doing business and to choose what activity to focus on and not (core competency).
