Learn about business models

When analyzing companies investors can easily in caught details such as performance figures, stock ratios and valuation tools while forgetting a more fundamental question: how the company actually make money? A solid business model remains the foundation of every successful investment. To distinguish the big companies of the losers, investors should learn how to describe and to assess business models of companies. (Learn more about assessing your own business model, your business is viable model?) (An 8 point test)

Tutorial: Reading financial tables

What is a business model?
The business model is simple, as the company makes money. It explains the sources of the company's sales how much to pay these sources and how often. It is not enough to say that a company PC or burgers sold. You must go deeper and learn the structure through which the dollars are earned. Closes the doughnut business franchise or company-owned outlets? The outlet properties such as McDonald's, Burger company has or lease space? Generates the PC maker which does most of its money through direct sales, such as Dell, sell it or doing via retailers like Hewlett Packard does?

The business model also refers to the delivery of the product as brings in revenue. Consider shaving industry. Gillette is pleased to sell his Mach III razor handle at cost, or even cut because the company going you can sell profitable razor refills, over and over. Their business model is based on giving away the handle and the profits from a steady stream of margin razor blade sales.

Electric shavers have a different model. You cost much more than the Gillette handle. Remington, a manufacturer of electric shavers, makes most of their money in advance, rather than from a stream blade refill sales.

To change as industries not always companies can afford to stay the same business model. Remember Kodak and the rapidly changing camera business. Traditional film cameras generates a lot of money for the company, since user roll to buy, after roll of film to take pictures and then spend still images developed. But digital cameras get rid of movie sales and processing fees. So, in response, Kodak had to create a new business model has. Has digital printing Center, founded, where users your digital camera images on real Kodak paper to have printed. The business model that was once based sales and processing on film is a model based primarily on photography print become.

A company's business model is not always obvious. You look at General Motors. One might think GM his makes money selling cars and trucks. Indeed score were more than 60% of GM in 2003 from finance payments, not auto sales.

Business models can be also downright counterintuitive. Conventional wisdom says that a trader that crams stores close to each other have store sales cannibalize. But retailers of Starbucks coffee has a business model that only that bench: coffee shops within blocks of each other have. It turns out to market saturation drives consumption, created virtual carpets billboards for Starbucks and cuts back on customer lines at popular retail outlets. It keeps competitors from the road. (Is more about these companies and how they work, check out buying A franchise wise?)

Assessment of the business model
So how do you know if a business model is not good? This is a difficult question. Joan Magretta, former editor of Harvard Business Review, emphasising two critical tests for business models estimate. If business models don't work, it is, because you inappropriate and/or figures add straight up to profits.

Because there are companies that have suffered heavy losses and even bankruptcy, the airline industry is a good place to find business models, stopped making sense. Years great American Airlines, Delta and continental built their business around a "hub and spoke" system, where all flights of over a handful of big city airports routed. By ensuring that seats were filled, the business model produced great profits for airlines.

But the business model that once a source of strength for the major airlines was a burden. It became apparent that competitive carriers such as Southwest and JetBlue could aircraft between smaller centres to lower cost – partly due to the lower labor costs, but also shuttle because you of some operational inefficiencies avoided, that occur, in the hub and spoke structure. As competitive carriers moved away more customers, the old institution were made with less passengers - a condition worse to support their large, extended networks, if traffic began in 2001 should be dropped. Airlines had to offer more and deeper discounts to fill seats. No longer able to producing profits, the hub and spoke model made more sense.

Examples of business models that the numbers test failed, we look to U.S. automakers. Offered in 2003 customers such deep discounts and interest-free financing compete against foreign manufacturers, Ford, Chrysler and GM that they effectively sold vehicles for less than it cost to make. This dynamic expressed all gains from Ford's U.S. operations and threatened Chrysler and GM do the same. To stay viable, the big automakers had to renew their business models.

Conclusion
If a company know exactly your money makes you as assess a potential investment as you. Then think about how is more attractive and more profitable, that business model. Admittedly, the business model not learn about the prospects of a company, but investors with a business model state of mind can better feel of the financial data and business information. It simplifies the work the company to identify the best investments. (Check out another way to evaluate a business, do not forget to read the prospectus!)

Ben McClure (Contact author |) (Biography)

Ben McClure is a long-time contribution to the Investopedia.com.

Ben is the Director of the Bay of Thermi limited, an independent research and consulting company which specialized in early stage ventures for new investments and markets prepare. He works with a variety of customers in North America, Europe and Latin America. Ben was a highly rated European equities analyst at London's old mutual securities, and introduced new venture development, a major technology commercialisation consulting group in Canada. He began his career as a writer/analyst at the Economist Group. Mr. McClure graduated from the University of Alberta's School of business with an MBA from.

Ben's investing hard and fast philosophy is that the Flock is always wrong, but heck, if it is worth it nothing is wrong with his sheep.

He lives in Thessaloniki, Greece. You can Bay of Thermi limited at www.bayofthermi.com more information.