Transcript Welcome to “Entrepreneurship and Business for Engineers and Scientists” !! TG 401, Section A Course website: stevens.edu/sse/tgcourse Dr.

Welcome to
“Entrepreneurship and Business
for
Engineers and Scientists” !!
TG 401, Section A
Course website:
stevens.edu/sse/tgcourse
Dr. Carl Pavarini
Distinguished Service Professor
School of Systems & Enterprises
Today’s Agenda







Course objective and target audience
Course administration/requirements
Course outline and learning outcomes
The goal of a commercial business
Defining product success
Introduction to financial measurements
Readings and assignment for next week
Course Objective
Investigate the business-related issues
critical for successful commercialization
of new technology,
in start-ups and existing businesses
- understanding the business side
of a company (goals and roles)
- identifying the key business issues
in making products successful
- learning how to address
these issues
- understanding the impact of
business issues on products,
and on technical work
Course Objective
Investigate the business-related issues
critical for successful commercialization
of new technology,
in start-ups and existing businesses
- understanding the business side
of a company (goals and roles)
- identifying the key business issues
in making products successful
- learning how to address
these issues
- understanding the impact of
business issues on products,
and on technical work
Critical Business Issues…..
the five key business issues
in technology commercialization





Market and customer analysis
Beating the competition
High-tech marketing and sales
Planning and managing for
profitability
Partnering with other companies
Dimensions of
Commercialization

Opportunity selection: deciding on the

Business planning: creating a

Financing: getting the money and

Managing: executing the plan, with
market and the specific product/service
“winning” plan for the business
resources (people, assets, connections…)
ongoing modifications, to market-entry
and eventual success
This Course is NOT….


A management course
(it’s taught from the perspective of
someone with a technical job)
A course on how to launch a start-up
(the start-ups we’ll study are
already in existence)
Technical and Business jobs……..













Design and development of technology-based products
(R&D); engineer or engineering manager
Manufacturing engineering
Corporate information technology (infrastructure and/or
applications)
Sales engineering (aka technical sales)
Customer technical support (aka post-sales support)
Technical consulting
Marketing and/or product management of technologybased products
Sales
Manufacturing/operations (supply chain management)
Financial analysis
Business consulting (strategy, operations, …)
Leading technology-based companies/divisions
Founding high technology businesses
Business and Technical Jobs
Product
Planning
(New)
Product
Management
Marketing
&
Sales
Manufacturing
&
Logistics
Customer
Support
Exploratory
R&D
Product
Design &
Development
Technical
Sales
Operations
Engineering
Post-sale
Technical
support
Information Technology/Infrastructure/Applications
Why you need to know about
“business” in a technical job….

Business issues will directly impact the technical
work you will do each day

Technical employees who contribute to resolution of
business issues are considered more valuable

Many people transition from technical to business
jobs as their career develops (including starting a
business)
…this course will make you a better engineer or scientist
(or help position you for an eventual “business” job)
Are these
“technical” questions?
How would you go about
answering them?
What would you do…?
You need to decide whether to add a
particular feature to a product you are
designing.
The product requirements document
doesn’t mention it.
You ask someone in Marketing, but she
really can’t recommend with confidence
whether to add it or not.
What would you do…?
Your product team is meeting to make some
important decisions on:
(1) new product directions,
(2) which customers/markets to focus on, and
(3) how to improve customer service.
You are asked to represent the Engineering
or IT department at the meeting.
What contributions will you make to these
deliberations?
What would you do…?
You have an idea for an exciting new
intrusion detection product, based on a
new signal processing algorithm you
invented.
You’d like to convince “management” to
fund the development of this product.
What arguments/analyses will be
persuasive, and how will you create them?
What would you do…?
You are behind schedule in implementing
an important new process technology for
the Manufacturing line.
A Sales person asks you to join him in
visiting an important potential customer.
The customer location is in China and the
visit will take 3-4 days.
What would you do…?
You need a new piece of test equipment
for your design lab.
A Manufacturing engineer on your product
team also needs a (different) piece of test
equipment; there’s not enough money for
both.
Your product team leader (a non-technical
person from Marketing) asks the two of
you to decide which one to buy, and to
explain the reason for your decision.
These are decisions that
typically must be made by
“engineering” or “technical”
people…
…how will you make them?
…what objective(s) and criteria
will you use in
making these decisions?
We’ll learn by analyzing
“Business Cases”












WiFi networks (FHP Wireless)
Online brokerage services (DLJdirect/eTrade)
Package delivery (Airborne Express/DHL)
Electric Cars (THINK)
Engineering analysis software (Mathsoft)
Personal computers (Lenovo)
Golf equipment (GolfLogix)
Web marketing software (Hub Spot)
Pacemakers/defibrillators (Guidant)
Shoes (Crocs)
Videogame accessories (Emotiv)
Orthodontics (Invisalign)
Instructor Introduction
Carl Pavarini
-
PhD, systems engineering, Rensselaer Polytechnic Institute
10 yrs applied research and product development (Bell Labs)
15 yrs product & division management (AT&T/Lucent)
10 yrs venture investing and board participation
Adjunct professor at RPI and Stevens Inst of Tech
(previously taught in Columbia & Rutgers MBA programs)
Why am I teaching this course……
and what makes me qualified to do so?
Course Requirements/Admin

Required text (custom casebook, e-access via HBSP)

Required readings each week; articles on business
concepts, business “cases,” internet searches

“One-page, two-sides” written homework each week

Class discussion/dialogue on readings and assigned
homework questions


Syllabus, weekly class presentation slides and
supplementary materials are available on the course
website: stevens.edu/sse/tgcourse
Class attendance and participation: we start on time;
email pre-notification of missing class
Accessing the Casebook

Link:
cb.hbsp.harvard.edu/cb/access/12058376


Complete the registration process to get a
login and password
Pay for the casebook via credit or debit
card
Course Grading

25% case-based midterm exam

25% weekly homework

25% case-based final exam

25% in-class participation (really!)
Weekly Homework








Questions related to the reading assignment will
be assigned each week (12 weeks)
Each student submits written answers via email or
on paper; no late submissions
maximum length of “one page (both sides)”
Homework questions are “in advance” of covering
the material in class, so…
Objective is to demonstrate that you’ve thought
about the questions (not that you necessarily have
the correct answers -- yet)
Graded “acceptable” or “not acceptable”
Individual submissions required, but group
discussion encouraged!
Returned with comments only at request of
student
Course Homework Grades
# of acceptable
submissions
course hw grade
12
A
11
A-
10
B
9
C
8
D
7 or fewer
F
Email notification of unacceptable or missing assignments;
Homework will be not be returned UNLESS you ask for comments
Class Participation Grading




D,F: poor attendance and participation; inattention
(web surfing, texting, talking, sleeping, etc)
C: good attendance and attention, but little/no active
class participation
B: 2-4 active contributions per class (answers,
comments, questions, stories, disagreements,
challenges, …)
A: particularly insightful or useful contributions
(not necessarily more frequent!)
You will receive an interim cp grade at mid-term;
If you want to know how you’re doing……ASK ME
Typical Grade Distribution
individual semesters vary considerably
D/F
C
B
A
homework
0+
10%
10%
80+%
class participation
0+
30%
45%
25%
mid-term exam
5%
35%
40%
20%
final exam
0+
25%
50%
25%
course final grade
0+
15%
60%
25%
out of 18 students
0
3
11
5
Carl Pavarini
Contact Information

Office hours: before and after class
and by appointment
(in-person, phone, e-mail, IM)

Email:
[email protected]
[email protected]

Telephone:
973-543-9496 (home)
973-809-8336 (cell)
What you get in return…...



Useful concepts, information and insights
about the business world…..will make you
a better engineer/scientist
The benefit of my practical experience as
an engineer and business person…..what’s
important, and what works
A productive, stimulating, interactive and
fun environment…..if you do your part
Course Outline – modules 1 & 2








Objectives of Commercial Businesses
Financial Measures
Structure and roles within a company
Creating winning Business Plans
Market and customer analysis
Beating the competition: competitive
advantage and differentiation
Making decisions about products
Case-based midterm exam – on product
decisions (Mathsoft – engineering
analysis software)
Course Outline – modules 3 & 4






Marketing, and its interfaces with R&D
Sales and sales channels
Market-focused product development
Operations (manuf, logistics, service)
Launching a product (esp. marketing &
sales decisions)
Case-based final exam – on product
launch (Invisalign – orthodontics)
Course Outcomes
You are able to analyze a company’s income statement,
and can identify the company’s critical opportunities and
challenges in growing its business profitably.
You understand the importance of competitive
differentiation, and can utilize the “whole product” concept
and identify opportunities for competitive advantage.
You can identify and choose target customers and
perform a competitive analysis, in order to make decisions
on product definition and other elements of the marketing
mix.
You are able to identify: the best-practices utilized in
market-focused product development processes, the key
operations trade-offs/balances, and the impacts technical
people have on a company’s business functions
(marketing, sales, operations).
…because you’ll understand and
apply these Concepts (13)






Definition of
product success
Whole product
Product plan: key
success factors
Differentiation
Market
attractiveness
Target customers







Competitive
advantage
Marketing mix
(C+4P)
Product positioning
Sales functions
Channel options
Channel valueadded
Operations balance
… and you’ll be able to use these
Methods/Tools (13)






Income statement
analysis
Financial
benchmarks
Target customer
description
Target customer
selection
5 Forces analysis
Competitive
analysis (10 dimensions)







Product decisions
Decision criteria
Identifying
competitive options
Product
competitive
positioning
Channel economics
Process dimensions
Product
development best
practices
Today’s Topics


The “purpose” of a business;
objectives of business leaders
Introduction to financial
measurements
How do you know if a
product or service is
“successful”?
Definition of success,
and
its market/competitive/financial
drivers
(class discussion and dialogue)
The “Purpose” of a
Business
Understanding the Objectives
of Commercial Businesses
(and Business Managers)
A Commercial Business’
Objective is to…?









Provide quality goods and services
Provide jobs
Beat competitors
Contribute to the overall economy
Contribute to economic/national security
Make money (profits)
Increase the wealth of its executives
Increase the wealth of its owners
Some combination of the above
On What Basis Should We Decide on
the Answer?
How about:
Examine how the business’
leader is evaluated and
compensated?
Which raises the question:
Who does the leader
“report” to?
Corporate Governance
Owners
Board of Directors
President/
Chief Executive
Officer (CEO)
Who are the owners?




Normally, a company has many owners
Owners may be individuals, other
companies, investment firms, …...
The units of ownership are “shares of
stock”
Each owner owns a percentage of the
company (equal to the percentage of
the total shares of stock)…….if a company
has 10M shares outstanding, an owner with
500,000 shares owns 5% of the company

Shares can (normally) be sold to others
S&P 500 Stock Price Index
(log scale)
The Board of Directors
represents the Owners



The (share)owners of a company elect a board of
directors to represent the interests of the
owners; the board elects a chairman
The management of a company is selected by,
and reports to, the board of directors; the
highest member of management is the Chief
Executive Officer (CEO), who is also often the
President
One or more members of management may also
serve as members of the board; at a minimum,
the CEO is on the board
The Difference Between
Public and Private Companies

Public: shares of its stock are sold
through “public” exchanges (NYSE,
Nasdaq, etc)…. anyone can purchase stock,
and its price is known and public information

Private: all sales of shares of its stock
are arranged through “private”
transactions….. price is determined through
private negotiation (at the time of a
transaction) and is not publicly known
The Objective of a
Commercial Business is to…?









Provide quality goods and services
Provide jobs
Beat competitors
Contribute to the overall economy
Contribute to economic/national security
Make money (profits)
Increase the wealth of its executives
Increase the wealth of its owners
Some combination of the above
Answer:
Increase the Wealth
of the Owners
The total value of the owners’
interests in the company
( “total shareowner value”)
Shareowner Wealth is Most
Directly Measured By……?






Revenues
Profits/earnings
Stock price per share
Market capitalization
Dividends paid to shareowners
Combination of the above
Ans: Market Capitalization
plus dividends
The “market cap” (for private firms: “valuation”) of the firm =
stock price per share
x
number of shares outstanding (held by shareowners)
Dividends =
Cash payments ($/share) made by the firm to shareowners
upon the approval of the board of directors
Market Cap (Stock Price) is
Primarily Driven By…….?






Revenues
Revenue growth
Earnings (profits)
Earnings growth
Beliefs about the future values of
revenues and earnings
Combination of the above
Ans: beliefs about future earnings
(and revenues)
By definition:
Stock price/share = (P/E ratio) x
earnings/share
Empirically, it has been observed that:
P/E ratio ~ k x % earnings growth
(so, k is often called the “PEG ratio”)
P/E and PEG, empirically…
For the S&P500 from 1950-2008:
Average long-term earnings growth ~ 7%
Average P/E (trailing=most recent) ~ 16
Average PEG ~ 2.2
Interesting article on “current” P/E:
http://finance.yahoo.com/bankingbudgeting/article/110510/the-decline-of-the-pe-ratio
[note: both “trailing” (last 12 months earnings) and
“forward” (expected earnings) P/Es are discussed]
PEG varies by industry and over time
Average PEG by industry as of July 2002
Financials
Utilities
Health Care
Consumer-discr
Industrials
Consumer-staples
Info Tech
Materials
Energy
Telecom
0.84
0.88
1.03
1.10
1.10
1.32
1.33
1.40
1.47
1.93
…as does Earnings Growth
Annual Earnings Growth by industry--- 2Q08
Information Technology
24.3%
Industrials
20.5%
Utilities
17.2%
Telecommunications
Services
17.2%
Healthcare
9.6%
Consumer Staples
(mostly soft goods)
8.3%
Energy
7.2%
Consumer Discretionary
(mostly hard goods)
-53.8%
Financials
-96.8%
All S&P 500 – average
-22.1%
Median sector
9.6%
The money to pay dividends
usually comes from…….






Revenues
Earnings (profits)
Company borrowing (loans)
Selling more stock
“Excess” cash on hand
Combination of the above
Answer: Earnings
Earnings
not spent on business operations
(e.g., marketing, new product development,
manufacturing, sales, etc)
or saved
(retained earnings)
So, if earnings and earnings growth are
the primary drivers of shareowner
wealth;
and, businesses are trying to maximize
earnings and earnings growth……..
when is a product or service
“successful”?
The Technology
Commercialization Mantra !!
A product (or service) is
successful if and only if
it generates, over time,
earnings at or above
the levels targeted for it
by the company itself
Company and/or Product
Earnings are Determined By…?







Sales/revenues
Cost of goods sold
Gross margins
Expenses
Interest paid/received
Taxes
Combination of the above
Ans: A combo of all of these
Earnings are calculated via
the
“income statement”
The Income Statement
(simplified)
Revenues (Sales)
- Cost of Goods Sold (COGS)
= Gross Margin (gross profit)
- Marketing & Sales expense
- Research & Development expense
- General & Administrative expense
= Operating income (~EBIT)
- Interest paid or received
- Taxes paid or credited
= Net income (earnings)
Standard Financial Measures


A firm’s income statement, as well as ……
Cash flow and balance sheet statements
(next week)
So far……….





Companies try to maximize their market cap (or
stock price) plus dividends
Stock price and the ability to pay dividends are
both driven by earnings, and beliefs about
future earnings growth
Individual products and services are expected
to contribute to earnings/growth; successsful
products meet or exceed their earnings targets
Earnings growth (ultimately) requires revenue
growth, which is “easier” in fast(er) growing
markets
Firms use financial statements to develop plans,
and measure/analyze/report on their performance
Let’s try an example……
What can we learn about the
performance of
Apple, Inc. (AAPL)
by looking at its
income statements ?
(Sources:
finance.yahoo.com,
google.com/finance,
reuters.com/finance/stocks,
www.sec.gov)
Apple Annual Income Statement
Year ending Sep 24
Revenue ($M)
2011 %revenue
108,249
100%
COGS
64,431
59.5
Gross margin
43,818
40.5
R&D expense
2,429
2.2
SG&A expense
7,599
7.0
33,790
31.2
415
0.4
8,283
7.7
25,922
23.9
Operating income
interest & other inc
taxes
Net income
Apple Annual Income Statement
Year ending Sep 24
Revenue ($M)
2011 %revenue
2010
%revenue
108,249
100%
65,225
100%
COGS
64,431
59.5
39,541
60.6
Gross margin
43,818
40.5
25,684
39.4
R&D expense
2,429
2.2
1,782
2.7
SG&A expense
7,599
7.0
5,517
8.5
33,790
31.2
18,385
28.2
415
0.4
155
0.2
8,283
7.7
4,527
6.9
25,922
23.9
14,013
21.5
Operating income
interest & other inc
taxes
Net income
Apple Annual Income Statement
Year ending Sep 24
Revenue ($M)
2011 %revenue %growth
2010
%revenue
108,249
100%
66.0
65,225
100%
COGS
64,431
59.5
62.9
39,541
60.6
Gross margin
43,818
40.5
70.6
25,684
39.4
R&D expense
2,429
2.2
36.3
1,782
2.7
SG&A expense
7,599
7.0
37.7
5,517
8.5
33,790
31.2
83.8
18,385
28.2
415
0.4
167.7
155
0.2
8,283
7.7
83.0
4,527
6.9
25,922
23.9
85.0
14,013
21.5
Operating income
interest & other inc
taxes
Net income
Method: How to Analyze an
Income Statement

Operating income vs. net income

In-period operating performance:

Cross-period performance (trends):

One more item to come…
expenses and earnings as a % of revenue
costs,
change in revenues, costs, expenses, earnings…
improvements vs. deteriorations, and why
(next week)
relative
How did 2011 net income compare
to 2011 operating income?
How did 2011 net income compare
to 2011 operating income?




Net income ($25.9B) was less than operating
income ($33.8B) …
Largely because of taxes paid ($8.3B) …
Slightly offset by other income ($415M, mostly
interest received)
Since taxes grew faster than revenues (83 vs
66%), relative net income (23.9%) was less than
relative operating income (31.2%)
For the year ending Sep ‘11 (FY11), what were AAPL’s
revenues ($), and relative (%rev) gross margin, operating
income, and net income?
For the year ending Sep ‘11 (FY11), what were AAPL’s
revenues ($), and relative (%rev) gross margin, operating
income, and net income?

Revenues = $108.3 B

GM% = 40.5%

OI% = 31.2%

NI% = 23.9%
How did operating income change from FY10 to FY11 (on
both a total $ and relative basis)? What were the major
financial determinants of the total $ change (revenues?
COGS? R&D exp? SG&A exp?)? Of the relative change?
How did operating income change from FY10 to FY11 (on
both a total $ and relative basis)? What were the major
financial determinants of the total $ change (revenues?
COGS? R&D exp? SG&A exp?)? Of the relative change?

Total$OI: grew from $18.4 B to $33.8 B, up 83.8% !

Relative%OI: increased from 28.2 to 31.2% of revenue


Total$ change (up 83.8%) mostly driven by 66%
revenue growth
Relative improvement of 3.0% comprised of:
1.1% GM% improvement
0.5% R&D exp improvement
1.5% SG&A exp improvement
Method: How to Analyze an
Income Statement

Operating income vs. net income

In-period operating performance:

Cross-period performance (trends):

One more item to come…
expenses and earnings as a % of revenue
costs,
change in revenues, costs, expenses, earnings…
improvements vs. deteriorations, and why
(next week)
relative
For more detailed info….


Access Apple’s 10Q (quarterly) and 10K (annual)
reports at www.sec.gov (or through Yahoo Finance)
Particularly useful 10K/10Q sections:
financial reports (incl. income statement)
management’s discussion of financial …. (incl. net sales,
gross margin, operating expenses, other income, taxes)

Interesting article on Apple’s financial growth:
http://tech.fortune.cnn.com/2010/07/12/how-applemaintains-explosive-earnings-growth/
For FY11 what % of revenue came from
each of AAPL’s product categories?
Revenues; $M
2011
Annual growth
Desktops
Portables
Total Mac sales
Peripherals and other hardware
Software, service and other sales
6,439
15,344
21,783
2,330
2,954
4%
36%
25%
28%
15%
iPod
Other music related products and services
iPhone and related products and services
iPad and related products and services
Total sales
7,453
6,314
47,057
20,358
(10%)
28%
87%
311%
108,249
66%
Apple Stock Price, 2007 - 11
How has AAPL stock performed compared to the Nasdaq
index over the last two years? Speculate as to why.
Readings for Next Class
Appendix to Writing a Business Plan: The Basics (in casebook)
…and…
How to Read a Financial Report
(on course website under “Supplementary Materials”)
read about the income statement,
pages 1-3, 6, 26-36, 42-43; note glossary at back
…and…
Google’s (GOOG) financial and stock performance
http://finance.yahoo.com/q?s=GOOG&ql=0
…and…
Google’s SEC 2010 Annual Report (10K) filed 11-Feb-2011
(access via Yahoo Finance or SEC website www.sec.gov)
read “Management’s Discussion” pages 22-29
Assignment Question #1:
understanding that technical people affect
income statement results
How can technologists impact the
line items of the income statement?
(cite two examples for each line item:
revenues, COGS, M&S expense, R&D
expense, G&A expense, interest, and
taxes)
Assignment Question #2
analyzing Google’s (GOOG) income statement





For FY10 (calendar 2010), what were GOOG’s revenues ($),
and relative (%rev) gross margin, operating income, and
net income?
Why did relative operating income and relative net income
change differently from FY09 to FY10? Taxes? Interest?
Other?
How did operating income change from FY09 to FY10 (on
both a total $ and relative basis)? What were the major
financial determinants of the total $ change (revenues?
COGS? R&D exp? SG&A exp?)? Of the relative (%rev)
change?
For FY10 what % of revenue came from each of GOOG’s
product categories? Which products had the highest and
lowest gross margin %? (see 10K for product data)
How has GOOG stock performed compared to the Nasdaq
index over the last year? Speculate as to why.
Reminders

“How to Read a Financial Report,” today’s slides and
slides for next week’s class on course website

Hand-in your name card at the end of each class

Register on HBSP site to purchase e-casebook:
cb.hbsp.harvard.edu/cb/access/12058376

Notify me via email if you will be missing a class

Discuss readings and homework in small groups

Submit written homework via email before class
(preferred), or on paper at beginning of class