Investors often place so much emphasis on ratios and valuation tools that they overlook the driving force behind the end result — a Company’s business model. Simply put, a business model details how an organization creates value, not just how it generates earnings. It determines a Company’s capital requirements, competition, required resources, market segment, revenue generation and margins.

Savvy investors will want to know where the Company is positioned in the industry and how it will engage the market? To put this into perspective, knowing that Carreras Ltd (CAR) is a cigarette Company is not the only consideration to bear in mind when analysing the Company. Did you know that CAR does not manufacture cigarettes but rather distributes them? This is why it is important to dig deeper to ascertain the structure through which a Company’s dollars are earned.

The distributor of cigarettes, including popular brands like Craven A, Pall Mall, Dunhill and Matterhorn, changed its model to match the current business environment, shifting its operations to its subsidiary in Trinidad and discontinuing manufacturing in Jamaica. And more recently, with the elimination of the right to directly advertise, CAR has turned to marketing its products at entertainment events, targeting a younger crowd. This highlights the fact that business models are not set in stone, and oftentimes management and the Board of Directors must go back to the drawing board as the industry changes. CAR’s ability to redesign its business model has helped to drive its results, which climbed 10 per cent to $3.31 billion for its year ended March 31, 2011.

Business models also relay a Company’s product delivery and how much revenue it generates. For instance, Jamaica Broilers Group Ltd (JBG) employs a successful strategy in its Hi-Pro Ace segment which benefits from the interdependence between the Chicks Division and the Feeds Division. The Group delivers over 200,000 low cost chicks weekly, and consequently enjoys a steady stream of profit from feed sales due to the dominant market position of Hi-Pro Feeds. It is important to note that this forms only one part of the Group’s overall business strategy as its model focuses on diversified revenue streams in order to cushion earnings.

It is also important to note that as businesses environment changes, so too must the business models of various Companies. Jamaica Producers Group Ltd (JP) is an example of a Company that has effectively adapted to change owing to the prudence and foresight of its management team which successfully transformed the struggling banana producer into an internationally recognized and profit-bearing fruit processor. At the end of 2008, JP took the decision to exit its United Kingdom (UK) juice business and to cease exporting Jamaican bananas to the UK – a change in its business model to match the changing industry. Overall, JP has evolved from a banana chips producer into a Company with a more diversified revenue stream. Its Tropical Snack line has expanded to now include Cassava chips, Sweet Potato chips, Plantain chips and flavoured variations.

In addition, the Company continues to aggressively prospect new markets and opportunities, with plans for expansion into mining, increased investment into plant and new machinery and offering a range of new products, including bammies and peeled green bananas.

Likewise, Scotia Group Jamaica Ltd (SGJ), which was once just the Bank of Nova Scotia Jamaica Ltd (BNSJ), has evolved into one of the largest financial groups in Jamaica. In the past, traditional savings accounts used to be the order of the day in the financial sector, generating the majority of funds for BNSJ and other Banks alike. With Investment Banking now at the forefront of the financial sector, SGJ has realigned its model to include this new paradigm of finance. Despite being challenged by the current environment, SGJ continues to be a fundamentally sound Company with a solid management team that maintains its focus on long_term growth.

Generally, shares of Companies with strong business models tend to outperform those which do not. For example, JBG and SGJ have both inched up approximately 5 per cent Year-to Date (YTD), while CAR and JP have both surged almost 20 per cent. On the other hand, Montego Freeport Ltd (MFP) and Palace Amusement Co Ltd (PAL) have declined 3 per cent and 24 per cent respectively YTD.

MFP continues to produce inconsistent results year after year, which is not surprising given that its business model has been largely dependent on what the Company deems its “undecided long term vision”. Likewise, PAL’s revenue remains heavily dependent on external factors such as movie quality and timeliness of distribution which wanes its model.

As Joan Magretta, former editor of the Harvard Business Review noted, “When business models don’t work, it is because they don’t make sense and/or the numbers just don’t add up to profits”. A solid business model defines a successful Company and accordingly a good investment. Admittedly though, a Company’s business model does not tell the entire story, but, as the backbone of successful Companies, it simplifies the job.

Sutanya Chedda is a Client Services Officer at Stocks & Securities Ltd (SSL). You may contact her at schedda@sslinvest.com.