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Business Models. MGT 709 New Venture Creation. 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.

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business models

Business Models

MGT 709 New Venture Creation

business model analysis hammermesh
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
economics of one unit eou
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?
revenue
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
fishbone revenue model
Fishbone Revenue Model

Avg. tuition

rate

Student

mix

Tuition

Curriculum

# of

students

Rate

of return

COB

Revenue

Endowments

Reputation

Size of

endowments

Grants

Grant

applications

Quality of

faculty

Executive

education

costs
Costs
  • Types
    • Fixed, variable, semi-variable, non-recurring
  • Structures
    • Payroll-centered (direct)
    • Payroll-centered (support)
    • Inventory
    • Space/rent
    • Marketing/advertising
fishbone cost model
Fishbone Cost Model

# of faculty

Productivity

Faculty

Salaries (80%)

Market rates

Faculty mix

COB

Expenses

# of staff

Support

ratio

Support

Salaries (10%)

Salary rates

Teaching

resources

Operating

Expenses

(10%)

Research

resources

investment size
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.
critical success factors
Critical success factors
  • Which factors have the greatest impact on profitability?
  • Sensitivity analysis
discovery driven planning mcgrath
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
revisit income statement
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
milestones
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
expectations for feasibility presentations
Expectations for Feasibility Presentations

Exercise 3 (p. 178)

Exercise 4 (p. 184)

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