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Business Models

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

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  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 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

  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 # 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

  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

  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

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