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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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

ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS

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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.

ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS

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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