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									business models


  starterseminaries
        15-12-2009




     1
                  business model analysis
    analysis of a company’s ‘profit engine’
       uncover whether the business concept can be translated into a viable,
        profitable business venture
       uncover how much cash it will take to achieve that result

    Facets of that analysis
     –  Revenues
             Cash flows and their timing
             Revenue drivers
     –  Expenses
             Cash flows and their timing
     –  Investment required through cash flow breakeven
             Working capital
     –  Maximum financing required and cash flow breakeven timing
     –  Sensitivity analysis
             Key success factors
                                                                                2
                        Two business model tests
     narrative test:                                      telling the story
      –  is it a compelling story?
                how do you create value?
                   –  who’s the customer? what’s his pain? Your solution? his alternatives? are you better?
                   –  what complementary assets are needed? who posesses them?
                how do you capture value?
                   –  how do you position yourself, in the value chain, in the ecosystem?
                   –  how do you appropiate the value you created ?
      –  does the story make sense?


     the numbers test:                                    adding up the numbers
      –  can you quantify the revenue sources & define a revenue model?
      –  what are the biggest cost drivers & can you define a cost structure?
      –  what is the required investment size in order to break-even or keep
         operating?
      –  do you understand the critical succes factors and their (financial) impact?

                                                                                                              3
source: Magretta, HBR 2002
  business model


telling a story




   4
                                             story telling
     business models are stories that explain how
      enterprises work by answering the following
      questions
      –  who is the customer? what does he value?
      –  how do we make money in this business?
      –  what is the underlying economic logic that explains how we can
         deliver value to customers at an appropiate cost?


     a succesful business model represents a better
      way than the existing alternatives
      –  by offering more value to a discrete group of customers
      –  by completely replacing the old way of doing things and becoming
         the standard for the next generation of entrepreneurs to beat

                                                                            5
source: Magretta, HBR 2002
      does the story make sense?
    Priceline Webhouse Club, the online power broker
     for individual consumers
     “how much would you like to pay for .. let’s say a jar of peanut
       butter?”

      let consumers specify the price, not the brand
      webhouse will aggregate the bids and go to companies like P&G,
       Kraft, Bestfoods, etc. to make the deal
      let consumers buy on price alone

       do companies like P&G, Kimberly-Clark, Exxon.. want to negotiate volume discounts
        directly with with the end-user ?
       haven’t they invested heavily in brand loyalty?
       you need a big consumer base before you launch your powerbroker and this can
        only be obtained by first getting the discounts from consumer product
        manufacturers who aren’t willing to do so..
                                                                                            6
                                       opportunity


                                       product &
                                        market
   technology                                                        organization
                                   Who is your customer?
                                      What is his pain?
What are the unique                                            What resources do you need,
assets your venture              What are his alternatives?    how do you plan to get them?
   is based on?                     Why are you better?           Can you build a viable
   Can you claim                                                       business?
intellectual property
  rights on them?

                                      environment


                                   What is your place in the
                                    business ecosystem?


                                                                                           7
*how we look at business development projects
                                          The elevator pitch
     Who is your customer, what is his pain?
       –    For [target customer]
       –    Who [statement of need or opportunity]
       –    The [product/service name]
       –    is a [product/service category]
       –    That [statement of benefit].


     What are his alternatives, why are you better?
       –  Unlike [primary competitive alternative]
       –  our product [statement of primary differentiation].




                                                                                                          8
source: Stanford University Technology Ventures Program, entrepreneurial marketing, Byers & Kosnik 2008
     example Palm Treo
           for busy individuals
           who need a way to organize, manage and
           communicate
           the Palm Treo is an all-purpose handheld computer,
           camera and mobile telephone, all based on the proven
           Palm operating system
           that offers simplicity of use, portability,
           personalization connectivity and functionality.

           Unlike pure personal digital assistants
           our product offers expandibility due to the
           springboard technology and benefits of an all-in one
           capability.
                                                                                                          9
source: Stanford University Technology Ventures Program, entrepreneurial marketing, Byers & Kosnik 2008
     example Apple iPhone
           for anyone who wants to travel in style
           who loves to communicate and mix work and play,
           anywhere, anytime
           the Apple iPhone is a smart phone AND an iPod,
           that offers Apple’s legendary ease-of-use, elegance,
           intuitive integration and cool.

           Unlike Blackberries, Treos and other smart-phones,
           our product offers better talking, faster browsing,
           music and movies, and photos that come to life, all on
           the big screen in the palm of your hand.


source: Stanford University Technology Ventures Program, entrepreneurial marketing, Byers & Kosnik 2008 10
          business model


adding up the numbers




           11
      “a business model is a summation of the core business
        decisions and trade-offs employed by a company to
                             earn a profit”
     revenue sources
       money coming from sales, service fees, advertising..
     cost drivers
       any factor that affect costs such as labor, goods purchased, energy..

     investment size
       the measurable level of investment to get off the ground and to keep
        operating
     critical succes factors
       depending on the business, this might be the ability to roll out new products on a
        sustained basis, success in reaching some critical mass of business within a certain
        time..

                                                                                               12
source: Hamermesh, Marshall, Pirmohamed, HBR Jan 2002
                                                 revenue model
     a business model can incorporate one or several
      different revenue streams, depending on the product,
      industry and customers

     examples of integrating revenue streams into the business
      model are,
      –  subscription/membership:
         fixed amount at regular intervals
      –  volume or unit-based:
         fixed price per unit
      –  advertising-based:
         end-user pays a fee equivalent to only a fraction of the true value
      –  licensing & syndication:
               one-time licensing
               royalty fee
      –  transaction fee
                                                                               13
source: Hamermesh, Marshall, Pirmohamed, HBR Jan 2002
                              looking at revenues..
     revenue stream
      –  is the business model based on a single, multiple or a loss leader
         revenue stream?
               if the company has a loss leader revenue stream, how likely are the
                losses to be covered by other reveneue streams?



     revenue model
      –  is the business model based on a single or hybrid revenue model?
               in case of a hybrid model, what are the underlying revenue models
                (i.e. subscription, transaction, advertising..)?
      –  how quickly will the revenues increase?
      –  are there many barriers to revenue growth?
      –  how long does it take to collect cash following a sale?


                                                                                      14
source: Hamermesh, Marshall, Pirmohamed, HBR Jan 2002
     which price model should you use?
    never assume there’s only one way to price a
     product
      –  film videotapes sold at about $80 when they came out; Blockbuster
         Video changed the pricing model from selling to renting at a few
         dollars a rental
      –  Hewlett-Packard trades high-powered servers to Silicon Valley start-
         ups for a share of their revenues. The customers get immediate
         acces to key capabilities and HP stands to earn a lot more than the
         price of the machine




source: Kim and Mauborgne (2000)                                           15
                                                                                       costs
     four primary types of cost drivers
      –    fixed                =   do not vary at all with volume
      –    variable             =   vary in total, directly and proportianely with volume
      –    semi-variable        =   combination
      –    non-recurring        =   appear irregularly of infrequently



  the dominant cost driver of a business model usually characterizes the
   overall cost structure
   examples:
      –  payroll-centred (direct) : semi-variable cost driven by employees directly involveed in
         the output of the firm
      –  payroll-centred (support): fixed costs driven by employees indirectly involved in the
         output of the firm
      –  inventory: primary cost venter related to maintenance of raw materials and/or
         finished goods inventory
      –  space/rent: costs driven by the high cost per m² of office or retail space
      –  marketing/advertising: costs driven by total marketing or advertising expenditures
         required to attract and retain customers
                                                                                              16
source: Hamermesh, Marshall, Pirmohamed, HBR Jan 2002
                                                                    example
    eBay
     –  online auction company
             creation of infrastructure that allows people to communicate for a modest fee
             company takes no part in transactions, has no responsibility for the goods
              offered at auction, nor for collecting the payments, nor for shipping the goods
     –  recieves revenues from seller fees
     –  pays the cost of building and maintaining the online infrastructure,
        marketing, product development and general and administrative expenses

       heavy reliance on fixed costs over variable costs gives the company
        enormous operating leverage
       small number of salaried employees can handle huge and growing volume
        of business
             a doubling of transaction volumes (and revenue) can be accommodated with
              relatively modest extra investments




                                                                                                17
                                              investment size
 = the amount of cash required before a company
   achieves positive cash flow

     cash flow diagram
      –  maximum financing needs: what is the maximum financing need of
         the business model (i.e. how deep is the cash through?) over what
         period of time is the investment required?
      –  positive cash flow: at what point does the cash flow of the
         company turn positive? how long does it take to arrive at this
         point?
      –  cash break even : when does the company achieve cash breakeven
         (i.e. what does time equal when the curve crosses the x-axis?) how
         does the slope of the cash curve change after breakeven?


                                                                          18
source: Hamermesh, Marshall, Pirmohamed, HBR Jan 2002
                                                        19
source: Hamermesh, Marshall, Pirmohamed, HBR Jan 2002
                                                           example
    medical device start-up
     –  sale of two interdependent products
             equipment or instruments, priced from $50,000 - $100,000
             consumables, priced from $500 - $2,000


     –  sales of the consumables is dependent upon the installed base
        (total number of instruments installed at hospitals)
     –  cost of equipment >> cost of disposables
             impact on cash requirements !!


     –  equipment can be sold at a profit, sold at cost or given away free
     –  disposables are always sold at a profit




                                                                             20
21
                 business model analysis
    Facets of analysis
     –  Revenues
          Cash flows and their timing
          Revenue drivers

     –  Expenses
            Cash flows and their timing
     –  Investment required through cash flow breakeven
            Working capital
     –  Maximum financing required and cash flow breakeven
        timing
     –  Sensitivity analysis
            Key success factors



                                                             22
the business plan
Haiku
5/7/5 syllables
    Why Write a Business Plan?

    Because I have to...
     –    Needed for financing
     –    Strategic partnering
     –    To explain business to customers/suppliers
     –    To attract key people


    Because I Need to Understand My Business
     –  The Business Plan is a result of a PLANNING PROCESS
     –  People don’t Plan to Fail; they Fail to Plan
      key attributes of business plan
    a business plan describes your current thinking on your
     company’s objectives and on how to get there.
     –  it is a collective, structured “braindump” of the management team’s ideas
        on how to move forward, and why.
    describe a integrated vision that is consistent between the
     different levels of planning
     –  mission, strategy, business model, and concrete, tactical plans
    spell plans out explicitly and unambiguously
     –  or if your thoughts are ambiguous, spell that out then
    include both qualitative and quantitative objectives




                                                                 Peter Camps
    The Plan is a SELLING DOCUMENT
     –  Don't lose sight of the vision
     –  The excitement must come through
     –  The Plan should project your image
    BUT: The Plan Must Be Defensible
    don’t over-promise
     –  differentiate between what you will do under this plan, and what
        you might do (to indicate the upside potential) but don’t mix these
        up
    provide concrete motivation (other than your own
     belief) of why your objectives and plans seem to
     be realistic
     –  for example, market research for projected sales numbers,
        feasibility study for technological challenges




                                                            Peter Camps
                                     Who writes?
    Who should write the Plan?
     –  CEO alone?
     –  The team?
     –  A hired writer/consultant?
    You need to OWN the Plan
                                                            get help
    at a minimum, get help and participation from all the key
     players in your company
     –  to complement your skill set, and to get the much needed interaction and
        brainstorming
    seek external feedback from different perspectives
     –  (potential customers, industry experts, or friends – even if they are not
        really in your industry) who can help you find the weaknesses in your plan,
        and add new ideas
    seek external help for areas outside your collective skills
     –  for many entrepreneurs with a technical background this means the
        marketing research area
    enfocus example:
     –  thad mcilroy brought a hole new dimension to our strategic thinking and
        market research efforts when he came on board when we wanted to
        prepare in earnest for securing funding



                                                                Peter Camps
    Have an Independent Reader Review the Plan.
     One or more independent readers for feedback:
     –    Retired industry pro?
     –    Customer(?)
     –    Consultant?
     –    Professor?
     –    Accountant-yes definitely
     –    Lawyer-yes definitely
                               Executive summary
    An Executive Summary is
     –  NOT an introduction
     –  NOT a preface
     –  NOT a random collection of highlights
    An Executive Summary IS the Business Plan in
     miniature
    Size
     –  Two pages (preferable) to five pages (max)
    The Executive Summary must be
     –  Logical
     –  Clear
     –  Interesting/Exciting
    The Executive Summary is like a RESUME
     –  If it gets the reader’s attention, the rest gets read
     –  The Elevator Speech is to the Exec Summary as the Exec Summary is
        to the Full Plan
    The Executive Summary tells
     –    Who you are
     –    What your strategy/vision is
     –    What you are doing and/or propose to do
     –    What is the market
     –    How many $$$$ do you need and what will you do with them
     –    What your SUSTAINABLE COMPETITIVE ADVANTAGE is
    When the reader is finished he or she should be able
     to tell someone what you are up to.
    The Executive Summary Should Contain:
     –    Description of the Business Concept and the Business
     –    The Opportunity and Strategy
     –    The Target Market and Projections
     –    The Competitive Advantages
     –    The Economics, Profitability and Harvest Potential
     –    The Team
                      vizid exec. summary v1
    VIZID heeft als hoofddoel een sterk merk op te bouwen. Dit zullen we
     voornamelijk via de opbouw van een community trachten te bereiken.
     Vanaf dat deze gelanceerd is kunnen we er de resultaten van plukken
     dankzij mond-tot-mond-reclame en ons affiliate-programma.
    Als dit succesvol is zal automatisch ook een verder doel, een van de
     belangrijke Belgische hosters worden, binnen bereik komen.
    Onze unique selling proposition is een combinatie van een lage prijs,
     goede kwaliteit, en persoonlijkheid. Een lage prijs aanbieden is iets wat
     in de hostingmarkt geen probleem vormt, net als kwaliteit, maar
     persoonlijkheid ontbreekt te vaak bij andere bedrijven.
    Wat ook van belang is, is de kostminimalisatie. Dit willen we na het
     bereiken van enige schaal doen via verticale integratie:
      –  agent worden bij DNS zou onze Belgische domeinnamen aanzienelijk goedkoper maken
      –  een eigen server aankopen maakt ons minder afhankelijk van de vaste configuratie bij de
         reseller services en heeft ook een veel lager prijskaartje
    Dit alles zal uiteindelijk leiden tot het doel dat bij de meeste bedrijven
     centraal staat, winstmaximalisatie.
                                              content
    Executive Summary
    The Opportunity and the Company and its Services/
     Products
    Market Research/Analysis
    Economics of the Business
    Marketing Plan
    Design and Development Plan
    Manufacturing and Operations Plan
    Management Team
    Schedule
    Critical Risks, Problems and Assumptions
    The Financial Plan
    Appendices
    Notice That “Technology” Is NOT A Section
                                The main document
    The Opportunity
     –  What is the Market / Opportunity?
             How big is it now?
             What are the trends-how fast is it or will it grow?
     –  Why Is This Time The Right Time For Your Product/Service?
             Convergence of Opportunity and Solution
    Market Analysis
     –  Existing and planned products in marketplace
     –  Market segments
     –  Market players/competition
             Competitive Advantages
     –  Estimated Market Shares
             Current Players
             You
    Marketing Plan
     –  What is your Marketing Strategy?
     –  Pricing and Distribution
             Pricing and margin erosion
             Distribution must match strategy/pricing
     –  Sales Tactics
             Who will be the first customer, second customer etc.?
             How will you reach the customer?
     –  Advertising and Promotion
    Development Plan
     –  Where is development today-product status
     –  What development is needed?
             Time and resources needed for development
             Do you have to produce a complete product to get going? Avoid “Nuclear
              Fusion”
     –  Difficulty and Risks
     –  Product Pipeline Plans
    Action Plan–What Will You Do and When?
     –  Identification of “Credibility Testers”
     –  Sequencing to build VALUE
     –  Eliminate or Reduce Dependencies
               Coordination of Schedule, Value Recognition Events and Financing
                Requirements
    Appendices
     –    Separately Bound Volume
     –    Resumes of Principals
     –    Product Literature
     –    Trade Press/Business Press
     –    Patents (front page)
     –    Testimonials Letters
     –    Technical Information
     –    Confidentiality
     –    Technical person to technical person discussion
44
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    the executive summary
      –  ‘hang gewichten aan uw woorden’
    ch ch changes!
      –    postscript
      –    doublecheck >3 pages, PitStop ¼ of a page
      –    marketing
      –    org chart
    ‘er zijn twee dingen’
    ‘big enough’
      –  market size assessment
    validation
      –  EFI, Agfa, RR Donelly, Boy Souts
      –  OEM customers
    focus on what is important
      –  adobe
      –  exit scenario’s
    the patent?
            VC business plan reading
    First Reading: Like a Resume
     –  Make The Cut, So That You Get An Opportunity To Tell Your Story
  Second Reading: Justify The Investment
  Third Reading: Commit To A Plan
     –  That You And The Investors Can Live With.
    REMEMBER:
     –  If you don’t make the FIRST CUT, B and C never happen.
    MAKING THE FIRST CUT
     –    An Idea Too Good To Ignore
     –    A Financial Promise Too Good To Turn Down
     –    A Team Good Enough To Believe In
     –    An Action Plan That’s
               Credible
               Focused
               Details That Give Assurance of Insight, Commitment and Follow
                Through
     –  Format and Style That Show
     –  Passion
     –  Sanity
      Whan plans fail the first cut
    Insufficient Market                Action Plan Not Credible
    Non-Credible Technology             –  Too Optimistic
     –    Too Wild                       –  Naïve About The Hurdles
     –    Too Blue-Sky (Unproven)        –  Runs Off In All Directions
     –    Not Protectible                –  Not Ambitious Enough
     –    Too Mundane                    –  Regulatory Barriers
                                            Insufficiently Addressed
    Investment Too Large
                                         –  Gaps Filled By
     For The Promise                        Handwaving
    Failure to Understand               –  No Promises At All
     The Market                         Team Not Credible
    COSMETIC” REASONS FOR FAILING THE FIRST
     CUT
     –  I Can’t Understand It.
     –  Filled With Market Or Technology-Specific Jargon
               i.e., WHAT IS THE BUSINESS?
     –    Naïve Projections
     –    Sloppy: Misspellings, Poor Grammar, Poor Quality Printing
     –    Too Damn Long
     –    Ignores The Basics
     –    “Forget Marketing, My Technology Is Best”
     –    Naïve (or Terrible) Writing
                                      My advice
    First think about the project

    Start with the powerpoint presentation

    Be to the point
     –  Address concerns


    Consistency

    The plan changes (slightly) after nearly every
     meeting
                                 Some quotes
    Plans are nothing, planning is everything
     –  Dwight D. Eisenhower
    Everything must be explained as simple as
     possible, but not any simpler than that
     –  Albert Einstein
templates
bizidee
     bizplanit's virtual business plan
    free online resource that mirrors the major sections of a
     business plan and provides insight into the fundamentals of
     writing an effective business plan
    each section of the virtual business plan includes:
     –  bizbasics – the business plan fundamentals to consider and incorporate
        into each section of your plan.
     –  common mistakes to avoid – highlights the most common mistakes that
        business plan writers make. avoid these mistakes to add credibility and
        power to your business plan.
     –  section-specific tips – other advice, articles, tips, tools and links related to
        each section of a business plan.
    www.bizplanit.com/vplan.html
what do VC’s look at when analysing a project?
most VC’s focus on a certain domain

    such as
     –    industry sector (biotech, IT...)
     –    investment size
     –    stage of investment (early stage capital, ..)
     –    geographical focus
     –    ...


    this functions as a filter for VC’s
     –  It enables them to provide ‘smart money’: allows them to leverage
        their expertise and networks within a certain domain




                                                                            69
      General VC investment criteria
    Two schools of thought:
     –  ‘ I invest in people first and foremost. Smart people will find great
        opportunities and I will never know the sectors or technologies as
        well as smart people.’
     –  ‘I don’t care about people, I care about markets. I look for big
        painful problems that customers have. If management doesn’t work
        out, I can always fix management.’

     The truth is somewhere in between.
                                                  (Robert Simon)




                                                                           70
     Common VC investment criteria
  Product/technology
  Strategy/ business model

  Market

  Marketing (customer/target)

  People/ team

  Organisation

  business ecosystem



    Financial


                                 71
                                 lessons from enfocus
    1995
     –  just peter, ignace and 2 board members
     –  in 3 years sales of 1.000 copies of tailor into an installed base of
        75.000 seats
     –  revenue stream barely sufficient for personal survival, and
        decreasing; zenfocus is running out of money fast
     –  next does not gain traction in a world dominated by apple, moves
        away from publishing
             zenfocus looses its target market
              (publishing users who own next computers)
             tailor heavily uses the display postscript facilities only offered by
              nextstep
     –  plans to port tailor to mac
     –  funding: business angel, private funds, iwt

-> reponse of VC’s: we do not fund turnarounds!


                                                                                      72
                        lessons from enfocus
    1998
     –    team of 9 (plus board members)
     –    senior management team
     –    run-rate of € 200.000+ per quarter
     –    flirting with break-even
     –    some brand recognition
     –    riding the wave of pdf
     –    innovating and well-received products
     –    promising opportunities
     –    contacts with potential oem customers


-> project was validated!


                                                  73
belgian vc selection criteria




                            74

								
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