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PART THREE
INTRODUCTION TO BUSINESS
MODELING
WHAT DOES “VALUE PROPOSITION” MEAN TO YOU?
ASPECT DESCRIPTION
VALUED Customer will pay money to buy what you are selling b...
BUSINESS MODELS CAN BE EXPRESSED AS A FORMULA
$= REVENUE – COST
implementability,
sustainability, & exit
&
$ > $ from othe...
COSTS BOIL DOWN TO 4Ps
COST = PEOPLE
+ PRODUCTION
+ PROMOTION
+ PLACE
PROFIT = (REVENUE – COST) I, S,E
COSTS TREES HELP FOCUS VARIABLES AND LEVERS
PROFIT = (REVENUE – COST) I, S,E
PEOPLE
COST
# OF
PEOPLE
COST PER
PERSON
REDUC...
REVENUE IS MORE COMPLEX, BUT STILL DIVISIBLE
PROFIT = (REVENUE – COST) I, S, E
REVENUE =
Rev stream 1
All revenue streams
...
PRICE IS A BALANCING ACT
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
Customer
Perceived
Value
Cost to
Pro...
VOLUME STARTS WITH SEGMENTATION STRATEGY
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
Q: Why are whole mar...
SEGMENTATION STRATEGY SHOULD BE PHASED
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
• Choose a “beach head...
VOLUME CAN BE EXPRESSED AS A FORMULA
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
VOLUME = BeachHeadMarket...
SUSTAINABILITY & IMPLEMENTABILITY
PROFIT = (REVENUE – COST) I, S, E
IMPLEMENTABILITY = PEOPLE (EXP & SKILLS)
+ PRODUCT
+ P...
SUSTAINABILITY & IMPLEMENTABILITY
PROFIT = (REVENUE – COST) I, S, E
SUSTAINABILITY = MARKET LIFE SPAN
+ COMPETITIVE DEFENC...
EXIT
PROFIT = (REVENUE – COST) I, S, E
• Spin Out (Promise)
• Trade Sale (Synergy)
• Dividends (Sustainability)
• Liquidat...
WHAT WAS VAGUE, IS NOW CALCULATABLE
$ = (REVENUE – COST) ISE
= REVENUE – (P4) ISE
= ∑(PRICE x VOLUME) - (P4) ISE
= ∑(PRICE...
WHAT WAS VAGUE, IS NOW A CONVINCING ARGUMENT THAT CAN BE
SUMMARIZED IN 1 PAGE
∑(C<P<PV & P=f(CP, SP, BP) x [BHM + BPMs] - ...
NPV KEEPS MGMT FOCUSED ON PROFITABILITY
t - the time of the cash flow
N - the total time of the project
r - the discount r...
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7Vs and Business Model Validation

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This is the slide deck that goes along with this video: https://www.linkedin.com/pulse/business-idea-validation-7vs-simple-algebra-models-eric-tachibana

Warning: I don't think the slides make much sense without watching the video :)

Published in: Business

7Vs and Business Model Validation

  1. PART THREE INTRODUCTION TO BUSINESS MODELING
  2. WHAT DOES “VALUE PROPOSITION” MEAN TO YOU? ASPECT DESCRIPTION VALUED Customer will pay money to buy what you are selling because it addresses a real urgent & intense need/pain/opportunity VALUABLE The # of customers willing to pay is sufficiently large to fund your company & your segmentation strategy gets you access to them effectively VALID Your product works, is compliant as required, and has the right features VALUNIQUE You have a sustainable & defensible competitive advantage and are competing on the right vectors of differentiation VALUE CHAIN You can deliver the product promises across the value chain and scale with growth VALENCE You have a strongly-bonded team with all the right skills to pull this off VALUATION Your cost and revenue models lead to profit and the profit potential is attractive enough for shareholders and investors
  3. BUSINESS MODELS CAN BE EXPRESSED AS A FORMULA $= REVENUE – COST implementability, sustainability, & exit & $ > $ from other investments
  4. COSTS BOIL DOWN TO 4Ps COST = PEOPLE + PRODUCTION + PROMOTION + PLACE PROFIT = (REVENUE – COST) I, S,E
  5. COSTS TREES HELP FOCUS VARIABLES AND LEVERS PROFIT = (REVENUE – COST) I, S,E PEOPLE COST # OF PEOPLE COST PER PERSON REDUCE HEADCOUNT REDUCE SALARY REDUCE OTHER COSTS Automate functions Support fewer process/product Consolidate functions across silos Increase productivity Pay cuts Replace expensive staff with cheaper Grants & Subsidies Reduce recruiting costs Reduce benefits Outsource
  6. REVENUE IS MORE COMPLEX, BUT STILL DIVISIBLE PROFIT = (REVENUE – COST) I, S, E REVENUE = Rev stream 1 All revenue streams (PRICE x VOL) Revenue is slightly more complex than cost & embodies more assumptions that you must justify! We must still break out PRICE & VOLUME separately. ∑
  7. PRICE IS A BALANCING ACT PROFIT = (REVENUE – COST) I, S, E & REVENUE = PRICE x VOLUME Customer Perceived Value Cost to Produce Range of Prices Customer Perceived Value Cost to Produce Effect of Competition Customer Perceived Value Cost to Produce Goal of Competitive Positioning Customer Perceived Value Cost to Produce Goal of Branding & PR Strategy Customer Perceived Value Cost to Produce Goal of Operations Strategy
  8. VOLUME STARTS WITH SEGMENTATION STRATEGY PROFIT = (REVENUE – COST) I, S, E & REVENUE = PRICE x VOLUME Q: Why are whole markets not addressable by any single company. • Real customer wants – who wants a generic product? • Product realities – no one product can satisfy these days • Production realities – Production facilities typically hard-coded to build certain forms of a product • Marketing resources – Marketing collateral $ So, marketers segment markets into smaller, addressable chunks where individual buyers in any given segment share the same motivations to buy & want the same feature set Q: How could you segment a market? • Buyer demographics (size, geographic location) • Buyer psychographics (early adopter, late adopters, etc) • Industry • Product usage • There is no right answer, but there are “better” answers!
  9. SEGMENTATION STRATEGY SHOULD BE PHASED PROFIT = (REVENUE – COST) I, S, E & REVENUE = PRICE x VOLUME • Choose a “beach head” segment to target first • Lowest hanging fruit • Higher value – lower risk • Specify “bowling pin” segments to target over the next 2-3 years
  10. VOLUME CAN BE EXPRESSED AS A FORMULA PROFIT = (REVENUE – COST) I, S, E & REVENUE = PRICE x VOLUME VOLUME = BeachHeadMarket(SIZE x SHARE) + BowlingPinMarket(SIZE X SHARE) Market 1 All markets ∑ SHARE = 100% - UNINTERESTED BUYERS – COMPETITORS % SHARE)
  11. SUSTAINABILITY & IMPLEMENTABILITY PROFIT = (REVENUE – COST) I, S, E IMPLEMENTABILITY = PEOPLE (EXP & SKILLS) + PRODUCT + PROCESSES + PRODUCTION CAPABILITY + PARTNERS (SUPPLY & DISTRIBUTION) + PROMOTION PLAN + PESTs
  12. SUSTAINABILITY & IMPLEMENTABILITY PROFIT = (REVENUE – COST) I, S, E SUSTAINABILITY = MARKET LIFE SPAN + COMPETITIVE DEFENCE and MARKET LIFE SPAN = TECH RATE OF CHANGE + RATE OF MARKET COMMODITIZATION COMPETITIVE DEFENCE = BARRIERS TO ENTRY + BARRIERS TO EXIT + PLANNED RESPONSE TO COMPETITIVE POSITIONING OVER TIME
  13. EXIT PROFIT = (REVENUE – COST) I, S, E • Spin Out (Promise) • Trade Sale (Synergy) • Dividends (Sustainability) • Liquidation (Transferability)
  14. WHAT WAS VAGUE, IS NOW CALCULATABLE $ = (REVENUE – COST) ISE = REVENUE – (P4) ISE = ∑(PRICE x VOLUME) - (P4) ISE = ∑(PRICE x [BHMS + BPMS] - (P4 )) ISE = ∑(C<P<PV & P=f(CP, SP, BP) x [BHMS + BPMS]- (P4)) ISE = ∑(C<P<PV & P=f(CP, SP, BP) x [BHM + BPMs] - (P4)) (P7) & (MLS + CD) & (I|T|D|L) This formula is much more complex, but now the components are actionable & the assumptions can be identified and justified. Convert this math to words and there’s your Executive Summary!
  15. WHAT WAS VAGUE, IS NOW A CONVINCING ARGUMENT THAT CAN BE SUMMARIZED IN 1 PAGE ∑(C<P<PV & P=f(CP, SP, BP) x [BHM + BPMs] - (P4)) (P7) & (MLS + CD) & (I|T|D|L) • Our product is X • 60% of our revenue comes from license fees • At 16.99 per unit, we will sell 1.2M units in 2009 • Given market size of X for our beachhead niche and our key competitive advantages of IP, control of distribution network, our max manufacturing capacity of 1.2M, and general good looks our first year revenue will be 21M. • Phased expansion across key bowling pin niches and 3 E Asian countries as well as 40% additional revenue from S&M and Training will yield 5YR revenue of 240M • Profit margin is 25% given key costs in People and manufacturing • This plan is possible given 2.5M investment for 25% equity to complete development and support startup sales
  16. NPV KEEPS MGMT FOCUSED ON PROFITABILITY t - the time of the cash flow N - the total time of the project r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.) Ct - the net cash flow (the amount of cash) at time t (for educational purposes, C0 is commonly placed to the left of the sum to emphasize its role as the initial investment.). Time to make Decisions 1. Is NPV Project 1 < NPV Project 2? 2. Remember, ML has a top-down budget culture 3. Management may define incremental, fixed, flexible, zero-base, or rolling budget assumptions Once you submit the cost model and the business submits the revenue model for a Project, the firm must evaluate the project against others that it could invest in. This is done with some form of “time value of money” equation such as NPV or IRR

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