Understanding a Company’s Business Model

Understanding a company’s business model is the first step in conducting an industry and company analysis. This process is crucial as it helps in summarizing the key drivers of a company’s financial results and position. It also assists in focusing on areas that require further investigation and sets the analyst’s expectations for the issuer.

For instance, if we consider a company like Apple Inc., understanding its business model would involve understanding its revenue streams, key products and services, its target market, and its competitive advantage in the technology industry.

Key Elements of a Business Model

A business model describes a company’s operations and includes several elements. Analysts investigate these elements by answering key questions. The answers to these questions are company-specific, but the key questions are common across industries and companies. Some companies have a conventional business model, such as a retailer like Walmart or a natural resource producer like ExxonMobil, which simplifies business model identification. Analysts often focus their analysis on the differences in a company’s business model from a conventional model or those of its competitors.

Detailed Business Model Analysis for Analysts

$$\begin{array}{l|l|l}
\textbf{Business Model} & \textbf{Key Questions} & \textbf{Explanation} \\
\textbf{Element} & \textbf{for Analysts} & \\
\hline
\textbf{Goods or} & \text{What offerings does} & \text{Core of any} \\
\textbf{Services offered} & \text{the company bring} & \text{business. Analysts assess} \\
& \text{to the market?} & \text{offering nature,} \\
& & \text{features, benefits,} \\
& & \text{and uniqueness.} \\
\hline
\textbf{Primary customers} & \text{Who is the} & \text{Crucial for determining} \\
\textbf{and customer} & \text{company’s target} & \text{scale, pricing,} \\
\textbf{Segments} & \text{demographic?} & \text{and marketing.} \\
& & \text{Identify main} \\
& & \text{customer segments.} \\
\hline
\textbf{Sales channels,} & \text{How does the} & \text{Effective ways to} \\
\textbf{including customer} & \text{company reach potential} & \text{get product to} \\
\textbf{acquisition and} & \text{and current customers} & \text{the customer.} \\
\textbf{product/service} & \text{and deliver products?} & \text{Understand distribution,} \\
\textbf{delivery mechanisms} & & \text{retail, online} \\
& & \text{platforms. Evaluate} \\
& & \text{product/service} \\
& & \text{delivery.} \\
\hline
\textbf{Pricing Model} & \text{How does the} & \text{Influence on} \\
\textbf{and Payment} & \text{enterprise set its} & \text{company’s revenue.} \\
\textbf{Conditions} & \text{pricing, and what} & \text{Analyze pricing} \\
& \text{are the payment} & \text{strategy and} \\
& \text{conditions?} & \text{payment terms.} \\
\hline
\textbf{Dependencies:} & \text{Which external entities} & \text{Gauge company’s} \\
\textbf{Suppliers and} & \text{does the company} & \text{dependency, risks,} \\
\textbf{Collaborative Entities} & \text{depend upon, and} & \text{and bargaining power.} \\
& \text{how does it} & \text{Understand relationships} \\
& \text{manage relationships?} & \text{with external} \\
& & \text{entities.} \\
\end{array}$$

Sources of Information for Determining a Business Model

To analyze and understand a company’s business model, analysts require various information sources. These sources provide insights into a company’s operations, financial performance, strategies, and market positioning. Let’s delve deeper into these sources and understand their significance and utility.

1. Issuer Sources

Issuer sources are directly provided by the company and tend to be the most reliable for understanding company-specific operations and strategies.

• Regulatory filings: These, especially annual (10-K) and quarterly reports (10-Q), contain a wealth of information about a company’s financial performance, risk factors, strategies, and more.
• Earnings calls: Management discusses recent performance and future outlooks, and analysts can ask questions directly.
• Investor events: These provide deeper insights into specific segments or strategies of the company.
• Press releases: Offer timely updates on recent developments, product launches, or mergers and acquisitions.
• Direct communications: Conversations with company personnel can provide nuanced insights.
• Company website: A hub of information, including company history, product details, and more.

2. Public Third-party Sources

These are external sources that provide a broader perspective on industry trends, economic factors, and more.

• Industry reports: Offer a comprehensive view of industry trends, challenges, and opportunities.
• Economic indicators: Help in understanding the macroeconomic environment in which the company operates.
• News outlets: Provide current events and developments that might impact the company.
• Social media: Offers real-time insights and public perception about the company and its products.
• Search engines: A vast resource for miscellaneous information, from customer reviews to academic papers.

3. Proprietary Third-party Sources

These are specialized sources that provide in-depth, often paid, insights and analyses.

• Analyst reports: Detailed reports by experts on company performance, industry comparison, and forecasts.
• Data platforms: Platforms like Bloomberg and FactSet offer real-time data, analytics, news, and more.
• Consultancy reports: In-depth industry insights, such as Rystad in energy, Gartner, and IDC in information technology, are often based on proprietary research methodologies.

4. Proprietary Primary Research

This involves firsthand research conducted or commissioned by the analyst. It’s tailored to the analyst’s specific requirements.

• Surveys: Gather data directly from customers, suppliers, or other stakeholders.
• Product comparisons: In-depth analyses of how a company’s product stands against competitors.
• Interviews: Conversations with industry experts, former employees, or others can provide unique insights.

A blend of these information sources provides a comprehensive understanding of a company’s business model, its competitive positioning, and potential future performance.

Question 

What is most likely the role of issuer sources in determining a company’s business model?

1. They provide information about the company’s competitors.
2. They provide information about the company’s stock price.
3. They provide information through regulatory filings, especially the annual and quarterly reports, and other issuer-related sources.

The correct answer is C.

Issuer sources are vital for understanding a company’s business model, and they do this by sharing information in regulatory filings, particularly in the annual and quarterly reports and other documents related to the company. These sources are a goldmine of information about the company’s activities, financial health, future plans, and the risks it faces. They offer a glimpse into the company’s business model, including how it makes money, manages costs, targets specific customer groups, defines its unique value, and competes in the market.

Regulatory filings, such as the annual report (Form 10-K) and quarterly report (Form 10-Q), are required by securities regulators and are publicly available. They contain audited financial statements, management’s discussion and analysis (MD&A), disclosures about market risk, and other important information. Other issuer-related sources may include press releases, investor presentations, conference call transcripts, and corporate websites. These sources can provide timely and detailed information about the company’s recent developments, management’s outlook, and other relevant issues.

A is incorrect. While issuer sources may contain some information about a company’s competitors, their primary role is not to provide information about the competition. Information about competitors is typically obtained from industry reports, market research, news articles, and other external sources.

B is incorrect. Issuer sources do not directly provide information about the company’s stock price. The stock price is determined by the market and can be influenced by a variety of factors, including the company’s financial performance, market conditions, investor sentiment, and other factors. While issuer sources can provide information that may affect the stock price, they do not provide the stock price itself.