Efficiency is Profit

The marketing model, business model, and financial model of an enterprise are like three-stage rockets that gradually propel the enterprise to rapid development.

A good business model is essentially to control the social resources through the value chain and turn the enterprise value into profit. The core is to solve the following three problems, value chain, moat, profit zone.

1. Control social resources through the value chain to solve the problem of benefit distribution;

2. Continuously invest resources to establish a moat to strengthen the core competitive advantage;

3. Lock the user to occupy the core profitability area to solve the problem of value realization;

The "value chain" (Value Chain) was originally developed by the United States. Value Chain) was initially proposed by Harvard professor Michael Porter (Michal - Porter) in 1985. Value Chain is a general term for a series of economic activities carried out by a company to create value for its customers, and a company can also be said to be a collection of these activities.

The essence of a value chain is that a group of stakeholders invest their resource capabilities to form a transaction structure. This transaction structure will continue to create value, both upstream and downstream of the enterprise, or internal employees, each party will be in accordance with a certain proportion of the interests of the distribution of this value. If the value each party receives exceeds the opportunity cost of the resources it has invested, the structure will become more and more solid.

When constructing the value chain, the core is to start from the customer, what are the customer preferences, what kind of sales channels are convenient for them, what kind of products/services are they willing to buy, what do we need to invest in, and what kind of assets/core competencies do we have to realize these?

Business models can create value continuously, but they cannot avoid being copied and imitated by others. Quality products, high market share, effective execution and excellent management are likely to be fleeting good news that will not stand the test of time. Warren Buffett introduced the concept of a moat in long-term value investing. A moat is a structural feature that enables a company to maintain a competitive advantage, a core strength that is difficult for other competitors to replicate.

Common corporate moats are the following:

1. Intangible assets , such as brands, patents or statutory licenses; everyone knows the brand, the enterprise owns the technology patents, the government's statutory licenses, can be given to the enterprise pricing power and effectively prevent competitors from entering.

2. Customer switching costs, when customers face high switching costs in the competition of similar products, they will not easily try new products, unless the new product has a great improvement in price or functionality.

3. Network effect, as more and more users use a certain product or service, the value of the product or service to new and old users also increased, which appeared in the network effect.

4. Cost advantage, companies can compete at lower prices to capture market share, favorable cost advantage may come from process advantages, good geographical location, scale effects or access to a unique asset.

5. Economies of scale, if a firm can serve more users without incurring additional costs, then its marginal cost will tend to zero, and the firm's economies of scale will be very strong.

In the office of the stockbroker Warren Buffett there is a picture of former Boston Red Sox legend Ted Williams in his first game. He had a career batting average of 34.4 percent, making him one of the highest hitters in the game. He once famously said, "To be a good hitter, you have to wait for a strike before you go to bat. If I always went to bat on balls out of the lucky zone, there's no way I'd be a Baseball Hall of Famer."

No diamond in the rough. When we determine what kind of moat we want to build, so as to keep ourselves away from homogenized competition, we need to constantly invest resources to build a core circle of competence. When competitors enter the game will be the first time to usher in the head of a stick!

Google started as a search engine, and by May 2014, it held 68% of the online search market. Although Google defines itself as a tech company, developing self-driving cars, Android phones, wearables, etc. But 95% of its revenue still comes from search engine advertising, and other product revenue was only $2.35 billion in 2012. This is the core profit zone of the business, where the value of the business is consistently realized as profit.

Every industry has its own life cycle, and with the entry of competitors, the pursuit of market share in the homogenization of competition, oversupply has led to the gradual formation of the industry, a no-profit zone, and most companies can only get the salary of the manager in the end.

Then how can we always grasp the industry's profit zone? There is only one answer, and that is to always keep up with customer demand.

One way to keep iterating the product itself, so as to constantly meet the needs of customers. For example, from the PC computer Internet to the cell phone mobile Internet, the same game products, in order to adapt to the customer in the cell phone to play happy, the game operation design has changed dramatically.

Another way is around the customer's economic system, product extension and expansion. For example, a printer from the provision of printing services, expanding to provide design, warehousing and delivery services, so as to create more value for the customer, to obtain more profits.

We must recognize:

Why do customers continue to rely on us, and what kind of value do they need from us?

Why are customers willing to pay consistently, and where is the core profit zone we occupy?

In the book "Discovering the Profit Zone", Slewski summarized the following 22 common profit zone patterns in business to help us better design our own business profit zone.

1. Customer Solutions Model

Investing in understanding customers, designing solutions, and building good customer relationships. For suppliers, this approach is a net investment in the initial development of customer relationships, but it can lead to significant profits later. One famous example is: General Electric (from hardware to services to solutions).

2. The Product Pyramid Model

It is the differences in revenue and preferences of customers that form the product pyramid. At the bottom of the tower are low-priced, high-volume products; at the top of the tower are high-priced, low-volume products. Most of the profits are concentrated at the top of the pyramid, but the products at the bottom of the tower also have an important strategic role. Because, here the product can play a "firewall" role.

3. Multi-component system model

In the multi-component system model, a supply system contains a number of subsystems, some subsystems account for a large proportion of the profits, and some almost unprofitable. The multi-component system model can be applied to a variety of industries, such as the carbonated beverage industry (where profits are primarily in the restaurant and vending machine subsystems), and the hotel industry (where profits are low in the regular business and extremely high in the corporate meeting rental business).

4. Switchboard Model

In some markets, many suppliers transact with many customers, and the transaction costs for both sides are high. This leads to the emergence of a value brokering business. This business acts like a switchboard, and its function is to establish a communication channel between different suppliers and customers, thus reducing the transaction costs for both buyers and sellers. The more suppliers and customers that join the system, the greater the value of the switchboard.

5. Velocity Model

In some industries, suppliers that innovate their business have a first-mover advantage that allows them to earn excess returns. As imitators follow, profits begin to erode. The velocity model reflects the innovator's first-mover advantage. In the velocity model, profits come from the uniqueness of the product or service. Excess profits will disappear as copycats enter the market. A successful example of applying the speed model is Intel, which is always two steps ahead of its peers in competition.

6. "Blockbuster" model

In the pharmaceutical, music publishing, film and television production, publishing and other industries, the main business activities are centered around the project. In these industries, the cost of various projects may be 5 times the difference, while the project revenue may be 50 times the difference, all the profits are concentrated in the "blockbuster" project. For example, a drug may cost between $50 million and $300 million to develop, while the cumulative revenue from the drug ranges from $500 million to $15 billion.

7. The Profit Multiplier Model

The Profit Multiplier Model refers to the repeated harvesting of profits from a product, product image, trademark, or service. The best example of applying the profit multiplier model is the Disney Company. Disney Company packages the same image in different ways. Characters such as Mickey, Minnie, and the Little Mermaid appear in movies, films, books, clothing, watches, lunch boxes, theme companies, and specialty stores. Whatever form they take, these characters pay off for the Disney Company.

8. The Entrepreneurial Model

When a business succeeds and grows, diseconomies of scale come into play: the business's overhead goes up, unnecessary expenditures increase, decision-making is slow, and it becomes detached from its customers. To counteract this negative force, some companies (such as ABB and Software Vault, Inc.) reorganize themselves by dividing the company into many very small profit centers in order to strengthen profitability responsibilities and get closer to customers.

9. The Specialization Profit Model

In many industries, specialists are several times more profitable than "jack-of-all-trades". Specializers are profitable because of low costs, high quality, good reputation, shorter sales periods, and higher cash inflows.

10. The Base Product Model

In many businesses where the base product model is applied, the base product does not generate high sales or profits, but the profitability of its successor is extremely attractive. Such businesses include: copiers, printers, razors, elevators, and so on. The key point is to build the base product that has the greatest potential to generate more revenue and profit from follow-on product sales.

11. Industry Standard Model

The most compelling feature of the industry standard model is its returns to scale. In industries with positive returns to scale, a large number of competitors (from the starting device manufacturers, to application developers, to users) are drawn into the industry standard someone's "gravitational field". The more people that enter the system, the more valuable the system becomes. So, as the value of the system increases, the industry standard holder gets higher returns to scale.

12. The Brand Model

Over the years, companies applying the brand model have invested heavily in marketing to increase the public's understanding, recognition, trust, and credibility of their products. When customers are willing to pay a premium price for such a product, the branding effect translates into tangible profits.

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13. Unique Product Model

When a company develops a new product, it profits from the premium price of that product. Unique products are profitable until competitors begin to follow suit.

14. Regional Leadership Model

In many industries, a company's business is almost entirely regional. Such industries include: door-to-door medical care, food stores, and retail outlets. It is important to be a regional leader, not a national company.

15. Large Transaction Model

In some industries characterized by transactions, the cost of completing each transaction does not increase at the same rate as the volume of transactions and revenues increase. Profits are concentrated on large transactions. Such examples include investment banking, real estate operations, and long-distance air transportation.

16. The Value Chain Positioning Model

In many industries, profits are concentrated in some parts of the value chain and minimal in others. In the computer industry, profits are concentrated in microprocessors and software. In the chemical industry, profits are concentrated in production, not sales. For products in general, profits are concentrated in sales, not production.

17. Cyclical Profit Model

Many industries are uniquely and distinctly cyclical, such as chemicals, steel, and equipment manufacturing. In these industries, corporate profits are a function of cyclical changes in the industry. Thus, the utilization of production capacity can reflect the profit level of an enterprise.

18. After-sales profit model

In industries such as product manufacturing and air transportation, firms do not rely on the sale of products or the provision of services to make a profit, but rely on after-sales service and financing of products to make a profit. For example, Kingston sells add-on memory to personal computer users and gets high profits.

19. New Product Profit Model

The profitability of a new product is a function of the new product and its rate of development. After a new high-margin product is introduced, it will grow very quickly. Once the product matures, profits will fall. In industries such as automotive, machinery and equipment, product cycles range from 3 to 7 years. The key to winning is to develop the next generation of dominant products and achieve a leadership position. Next-generation lead products are those that most appropriately fulfill the most important needs of customers at the time.

20. Relative Market Share Model

In many industries, firms with high market shares are more profitable than others. Large firms have cost and pricing advantages because they have more experience in manufacturing products and buying raw materials in bulk. Relative market share refers to competitors in the same industry, not absolute market

market share.

21. Experience Curve Model

The experience curve model means that as a firm gains more experience in making a product or providing a service, the cost per transaction falls. A firm that has accumulated a lot of specialized experience will be more profitable than a firm with no experience.

22. Low-cost business design model

You can always beat past experience, and many people do. You can use low-cost enterprise design to overcome past experience, thus rendering the experience of existing rivals in the industry worthless. Dell Computer Corporation applied the low-cost enterprise design model to beat the traditional street store sales approach and multi-level sales channels with direct sales.

A company's profitability comes from its ability to accurately control the needs of its customers, and no matter what profit model it chooses, it is only through the continued reliance of its customers that it can realize its value as a company.

A business model is simply the formation of a transaction structure through the value chain and the transfer of value to the customer for realization. The key to a good business model is to find a moat and protect your profit zone.

I hope today's sharing has inspired you~