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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)


Case study
Case Study

Zipcar