1 countdown to launch mba 101 patrick vernon clinical assistant professor, executive director center...
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Countdown to Launch
MBA 101
Patrick VernonClinical Assistant Professor, Executive Director
Center for Entrepreneurial Studies
©2013 Patrick Vernon
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Agenda• Accounting• Finance• Operations• Marketing• Economics
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Accounting• Purpose: account for and communicate• Necessarily “backwards looking”
Prof. Mark Lang: “What’s the difference between an African village market and WalMart?”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Financial Statements
3 Communications Pieces:• Balance Sheet• Income Statement• Cash Flow Statement
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Accounting: All Three
Income StatementCash Flow Statement
Balance Sheet CocaCola 2009
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Balance Sheet
• Snapshot• Assets and liabilities• No income
• Not very relevant for startups
Like a bank statement summary: shows what you have now
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Income Statement
• Official accounting of income (e.g., for IRS or SEC)
• Complications for startups…
Like a pay check or tax return: shows where things went
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Income Statement: Complications• When can you book sales and how do
you handle inventory?
(cash vs. accrual)(accounts receivable and inventory)
• How do you handle loan payments?(interest vs. principle)
• How do you handle big purchases?(depreciation)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Cash Flow Statement• Accounts for those
things • Very complicated• Not for us
(anytime soon)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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For Startups
We “project” using income statement:
EBITDA (earnings before interest, taxes,
depreciation and amortization)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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EBITDA
Income StatementCash Flow Statement
Balance Sheet
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12ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
Income Statement
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Variable vs. Fixed Cost• Variable = scaling with production
– COGS (cost of goods sold)– Sales commissions
• Fixed = overhead– Rent– Depreciation of equipment– R&D
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Variable vs. Fixed Costs• Gray area: labor cost
– Temps → variable– Salaried → fixed
• Ideal business model:– All costs are variable, and you can get
income first (accounts receivable before accounts payable)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Accounting Glossary
COGS Cost of goods soldOverhead Fixed costGross Margins Income – COGSCap Ex Capital (or BIG) expendituresDepreciation Asset written off over years
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Agenda• Accounting• Finance• Operations• Marketing• Economics
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Finance• Purpose: planning how to invest• Invest = put some in now, get some back• “Forward looking”• Key topics:
– DCF, NPV, ROI– Liquidity– Debt and equity
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Finance• Time value of money: DCF
(discounted cash flow)
• Pricing risk with a discount rate (r)
PV (present value) = FV (future value)
(1+r)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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What is the value of:
“Two Birds in the Bush”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Bird in the Hand
PV (present value) = FV (future value)
(1+r)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Risk and Return• Higher risk implies higher potential
return and higher variability (we may win big or lose all)
• Risk gets converted into discount rate– Bird in the hand | r = 100%– Savings account | r = 1.5%
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Why bother?We have to decide how much we are
willing to invest based on:• Expected risk: r• Expected end value: FV
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
Examples: risk and r
Savings Account 0.75%
Money Market 1.5%
Bonds 4.0%
Public Stocks 7.0%
Tech Startup 10X !
More Examples: risk and r
Variable Mortgage 2.5%
Fixed Mortgage 3.5%
Home Equity Line 10%
Credit Card 17%
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Another Lens: NPV• Net Present Value• The current value of future cash flows• Minus the investment required
PV – Investment = NPV
Example: $100 - $90 = $10
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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ROIReturn on Investment
ROI =Gain
÷ # yearsInvestment
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
Note: does not account for compounding.
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ROI
Examples
$50÷ 5 years = ROI ~10%
$100
$1.50÷ 1 year = ROI 1.5%
$100
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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ROI Example• $50,000 to start venture• Sold in year 5 for $150,000• ROI
– $100,000 ÷ $50,000 ÷ 5– 40% over 5 years
• Or “3X return in 5 years”
How can we estimate the exit value?
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Estimate Value = “Valuation”• #1 = find comparables• #2 = use multiples
• But remember– Depends on what someone is willing to pay
(= “market driven”)– Illiquid asset
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Liquidity• Liquid: spend/trade easily• Illiquid: takes days/months/years to trade
• Cash: liquid• Equity: illiquid
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Why bother?We have to decide how much we are
willing to invest based on:• Expected risk: r• Expected end value: FV
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Why not bother?• For startups, the odds of success and
potential future values are wildly variable• So we should know these concepts exist,
create goals, but don’t get married to the specific numbers
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Finance Acronyms
ROI return on investmentIRR internal rate of returnDCF discounted cash flowNPV net present value
r discount rate
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Agenda• Accounting• Finance• Operations• Marketing• Economics
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Business Model GenerationOperations Marketing
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Operations• Purpose: maximize efficiency in business
activities• Key topics:
– Supply chain and inventory (SKUs)– Production (capacity/queues)– Complexity– Core competency
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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What are they famous for?
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Sell By Dates
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Complexity: Which is Better?
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Complexity• SKUs (stock keeping unit): code for each
product• More SKUs = more complexity =
exponentially more variability = death• Simple is king
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Core Competency• You can’t be good at everything• Anything you cannot dominate…
…outsource!
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Capacity and Queues
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Capacity and Queues • Lookout for bottlenecks (where in the
production line you have limited capacity)– MBAs call these “Herbies,” from The Goal
• Bottlenecks = HUGE queues• General rule: capacity should be well
below 90%
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Operations
Focus
Keep it Simple
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Agenda• Accounting• Finance• Operations• Marketing• Economics
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Business Model GenerationMarketing
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Marketing• Purpose: connect with customers
– Design products and services according to customer needs
– Communicate (both ways) and interact with customer
– Set prices fairly with knowledge of customers, competition and company strengths
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Marketing: 4 P’s• Product• Placement• Pricing• Promotion
= 5th P = “Positioning”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Product • Place • Promotion • Price
• “Understand customer needs and design products and services accordingly”
• Differentiation (of products)• Segmentation (of market)• Product “mix”: multiple products for
multiple segments• “Value proposition”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Channels• Direct
– We directly contact customers• Indirect
– A partner, reseller or distributor contacts customers
Product • Place • Promotion • Price
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Advertising Sales PR
Print adsBroadcast ads
Packaging Inserts Product placement
Brochures Posters
Billboards Display signs
Point of purchase Logos
Symbols Trademarks
Premiums Gifts
Sampling Fairs
Trade shows Exhibits
Demonstration Coupons Rebates Trade-ins
Tie-in Loyalty
Bundling
BloggingTweetingWebsite
Press kits Speeches Seminars Charity
Sponsorships Publications
Community relations Lobbying
In-house magazine Events
Product • Place • Promotion • Price
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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• Positioning• Value vs. quality• Rational vs. emotional
Product • Place • Promotion • Price
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Pricing Strategies
Cost Plus Going Rate PremiumSet prices to cover variable costs and a portion of fixed costs.
Create pricing wars between competitors who offer the sameor similar.
Price to match customers’ enhanced perception.
Penetration Opportunistic PredatoryPrice at a loss to gain market share.
Set premium prices for products/ services in high demand with short supplies.
Price-cutting prevents others from entering the market.
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Pricing Lesson
Do not compete on price!*
*Unless you have a cost advantage.
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Positioning – Segmentation
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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ZapletsilverPOP
1- email 1-1 emailIT
Im
pact
Target Market
Light
Heavy
eDesignseMailgen
MailRound
Bissmail
MindArrow
Incredimail
DIY
Segmentation
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Segmentation
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Agenda• Accounting• Finance• Operations• Marketing• Economics
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Economics• Purpose: understand production and
consumption best practices• Key topics:
– Supply and demand– Utility– Elasticity
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Economics
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Elasticity• “Price elasticity of demand”• How much will demand change as price
changes
Examples of elastic products?
Inelastic?
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Porter’s Five Forces• Framework to assess
attractiveness of an industry
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Barriers to Entry• How to stop others from competing• Sustainable competitive advantage
– Patent– Trade secret– Superior business practice– Location– Partnerships– First mover?
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Economics GlossaryEconomies of
scaleThe increase in efficiency as size increases
Utility Measure of satisfaction
Commodity Same no matter who produces it; must compete on price
Sunk cost Amount already spent; should not be factored into future return potential
Opportunity cost
Consider the lost income of other activities; e.g., add lost income to cost of going to school
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MBA “Core” Curriculum• Accounting• Finance• Operations• Marketing• Economics