Business Model Workshop Richard West rwest@baebies.com
Business Model Defined l A description of the business and how it will work in economic terms l A set of planned assumptions about how a firm will create value for all its stakeholders [Magretta, 2002] l The framework that connects a technology to economic profits [Dorf & Byers, 2008] 2
Key Elements of A Business Model l Context/Inventory l Strategic focus l Market focus l Company scope l Interaction with others l Economics & cash flow 3
Context/Inventory l Evolving needs and wants in the target market l New technologies, economic conditions, demographics l Platform or one-trick pony? l Identify distinctive competencies or assets what do you have? l Company resources material, financial, and human as extending or constraining opportunity 4
Strategic Focus l You need a big vision but a narrow initial focus l Market/focus selection drives technology requirements, not the other way around A solution looking for a problem rarely works out well pick a problem to solve l What problem are you solving?? 5
Strategic Focus - Execution poor Really good l What are the 2-3 things you must do really well? Relative to the competition l One is usually not enough l 4-5 is not focused enough l It s OK to be average at many things average 6
What are the 2 or 3 things we need to be really good at? l Develop an outstanding plan, processes, tools and team for commercializing our products l Implement an excellent stage-gate process; select from among opportunities and then focus resources to develop and launch highly differentiated products l People selection and development; get the most from people and develop an environment where people love to come to work 7
Strategic Focus - The Time Dimension l Prioritize the development of core capabilities develop early what you will need early l Keep it narrow l Grow additional internal functions when you must if you can afford it l Some elements can be introduced early without a significant investment that make you appear more mature than you are e.g. a quality system 8
EXERCISE - Scope of the Business l What s in? What are the three things you need to do really well? l What s out? 1. 2. 3. 9
Market Focus - Segmentation l Segmenting the market What s different? l Different regulatory requirements l Different users l Geography l User perspective Differing buying habits, wants, and needs What s the same? l Similarities in requirements same product can serve users l Similarities in specific technology challenge l Users will cross-refer How far do you go? Sub-sub-sub segments? 10
Initial Target Market Market Current Related Unrelated Current Related Unrelated First product you develop, select a narrow target market you can dominate In what neighbor markets can you sell that same exact product? Product Are there any unrelated markets where you might be able to sell the same product? Can you extend the capability of the product in the same market? New products for that same market? 10 Steiner Opportunity Grid
Example - NBS Total Available Market Achievable Domination l Establish an initial beachhead l Pick a market segment you can dominate quickly Most typical way to subsegment is geography e.g. local 5 Most prevalent LSD s ($20M) 12 Initial Target Market 4 US States mandate LSD testing ($3M) All LSD s in US ($40M) Moore Crossing the Chasm
EXERCISE - Initial Target Market Product Current Related Unrelated Current Market Related Unrelated 12 Steiner Opportunity Grid
Interaction with Others l Who are the stakeholders? l Who does what to whom? l What goods, services, contracts, etc. are passed from one entity to another? l Who pays what to whom? 14
Example - ALL Business Model Trusted name brand products End Users PO s and cash for products Problems to be solved, requirements, lead users Access to our technology in a field, a % of product sales Disposable products wholesale Market Partners Customer service Advanced Liquid Logic PO s and cash for licenses, development projects, and/or products Specifications Prototypes, pilot runs Equipment products wholesale Suppliers Contract manufacturers for equipment and disposable components and assembly 15
16 Your Business Model?
Business Economics Unit Economic Model Price per unit $100 Direct cost per unit $ 10 Overhead $ 10 Gross Margin $ 80 17
Business Level Model Revenue and Cost Total Revenue $50,000,000 100% Cost of Goods $17,500,000 35% Gross Margin $32,500,000 65% R&D $5,000,000 10% SG&A $10,000,000 20% EBIT $17,500,000 35% 18 Start at the bottom: At scale, what level of profit is required? What level of margin on products is required to support A large sales budget (20% of revenue)? R&D (10% of revenue)?
EXERCISE - Your Unit Economic Model Price per unit $ Direct cost per unit $ Overhead $ Gross Margin $ 19
Cash Flow CASH IS KING! l How long will it take to make a sale? l How long will it take to collect? l What is your profit margin? l How long does it take to convert materials into products? l How soon do you need to pay your suppliers? l How much capital equipment or other investment will you need? l How many months will it take to develop and launch a product or service? l How much will the marching army cost per month? 20
The Ideal Economic Model the Cash Perspective l Develop product quickly l Low cash cost of development l Sell product quickly l Make product quickly l Collect early l Pay late l Sell at a high margin l Requires little investment to produce 21
EXERCISE l Where will your business fall short of the ideal economic model? Cash Driver Ideas Develop product quickly Low cash cost of development Sell product quickly Make product quickly Collect early Pay late Sell at a high margin 22 Requires little investment to produce
Key Elements of Business Success It s All About the Model! l Strategic focus l Market focus l Limiting company scope, positive interaction with partners l Sound unit and business economic models l Positive cash flow there s only one ultimate cause of business failure! 23