Can you read the business model of your industry?

Vishwesh is an ace hardware engineer. He wants to enter in the business of selling and maintaining desktop computers in a town of about 10 Lakh population after having worked in the corporate field for 5 years.  He feels that he knows lot of people in this home town and is confident of selling better service at higher price. What should he do? 

A business model of an industry gives you a fair idea of a business dynamics in that industry and helps you to understand the wherewithal to use to stay ahead in the industry. It also helps an entrepreneur to monitor the pulse of his own business model, so that he/she can avoid getting caught on the wrong foot.

Business model basically comprise of two sub-models: Customer acquisition ( cost and difficulty of acquiring customers) and Value delivery model ( the cost and difficulty of delivering the promised value to the customer). Basically, the business model helps you first to understand how the revenue of getting a customer every month/quarter/year is more than the cost of delivering and maintaining promised value to the customer. Secondly, it therefore helps you design your own business model to help you stay ahead of the rest of the industry, as we discussed in the earlier blog.

If you observe the industry of selling desktop computers, you will see the industry is 'localised' (which is good for Vishwesh) . On the other hand, revenue margins are constantly shrinking due to the 'commoditisation' of desktop computers  ( as well as online selling) as 'brand'  value is insignificant for the customers. Due to commoditisation, assembled PC business ( another source of revenue) is also vanishing slowly.

Second stream of revenue - maintaining the desktop - is under constant threat of lower price of new competitors because of the low entry barrier. Due to low investment, new competitors can enter the industry with ease. This competition will make it difficult for Vishwesh to charge higher revenue for better service. In other words, the basic proposition of Vishwesh of 'delivering high value service' is not tenable due to low entry barrier in this industry.

The business of maintaining computers, although scalable ( which means it can grow in size), depends on the available supply of quality hardware engineers. However good hardware engineers are difficult to get in a small city. Even if they come in a small city, they start their own business. In other words, opportunity to increase the 'scale' of business is highly limited for a 'local' supplier.

One of the common reasons why entrepreneurs in service-industry cannot increase the size of their business is due to scarcity of  'good quality resources'.  Unable to get skilled employees, entrepreneurs get untrained people and train them. No sooner they get trained, these employees can fetch higher salary for their skills. If the business has not grown fast enough to accommodate the higher expectations of employees, the employee leaves. The entrepreneur has to start from scratch.

What is your conclusion? Because of 'commoditisation' of desktops, it is difficult to earn higher revenue from selling branded PC's. Due to the same reason, it is also difficult to find customers who will buy 'assembled' PC. Revenue from hardware maintenance is also under threat due to low entry barrier. On the other hand, increasing the scale of business is difficult due to dependence on high quality engineers. In such a situation, what will you advise Vishwesh?

Do you think Vishwesh can do something and create his own business model that will offset the disadvantages? Now let us think of other options.

One of the option could be to 'start' the business with a higher scale - say at a district level? This will increase his investment and reach. Will this 'reputation' be enough to offset the reputation of local suppliers? Another option is to start 'hardware training'. This will fetch him a constant supply of quality engineers, although untrained? Can he offset low 'skill' of these fresh engineers with better processes and quality control? Is this practical? Or there is another option. Can Vishwesh cater to a new segment in his city- the small businesses in the industrial sector? In these companies, the network has to be managed, not just independent computers? Even if he has the skillset to manage the networks, can he train other engineers to sustain his business? And will these trained engineers start their own business after they learn from him? Is there something in the industry dynamics that will prevent them?

Many such options can be meaningfully discussed, once Vishwesh understands the business model of his industry. In order to avoid arm-chair theorising, Vishwesh has to use estimated figures of revenue/cost to weigh different options. Naturally, in some industry, other than customer acquisition and value-delivery, even other models could be important. For instance, i am aware of a composite material company, based in Mysore, which depends on innovating new composite materials to sustain its business.

Very often, entrepreneurs take the decision of entering a business based on their skill set, and not on the cold reality of the industry dynamics. It is also important to monitor the changing 'pulse' of your industry dynamics, so that you can take advantage of the emerging situations, and not become the hapless victim of the situation.

If you are an entrepreneur, you have to develop the skill to read the business model of your industry. Only this helps you to 'develop your own business model' to sustain your leadership. Can you read the business model of your industry?