Business Model Analysis for the Entrepreneur

Business Models A business model is the summation of the core business decisions and trade-offs employed by a company to earn a profit. In general, these elements fall into four groups: Revenue sources Cost drivers Investment size Critical success factors Source: A Note on Business Model Analysis for the Entrepreneur HBS Note N9-802-048

Draw The Business Model Driver 1 Driver 1 Revenues Driver 2 Driver 2 Driver 3 Driver 3 Cash Profits Driver 1 Using the tool 1. Draw the key drivers of revenue and cost 2. Identify key drivers and quantify assumptions 3. Test sensitivity to changes in key drivers 4. Identify Key Success Factors for monitoring Costs Driver 2 Driver 3

Analyzing the Business Model Determine revenues, timing and key drivers Determine costs/expenses, timing and key underlying drivers Same for investment Determine the key unit of analysis: a customer / store / unit

Using The Business Model to Drive a Forecast Play out the business model over time, looking at P&L and cash flow How much cash is required to get the business to cash flow breakeven

The Cash Flow Cycle for a Venture Cumulative Cash Flow in $ Date of First Cash Flow Positive Time Maximum Financing Needs Date of Cash Breakeven Burn Rate

Business Model Analysis Framework How Output Valued Inputs Recipe Target Outputs People Revenues Value Creation via Money Customer Base Profits IPO Merger/ Acquisition Dividend Stream Business Model Market Opportunity License Revenues Intellectual Capital Cash Flow Intellectual Property Physical Assets

Exhibit 1: Fishbone Diagram for The Grateful Dead Revenue Model # Concerts Concert Revenue # Tickets Revenue/Concert Price/Ticket # Concerts Total Revenue Merchandise Revenue # Attendees Revenue/Concert Revenue/Attendee Albums Recorded Recording Revenue # Albums Sold Revenue/Album Revenue/Album

Exhibit 2: Fishbone Diagram for Seven-Eleven Japan Cost Structure Price/SKU Cost of Goods Sold # of Suppliers Inventory Turns Development Costs Information Technology Implementation Costs Maintenance Total Cost Head Office Payroll Payroll Employees/Store Daily Wage/Employee Square Footage/Store Price/Square Foot Facilities Advertising Cost/Store Company-wide Spend Marketing/ Advertising

Exhibit 4: Cumulative Cash Flow Diagrams for Two Hypothetical Medical Device Ventures Medical Devices Company Giving Away Instrument Time Medical Devices Company Selling Instrument