Business model (MODULE – III)

At its core, your business model is a description of how your business makes money. It’s an
explanation of how you deliver value to your customers at an appropriate cost.

According to Joan Magretta in “Why Business Models Matter,” the term business model came
into wide use with the advent of the personal computer and the spreadsheet.

These tools let entrepreneurs experiment, test, and, well, model different ways that they could
structure their costs and revenue streams. Spreadsheets let entrepreneurs make quick,
hypothetical changes to their business model and immediately see how the change might
impact their business now and in the future.

In their simplest forms, business models can be broken into three parts:

1. Everything it takes to make something: design, raw materials, manufacturing, labor, and so

on.

2. Everything it takes to sell that thing: marketing, distribution, delivering a service, and

processing the sale.

3. How and what the customer pays: pricing strategy, payment methods, payment timing, and
so on.

A business model is simply an exploration of what costs and expenses you have and how
much you can charge for your product or service.

A successful business model just needs to collect more money

from customers than it costs to make the product. This is your
profit—simple as that.
New business models can refine and improve any of these three components. Maybe you can
lower costs during design and manufacturing. Or, perhaps you can find more effective methods
of marketing and sales. Or, maybe you can figure out an innovative way for customers to pay.

Keep in mind, though, that you don’t have to come up with a new business model to have an
effective strategy. Instead, you could take an existing business model and offer it to different
customers. For example, restaurants mostly operate on a standard business model but focus
their strategy by targeting different kinds of customers.

The different kinds of business models

You don’t have to invent an entirely new business model to start a business. In fact, the vast
majority of businesses uses existing business models and refines them to find a competitive
edge. Here’s a list of business models you can use to start your own business.

1. Advertising

The advertising business model has been around a long time and has become more
sophisticated as the world has transitioned from print to online. The fundamentals of the model
revolve around creating content that people want to read or watch and then displaying
advertising to your readers or viewers.

In an advertising business model, you have to satisfy two customer groups: your readers or
viewers, and your advertisers. Your readers may or may not be paying you, but your advertisers
certainly are.

An advertising business model is sometimes combined with a crowdsourcing model where you
get your content for free from users instead of paying content creators to develop content.

Examples: CBS, The New York Times, YouTube

2. Affiliation

The affiliate business model is related to the advertising business model but has some specific
differences. Most frequently found online, the affiliate model uses links embedded in content
instead of visual advertisements that are easily identifiable.

For example, if you run a book review website, you could embed affiliate links to Amazon within
your reviews that allow people to buy the book you are reviewing. Amazon will pay you a small
commission for every sale that you refer to them.

Examples: TheWireCutter.com, TopTenReviews.com

3. Brokerage

Brokerage businesses connect buyers and sellers and help facilitate a transaction. They charge a
fee for each transaction to either the buyer or the seller and sometimes both.

One of the most common brokerage businesses is a real estate agency, but there are many
other types of brokerages such as freight brokers and brokers who help construction companies
find buyers for dirt that they excavate from new foundations.

Examples: ReMax, RoadRunner Transportation Systems

4. Concierge/customization

Some businesses take existing products or services and add a custom element to the
transaction that makes every sale unique for the given customer.

For example, think of custom travel agents who book trips and experiences for wealthy clients.
You can also find customization happening at a larger scale with products like Nike’s custom
sneakers.
Examples: NIKEiD, Journy, MAKE MY TRIP

5. Crowdsourcing

If you can bring together a large number of people to contribute content to your site, then
you’re crowdsourcing. Crowdsourcing business models are most frequently paired with
advertising models to generate revenue, but there are many other iterations of the model.
Threadless, for example, lets designers submit t-shirt designs and gives the designers a
percentage of sales.

Companies that are trying to solve difficult problems often publish their problems openly for
anyone to try and solve. Successful solutions get rewards and the company can then grow their
business. The key to a successful crowdsourcing business is providing the right rewards to
entice the “crowd” while also enabling you to build a viable business.

Examples: Threadless, YouTube, P&G Connect and Develop, Cuusoo

6. Disintermediation

If you want to make and sell something in stores, you typically work through a series of
middlemen to get your product from the factory to the store shelf.

Disintermediation is when you sidestep everyone in the supply chain and sell directly to
consumers, allowing you to potentially lower cost to your customers and have a direct
relationship them as well.

Examples: Casper, Dell

7. Fractionalization

Instead of selling an entire product, you can sell just part of that product with a
fractionalization business model.
One of the best examples of this business model is timeshares, where a group of people owns
only a portion of a vacation home, enabling them to use it for a certain number of weeks every
year.

Examples: Disney Vacation Club, NetJets

8. Franchise

Franchising is common in the restaurant industry, but you’ll also find it in all sorts of service
industries from cleaning businesses to staffing agencies.

In a franchise business model, you are selling the recipe for starting and running a successful
business to someone else. You’re often also selling access to a national brand and support
services that help the new franchise owner get up and running. In effect, you’re selling access
to a successful business model that you’ve developed.

Examples: Ace Hardware, McDonald’s, Allstate

9. Freemium

With a freemium business model, you’re giving away part of your product or service for free
and charging for premium features or services.

Freemium isn’t the same as a free trial where customers only get access to a product or service
for a limited period of time. Instead, freemium models allow for unlimited use of basic features
for free and only charge customers who want access to more advanced functionality. For more
on the freemium model (and other pricing models popular with SaaS businesses

Examples: MailChimp, Evernote, LinkedIn, HOTSTAR,

10. Leasing
Leasing might seem similar to fractionalization, but they are actually very different. In
fractionalization, you are selling perpetual access to part of something. Leasing, on the other
hand, is like renting. At the end of a lease agreement, a customer needs to return the product
that they were renting from you.

Leasing is most commonly used for high-priced products where customers may not be able to
afford a full purchase but could instead afford to rent the product for a while.

Examples: Cars, DirectCapital

11. Low-touch

With a low-touch business model, companies lower their prices by providing fewer services.
Some of the best examples of this type of business model are budget airlines and furniture
sellers like IKEA. In both of these cases, the low-touch business model means that customers
need to either purchase additional services or do some things themselves in order to keep costs
down.

Examples: IKEA, Ryan Air

12. Marketplace

Marketplaces allow sellers to list items for sale and provide customers with easy tools for
connecting to sellers.

The marketplace business model can generate revenue from a variety of sources including fees
to the buyer or the seller for a successful transaction, additional services for helping advertise
seller’s products, and insurance so buyers have peace of mind. The marketplace model has
been used for both products and services.

Examples: eBay, Airbnb

13. Pay-as-you-go
Instead of pre-purchasing a certain amount of something, such as electricity or cell phone
minutes, customers get charged for actual usage at the end of a billing period. The pay-as-you-
go model is most common in home utilities, but it has been applied to things like printer ink.

Examples: Water companies, HP Instant Ink

14. Razor blade

The razor blade business model is named after the product that essentially invented the model:
sell a durable product below cost to increase volume sales of a high-margin, disposable
component of that product.

This is why razor blade companies practically give away the razor handle, assuming that you’ll
continue to buy a large volume of blades over the long term. The goal is to tie a customer into a
system, ensuring that there are many additional, ongoing purchases over time.

Examples: Gillette, Inkjet printers, Xbox, Amazon’s Kindle

15. Reverse razor blade

Flipping the razor blade model around, you can offer a high-margin product and promote sales
of a low-margin companion product.

Similar to the razor blade model, customers are often choosing to join an ecosystem of
products. But, unlike the razor blade model, the initial purchase is the big sale where a
company makes most of its money. The add-ons are just there to keep customers using the
initially expensive product.

Examples: Apple’s iPod & iTunes, and now MacBooks & Pages, Numbers, and Keynote

16. Reverse auction

A reverse auction business model turns auctions upside down and has sellers present their
lowest prices to buyers. Buyers then have the option to choose the lowest price presented to
them.

You can see reverse auctions in action when contractors bid to do work on a construction
project. You also see reverse auctions anytime you shop for a mortgage or other type of loan.

Examples: Priceline.com, LendingTree

17. Subscription

Subscription business models are becoming more and more common. In this business model,
consumers get charged a subscription fee to get access to a service.

While magazine and newspaper subscriptions have been around for a long time, the model has
now spread to software and online services and is even showing up in service industries.

Examples: Netflix, Salesforce, Comcast

This is by no means an exhaustive list of all business models that exist—but, hopefully, it gets
you thinking about how you might structure your business.

They key thing to remember is that you don’t need to invent a new business model when
you’re starting your business. Using existing models can help lead you to success because the
model has been proven to work. You’ll be innovating in smaller ways within that existing
business model to grow your business.

A new business model could be extremely lucrative but also brings with it higher risk. You don’t
know if customers will accept the model or not.

If you think I should add another business model to this list, please find me on Twitter and let
me know.
CORE COMPETENCIES

Project Financer requires efforts and it is certainly not an easy job. It involves several steps;
from the initiation,  planning, executing, and controlling to the closing of a project. The most
challenging part is that the project is delegated to a team with specific goals to achieve over a
defined timeline for a determined budget. A successful and effective project manager is one
who can keep projects and the team on track.This normally takes more than just technical
know-how.

The key, of course, is being able to manage a project on time and on budget, by gaining the
confidence of all stakeholders and leading a highly motivated team to a successful outcome. An
innovative training and development program is one of the best ways to help project managers
improve their skills and knowledge. So what skills do great project managers need? Are they the
same as any other manager or are they unique? The truth is they need various degrees of
expertise, some of which are obvious and others less so. Here are 7 essential skills needed by
project managers:

1. Good leadership

As a project manager you’re responsible not only to lead the project to a successful completion,
but you’re also responsible for leading a team to achieve that goal. To manage everything
efficiently, this requires you to motivate and mediate when necessary.  Some believe you’re
born with leadership skills while others think everyone has the potential to learn how to apply
proven leadership skills and techniques.

Indeed, through an effective training, it is possible to learn the skills to become a good leader.
For example: through modern training solutions such as simulations or scenario-based training
videos, employees experience real work situations which prepares them to face any challenge
in their daily jobs. In short, a leader must know how to utilize the assets of the team and use
interpersonal skills to inspire them to complete their work, without constantly having to check
in on them. It is important to inspire and motivate the team members as this will help to keep
the project on track.

2. Effective Communication

Essential qualities of great project managers are great communicaton skillscombined with a
high emotional intelligence. They are clear and concise in the way they communicate. Such
prompt and honest communication immediately gives project managers credibility, and
increases the likelihood of a successful project.

All the stakeholders are more likely to be engaged if the project manager communicates well.  
For instance: at the start of any project, the project manager needs to ask the right questions
and set a clear goal for the outcome. Project managers also need to communicate equally well
with colleagues, vendors, and customers, and understand how to tailor their style to each
stakeholder.

3. Risk Management

It may happen that things do not go as expected on projects; experienced project managers are
more likely to know this and plan for it. Knowing how to manage the unexpected in a peaceful
way is another important skill for a project manager. It is important to analyze all the risks
involved in the project and how it could lead to a downfall. This is the best way to get prepared
for what might hit your project in the future. After identifying the possible risks, you also have
to plan what to do about them. This usually involves using risk management strategies.
Therefore, these action plans need to be incorporated into your main plan and tracked as well.

4. Cost Control
Cost management is one of the most critical elements to be considered by project managers.
They need to show that they can deliver the project within the cost constraints and by
managing the project finances intelligently. This also includes forecasting, especially if the
project will last long enough to push some of the budget into the next financial year. As a
minimum, you’ll have to work out how to spend what you’ve been allocated and whether it is
enough to deliver what the project sponsor is expecting.There are also likely to be company-
specific processes to follow to actually procure services, receive goods and spend money paying
invoices.

5. Negotiation Skills

A good project manager must be an excellent negotiator.Negotiating the use of resources,

budgets, schedules and so on are important attributes. Knowing how to negotiate well so that
all parties are satisfied is a key skill for the successful project manager. It is very common for
project managers to find themselves negotiating with just about everyone, every day.

Whether they are negotiating for resource from their fellow project managers, negotiating for
support from senior management, negotiating with 3rd party suppliers or with clients; there are
always different interests that they need to try and align. The key to successfully negotiating is
to arrive to a win-win situation. To improve negotiation skills, it is important to invest time to
understand relationships and stakeholders’ interests, so that project managers can clearly
identify what is needed to move their projects forward.

6. Tech Savvy

As technology is evolving rapidly, a successful project manager must stay abreast of relevant
technology in his or her industry. The project manager should also serve as an effective conduit
between programmers/developers and non-tech team members, and is able to communicate
effectively between these departments to work rapidly toward bringing the various
components of a project to completion. Strong project managers must be interested in
continuously learning, staying up to date with the latest software and other technologies that
will keep their teams on the cutting edge.

7. Critical Thinking

Critical thinking is an ability that everyone should develop since most of us are not thinking, but
only reacting or following a series of responses that we’ve either been told or learned. Critical
thinking is simply being as objective as you can in analyzing and evaluating an issue or situation,
so that you can form an unbiased judgement. Therefore, this is a critical skill for project
managers to manage any challenging situation. Critical thinking pulls you out of acting on
emotions or from received knowledge, and this is exactly what a project manager must do.

Let’s face it: project managers will encounter problems every day while working on a project,
and their decisions should be unbiased. In fact, the only thing guiding their decision should be
what’s best for the project. They have to weigh up the pros and cons of solutions to problems
before choosing the right way forward. Critical thinking skills can be developed through practice
and by equipping yourself with tools and approaches to help you structure arguments logically
and see things from all angles before making afinal decision.

Conclusion:

Everyone will be inspired to follow a project manager who leads effectively. Project managers
are the backbones for a project’s success but they must have the requisite skills to manage not
just the project, but also the team. A good training and development program can be a good
way to enhance those skills to ensure productivity and success.
COMPETANCY MATCH

This is an important aspect of performance management that is often overlooked. Attainment of goals

and good performance should not be judged solely on whether or not the objective was attained within
its set time. As a manager you must also assess a person's performance on the behaviors they
exhibited and how closely these match those expected of the role.
As part of your information gathering, you need to include and note your observations of the competencies an
individual displays. 'Competencies' can be defined as the way in which a team member works towards their
objectives. Does the member's behavior match the responsibilities of their role?
Does the team member exhibit competencies that are more akin to their superiors? If this is the case should
you be acknowledging this in their appraisal meeting and setting them goals more appropriate to their level of
competency? These are the sorts of observations you can discuss with the individual throughout the year.
When you set an individual's goals you can also specify the degree of competency you expect that person to
attain. The responsibilities that have been assigned to this individual's role indicate what the organization
expects of them and their behavior.
You will need to decide the relative weight given to each objective and the competencies that are expected.
You will also need to ascertain how much emphasis your organization places on results and how much it
places on encouraging the competencies or behaviors that will lead to higher performance.

Using each role's responsibilities as outlined in the job specification you can define and communicate the role's
competencies to the individual so that they know the aggregate behaviors they need to display in order to
perform their job to a high level.
This illustrates to each member that the way in which they achieve their objectives is as important as the end
result.
For example:
Just because a sales person achieves their sales target does not mean they are a high performer. The
behaviors they displayed in attaining this target may have been:
▪ To focus only on this sale and not future potential business, which is contrary to organizational
objective.
▪ To have poorly communicated the client's needs internally, resulting in wasted effort during
implementation and a low level of customer satisfaction.
Typically, competencies will have various levels, each of which is defined and illustrated by the  expected
behaviorswritten as part of the role's responsibilities. Larger organizations may develop a competency
framework that defines the whole range of competencies. Some are defined as 'core competencies,' apply to all
employees, whilst others, such as leadership, may only be appropriate to managers.
All organizations are different and will need to develop the particular competencies that suit them. Some of the
competencies found in competency frameworks include:
Communicating Effectively
• Planning and Organizing
• Leadership
• Teamwork
• Creativity
• Focus on Goals
• Embracing Change
For a more complete description of competencies please see our eBook 'Developing Competencies'.
As part of the appraisal process you will need to agree appropriate competencies with each member of your
team. Each competency is then assessed against the framework according to the behaviors they demonstrate
whilst performing the role. A well-designed framework will help with a wide range of human resource activities.
These may include performance management, learning, development and career planning, as well as
recruitment and selection.
What is Due Diligence in Project Finance?
In the project finance business, deal origination happens by the direct
relationship that relationship managers across different sectors enjoy in the
industry. Proposals are presented in the form of appraisal notes put up to either
the credit committee or a committee of senior management, whichever is the
appropriate sanctioning authority. Due diligence in project finance involves
thoroughly reviewing all proposals involved in a deal.

An appraisal note ideally contains a write up on the company background, its

management and shareholding pattern, its physical and financial performance,
purpose of funding details of project being funded, costs involved and means of
financing, market for company’s products, future prospects and profitability
projections, risk analysis, and the terms and conditions of sanction.

How is Due Diligence in Project Finance carried out?

The process of conducting an appraisal involves a comprehensive due diligence
of the transaction and preparation of a credit appraisal note. The process
consists of the following stages:

 Study of promoter background

 Assessment of business model
 Legal due diligence
 Assessment of financial structure
 Identification of key risks
 Financial statement analysis
 Assessment of tax implications
 Applicability of Bank guidelines
 Credit scores/Security valuation/Sectoral expert
 Assessment of key terms of the loan

 
Due Diligence in Project Finance – Key Processes
 

PROMOTER ANALYSIS
Study of promoter background
Study of promoter background is undertaken in order to ensure the
commitment of promoters to the project. The main motive is to identify the
background and track record of the promoters sponsoring the project. The
following terms are assessed:

 Assessment of group companies – needs to be done based on past

experience and knowledge of the sector
 Assessment of group companies – Involves in-depth study of various
companies promoted by the sponsor. Assessment of group companies is
necessary even in cases where no direct support from companies to the
project company exist. In case the group is facing a severe financial
crunch, the possibility of diversion of funds from the project company
cannot be ruled out. In such circumstances, the lenders need to take
adequate steps to ring-fence the project revenues.
 Track record of sponsors – In case of any subsisting relationship with the
sponsor, the track record of the sponsors should be studied in light of its
relationship. The lender should identify the incidences of default and
analyze the causes for the same.
 Management profile of sponsor companies – Helps in assessing the
quality of management. Lenders are typically more comfortable taking
exposure in professionally managed companies.
 Management structure of project company – Study of shareholders
agreement helps in determining the management structure of a project
 Study of shareholders agreement – Study of the shareholders
agreement should be done in order to get clarity on issues such as voting
rights of shareholders, representation on the board of directors, veto
rights (if any) of shareholders, clauses for protection of minority interest,
procedure for issuing shares of the company to the public and the
method of resolution of shareholders disputes

 
Assessment of the business model
An extensive study of the business model assists the lenders in assessing the
financial viability of the project. Typically, a business model is developed in
consultation with financial and technical consultants. The lenders need to
undertake the following steps while accessing a business model:

 Understanding the assumptions – major assumptions are involved

regarding revenues, operating expenses, capital expenditures and other
general assumptions like working capital and foreign exchange
 Assessment of assumptions – involves evaluating the various
assumptions and benchmarking the same with respect to the industry
estimates and various studies. Sometimes the lenders appoint an
independent business advisor to validate the assumptions made in the
business model.
 Analysis of project cost – One of the most important stages in due
diligence, as a substantial amount of capital expenditure is to be incurred.
The project cost is benchmarked to other similar projects implemented in
the industry. Also, there needs to be assurance that appropriate
contingency measures and foreign exchange fluctuation measures have
been incorporated into the estimated project cost.
 Sensitivity analysis – A business model involves many estimates and
assumptions. Some of these assumptions do not materialize in view of
changing business scenarios. Hence, it is important to sensitize the
business model to certain key parameters. The lenders need to access
financial viability of the project in light of sensitivity analysis coupled with
ratio analysis.
 Benchmarking with the industry – An analysis of the key ratios in light
of available industry benchmarks is useful in an overall assessment of the
business plan.

Legal due diligence in project finance

Legal due diligence is usually undertaken by an independent legal counsel
appointed by the lenders. This process is comprised of the following:

 Identifying the rights and liabilities of various project participants

 Study of project implementation schedule
  Adequacy of liquidated damages and penalty payable on non-
performance

Assessment of financial structure

The following aspects need to be considered in order to access the financial
structure:

 Debt equity ratio – A good project would ideally have a low debt-equity
ratio which helps in reducing the cost of the debt, thereby increasing the
net cash accruals. Higher net cash accruals enable the company to build
up sufficient cash reserves for principal repayment and provide a cushion
to the lenders.
 Principal repayment schedule – The lender endeavors to match the
principal repayment schedule with the cash flow projections while leaving
sufficient cushion in the cash flow projections. One way of safeguarding
lenders’ interests is to negotiate the creation of a sinking fund for this
purpose
 Sinking fund build-up – Build-up of a sinking fund or Debt Service
Reserve Account is usually established in order to safeguard the lenders’
interests. Such a fund entails deposit of a certain amount in a designated
reserve account which is used towards debt servicing in the event of a
shortfall in any year/quarter of the debt repayment period.
 Trust and retention mechanism – In projects, a trust and retention
mechanism is often incorporated in order to safeguard the lenders’
interest. The mechanism entails all revenues from the company to be
routed to a designated account. The proceeds thus credited to the
account are utilized towards payment of various dues in a predefined
order of priority. Generally, the following waterfall of payments is
established: statutory payments including tax payments, operating
expenditure payments, capital expenditure payments, debt servicing,
dividends and other restricted payments.