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24.06.2019 Business Features

Business Model Implementation: the key to Viability

By Alexander Ayertey Odonkor Ch.E & Emmanuel Amoah-Darkwah Ch.E
Alexander Ayertey Odonkor Ch.E & Emmanuel Amoah-Darkwah Ch.E
JUN 24, 2019 BUSINESS FEATURES
Alexander Ayertey Odonkor Ch.E & Emmanuel Amoah-Darkwah Ch.E

It is utterly jaw-dropping to know that some companies have operated for more than 1000 years especially when many start-ups in recent times cannot survive beyond five years. Kongo Gumi, a Japanese construction company specialized in building Buddhist temples was established in 578 AD and has been operating for about 1,400 years – the company is now a subsidiary of Takamatsu Construction Group, after struggling with a financial snag. Prior to the merger in 2006, Kongo Gumi had staff strength of one hundred and was operating with an annual budget of about $70 million. In 2011, the Guinness World Records named Nishiyama Onsen Keiunkan, as the oldest hotel in the world - Nishiyama Onsen Keiunkan is a hot spring hotel in Japan that was founded in 705 AD.

The International Business Machines Corporation (IBM), General Electric Company (GE), Ford Motor Company, Nestlé, Coca-Cola and Banca Monte dei Paschi di Siena (BMPS) are a few of the companies that have been operating for over a century now. The operations of these companies cuts across the automobile industry, information technology, food processing industry with Banca Monte dei Paschi di Siena (BMPS) an Italian bank that was originally founded in 1472 being considered the oldest bank in the world and the fourth largest commercial and retail bank in Italy.

On the African continent, not many companies have operated for a century as companies usually stop operating when the original owners are no more in existence. It is a common characteristic for a family business to end its operations once the founder of the business is no longer in a position to run the business. The Madhvani Group, established in 1914 in Uganda, is one of the few African companies that have operated for more than 100 years – with a population of 42.86 million and a gross domestic product (GDP) of $25.89 billion in 2017 as reported by the World Bank, the company contributes about 10% of the GDP of Uganda.

Even though the Madhvani Group has been operating for many decades this feat is not usually accompanied with the needed exhilaration among Ugandans – Uganda is a country of entrepreneurs. In 2016, the British newspaper, The Guardian published a report of a research work conducted by the Global Entrepreneurship monitor (GEM) that ranked Uganda as the World’s most entrepreneurial country. There are few job opportunities in the country as about 400,000 young people enter the job market annually with a goal to compete for 9000 new jobs. This situation has created more entrepreneurs in Uganda – according to the Global Entrepreneurship Monitor, 28% of adults own or co-own a new business in the country but only a few survive the test of time. One of the major reasons for this perennial debacle has been product failure.

The product life cycle of a new product makes a progression through four main stages - the introduction, growth, maturity and the decline stage. Not all products make it successfully through the four stages as some products progress from the introduction stage to the decline stage within a short duration without going through all the stages. In 1965, Harvard Business School’s Professor Theodore Levitt, who was the editor of the Harvard Business Review wrote in the Harvard Business Review that, innovators lose the most as many new products fail at the first phase of the product life cycle. This imminent failure discourages corporate organizations from trying new things - instead theses companies clone the success of other companies that venture into new areas.

The product life cycle has the tendency to influence the decisions made by the leadership of business entities – the decision may proliferate from pricing products, cost-cutting, forms of advertisement to adopt etc. The process of strategizing measures to continuously support and maintain a product is referred to as the product life cycle management. The product life cycle management is embedded in the business model – the blueprint of the company.

For companies that have been operating for over one hundred years the indispensable tool for envisaging the future of the company has been the successful implementation of a business model. The successful implementation of a business model puts a company in a position where it can meet the preference of consumers at a competitive price and a sustainable cost. To derive the full benefit a business model offers, it is incumbent on entrepreneurs or the management of business organizations to revise their business models to reflect the constantly changing market demand and the business environment within which the company operates. The key component of a business model is the value proposition – this refers to the product a company offers to consumers that is unique from what other competitors offer on the same market. It is this value that makes the product desirable to consumers and eventually drives the demand for the product.

The economies of many developing countries have a large informal sector so business entities operating in this sector continuously avoid corporate taxes and other costs associated with registering a company. This condition has deprived companies in the informal sector from bidding for projects that offer higher financial rewards that could propel the growth of the business. In a research published by the International Monetary Fund (IMF) in July, 2017- the paper indicates that the informal sector of economies in Sub-Saharan Africa is one of the largest in the world ranging from 20% to 65%. This condition makes it increasingly onerous for companies operating in the informal sector to secure credit from the bank as the cost of borrowing is comparatively high as a result of the risk exposures in the informal sector.

For a new business entity, the business model covers the projected start-up cost, the marketing strategy, the sources of financing, review of competition, expenses and revenue projections. Companies experience tremendous growth from the successful implementation of a business model.

Coca-Cola has a successfully implemented business model that has sustained the company since it began operation in 1894. The company has frequently reviewed the business model it operates with to reflect the current market demand. For instance in 1916, Coca-Cola changed its bottle to the famous contour design bottle in an attempt to distinguish Coca-Cola from the imitations by its numerous competitors. This became necessary as over one thousand production plants from different companies started imitating the product. The contour bottle proved to be effective in solving the problem of imitation and it is used even today for the same purpose.

Entrepreneurs and the management of corporate organizations can assess the effectiveness of a business model by comparing the gross profit of the company to that of its competitors – the gross profit of a company is the difference between the total revenue of the company and the cost of goods sold (COGS). The gross profit otherwise known as the gross margin is a company’s profit before operating expenses, taxes and interest payments are deducted. Using only the gross profit as an indicator can be misleading so it is appropriate to also rely on the net income. The difference between the gross profit and the operating expenses will give an adequate indication of how much real profit the company has generated over a period of time.

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