Leverage business model is a type of business which borrowed money to purchase the business or raised the money from investors.
Many mining, investments and manufacturing business investors are using this type of business model.
They are raising money in advance from the individual investors to purchase and establish the business with a significant amount of assets.
It is a type of investment strategy which the company is using the borrowed capital to increase its potential return as well as the amount of debt the company uses to finance the assets.
The individual investors gain their own profit with company’s growing in assets.
What Does Leverage Business Model Strategy Means?
The leverage business model is a long-term marketing and financial process.
What are the Types Of Financial Leverage?
Leverage business model is usually in two ways:
- Use of credit to increase the return to equity. An example of this is KaratBars International crypto-currencies which they are selling gold based tokens to the members or share holders, in advance and then they go and purchase the physical gold from the mine and save it in the karatbank as their backup.
- Competency which is to gain an advantage with safe products for example: KaratBars gold purchase to the clients in order to do the long-term investments in the right and safe investment, because gold never goes bad and the price increases at all the time.
Moreover, leverage business strategy enhancing the companies’ resources to increase its out performance by providing superior value to the customers to achieve extraordinary profit.
In both ways the firms can use the strategic frameworks to understand about how using leverage strategic model is increasing its capabilities and enhance their profit potential.
This type of business model, does more with less resources such as well trained employees such as marketing experts and financial managers.
Why Doing More With Less, Call Leverage Business Model?
Doing more with less in leverage business is because of the following strategies;
- Better Products
- Compatible strategies
- It is based on the past successes and not the future leaderships
- Also depends on compatible sub strategies
1- The vision of leverage business model is:
the main goal of using the borrowed money in order to compete with the other firms in the same industries with the use of less resources.
When the company has a potential goal to raise money from the investors in order to create a new way of business firm and all the investors are gaining based on their shared amount.
The basic calculation of the financial leverage is as follow:
Total Debt of the Company / Total Equity held by shareholders
2- Better production:
In general leverage business model goal is to provide a better products with less resources in order to compete with other larger competitors.
3- Compatible strategies:
The authors first suggest that firms should implement initiatives where the need is aligned with business competencies. In doing so, the firm can create a greater impact while also learning from these projects to further hone such competencies.
For example, if a firm is strong in environmental resource management then working with a group that restores wetlands is a better idea than working to promote literacy.
The research argues that the path to profitability lies in the potential for the firm to learn from its experiences. When a firm engages in initiatives aligned with its business competencies, that learning enhances such competencies.
Wegmans, a privately-held grocery store known for its high quality food, for example, has supported local food banks for decades, contributing 16.5 million pounds of food in 2013 alone. By sending day-old bread and not-quite perfect produce to food banks, they find good uses for good food while maintaining the quality of what they sell.1
The Common Inconsistency of Leverage Business Model
1- Big Companies with more resources: We have more resources than all our competitors, therefore, we’re more powerful.
They are using different strategies such as resource-surplus which spends much on technologies but do not do employee’s training, technology-consumption and new products introductions.
As a result, they are wasting too much of their resources which can lead to serious problems.
2- Small Companies with less resources: We have less resources and must innovate more and offer better products to compete with our competitors.
Accomplish more opportunities with the right niche market and less confrontational comparing to the bigger firms.
They are focusing on more skills and capabilities of doing more with less resources, as well as finding alternative ways of doing better manufacturing comparing to their competitors.
There are no sufficient resources but they can succeed by their own innovation instead of copy replication.
Small firms should not try to match dollar-for-dollar with their competitors, but they can find the way to match existing advantages to become strategically more competitive.
What is Resource based View of Business Strategic Leverage?
The main strategy is doing more with less resources, establishing strategic alliances, building more clients, using skilled resources across business models.
Resource based of the firms is not refers to financial resource only and it’s refers to technical resources and the human resources as well.
An example of limited resources constraints with success: e-Bay, Amazon, KaratBars International.
In the other hand, an examples of companies with plenty of resources which could not yet sustain success; General Motors, General Electric, Sears and so on.
Index of Leverage Business Model Resources
The ratio of relative shares of investment or investors or resources.
Growth of revenue.
- Concentrating on the key strategic goals, every individual functions and units within the organization must focus on the same organizational goal.
- All the members should understand the main purpose of the investment program of the companies and their goals.
- Accomplishing the resources by integrate a resource with another resource.
- Should not concentrating on one resource and ignore the others and should establish the priorities in order to use the resources in the best use.
- A company accumulating resources with learning form experiences and continuously learning new things is the key.
- Outsourcing if it’s necessary in order to implement a better quality products or services.
- The complimenting resources by mixing products and combination such as strong on product quality and arrangement of the good marketing structure.
The time between the outflow and inflow of the revenue should be fast enough to recover the resource and as a result that type of firms doing twice better than its competitors.
For example: Detroit Car makers introduce a new model every eight years while Honda introduce a new model every 4.5 years and they can recover their investments sooner than their competitors.
However, a good strategic leverage model provides the answers to many of business strategies issues.
Types of Financial Leverage Model:
1- The funds raised through Owners and Creditors’ equity and usually the long-term finances are used for the sources of capital.
2- Create your passive income in leverage business model.
In today’s usage of technology and internet the compete with highly competitive market is very important.
People are looking for such a business to make passive income which is making money while you are away, sleeping and so on.
Generally people who wants to make an automatic passive income are more interested in the leverage business model.
Also, people with less time but with a goal of making money from home in their mind are taking action and more interested in this type of business.
Investors are the share holders of the business as well and they will gain and make money when the firm makes money or the value of the firm increases because of the advanced sales in their future productions.
In the other world, the percentage of payable to the investors should be greater than the borrowed loan interest payable.