Module 2 - Business Plans and Business Models

Question 1

What is a sprint?

Answer 1

A short intense period of time where you work on a business case long enough to get a sense if it’s worth pursuing.

Question 2

What did Novozymes do to generate more innovation in their R&D pipeline?

Answer 2

Created an innovation lab - Separated high risk/high value experimentation projects like “start-ups” with milestone funding-based product innovation, more agility, venture mindset (investing in projects internally with pitches etc).

Question 3

What is the difference between a business plan and a business model?

Answer 3

Business Plan
▪ Document answering the What? and Why? of your business
▪ Describes market opportunity & cash flow forecasts (3-5 years) based on key assumptions

Business Model
▪ Important part of the Business Plan
▪ How will you run your business and generate profit? Set of choices regarding:
o Value proposition for customers
o Capabilities and resources needed(e.g., employees, partners, infrastructure, go-to-market plan, financing)
o Strategic positioning (markets to serve, products to offer, role in the industry)

Question 4

What should be included in a business plan?

Answer 4

What to include:
▪ Key features of the business model
▪ Forecasted cashflow(sources of revenue+ costs)
▪ Assumptions behind financial forecasts
▪ Sources of uncertainty and risks (+ approaches to mitigate them)
▪ Metrics and Milestones (Intellectual property)
▪ For VCs: How much $$$ you need (justification)

Key content should be tailored to whoever you are pitching to

Question 5

Which questions should a business plan answer?

Answer 5

1) Why
2) What
3) Who
4) How
5) Where
6) When

Question 6

Who is more likely to write a business plan?

Answer 6

• Ventures which used external support before entry
• Ventures which brought new products/services to the market
• Previously unemployed entrepreneurs
• Ventures with electronic financial records
• Ventures with their own accountant

Question 7

Does it pay off to have a business plan?

Answer 7

YES!

Burke, 2010:
* Firms with written BP grew faster than those without (on avg +33pp)!
* BP may help less able entrepreneurs to catch up and surpass more skilled entrepreneurs without a BP

Question 8

What four elements are there to a business model?

Answer 8

Think the 4 quadrants:
1) Customer Value Proposition
2) Go-to-market plan
3) Technology and operations management
4) Cash flow/profit formula

Question 9

What is a business model?

Answer 9

How to create, deliver and capture value to customers
- Through a set of integrated choices and how to configure activities to deliver and sustain profits

Question 10

1) Customer Value Proposition.
What three parameters should you look at to identify your unique value proposition?

Answer 10

1) Customers (What customers, channels, end users?)
2) What needs do they have? (Products, services, feature)
3) What relative price

All of these must be different for competitors (otherwise it’s no unique)

Question 11

1) Customer Value Proposition.
What is the CVP?

Answer 11

Customer Value proposition . i.e. the value created to the customer.

Stuff like:
- Unmet needs
- Customer segments targeted?
Pricing strategy (skimming, penetration, differentiation, low cost?)

Question 12

1) Customer Value Proposition.
How can you test your CVP?

Answer 12

Using a MVP (minimim Viable Product) you can test CVP assujmptions

Question 13

1) Customer Value Proposition.
What is an MVP

Answer 13

• MVP: Smallest set of features to satisfy early customers and obtain feedback for future development
• Are complements required? (e.g., Nike+iPod; InterSystems data platform)

Question 14

1) Customer Value Proposition.
How can your CVP be designed according to Porter?

Answer 14

CVP can be based on his three Generic Strategies. Can be a source of competitive advantage.

1) Differentiation (high WTP and Price)
2) Niche Market
3) Cost Leadership (Low cost)
4) Cost focus in a narrower scope/market

Question 15

1) Customer Value Proposition.
What kind of pricing strategies is there?

Answer 15

High Level: Differentiation (high price and lower volume) vs. low cost (lower price and higher volume)

1) Fixed pr. product
2) Fixed pr. period i.e. subscriptions
3) Variable based on use
4) Tiered based on features/service level

Question 16

1) Customer Value Proposition.
What can affect the CVP

Answer 16

CVP = Customer Value proposition

1) Customer Switching Costs
- Expenditures, inconveniences, risks when a customer changes providers. Can be contractual commitments (6 måneders binding fx)

2) Network Effects
- When customers WTP depends on number of others the can interact with using the product. (Platforms like Facebook).

Question 17

3) Technology and operations management
What key decision is there regarding operations and technology in your company?

Answer 17

• Buy or make = Outsourcing vs. vertical integration
• First or late mover

Question 18

What are first and late mover advantages?

Answer 18

➢ First movers might control:
o Customer relationships
o Scarce assets
o Key patents
o Capacity

➢ Later movers might:
o Reduce R&D costs
o Leverage existing technology

Question 19

3) Technology and operations management
What must you keep in mind with your tech?

Answer 19

Tech feasibility: Keep cost drivers and scalability in mind!

Question 20

2) Go-to-market plan
GTM entails what?

Answer 20

How to generate and sustain demand on the market?
- What channels?
- Customer acquisition costs
- Crossing the chasm between early adopters and early mainstream (Remember there is a big challenge in going from innovators and early adopters to early majority!)
- Customer Lifetime Value

Question 21

2) Go-to-market plan
How can you generate and sustain demand?

Answer 21

1) Free vs. Paid demand generation
2) Viral customer acquisition methods:
- Direct network effects (Dropbox)
- Word-of-mouth
- Casual contact (“sent from my iPhone”)
- Incentives/”user-to-user” transmission (“discounts when you invite a friend”)

Question 22

What is Dropbox GTM plan?

Answer 22

Multiple viral mechanism in their Go-to-market plan:
▪ Direct network effect by allowing users to collaborate on documents
▪ Word-of-mouth referrals from loyal customers
▪ Causal contact when users send links to others to download content, even though the recipient does not use dropbox
▪ “User-get-user” incentive: e.g., both the inviter and recipient get 250MB extra free storage

Question 23

4) Cash flow/profit formula
In pharma hos does this often look?

Answer 23

Pharma product lifecycle = high negative cashflow (more so in recent years due to more expensive development) and peak after sales start, then patent cliff.

Other industries can avoid this huge negative cashflow if they are SMEs and not IDEs

Question 24

How long goes it take to develop a pharmaceutical drug to commercialization? A diagnostics?

Answer 24

Drug: 12-15 years (250 million USD to 2 billion)
Diagnostics: 3-7 years (5-100 million USD)

Question 25

4) Cash flow/profit formula
What are the two most important factors to know?

Answer 25

Two most important facts to know:
- What is the maximum cumulative negative cash flow, and when will that point be reached?
- When will the cash flow turn positive?

Also consider: Investment needed, contribution margin, fixed costs, total addressable market etc

Question 26

What is the Lean-Startup method?

Answer 26

A hypothesis-driven method to learn about the viability of their business model and entrepreneurial strategy. Allocating resources more efficiently.
- “Toe-in-the-water” approach

Build a product MVP and Hypothesis –> Test and measure reactions (defines measurements up front to ensure objectivity) –> Learn (PPP) –> Adapt product and repeat cycle until customers need are clear and a good product-market fit is achieved.

When key assumptions are confirmed = Preservere, if not, Pivot or perish.

Question 27

What characterizes the lean-startup/hypothesis driven method?

Answer 27

▪ Translated the entrepreneur’s vision into hypotheses about the strategy and BM, and test them using a series of MVPs, avoiding waste

▪ Iterative and ongoing process: PPP approach (fail fast)
- Using feedback from each test/experiment, decide whether to PERSEVERE (with the proposed BM), PIVOT (to a revised model), or PERISH (by abandoning the venture)

▪ Speed and agility matters: “test-then-invest” approach

Question 28

Why do you need the lean startup method/hypothesis driven method?

Answer 28

Because as a startup, you don’t necessarily know what the market wants. If you spent too many ressources on a product without a market fit, you will perish.

Question 29

What is an MVP?

Answer 29

Not a product to be proud off.

The minimum viable product that you can use for testing key assumptions.

Question 30

Really short, the lean startup/hypothesis driven method is?

Answer 30

1) Build
2) Measure
3) Learn

Efficient use of ressources.

Question 31

What are some limitations of the lean startup method?

Answer 31

Lean-startup method may be less useful when:
- Mistakes are too costly (e.g., drugs, aircraft technology)
- Resources are abundant (“born-fat” startups)
- Demand uncertainty is low (no need for continuous feedback and tests about customer)
- Development cycles are long (a costly working prototype is required to test the demand –e.g., Segway)
- Cognitive traps (e.g., entrepreneurs’ confirmation bias)

But all firms (new and old) need to search for a good business model and this requires experimentation

Question 32

What is the entrepreneurs’ confirmation bias?

Answer 32

The tendency to search for or interpret information in a way that confirms one’s preconceptions.

Question 33

What is the Business Model Canvas?

Answer 33

A model that divides your business model into external and internal attributes.

Question 34

What is in the business model canvas?

Answer 34

Internal:
1) Key Partners
2) Key activities
3) Key resources
8) Cost structure (internal)

4) Value Proposition

External:
5) Customer relationships
6) Channels
7) Customer segments
9) Revenue streams (external)

Question 35

What is entrepreneurship vs. intrapreneurship?

Answer 35

Intrapreneurship - developing something inside a company:
- Dependent
- Company ressources
- Alignment with company culture needed

Entrepreneurship - developing something independently:
- Independent
- Own resources
- Access to market is needed

Question 36

What are some key learnings from this module?

Answer 36

• ‘‘Startups don’t begin with a business plan, they begin with the search of a business model”
• Experimentation/learning is not commitment free (paradox of e-ship)
• Before drafting and searching for your business model (and test hypotheses about potential comercialization paths), you first need to think about your overall e-strategy!
• The Business Model will implement the e-strategy
• The search for business model could inform e-strategy (pivoting)
• E-strategy: values and goals should guide the roadmap for experimentation/learning
• Business models can pivot (some parts), but the mission and values (reflected in the founding team) are persistent

Question 37

Compared to the lean-startup method, how would a traditional business approach work?

Answer 37

Traditionally, a venture’s founders would write a business plan, complete with a five-year forecast, use it to raise money, and then go into “stealth mode” to develop their offerings, all without getting much feedback from the people they intended to sell to.

Lean start-ups, in contrast, begin by searching for a business model. They test, revise, and discard hypotheses, continually gathering customer feedback and rapidly iterating on and reengineering their products.

This strategy greatly reduces the chances that start-ups will spend a lot of time and money launching products that no one actually will pay for.

Question 38

The lean method has three key principles, which?

Answer 38

1) BMC: Instead of writing an intricate business plan for months, founders summarize their hypotheses in a framework called a business model canvas
2) “Listen to customers” - Customer development: Asking potential customers about feedback on elements in the business model, including features, pricing, distribution channels and acquisition strategies. Nimbleness and speed are key words. They then go back and assemble MVP for eliciting customer feedback, start the cycle over and learn and iterate or pivot (if big changes)
3) Working agile: Agile development eliminates wasted time and resources by developing the product iteratively and incrementally through learning loops

Question 39

PillPack is built on what idea, and what is their history?

Answer 39

Idea: Presort medication and ship to people
Problem: Inconvenience of several pills a day
Solution: Blend of packaging, Innovative design, Internet-based software, Customer service

1. Pill-sorting robot from his family
2. Focused on start-up accelerator in MIT for initial funding
   instead of BA
3. Choosing customer segment:
   a. Elderly patients with multiple chronic conditions
   (adherence problem)
   b. “Early-boomer” (60-65) - First major condition (choose these as it was the easiest to target)
   c. Health supplements
   d. Deselected the adherence problem even if the potential was big
4. IDEO residency product development cycle

Question 40

What lean choices did pillpack take?

Answer 40

1. Early sales and execution in an iterative process
2. PillPack continuously revised their business strategy
3. Launched a limited beta test for the early boomer demographic and learn from the test (“With few resources and no existing product they started an ethnographic approach”)
4. Tested in smaller markets before rolling out changes nationwide
5. Simplistic designs ensures lower design and complexity costs
6. Rapid, operated on an online website for fast changes

Question 41

What entrepreneurial strategy did Pillpack take?

Answer 41

Compete with traditional pharmacies
○ Improvement of “retail pharmacy” → patient centered care = a disruption (fast execution + compete)

Question 42

Did Pillpack follow the three key principles of Lean?

Answer 42

1) BMC: Maybe, could seem like it from the process.
2) “Listen to customers” - Customer development: Yes! With few resources and no existing product they started an ethnographic approach.
3) Agile development: MVP, learn, iterate. YES!

Question 43

A business plan includes what?

Answer 43

1) Business idea (customer need, focus and profit idea, unique/differentiating factors)
2) Management (Competencies and incentives systems)
3) Market and competition
4) R&D timeline
5) IPR
6) Opportunities and Risk
7) Macroenvironmental considerations like PESTEL, Porters five forces
8) Financial analysis and roadmap / investment need