Business model
How a company actually makes money — what it sells, to whom, and how it delivers and prices it — which the workbook treats as the real basis of competition between companies.
In plain language
Two companies can be in the same industry and still make money in completely different ways.
Knowing what a company sells is not the same as knowing how it earns from selling it. The workbook quotes management scholar Gary Hamel on this: "Competition in the marketplace is not between products and services but between the Business Models of the competing companies."
How it works
The workbook shows what "business model" boils down to, sector by sector — because the metric that actually captures a business model's performance changes by industry. For retail, it is foot falls and same-store sales. For banking, it is Net Interest Income and Net Interest Margin. For telecom, it is ARPU. For hotels, it is average room tariff.
Understanding a company's business model is the starting point of qualitative research, ahead of any financial ratio — Chapter 13's own research checklist opens with "Do I understand the business" and "what is the revenue model — how does business make money," before any quantitative test is applied.
A worked example
Illustrative. Two Indian retailers both sell consumer electronics, so they look alike on the surface. Company A owns its stores and carries its own inventory — an asset-heavy model — and reports Return on Capital Employed of 14% on Rs 2,000 crore of capital employed. Company B runs an online marketplace, taking a commission on sales made by third-party sellers on its platform, carrying no inventory of its own — an asset-light model — and reports ROCE of 45% on just Rs 150 crore of capital employed, despite handling a similar volume of goods sold.
Both are "in electronics retail." Their business models — who owns the inventory, who bears the working capital — explain almost the entire gap in their returns.
Why NISM asks about it
Chapter 7.2 (Understand Business and Business Models) introduces the Gary Hamel quote and the sector-by-sector KPI examples. Expect a question pairing a sector with its defining business-model metric, or one testing the distinction between "what is the company's business" and "what is its business model" as two separate checklist questions.
Common exam traps
- "What does the company do" and "what is its business model" are two different checklist questions, both listed in Chapter 7.1 — knowing that a company "sells cement" is not the same as understanding how it prices, delivers and earns from that cement.
Check yourself
1.The workbook notes that each sector has its own unique parameters for evaluation. Which sector–parameter pairing is correct?
- a)Retail — Average Revenue Per User (ARPU)
- b)Hotels — footfalls and same store sales (SSS)
- c)Telecom — average room tariffs
- d)Banking — Net Interest Income (NII) / Net Interest Margin (NIM)
Show the answer
Answer: (d) Banking — Net Interest Income (NII) / Net Interest Margin (NIM)
The workbook gives four pairings in one sentence: "For the retail sector, foot falls and same store sales (SSS) are important parameters, whereas for banking it is Net Interest Income (NII)/ Net Interest Margin (NIM). For telecom, it is Average Revenue Per User (ARPU) and for hotels, it is average room tariffs."
Options A, B and C each take a real parameter and attach it to the wrong sector. ARPU belongs to telecom, footfalls and SSS to retail, and average room tariffs to hotels. Only banking–NII/NIM is correct.
The point behind the list: "Analysts must possess an in-depth knowledge of the sectors while researching companies." The same section says no analyst should go further "if he/she can’t address what a company does in a line with precision and clarity", and quotes Dr Gary Hamel: competition is "between the Business Models of the competing companies", not between products.
2.Which of these belongs to the QUANTITATIVE understanding of a company?
- a)Brand power
- b)Qualifications and capabilities of the management
- c)Capacity utilisation and market share
- d)Customer satisfaction
Show the answer
Answer: (c) Capacity utilisation and market share
Quantitative understanding is based on metrics of performance that are captured as numbers. It covers the financial information provided in the balance sheets and profit and loss statements of last few years, cash flows, assets and liabilities, and non-financial information like production, capacity utilisation, employee productivity, geographical expanse, and market share.
Note that quantitative does not mean only financial — capacity utilisation, employee productivity, geographical expanse and market share are numbers without being rupees.
The other three options are all from the qualitative list: qualitative understanding is more about understanding the intangible factors related to any firm that makes it perform better than its peers, like strengths and weakness of the business model, qualifications and capabilities of the management, brand power, employee competencies, customer satisfaction and so on.
Why both are needed: companies in the same industry may vary significantly in their approach towards business. Based on their styles, product configuration, business model, customers segment, their financials could also vary dramatically.
The syllabus treats them separately — Chapter 7, Company Analysis – Business and Governance for the qualitative side and Chapter 8, Company Analysis – Financial Analysis for the quantitative.
3.Which is listed among the desired qualities of a good research analyst?
- a)A licence to trade on the exchange floor
- b)Ability to read and comprehend financial statements and reports
- c)A minimum of ten years in fund management
- d)Membership of a stock exchange
Show the answer
Answer: (b) Ability to read and comprehend financial statements and reports
The workbook's list of desired qualities: good with numbers · good Excel (spread sheet) and other data analytical tools · clarity in financial concepts · ability to read and comprehend financial statements and reports · ability to ask pertinent questions · attention to details · communication skills — written and verbal.
None of the other options appears; they describe brokers or fund managers rather than analysts.
The broader description of what the job demands: the job of research analysts requires quantitative and qualitative skills. An analyst needs to have a high degree of comfort in dealing with numbers to be able to analyse various financial factors, identify trends and see the inter-relationship between different factors. At the same time, he needs to be methodical, have an enquiring mind and be discerning to know where to find relevant information.
And one more capability is singled out: ability to understand business models and competitive dynamics in a business is another important quality an analyst must possess.
Notice that communication skills sit alongside the numerical ones — the analysis is worthless if the client cannot follow it, which is why the client guidelines require reports to be simple, clear and concise.
Where this is taught
Free preparation for NISM Series XVRelated terms
- ARPUAverage revenue earned per subscriber over a period — the key top-line KPI analysts use to track telecom and other subscription businesses.
- Attractive industryAn industry structure, under Porter's Five Forces, with low competition, high entry barriers and weak buyer or supplier power — letting its companies earn strong, durable margins.
- Checklist approachUsing a fixed, written list of qualitative, quantitative and valuation questions before every investment decision, so judgement stays disciplined rather than based on memory or mood.
- CommoditisationA market state where competing products are seen as interchangeable, so competition happens almost entirely on price and no seller can sustain a premium.
- Customer concentration ratioThe share of a company's revenue earned from its largest customers — a high ratio signals dependence on a handful of clients who could walk away or squeeze pricing.
- Pricing powerA company's ability to set and raise its own prices — passing on cost increases and growing margins — without losing customers to competitors.
- Same-store sales growthGrowth in sales at stores that were open for a full year in both periods being compared, stripping out the effect of newly opened stores — the key like-for-like growth metric for retailers.