Business Models
MGT 709 New Venture Creation
Business Model Analysis
(Hammermesh)
 A business model is a “profit engine” or
cash generating machine
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Revenue drivers
Cost drivers
Investment size
Critical success factors
 Also think about:
 Value creation/capture/protection
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
 Types
 Single stream, multiple streams,
interdependent, loss leader
 Models
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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
Avg. tuition
rate
Tuition
COB
Revenue
# of
students
Student
mix
Curriculum
Rate
of return
Endowments
Reputation
Size of
endowments
Grants
Executive
education
Grant
applications
Quality of
faculty
Costs
 Types
 Fixed, variable, semi-variable, non-recurring
 Structures
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Payroll-centered (direct)
Payroll-centered (support)
Inventory
Space/rent
Marketing/advertising
Fishbone Cost Model
Faculty
Salaries (80%)
# of faculty
Productivity
Market rates
Faculty mix
# of staff
Support
ratio
COB
Expenses
Support
Salaries (10%)
Salary rates
Operating
Expenses
(10%)
Teaching
resources
Research
resources
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
 Which factors have the greatest impact on
profitability?
 Sensitivity analysis
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
Building assumptions
Assumption
1. Profit margin
2. Revenues
3. Unit selling price
4. Size of OEM market
5. Fixed asset investment to sales
6. Effective production capacity per line
7. Effective life of equipment
8. Average OEM order size
9. Sales calls per OEM order
10. Sales calls per salesperson per day
11. Selling days per year
12. Annual salesperson's salary
13. Containers required per order
14. Shipping cost per container
15. Quality level needed
16. Production days per year
17. Workers per production line per day
18. Annual manufacturing worker's salary
19. Materials costs per disk
20. Packaging costs per 10 disks
Measurement
10% of sales
$40 million
$160
1 million drives
1:1
25 drives per minute
3 years
100 drives
4 calls per order
2 calls per day
250 days
$ 100,000
1 container
$10,000
50% fewer flaws
348 days
30 per line
$50,000
$20
$40
Revisit Income Statement
 Allowable costs
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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
 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
 Exercise 3 (p. 178)
 Exercise 4 (p. 184)
Case Study
 Zipcar