Value Added Manufacturing- Key Focus Area Highlight
Strong Business Models is one of the 6-Key focus areas that we at Surge look for when we evaluate any investment opportunity.
Historically this focus area has led us to some of our biggest winners like those of Tips Industries, Suven Pharma and IEX.
In this post, we will highlight what to look for in Strong Business Models and one good framework to identify strong business models in manufacturing businesses.
In theory, moats are what gives businesses strength, which could be something like brands, distribution etc. But this is the old & simple way of looking at things, but businesses and markets are no longer that simple now. The real & new moat is companies that are doing value addition for their customers.
The more the value addition the stronger the business model.
Costco is a clear example of value addition business model. The business model for Costco is straight forward that we only want to make a small fixed margin of say 4% and then whatever cost & scale benefits we derive, we will keep passing the same to our customers and keep on increasing the value for them.
And one of the most important things to understand here is that this model of value addition to a large extent is also driven by the mentality/mindset of the management. Everyone knows the model of Costco, but no one has been able to replicate the same. And the reason for this is because not everyone has this mindset of limiting their profitability to a certain level, everyone wants to make more profits. And thus, business model driven by the value addition mindset are so much stronger.
One such value addition model that we have discovered on the manufacturing side of things is around low volume-high value-high customization manufacturing businesses.
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