1. Business Models MGT 709 New Venture Creation

2. Business Model Analysis (Hammermesh)  A business model is a “profit engine” or cash generating machine  Revenue drivers  Cost drivers  Investment size  Critical success factors  Also think about:  Value creation/capture/protection

3. Economics of One Unit (EOU)  Take one unit (can be a good or service)  Selling price per unit  less Cost Of Goods Sold per unit  Materials  Labor  =Gross Profit per unit  Can you drill down and defend your assumptions?

4. Revenue  Types  Single stream, multiple streams, interdependent, loss leader  Models  Subscription (gym, magazine)  Volume or unit-based (typical retail)  Advertising-based (google, TV)  Licensing/syndication (biotech)  Transaction fee (realtors, brokers)  Fishbone model

5. Fishbone Revenue Model COB Revenue Tuition Endowments Grants Rate of return Size of endowments Avg. tuition rate # of students Student mix Executive education Curriculum Reputation Grant applications Quality of faculty

6. Costs  Types  Fixed, variable, semi-variable, non-recurring  Structures  Payroll-centered (direct)  Payroll-centered (support)  Inventory  Space/rent  Marketing/advertising

7. Fishbone Cost Model COB Expenses Faculty Salaries (80%) Support Salaries (10%) Operating Expenses (10%) # of facultyProductivity # of staff Salary rates Teaching resources Research resources Market rates Support ratio Faculty mix

8. Investment Size  Maximum financing needs (lowest point)  Positive cash flow  Cash breakeven  Cash flow diagram is useful  cash balance over time  Cash is needed for infrastructure, salary, inventories etc.

9. Critical success factors  Which factors have the greatest impact on profitability?  Sensitivity analysis

10. Discovery Driven Planning (McGrath)  The Reverse Income Statement  Total Figures  Required profits to add 10% to total profits = $4m  Necessary revenues on 10% net profit margin = $40m  Allowable costs to deliver 10% sales margin = $36m  Per Unit Figures  Required unit sales at $160 per unit = 250,000 units  Necessary percentage of world market share of OEM unit sales = 25%  Allowable costs per unit for 10% sales margin: $144

11. Building assumptions AssumptionMeasurement 1. Profit margin 10% of sales 2. Revenues $40million 3. Unit selling price $160 4. Size of OEM market 1million drives 5. Fixed asset investment to sales 1:1 6. Effective production capacity per line 25 drives per minute 7. Effective life of equipment 3years 8. Average OEM order size 100 drives 9. Sales calls per OEM order 4calls per order 10. Sales calls per salesperson per day 2calls per day 11. Selling days per year 250 days 12. Annual salesperson's salary $ 100,000 13. Containers required per order 1container 14. Shipping cost per container $10,000 15. Quality level needed 50%fewer flaws 16. Production days per year 348days 17. Workers per production line per day 30per line 18. Annual manufacturing worker's salary $50,000 19. Materials costs per disk $20 20. Packaging costs per 10 disks $40

12. Revisit Income Statement  Allowable costs  Sales-force salaries $2.0 million  Manufacturing salaries $3.0 million  Disk materials $5.0 million yen  Packaging $1.0 million  Shipping $2.5 million  Depreciation 13.3 million  Allowable administration and overhead costs $9.2 million yen

13. Milestones  Each milestone allows for sets of assumptions to be tested and adjusted.  Stage 1: Preliminary – salaries, shipping costs, market size, competitor prices  Stage 2: Prototyping – materials costs, customer feedback on quality/features  Stage 3: Beta testing – price/quality  Stage 4: Production – sales/production metrics

14. Expectations for Feasibility Presentations  Exercise 3 (p. 178)  Exercise 4 (p. 184)

15. Case Study  Zipcar