THEORETICAL ANALYSIS OF PROFITABILITY MODELS

Background and Significance of Studies on Securities Company Profitability Models

Profitability models are of great importance to a business because its primary goal and duty is to generate profit. A profitability model is a business structure established gradually by the business to gain profit in the process of market competition. For a specific type of business, it is a certain operational approach that generates relatively greater sales and profit with relatively less input.

One key idea of the "golden rules for investment" proposed by the Paris School of Business maintains that the most important thing for a business is not capital, nor is it talent—it's the profitability model. The absence of a profitability model that is clear and reasonable would make it difficult for a business to survive and grow. Some scholars believe that a common business has a common profitability model, while a successful business always has an extraordinary profitability model behind its miraculous fortune.1 A unique profitability model is an integral part of the core competitive strength of a business, and the source of its competitive advantages.

The following three reasons make the profitability models of Chinese securities companies very special:

1. The securities industry is an emerging industry in China, compared to ordinary businesses. It has strengthened and expanded parallel to the birth, growth, and development of the capital market in China. As the capital market emerged and increased in size, the number of investment and financing participants has grown, and the demand for financial services has been rising and changing. Accordingly, financial products and transactions are increasingly diversified. Against this backdrop, some uncertainties have emerged in the profitability model of security companies.

2. The highly regulated system and regime of the Chinese securities industry made Chinese securities companies monopolistic in nature. However, stringent regulation has made the profitability models of securities companies closely connected to the policies made by regulators, leaving securities companies little room to develop new forms of business. Currently, most profitability models are essentially identical.

3. As competition intensifies, consolidation and restructuring of securities companies will continue. A labor division between securities companies based on different profitability models will gradually take shape. It is inevitable and necessary that securities companies shift from being opportunity oriented to strategy oriented. The positioning of profitability models will become clearer. Profitability models will become more intensely explored and sought after. Differentiation of profitability models will gradually take place among securities companies.

Generally, studies on profitability models for Chinese securities companies are helpful to policy making, development, and growth of securities companies and the establishment of their core competitive strength.

 
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