A good market capitalization requires a good business model

Guo Yun

Listed companies are all enterprises that have passed the embryonic period and have a certain business model. A business model is the basic business way a business does what a business does, how it does it, and how it earns money. What to do is to focus on the business positioning of the target object, how to integrate resources to form a business operation system, and how to make money is to form a benign profit structure with long-term and short-term coordinated income and costs.

There is an inextricable relationship between business model and enterprise value. Business model refers to the ways and methods used by enterprises to create, deliver and capture value, which is the key to determining the profitability of an enterprise, while enterprise value is based on the expected results of the company's future profitability and growth potential.

The impact of a business model on a company's value is reflected in a number of ways. First of all, a good business model can help enterprises establish their own differentiation and transform them into core competitiveness, so as to attract and retain customers, increase market share and profitability, and then enhance enterprise value. Secondly, the business model can optimize the allocation of resources, ensure the effective use and rational allocation of resources, reduce enterprise costs, improve economic benefits, and then maximize the value of enterprises. In addition, the business model can also resist external competition, establish the market position and credibility of the enterprise, and maintain the market position, thereby stabilizing and enhancing the value of the enterprise. Finally, the business model can also drive innovation and business expansion, explore new business opportunities and opportunities, promote the sustainable development of the enterprise, and further enhance the value of the enterprise. At the same time, the enhancement of enterprise value also helps enterprises to better implement business models. The increase in enterprise value means that the company has more resources and capabilities to implement its business model, including expanding market share, expanding into new business areas, and improving the quality of products or services. All these will help enterprises to better realize their business models and further consolidate and enhance their corporate value.

In general, business model and enterprise value are interdependent and mutually reinforcing. Enterprises need to continuously optimize their business models to adapt to changes in the market and changes in customer needs, so as to continuously improve the value of the enterprise. At the same time, companies also need to pay attention to the enhancement of their value in order to better implement their business models and achieve sustainable development.

Therefore, the value creation of listed companies is inseparable from a good business model.

Apple, which has ranked first in terms of market capitalization for many years, has never created a new and original technology like Microsoft and other companies, and the personal computer was not invented by Apple, nor was MP3 invented by it, let alone mobile phones. However, Apple has always been able to take the lead and continue to bring innovative products or services to the market, winning a number of market firsts. The key is to combine new technology with excellent business model, using the combination of "iPod+iTunes" and "iPhone/iPad+App Store" to create a new business model that integrates hardware, software and services, complements and promotes each other, and uses a unique business model to drive technological advantages and transform technology into huge market value.

The main elements of Apple's business model are:

1. What to do? Apple does "cool terminal (perfect leading product) + content (rich supporting products)" that is closely related to users.

(1) Cool terminal (perfect leading product). Apple's strengths in design and feature development allow it to create a range of products that are perfect for customer needs. Apple products are like the coolest "models" in the world, and each terminal has this in common: cool, bright, concise, and beautiful. This cool effect gives consumers the pleasure of having it, and this cool effect has won praise all over the world.

(2) Content (abundant supporting products). Apple has aggregated an ecosystem through iTunes and the App Store, providing rich "content" for Apple's end products. Sell and distribute digital content and applications through the iTunes Store, iBook Store, as well as the Mac App Store and App Store, selling a wide range of compatible products, including related applications, printing devices, storage devices, speakers, headphones, and a variety of other accessories and peripherals.

Apple is like a boxing master, playing a set of combination punches, so that all competitors can not find a crack tricks, so that Apple has achieved a gorgeous transformation from the past "hardware and software integration" to the current "software + hardware + service + business ecology". Such a blended model is so unique that it is almost impossible for others to replicate.

2. How to do it: Apple has created a powerful ecosystem that is completely controlled by itself, including chips, operating systems, software stores, component suppliers, assembly plants, marketing, retail systems, and App developers, and has created a complete set of operating mechanisms.

(1) Independent research and development of core components. Apple insists that Apple's operating system, chips, touch screens, software stores and other core areas are all independently developed by itself to ensure the best user experience.

(2) Parts procurement or outsourcing. Apple is a typical vertically integrated enterprise, with a huge R&D and fast supply chain, it controls the core part of the industry, Apple's core components are developed by itself, and the parts that are not core and not their own strengths are purchased or outsourced, and Apple is only responsible for supply chain organization and management.

(3) Application software and content cooperation. Apple's strategic alliances bring together top companies in various industries, and Apple has won the most value for Apple by connecting the capabilities of these partners through a design that can make the final product to the best and a platform that Apple builds. Today, Apple has transformed into one of the most influential manufacturers of popular products in the tech world.

(4) Production outsourcing. Apple controls the design, R&D, channels and sales links at the core of the industry, which are also the most profitable ones, while outsourcing the production with the lowest profit margins and is only responsible for the organization and management of the supply chain.

It is the integration of internal and external resources that Apple can form an efficient business operation system and ensure the operation of the business model.

3. How to make money: Apple's business model allows customers to pay not only for mobile phones, but also for apps and content. And customers will pay more for apps and content in the future than they will pay for a phone. This business model created by Apple will make the business more sustainable and more profitable.

(1) A revenue model that combines high hardware and low software. Apple's revenue comes from two main sources: one-time high profits from the sale of hardware products, and sustained profits from the sale of music and other applications provided by third-party content service providers through online stores, resulting in a large number of repeat customer purchases. Apple's revenue model is contrary to Gillette's famous profit model of low-priced blades + high-priced razors, Apple essentially adopts music and other applications that reduce the price of blades and low margins, and locks in the profit structure of high-priced razors (high-margin hardware products). The two revenue streams, hardware and software, reinforce each other, creating a virtuous circle that allows Apple to generate high and consistent profits.

and (2) revenue model for revenue sharing. Apple uses a revenue-sharing, open Apple Store model. Emphasizing its role as an app and content broker, content providers receive 70 percent of the revenue, while Apple gets a 30 percent share. However, it retains firm control over the sale of software and content (all applications and content of the integrated digital content sales platform must be licensed by Apple). The opening of a comprehensive sales platform for digital content has actually brought Apple a lot of profits.

(3) Apple's cost model. Apple has effectively controlled costs in the following ways: first, Apple has a firm grasp of core technologies and has a large number of patents in core technologies, thus saving a lot of costs; second, Apple has implemented a globalization strategy to effectively reduce Apple's R&D expenses and costs in manufacturing through global procurement and non-core business outsourcing. Third, Apple allows customers to experience the characteristics of Apple products through retail experience stores, which not only solves the problem of insufficient experience of sales personnel, reduces the corresponding training costs, but also reduces the investment in channel construction and the share of retailers, and reduces the cost of sales. At the same time, the method of conducting user demand survey with the help of the retail store platform also saves a lot of market research costs.

Apple's business model has not only made huge profits in operation, but also made a surge in value in the capital market, and its market value has always ranked first in the world.

From Apple's business model-driven technology to realize the value of the achievement, it can be seen that the business model is the key to transforming technology into business interests, and technology without an excellent business model cannot realize value; therefore, the capital market's understanding and recognition of the value of listed companies, and even investment, must deeply understand and evaluate the business model. The basic methods are:

First, judge the business model. The method is to judge the force of the business model of science and technology enterprises by examining several problems of listed companies. These problems include: the clarity of the enterprise's customer object, the urgency of customer needs, the market space of the enterprise's business, the market time of the enterprise's business, the uniqueness (difference) of the enterprise's business, the speed of the enterprise's business system, the quality of the enterprise's business system, the cost of the enterprise's business system, the number of the enterprise's business system, the customer's satisfaction with the enterprise's business, the allocation of the enterprise's human, financial and material resources, the coordination of the enterprise's production, supply and marketing, and the company's technical core capabilities. The company's management ability and the growth level of income, costs, profits, assets, net assets, etc.

Secondly, the constituent factors of the business model are deeply analyzed to discover the key factors that affect it. Analyze the connection between demand and business, analyze the resource conditions and capability advantages, analyze the diversity and multi-frequency of revenue sources, analyze the source and structure of costs, and analyze the factors that affect the revenue and cost structure, so as to comprehensively and accurately evaluate the advantages and weaknesses of the business model.

To this end, market value management should focus on these needs to help the market deeply understand, analyze and evaluate the business model of listed companies, so as to win the favor of investors and effectively improve the quality of market capitalization.

If you want to know more about the specific methods of market value management and business model evaluation, please contact us.

(The author is a market value researcher at the Financial Engineering Research Center of Central China Normal University)