Business Model Example

Business Model Example

Three different views of a company. Earlier we talked about modeling. The evolution of Henry's company highlights three different models of the company, the investment management in USA vehicle, accounting and set of contracts models that is also business model example. All three models are important. Each one provides powerful insights into particular problems.

The Investment Vehicle Model

The investment vehicle model is the most basic view of the company. Investors provide funds in exchange for financial securities. For example, a bond provides for a specified set of cash payment to its owner (who has previously paid money to purchase the bond).

We have identified the two basic types of financial securities; equity and debt. Equity is the company's ownership. It is typically represented by shares of common stock. A person who owns all the shares of common stock owns the company, as Henry did at the star. If more than one person owns shares in the company, each person's ownership portion is simply the number of shares divided by the total number of existing shares. For example, if a shareholder own 350 of a company's total 1000 shares, that person own 35% of the company.

Debt is a legal obligation to make contractually agreed upon future payments, identified as interest and repayment of the principal (original debt amount). Debt-holders have loaned the company money. They have no claim of ownership as long as the company meets its payment obligations. The company controls the use of the funds. 

In the investment vehicle model the company's managers are neutral intermediaries who act only in the best interest of the shareholders the owners of the company. Sometimes, especially in the case of small companies (as when Henry started out), the owner is the manager. In such cases, there is obviously no conflict between the owner and the manager because they are one and the same.

The investment vehicle model of the company is embodied in an often stated goal that managers should maximize shareholder wealth. In a "perfect" world (one without owner manager conflicts), maximizing shareholder wealth is the theoretically correct managerial goal. Because of this, the investment vehicle model is the best starting point for analyzing financial decisions.

The Accounting Model

In a sense, the accounting model is a subset of the investment vehicle model. In the United States, it's a way to operationalize and approximate the investment vehicle model. It is embodied in the balance sheet view of the company. The company's investment decisions concern the asset side, and the company's financing decisions concern the liabilities and stockholders equity side. Many day to day operating and financial policies also can be seen on the balance sheet as well as on the income statement and statement of cash flows.

One advantage of the accounting model is that it is highly integrated, showing how the company's pieces fit together. Another advantage is that accounting is widely familiar, so the accounting model makes communication easier.

There are disadvantages to the accounting model, however. A major one is accounting's primarily historical viewpoint. A lot of the information you use to make decisions is simply not in the accounting system. Although the accounting perspective is important and often helpful, it is frequently inadequate by itself for many corporate decisions.

The Set of Contracts Model

The set of contracts model is a refinement of the investment vehicle model. It starts with the investment vehicle model but recognizes imperfections that can arise in the contracts (relationships) between the company and its stakeholders. 

Contracts in the set of contracts model are implicit as well as explicit. Explicit contracts can be with investors, such as bondholders and creditors, where the company promises to pay them specific amounts of money on specific future dates. They also include such things as outstanding guarantees on previously sold products, severance pay for terminated employees, and pension obligations.

There are implicit contracts to be honest and disclose relevant information. Employees have implicit contracts to give their best effort. Managers have implicit contract with the shareholders to act in the shareholders best interests.

Regulatory and legally mandated contracts, such as workplace safety standards and product liability, include both explicit and implicit aspects. A court of law may be needed to determine specific obligations in applying implicit aspect of contract.

Many contracts depend on the occurrence of particular future outcomes, such as an employee bonus if profits reach a certain level. The bonus is contingent on reaching this profit gent on having worked for the company for the previous 52 weeks. Your participation in the retirement plan may be contingent on having worked for the company for a minimum number of years. This type of contract is called a contingent claim. The contract's outcome is contingent on the value of some other asset or a particular occurrence. This type of investment management in USA is very highly performance and good return and also provide us a business model example.