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Wednesday, July 27, 2005

The 10 business models

A collection of categories of businesses. Most businesses are a combination of multiple categories. For example, Mousetrap+Niche+Ghost Ship=Underpants Gnomes.
  1. Toll Bridge: Anyone who wants to do a particular thing must use your product or service, and lots of people do this thing regardless of how much you charge (within reason). This is the ultimate business to own.
  2. Habitual brand: People buy your product/service out of habit and they have a clear preference for your brand. The purchases are repetitive and small costs. Coca Cola and Marlboro are good examples (well we all know cigarettes are actually bad).
  3. Safety Brand: People buy your product/service because they trust it and anything else has enough uncertainty to warrant paying more for the known brand. Branded restaurants or hotels are good examples.
  4. Status Brand: We all know about these.
  5. Fight Club: Bare knuckles competition with no advantages other than brute force competition. Wal*Mart actually won this way, but there's only one Sam Walton and he's dead.
  6. Niche: A company dominates a small market no one else cares about.
  7. Bank: any highly leveraged financial institution working with interest rate spreads. Extremely dangerous if not run correctly.
  8. Mine: A hole in the ground owned [or managed] by a liar. (Mark Twain?)
  9. Mousetrap: A company based around some clever gimmick that no one wants, often with a patent (especially if it's the CEO's patent and it's framed hanging on the wall)
  10. Ghost Ship: A company without any sense of direction or purpose, drifting on past success.

Bruce, nice list. I was baffled by underwear gnomes but a quick google check took care of that. I seem to miss a lot of cultural references by not being a South Park devotee. While YaSheng took a breather today, my little Chinese flour and noodle company, NWD, jumped 26% of news of a supply deal with Coke.
Trey Parker, one of the creators of South Park, is able to see through crap very well. Unfortunately, South Park contains many brilliant observations of people and society hopelessly mixed in with childish toilet humor and worse.

So the Chinese Noodle Company took off. Great!

I've been working on automation of the stuff I'm doing. I've got some scripting done using the Expect/Tcl language and the Lynx browser, but I'm going to have to hire someone on eLance.com to do the heavy lifting.

The categories of businesses are a first draft. I run into the same kinds of dopey business mistakes over and over and it's just good to have categories to put them into. I see a lot of mousetraps. That's probably the most common business plan. I spent 4 years in a startup mousetrap and another few years in another startup operation mousetrap (two of the guys went on the be founders of Sonus Networks including the CEO. Actually the CEO was in the first 4 year mousetrap come to think of it).

A bank is simply a way of doing things. I view like rock climbing: you do a task that is inherently very dangerous but you reduce the risk back to normal levels by following careful methods and correctly using the right equipment.
Bruce, thinking about my portfolios in terms of your lists, my best performers over a long period (10-15 years), especially among the big caps, are heavily concentrated in the financial area e.g. afl, wtm, aig, c, wfc. I can't really explain it as these companies don't have substantial moats. It's also interesting to think about a microcap we both own, NICK. After leaving the corporate world, Peter Vosotas, who has an engineering background, went into the software business with limited success (mousetrap?). Then, despite having no financial background, achieved good success with Nicholas Finacial. Obviously these sorts of businesses carry plenty of risks, but it seems that with strong emphasis on the basics of execution, the odds of success are favorable.
NICK is an interesting example. I view it as bringing an engineering viewpoint into an industry that doesn't typically think that way. Sometimes taking a new viewpoint is like a moat in that other don't copy it. You look at Wal*Mart and Sam Walton simply did what others were doing at the time, but with an almost religious fervor about prices and costs. Anyone else could have done it for a long time (maybe even today someone could do it) and would have been a strong player.
nice list. i have read your posts on brk fool board and found them very good.

a silly question ...(maybe i dont get it ) ...i have seen the word 'mousetrap' used a lot in context of a business model ..what does the word mean ?
"i have seen the word 'mousetrap' used a lot in context of a business model ..what does the word mean ?"

When I use the term, it means a business whose plan is essentially to build a better mousetrap (there's some old saying about it). In my experience, people who view themselves as being in the business of building a better mousetrap are hopelessly caught up in technical wizardry and spend far too little time fully understanding their customers' problems and issues.

I'm just about all done with the side-issue I was working on. I plan to get back to evaluating lots and lots of businesses within a day or so. I might do some work today, but I'm fairly burned out right now.

The Berkshire board on TMF is an interesting place. It's getting to be a bit of a cult that frowns on stuff that Buffett himself happily does when working with "small" amounts of money: arbitrage, liquidations, and deep discount cheap stuff often run by less-than-ideal management.
thanks bruce
please let me know if i can publish your list ( and future ones ) in my blog ( which is on value investing , but in an indian context )
i follow buffett, munger and other value investors , but apply the principles in an indian context ( i am from india , but working in US ) as my area of competence is limited to indian companies
i have grappling the above issue also. trying to categorise business in various models so that it is easier to analyse a new company
the typical examples which get discussed are the perfect (or close to it ) franchises like coke or gillette to the other extreme (completely commodity with terrible economics ) , namely airlines
however a lot businesses lie somewhere between the two (some closer to a perfect franchise or some closer to the commodity business). i have trying to come up with such categories . the models you are developing would be very helpful if you can share the same
I'm not sure I understand what it is that you want to publish. What I do here is gather up lots of notes on specific companies and make investment decisions based on that. If you want to publish the particular companies that I currently invest in, that's fine. If you want to link to this site, that's fine. If you want to lift large portions of actual text, that's probably a bad idea for both of us (i.e. this stuff is not very well constructed and I probably make mistakes, but I also would prefer not to have my notes distributed outside of this blog).
"...trying to categorise business in various models so that it is easier to analyse a new company
the typical examples which get discussed are the perfect (or close to it ) franchises like coke or gillette to the other extreme (completely commodity with terrible economics ) , namely airlines...."

Buffett always talks about Coca Cola and such lately, but I think less widely discussed investments like Arcata gives a better view into how Buffett really invests, when he's not stuck with too much money and too few opportunities.
When he's away from Berkshire's billions, he dives into horrible businesses selling very cheap and making a killing at it. Just look what he did with junk bonds in 2002. That wasn't Coca Cola. On an Aegis Realty (or Real Estate) conference call, he had Debbie Bosanek, his admin, get into the queue to ask a question and then when they prompted for the next question from "Debbie Bosanek", Buffett gets on the phone and talks about how Debbie's his admin and that he didn't have a sex change operation or anything like that, then proceeded to hammer the management on a terrible decision they were planning to make, claiming that he would seek to push through his own plan with or without present management. And that my friend is how you strike mortal fear into the hearts of management. Buffett has that simple down-home Nebraska manner, but just ask him what the odds of drawing two-pair of a single digit red suit would be in a playing card deck without aces, or how much you'd end up with investing $1,500 at 5.3% interest for 9 years.
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