Professor Ken Homa Georgetown University. ROI Trees. Walk-thru & Examples. Proprietary Material. K.E. Homa

Transcription

1 Professor Ken Homa Georgetown University Trees Walk-thru & Examples Proprietary Material K.E. Homa

2 Trees A specific application of Logic Trees Useful for analytically dissecting profitability Isolates key variables and specifies links Provides a framework for financial modeling Many variations and permutations Trick is finding or crafting one that is applicable to specific situation

3 Let s walk-thru a basic Tree

4 Return on Normalized relates the level of profitability to the magnitude of the required investment. For example, generating $5 million of profits on a $50 million investment is better than generating $5 million of profits on a $500 million investment. A normalized profits measure Basis for investment decisions Capital should flow to projects and businesses with the highest s, provided that they exceed the WACC

5 Return on Volume supports the capacity needed to supply the market demand. Utilizing the capacity provides volume (quantity) available for sale. How much investment req d?

6 Return on Revenue Volume What s the cost structure?

7 Return on Structure: How much? (magnitude, timing) Revenue Composition? (fixed, semi-fixed, variable) Volume Variable Var. Per Unit Fixed

8 Return on Revenue What s the revenue model? Volume Variable Var. Per Unit Fixed

9 Return on Revenue Model: Price Core product plus secondary sources, e.g. copier plus toner cartridges Function of price times quantity Revenue Volume Variable Var. Per Unit Fixed

10 Return on 1. Revenue Model Key Components of Business Model Price Revenue Volume 2. Structure Variable Var. Per Unit Fixed 3. Required

11 Here s an example of a conceptuallevel, diagnostic Tree

12 XM Satellite Radio* Tree * Based on the case XM Satellite Radio Revolutionizing the Airwaves K.E. Homa, International Journal of Marketing Education 1(1), 2003, Senate Hall Academic Publishing.

13 Return on Start by splitting into component parts Numerator =s, Denominator = Satellites Towers Studios

14 Return on What investment is required? For what? When? Satellites Towers Studios

15 Return on Satellites Towers Studios supports productive capacity

16 Return on Subscribers Volume : magnitude of serviceable business Satellites Towers Studios

17 Return on Revenue Subscribers Volume breaks into Revenue and Satellites Towers Studios

18 Return on Revenue Subscribers Volume Satellites Towers Studios Fixed costs are largely driven by level of capacity Broadcast Ops Talent, Content Fixed

19 Return on Revenue Variable costs are largely driven by # subscribers Subscribers Volume Variable -to-serve Broadcast Ops Talent, Content Var. Per Unit Satellites Towers Studios Fixed

20 Return on Subscriber Acquisition s (SAC) are semi-variable since they are either programmatic (i.e. a budget chunk ) or are driven by the # of new subscribers. Revenue Subscribers Volume Variable -to-serve Broadcast Ops Talent, Content Var. Per Unit Satellites Towers Studios Fixed Subscriber Acq.

21 Return on XM charges a 2-part price: front-end activation & periodic (monthly, annual) subscription fees. Note: Any equipment profits are earned by the equipment suppliers ; XM incurs promo losses on equipment Price Revenue Activation Fees Subscript. Fees Subscribers Volume Variable -to-serve Broadcast Ops Talent, Content Var. Per Unit Satellites Towers Studios Fixed Subscriber Acq.

22 Return on XM sells some advertising it s derived from the level and quality of subscriptions Revenue Activation Fees Subscript. Fees Advertising = f(subs) Price Subscribers Volume Variable -to-serve Satellites Towers Studios Broadcast Ops Talent, Content Fixed Var. Per Unit Customer Acq.

23 Return on Revenue Activation Fees Subscript. Fees Advertising = f(subs) Price Subscribers Volume Variable -to-serve Satellites Towers Studios Broadcast Ops Talent, Content Fixed Var. Per Unit Customer Acq. So what?

24 XM s Business Model Economics Pivotal Conclusions Very high investment mostly sunk (?) s High fixed costs: content, talent, broadcast High semi-variable: customer acquisition costs Low variable costs: minimal costs-to-serve Revenues Multiple revenue streams: sub. fees and ads (all driven by number of subscribers) Margins Very high margins low cost-to-serve Breakeven????

25 Appendix Tree Variants Proprietary Material K.E. Homa

26 Return on Revenue s s Plant & Equipment Working Capital Inventory Receivables Payables

27 Return on Price Revenue Volume Variable Var. Per Unit Fixed

28 Return on Price Revenue Volume Variable Var. Per Unit Fixed K.E.Homa

29 R e v e n u e - s s R.O.S. DuPont Model R.O.A. S a l e s Inventory Assets Plant & Equip Asset Turns Equity Finl. Lever. R.O.I.

30 Manufacturing Financial Framework Forecast Demand. Shipments Inventory Revenue Available Product Price Production Output Variable Var. Per Unit Fixed

31 Marketing / Financial Framework MARKET POTENTIAL CAPACITY INVESTMENT MARKET SIZE MARKET PENETRATION SALES R.O.I. PRODUCTS + SUPPORT MARKET SHARE PROFITS BUSINESS / PROD. PORTFOLIO PRICE M/P I/G PROFIT MARGIN H/D D/W COST

32 Tree Example Improvement Which Product Lines? How? How? How? How can Acme increase profits from existing business lines? From Widgets From Thrummats Increase Revenues Decrease Expenses Decrease raw material costs Decrease labor costs Negotiate wage concessions Negotiate higher productivity quotas From Grommets Decrease overhead costs Implement a labor-saving production process Source: McKinsey Mind

33 Tree Example Line of Business Analysis Source: McKinsey Mind

34 For additional Tree Examples. see Performance Measurement, Ch. 20 Valuation, McKinsey & Company

35 Professor Ken Homa Georgetown University Trees Walk-thru & Examples Proprietary Material K.E. Homa