2.1 Business Modeling

Business Modeling

This is not a business course; I encourage you to continue your research and consider other graduate courses to understand business fundamentals. In Location Intelligence for Business, we’re examining methods of geospatial analysis that develop location intelligence for business decision makers.

Through geospatial analysis, location intelligence provides a way to reveal relationships between data sets to arrive at actionable insights. Throughout the course, you may build a list of advantages a business gains from effective location intelligence projects or studies.

• Exploit data to create competitive advantage.
• Make better, more actionable business decisions.
• Link datasets to reveal relationships.

Business modeling emerges from business intelligence as a method of solving complex problems. The more effort one puts into a project or analysis - they want to see the value increase, the complexity can also increase (Figure 2.1.1 Bacastow and Steiner, 2023). Early in a location intelligence analysis, applying available data to the business problem yields influencing factors with good certainty. More geospatial and non-geospatial data is added to gain foresight into the problem; but with significant uncertainty. This is the challenge of location analytics, it also takes more time, experience, and knowledge to gain value.

Figure 2.1.1 The challenge of analytics in value and complexity. Source: Todd Bacastow and Dan Steiner, 2023.

A business organizes departments, staffs, and roles to understand customer needs, create valuable products, market thier products or services, and distribute their product to the most likely locations for profitable sales. This is complicated, organized, established over years, risky, and often rewarding. An efficient organization performs business development, marketing, management, and reporting; constantly evaluating their performance to business elements, principles, and objectives. Analyzing data and situations with location intelligence to achieve business goals requires a connection to marketing SWOT analysis, needs assessments, risk and crisis management policies, and decision-making.

Examples of how this process benefits companies and customers include:

• reducing direct marketing costs through address verification;
• improving customer experiences with in-store location technology;
• enhancing civic & community engagement with targeted messaging for local events;
• modeling risk assessments to anticipate opportunities and threats; location intelligence is linked to SWOT analysis and needs assessments.

Business Advantage

A business promotes its products through marketing campaigns, alliances with partner businesses, and highlighting the advantages its products or services offer over competitors. Significant marketing effort is designed to transform consumers to customers. Sam Walton focused on consumers and relates in Sam Walton: Made in America that a company may need to redesign the entire business model with an understanding that "the whole thing is driven by the consumer, who are free to choose where to shop."

Competitive businesses in the digital age focus effort to fulfill two strategic goals for the organization and customers:

1. The business wants to deliver Personalized Consumer Experiences, offered via digital marketing.
2. Consumers desire Customized Products available through multiple channels, delivered in a simpler experience.

As an example, Amazon provides a standard for personalized marketing with:

• personalized Amazon page;
• chat connection for each experience; and
• recommendations based on previous purchases and preferences.

Digital transformation of marketing operations requires more data sources, relevant information, and geospatial connections to effectively segment markets and consumers. A buyer makes individual choices on the products or services needed; global businesses group buyers into collective segments to understand needs, preferences, purchasing behaviors, locations, and economic characteristics.

Business Metrics and Sales Reporting

One of the key accounting reports for a company is the Income Statement that reports the amount of revenue earned minus expenses paid for a given period of time (e.g. month, quarter, calendar year, or fiscal year). Another significant report is the company's periodic Statement of Cash Flows which reports the operating, investing, or financing activities during that time period. [These activities and reports are pertinent to Anti-Money Laundering/Counter Terror Finance investigations.]

• Operating expenses refer to the activities related to running the company to generate a profit.
• Investing activities include purchasing investments, lending resources, or buying long-term productive resources (e.g. purchasing large pizza ovens for a restaurant, earth moving equipment and trucks for a quarry).
• Financing refers to borrowing from institutions, receiving shareholder contributions, or paying dividends.

Resources owned by a company are Assets. In basic financial accounting, the Assets a company owns must equal what the company owes to creditors (Liabilities) and Equity (or Shareholders' Equity), as seen in (1). Creditors are anyone or any institution to whom money is owed. Typical creditors are banks, suppliers for the company, or finance companies. Depending on the type of business and how it is organized in its Articles of Incorporation, shareholders own shares in a company's stock. Limited Liability Company (LLC's) are formed with Articles of Organization; but do not have shareholders. LLC members share in the profits of the business.

Assets = Liabilities + Equity             (1)

As a company sells its products or services, it generates or receives Revenue. For a company to be profitable, its revenues must exceed its expenses, as seen in (2). Profit is also called Net Income; and a company's profits accumulate as Retained Earnings (RE). When a company distributes RE to shareholders, this is called a Dividend. Dividends are not an expense for the company, they are a distribution of earnings.

Net Income = Revenue - Expenses             (2)

Manufacturing Company Example.

As a business example to present common sales metrics, we view a Company that produces two products, A & B (Table 2.1). The company recently formed and has manufactured building materials (A & B) for four years.

• In Year 1, sales of Product A ($10M) were half of Product B ($20M) and total revenue ($30M) didn't even cover the costs ($35M) of doing business (Table 2.1).
• Year 2 was an improvement for the company with sales of Product A ($20M) doubling while Product B ($20M) remained flat. Annual revenue ($40M) equalled costs to produce and sell both products.
• Over Years 3 and 4, sales of Product A continued with aggressive growth and Product B modest increases. The company earned a profit in Years 3 and 4.

Figures 2.1.2 and 2.1.3 present the company sales data and company earnings in different ways.

• Figure 2.1.2, compares sales of Products A and B using bar graphs for annual sales and a trend line to visualize the trajectory or rate of increase in product sales. See how Product A outperforms Product B in Year 3 and 4 annual sales and as a growth rate year-over-year?
• Figure 2.1.3 depicts product sales and company earnings by year. One can generalize annual earnings as a loss, breaking even, or yielding a profit. The red/green bar (third bar in a year) shows this as a typical challenge for a new company reporting a ($5M) loss in Year 1, breaking even in Year 2, profit of $10M in Year 3, and profit of $25M in Year 4.

In Year 5, we would expect that Company executives would use these earnings charts and many more reports from the Business Development department to assess the performance of Products A & B and associated costs to determine future product planning. Location Intelligence supports business analysis to provide the where factor of product sales, growth or loss, early adoption by customers, or barriers to entry in markets. Assessments are continually measured in relation to business goals to drive sustainable growth, improve and optimize operations, and effectively manage risks.

Table 2.1. Company Sales of Products A & B in the first 4 years of business. Source: Daniel Steiner

Sales of Products A & B ($K)

	Gross Sales Product A	Gross Sales Product B	Revenue	Costs	Net Annual Sales
Year 1	$10,000	$20,000	$30,000	$35,000	($5,000) Loss
Year 2	$20,000	$20,000	$40,000	$40,000	$0 Even
Year 3	$30,000	$25,000	$55,000	$45,000	$10,000 Profit
Year 4	$50,000	$30,000	$80,000	$55,000	$25,000 Profit

Figure 2.1.2. Comparing sales of Products A & B in the first 4 years of business. Source: Daniel Steiner

Figure 2.1.3. Calculating profits or losses from a Company's net annual sales. Source: Daniel Steiner

To maximize profits and minimize losses, a business aligns its structure, costs, and production. Profit and Loss formulas are calculated based on costs (fixed and variable) and sales forecasts (unit volume and revenue) (Figure 2.1.4). The inflection point in a company's profit and loss chart, where costs (expenses) and revenue (sales) meet, is referred to as the Break-Even Point (BEP). Revenue is calculated as the number of units sold times the product's unit price. Revenue = Units sold x Unit price, (ex. $280.00 = 80 units x $3.50/unit). Any point in the graph that is below the BEP is a loss and any number above the BEP shows a profit.

Customers vary in their needs and ability - or willingness - to pay for a product or service. Human behavior studies provide information for marketing managers while determining a product's introductory market cost; as well as statistical modeling, competitive research, and historical sales data. At the base level, business leaders perform profit and loss calculations to determine their requirements for capital, marketing budgets, payroll and operational costs, and manufacturing requirements. "To turn a profit, our company must sell x Products A and y Products B. How many potential customers must we reach?"

 

Business Location Analysis

Business owners conduct Location Analysis or Site Selection to determine where to locate their stores, factories, distribution hubs, or offices. This is not just about finding a commercial property with the cheapest rent and insurance costs. With a focus on customers, where is a business selling products to their customers? 

1. At a physical site, an address where business will take place
2. Through e-Commerce, as an Online business with a website domain, web hosting services, and presence in search results (IP address rather than a brick-and-mortar site)

A company's online location is definable in a digital sense as having the right domain name with online advertising. This enhances search engine optimization (SEO) so prospects can find that business and successfully consider purchasing products or services.

Ryerson, et. al., in Why Where Matters, Sections 6.1 and 6.4, describe how companies use geospatial data to gain a Geo-Advantage over competitors.

As previously noted, the GeoEconomy has come about, in part, as a relatively rapid evolution of our societal information infrastructure. In many respects this evolution is akin to the introduction of computers in the 1960s and 1970s. During that period governments, financial services, and some businesses rapidly adopted the technology - and some didn't. Some implemented the technology in effective and creative ways that catapulted them ahead of their competition. Some started off poorly and then reinvented themselves. Some didn't understand that computerization was not an option but an imperative, and when they failed to adopt the technology quickly enough they failed and disappeared. The history of the introduction of computers also tells us that among the suppliers of the technology there were some hugely successful long-term survivors and myriad small players (and a few large ones) that disappeared. Those who benefited the most were the ones who discovered how to use it before others caught on.

The GeoEconomy is no different. Those who first figure out (or who have already figured out) how to create and use geo-information will do better in the GeoEconomy than those who don't. ... In all cases it starts with one simple question: where?

In grappling with the explosion of Big Data in volume and velocity, companies perform geospatial analysis to leverage location data and location intelligence for business decision makers. Current examples include smartphone penetration; location infrastructure of cell towers, beacons, global positioning system (GPS), radio-frequency identification (RFID); distribution networks of 5G cellular connectivity; and the Internet of Things (IoT) with connected sensors.

Visualizations

We'll discuss ways to include visualizations in research reports and presentations at lenght through the course. Readers, analysts, decision makers seek to gain an understanding from complex analysis. They seek to form a connection of geospatial information to descriptions of location intelligence discovered in the analysis method. Our graduate education reinforces the use of visualizations to strengthen these connections and there are literally hundreds of visualization styles with variables to employ.

At the very least, these visualizations include:

• tables, charts, graphs
• maps, storymaps, satellite images
• models, sketches, visual depictions of a phenomena

Mapping can be thought of as a "form of visualization that simplifies understanding of geographic differences" (Horan, 2022, pp.20-23). The text includes useful visualizations, maps, and figures in each chapter to assist a reader in understanding new or familiar concepts.

Site Selection

In the remainder of this lesson, we focus on Site Selection at the physical address where business will take place, raising the questions that Moreno (2017) highlights:

• Why here?
• How can I succeed here?

Site selection in business is a general term applied to a myriad of factors and actions taken to research, compare, and ultimately select location(s) for a company to operate. At that selected location, a business could sell to customers, manufacture products, assemble kits, or manage the company operations. From Google Maps, we see an example of a competitive retail area in Newington, NH with banks or ATMs, gas stations, pharmacies, and grocery stores competing for customers.

Figure 2.1.5. Sample retail center in Newington, NH with businesses selecting sites close to competitors. Source: Google Maps, 2024.

In retail markets, business analysts relied on gravity models and retail facility lcoation models to determine the likelihoods of customers choosing particular retail stores and how far they were willing to drive to store locations. Location Intelligence for Business refers to the Huff model (David L. Huff, 1962) who calculated the probability of a customer choosing a particular retail store as the ratio of the value of that store or the sum of values of all other stores which the person considers. Huff (1962) evaluated the variables of the size of the shopping center (in square feet) and travel time from the customer's base to a shopping center. This is also refered to as Retail Location Theory.

As a response to the 2020 Covid-19 pandemic and to reduce exposure risks to the public, elected officials closed businesses, enacted regulations on food service and beverage sales, and emplaced bans on significant commercial activity. Contemporary studies will highlight the effects on small businesses, regional vs. global commerce, supply chains, and large retailers (e.g. Costco, Whole Foods - Amazon, Walmart).

As a business chooses the location for their first or next store, manufacturing plant, or retail shopping mall, they are predicting future sales and an optimal site to achieve buiness objectives.

In location intelligence, this is conducting predictive analysis using geospatial information of consumer demographics, census data of potential areas, internal sales data, and competitive market data. Modeling the relationship of all these variables produces assessments of current and potential results from which the organization chooses where to establish, expand, or at times to reduce their physical presence. Companies engaging in these studies provide their own internal data, purchase or access market data that relates to their business question, and either conduct the analysis themselves or contract with another firm that produces location intelligence.

First, let’s establish our base understanding of census geography, regions, and geographic terms.