Posts Tagged ‘business model’

UNDERSTANDING BUSINESSES…….

While analyzing different companies, investors do easily get trapped in the details like figures, various stock valuation ratios tools to measure their performance while forgetting a more basic question that is “How does the company actually make money?”

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“BUSINESS MODEL” is the buzzword that gives the answer to the above question. In simple words, one can understand Business Model as “The strategic business plan that generates revenue and makes profit from the operations.” It defines the sequence how the business delivers value to customers, entices customers to pay for value, and converts those payments to profit. It reflects the management’s hypothesis about what customers needs, how they want it, and how an enterprise can meet those needs, get paid for doing so in terms of profit. It draws on the multitude of business subjects including entrepreneurship, strategy, economics, finance, operations, and marketing.

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When a business is set to establish, it entails a particular business model that shows the design or blueprint of the value creation, delivery, and mechanisms employed by the enterprise. An enterprise business formally can be described in four building blocks with nine basic elements as:

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1) Infrastructure

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Core Capabilities: A group or area of business competency where the business must excel in order for this business model to be successful. These are the key activities necessary for value proposition of the business. It includes the resources those are necessary to create value for the customer and drives revenue streams. This part in fact forces the need for specific business capabilities to perform at higher than average levels of effectiveness and efficiency. It describes how a company attempts to develop a sustainable competitive advantage and use it to improve its competitive position in the market.

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Value Configuration: Outlining the basic concept of a business model, this element describes how the business, through its activities, adds value to the consumer or marketplace. It binds together the conception of customer want, requisite core competencies, flow of revenue and various business alliances.

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It also identifies the resources that are necessary to create value for the customer.

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Partner Network: Partnership element describes the connection that the business has with other business entities, including suppliers, vendors, sales partners, service providers, and value-added resellers. These connections can define success for a business by allowing for specific efficiencies of capital, resources, and shared risk.

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2) Offering

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Value Proposition: What is being offered to the customer to drive revenue is being answered by this element i.e the products or services a business offers. It gives an overall view of products that represent value for a specific customer segment. It describes the customer problem, how the enterprise differentiates its offerings from its competitors and is the reason why customers prefer buying from certain enterprise over other. It is a solution that addresses the customer problem and describes the value of this solution from the customer perspective.

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3) Customers

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Customer Segments: The target market segment for a business’ products and services. It aims to recognize and focus the different needs and strategies to design the product, services for them and the way to reach them. Distribution Channels: This element presents the mechanisms of how the company’s product or service reaches the customer. In case of product manufacturing, the distribution channels element describes the flow of goods from manufacturing to market, including inventory and retailing however for service enterprise, this explains the location, management, and provisioning of service resources to the customers on an as and when required basis. Customer Relationship: It is the link a company establishes between itself and its different customer segments. It describes the motivations that lead customers to buy products and services from the business, and how the business nurtures those motivations through marketing and support activities. Various after sales services and the customer care support form part of it that helps management to get the responses of the users. It also helps in knowing the preferences of the consumer so as to keep the company aligned with changing environment.

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4) Finances

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Cost Structure: It accounts to the aggregate estimation of each resource being deployed that results to output in the form of product/services in the monetary terms. There are different strategies to determine the price of the product like Cost plus pricing, Competition based pricing, Target pricing, Dynamic Pricing etc. Revenue Streams: It’s not enough only to have an idea of what a business create value. A business operation has to be cognizant of where, and when, money flows into and out of the business. How money flows to the company through various products and segments of the business determines the revenue stream of the company.

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After analyzing the above nine elements one can simply get to know that how a business positions itself within the value chain of its industry and how it aims to sustain itself to generate revenue. So it’s not enough to say that a company sells mobiles or burgers. One needs to go deeper and understand the logic sequence of how the rupees are expected to earn and grow in future.

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We can take an example of shaving industry. Gillette sells the handle of its razor at cost, or even lower, because with this the company can sell razor refills, over and again. The company’s business model rests on giving away the razor’s handle along with blade as it actually generates profits not from the handle but from the sales stream driven by high-margin razor blade.

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Conclusion: Business model is considered to be the concrete foundation for a successful enterprise. In order to differentiate the companies from the losers, investors should know how to evaluate companies’ business models for perspective investment. Business model converts innovation to economic value for the business. When evaluating a company as a possible investment, one should be able to get how the company makes its money.Think on the lines as how attractive and profitable that business model is. Although, the business model doesn’t explains everything regarding the prospects of a company, but investor keeping a business model frame in mind can make better sense of the financial and business information. It eases the job of recognizing the companies that could be proved as the best investments.

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Points to Remember while Selling Stocks – Part 1

Hello Friends here we come up with our another write up on “SMC Gyan Series”. 🙂


Points to remember while selling stock

Points to remember while selling stock

 

Buying a stock is simple, but Selling is actually harder as it requires regulation, understandable thoughts, and a tight rein on one’s emotions.

The ongoing optimism, slow economic revival, positive signs on the global front and high expectations from the stable government at home have forced bulls to give up their lethargic activities and to march northward.

Many investors who had seen the value of their stocks hit rock bottom and are now facing dilemma whether to sell or should they hold on? :O

Investors often face problems to take right decisions in volatile market as markets could head either way.

Wouldn’t it be disheartening if the markets rallied northwards, the day after you sold your stocks?

What if the markets come crashing down tomorrow, depriving you of the opportunity to enhance profits?

So, the decision to sell is critical.

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Some of the points when to sell your stocks:

Prima facie, if there is any drastic change in fundamental of a company, this should be the only reason to sell stock.

But a depth research has to be done before taking any decision.

Changes includes;

-restructuring of its business model,

-different business focus and directions.

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FIRST THREE POINTS :

1. Margins Crashed

Margins are the profit that a company makes on its sales.

Rising gross margins tell us that a company is reducing production costs or raising prices.

Conversely, deteriorating margins say either that production costs are increasing and the company can’t raise prices proportionally or that the company is cutting prices in an attempt to maintain marketshare.

If there are expenses related to a new product’s introduction then margins might fall for inoffensive reasons.

Falling margins, either gross or operating, often signal a declining competitive position. Thus it’s important to check both.

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2.Is There Any Drastic Change In Company’s Management?

If people in top management of the company say director or president who are liable for a company’s success begin to go away, there might be a few negative implications for the future outlook of that company as an investor.

You must look into and find out the root cause and also to see how much it could impact you.

If negative prospects, investor should sell the stock and should relocate the funds into a similar company that has stronger and more constant management.

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3. What First Fascinated You To The Stock, No Longer Applies

For example, let’s suppose that you bought a stock of a health care company because of its innovative products in the pharmaceutical field and all of a sudden, it loses a crucial patent for a life-saving medicine.

This may result in a decrease of market share in its industry, which might lead to a reduction in future profits (resulting in a decline in the value of its stock).

🙂

Stay Tuned for more on this where we would touch upon other major points needed to keep in mind by investors before making any Buy and sell decision.

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