RCSC 216 Retail Business Analysis and Decision‐making

Instructor: Scott Hessell McClelland Park, Room 406E [email protected] ‐ PREFERRED Telephone: (520) 621‐8573

Physical Office Hours: ƒ Mondays and Wednesdays:: 11:00am to 1:00pm ƒ By appointment – please email to setup a time

Graduate Teaching Assistant: Tony Stovall [email protected]

Course Materials: Afuah, Allan. Business Models: A Strategic Management Approach. 1st ed. New York: McGraw‐Hill Irwin, 2004. [Required]

Berman, Karen, and Joe Knight. Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean. Boston, MA: Harvard Business School, 2006. [Required]

Course Reading Packet – available via Harvard Business School Press. Details in D2L. [Required]

Tennent, John, and Graham Friend. Guide to Business Modelling, Second Edition (Economist Series). New York: Bloomberg, 2005. [Recommended]

Suggested Materials: Standard or Financial Calculator (Hewlett Packard/Texas Instruments)

Course Description: This course is designed to introduce students to the fundamentals of business analysis in the context of developing and managing a company’s strategic direction. The core focus of the course is to understand and analyze the relationship between a company’s business model and its strategic performance by employing various analytical tools used to guide strategy. These business analytic tools include basic financial performance analysis, pro forma financial projections, business model simulation, and sensitivity analysis. There will be a particular attention to the financial performance metrics and standards used within the retailing industry.

Learning Objectives: At the conclusion of the course, the student will be able to:

• Describe the structure and relationships within an industry including the competitive strategic environment and apply that knowledge to specific retail industry sectors and markets. • Describe a company’s business model and comprehend how its various elements impact its overall contribution to corporate strategy. • Comprehend the process of identifying and estimating the value of the wide range of business drivers that impact a company’s business model • Develop a spreadsheet‐based business model that results in pro forma financial projections and analyze the results in light of a company’s strategic objectives.

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Grade Policy: The weights for the various elements of the course will be as followed:

Evaluation Component Grade Weight Business Model Concept Exams (2 exams) 20% Financial Analysis Exam 10% Case Study Write‐ups/Discussion (2 cases) 20% Financial Intelligence Quizzes 10% Concept Building Assignments 10% Spreadsheet Modeling Project (3 elements) 15% Group Activities Company Business Model Paper 10% Simulation Results Paper 5%

Course Grade Distribution A > 90% B > 80% C > 70% D > 60% E Below 60%

Lecture Outline

Below is the expected schedule; this is subject to change as the course progresses. The instructor will announce any substantive changes to this schedule. The items under the column “Student Prep” SHOULD BE COMPLETED BEFORE THE DATE SPECIFIED BELOW.

Date Lecture/Activity Student Prep/Assignment Week 1 1 Monday, August 23 Course Introduction Lovallo/Sibony – “The case for behavioral 2 Wednesday, August 25 Challenges of business decision‐making strategy”; McKinsey – “Strategic decisions – when can you trust your gut?” Magretta – “Why Business Models 3 Friday, August 27 Value of business models; difference to strategy Matter”; Shafer – “The Power of Business Models” Week 2 Afuah, Chp. 2; Johnson – “Four Box 4 Monday, August 30 Customer value proposition Business Model”; Johnson, et. al. – “Reinventing Your Business Model” 5 Wednesday, September 1 Customer value proposition (con’t) 6 Friday, September 3 Customer value proposition (con’t) Week 3 ‐‐ Monday, September 6 NO CLASS “Note on Retail Value Proposition” – in 7 Wednesday, September 8 Customer value proposition (con’t) Content/D2L 8 Friday, September 10 Customer value proposition (con’t) Week 4 9 Monday, September 13 Profit Model Afuah, Chp. 3, 4, 9, 10 10 Wednesday, September 15 Profit Model (con’t) 11 Friday, September 17 Profit Model (con’t)

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Week 5 12 Monday, September 20 Profit Model (con’t) 13 Wednesday, September 22 Profit Model (con’t) Due in D2L: Neiman Marcus case writeup 14 Friday, September 24 Gap, Inc. Presentation Week 6 15 Monday, September 27 Case Day – Neiman Marcus 16 Wednesday, September 29 Business Model Concepts – Exam #1 17 Friday, October 1 Business model resources/activities Afuah, Chp. 5/6 Week 7 18 Monday, October 4 Business model resources/activities (con’t) 19 Wednesday, October 6 Business model resources/activities (con’t) Due in D2L: Costco case writeup 20 Friday, October 8 Case Day – Costco Week 8 Afuah, Chp. 7; Birkinshaw and Goddard – “What is Your Management Model”; 21 Monday, October 11 Management model Skarzynski – “Innovating Across the Business Model” 22 Wednesday, October 13 Business Model Concepts – Exam #2 23 Friday, October 15 Discussion of simulation exercise Week 9 24 Monday, October 18 Retail performance and financial analysis 25 Wednesday, October 20 Retail performance and financial analysis (con’t) Due in D2L: Sears case writeup 26 Friday, October 22 Case Day – Sears and Roebuck Due in D2L: Group business model paper Week 10 27 Monday, October 25 Activity: SOHO office supply drivers 28 Wednesday, October 27 Building a revenue model Due in‐class: Simulation Decision #1 29 Friday, October 29 Building a revenue model Week 11 30 Monday, November 1 Building a revenue model Due in‐class: Simulation Decision #2 31 Wednesday, November 3 Activity: Premium pet food drivers Due in D2L: Dollar General case writeup 32 Friday, November 5 No Class Week 12 33 Monday, November 8 Case Day – Dollar General 34 Wednesday, November 10 Activity: Model Flowchart Due in‐class: Simulation Decision #3 Due in D2L: Element #1 – Business 35 Friday, November 12 Building a cost model Modeling Week 13 36 Monday, November 15 Modeling operating expenses Due in‐class: Simulation Decision #4 37 Wednesday, November 17 Modeling capital expenditures Due in D2L: Marsh case writeup 38 Friday, November 19 Case Day – Marsh Supermarkets Week 14 39 Monday, November 22 Net present value ‐‐ Wednesday, November 24 No Class Due in D2L: Simulation results paper Week 15 40 Monday, November 29 DuPont Model/Financial Statement Analysis (FSA)

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Due in D2L: Element #2 – Business 41 Wednesday, December 1 FSA – In‐Class Practice Set #1 Modeling 42 Friday, December 3 FSA – In‐Class Practice Set #2 Week 16 43 Monday, December 6 FSA – In‐Class Practice Set #3 44 Wednesday, December 8 Financial Analysis Exam

Course Activities

The following section describes the activities that will take place during the semester. As indicated, most of these are graded but others are simply required though not graded activities. Where indicated, additional information will be forthcoming.

NOTE: Unless stated otherwise, all assignments are to be submitted within the course’s D2L site. Most of these will be made via the Dropbox module with individual folders for each assignment. There will be two folders; one for assignments submitted by the correct time and date and another folder for late submissions. EMAILED OR HARD COPY SUBMISSIONS WILL NEITHER BE ACCEPTED NOR GRADED.

Business Modeling Project Selection/Instructor Chit‐Chat: All students in the class will be required to visit with the instructor – in person – during the first few weeks of the course. During this chit‐chat, students will select the company and modeling project. A link to a Doodle poll will be available on the home page of our course’s D2L site where you can indicate a time to visit. If one’s personal schedule conflicts with the instructor’s available hours, please contact the instructor to set a separate time.

Exams: Three exams will be administered during the course. There will be two exams on the covered chapters from the Afuah text and supplementary readings available from the Harvard Business School Press. These will be short answer formats. Specific dates for these exams are provided in the detailed schedule above (though these dates are subject to change). A third exam will cover in‐class lectures and supplemental readings on basic financial statement analysis.

Case Analysis and Discussions – “Case Days”: A key learning tool in the class will be the use of case studies. Through reading real business cases and understanding the issues that confronted the executives at the companies, students are able to have a clearer appreciation of the complexity and subtleties of business decision‐ making. This activity has two parts. First, students must WRITE TWO (2) ONE PAGE CASE ANALYSES on two of the cases; names provided below. These two cases do not include a practice case that will be done by everyone at the beginning of the semester. These cases will focus on both the quantitative and qualitative analyses of the respective company’s business model and related strategies. One will also find a description of how to read and write a case analysis under Content in D2L as well. This will also be discussed more fully in class. Second, students must also participate in “case days” for the two selected cases. These will be held periodically during the course; dates provided in the detailed class schedule above.

CASE SELECTIONS MUST BE MADE BY FRIDAY, SEPTEMBER 10 AND CANNOT CHANGE DURING THE COURSE SO A STUDENT MUST PLAN ACCORDINGLY. An announcement early in the semester will be made on how to indicate your preference. These cases may be bought through Harvard Business School Press at www.harvardbusiness.org. A link to the respective cases is available at the end of the syllabus. Please note that you should signup for your cases first before purchasing as the number of students is restricted to each case.

• Neiman Marcus • Costco Companies, Inc. • Sears and Roebuck

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• Dollar General • Marsh Supermarkets, Inc.

NOTE: Case write‐ups must be single spaced, in a standard font, 11 point minimum, with maximum margins of 0.75 inches on all sides and MAY NOT EXCEED ONE (1) PAGE.

Financial Intelligence Readings/Single Question Quizzes (weekly): The schedule listed below represents specific readings from the required text – Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean. On Tuesdays of each week or as otherwise announced, a one‐question, short answer quiz will be posted under Quizzes in the course’s D2L site. The quizzes will have a relatively narrow window during which they may be taken and will have a short time limit during which the question may be answered once started. Each quiz will be worth ten points.

Quiz Date: Chapter Reading(s) 1 August 31 Chapters 1, 2 2 September 7 Chapter 3 3 September 14 Chapters 4, 5 4 September 21 Chapters 6,7 5 September 28 Chapter 8/Part 2 Toolbox 6 October 5 Chapters 9, 10, 11 7 October 12 Chapters 12, 13, Part 3 Toolbox 8 October 19 Chapters 14, 15 9 October 26 Chapters 16, 17, 18, Part 4 Toolbox 10 November 2 Chapter 19 11 November 9 Chapters 20, 21 12 November 16 Chapters 22, 23, Part 5 Toolbox 13 November 23 Chapters 24, 25, Part 6 Toolbox 14 November 30 Chapters 26, 27, 28

Company Business Model Paper [Due: Friday October 22, 2010): Students, in groups of no more than four students, will be required to write a comprehensive paper regarding a retail company’s business model. Each group must select a company on which it will write its paper. The company selected must meet specific criteria and be approved by the instructor prior to submission of the paper. The basic criteria that must be met are that the company must:

• Be generally accepted to be a retail or direct‐to‐consumer company (e.g., Apple and Dell, though largely developers and manufacturers of products do sell direct‐to‐consumer so they may be considered for this assignment). • Be a publicly traded company (this is required so that the group will have access to financial information about the company) • Have either a physical presence in Tucson or be a pure online company (e.g., a company that does not have a store in Tucson but does have a website does not qualify; Amazon, which has no stores, would qualify)

The outline and content of the paper will be based on the lectures and chapters in the Afuah text and supplementary readings. A specific suggested outline is provided below.

Product Management Simulation (Due: 9:00pm, Wednesday, November 24, 2010): A computer‐based simulation created by the instructor will form the basis of an activity to understand more thoroughly the intricacies of managing the pricing, buying, and promotion of a small group of products. In teams, students will manage five separate product lines in a competitive environment with other student teams in the class. Each team will be

5 RCSC216 Syllabus – Fall 2010/University of Arizona | responsible for setting the price, purchase quantity and timing, and promotional budget for each product line. This will be done over four separate periods or “decisions.” After each decision, based on a computer model, unit sales will be allocated to each team in a simulated market process. The level of sales any team receives will be based on each team’s price and promotional effort and the sensitivity of each product to these factors. Teams will then be able to alter their strategies in subsequent periods or decisions to react to the market and competitor moves as well as hypothetical macroeconomic and industry news presented between periods.

At the conclusion of this four period simulation, student teams will have to write a brief report – not to exceed five single spaced pages – explaining their strategies for addressing the market and competitors and the logic or rationale for these moves. Papers will be assessed based on the soundness of the rationale which must come from a thorough understanding of the simulated market’s dynamics as outlined above.

Concept Building Exercises: During the semester, there will be various assignments that will be focused on building student understanding on key concepts discussed during the lectures. These assignments will be done a variety of ways including online, in‐class, and in regular out‐of‐class homework. These will be graded largely on a pass/fail basis and one may not redo an exercise to get credit for the assignment. No late submissions will be accepted if appropriate for a specific assignment. As many of these will be in class and unannounced in advance, it is the responsibility of the student to be present regularly throughout the semester. Only excused absences as per the course and university policies will be exempted from an in‐class assignment. All other assignments must be completed regardless of one’s absence from class. It is the responsibility of the student to be aware of such assignments as they are assigned and made due.

Individual Business Modeling Project (Final Component Due: Wednesday, December 15, 2010): Each student will be responsible for developing a comprehensive, multi‐period spreadsheet‐based business model developed from a broad list of industry, market, and company data. The purpose of this exercise is to give students the opportunity to develop individually a fully‐functioning spreadsheet model from which one could make strategic decisions as well as illustrate the results of those decisions. Details of this project are provided at the end of this syllabus. Please refer to that description as well as in‐class announcements and targeted lectures.

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Course/University Policies

Attendance: Attendance will be taken daily based either on a signup sheet/list or completion of an in‐class activity. Students who have more than three unexcused absences may result in an entire lost letter grade. It is each student’s responsibility to make certain he or she indicates their attendance on the signup sheet but actual attendance is based on being in class for the entire period (e.g., signing the sheet and then immediately leaving is a missed class) • All holidays or special events observed by organized religions will be honored for those students who show affiliation with that particular religion. • Absences pre‐approved by the UA Dean of Students (or Dean's designee) will be honored.

Special Needs and Accommodations Statement: Students who need special accommodation or services should contact the Disability Resources Center, 1224 East Lowell Street, Tucson, AZ 85721, (520) 621‐3268, FAX (520) 621‐ 9423, email: [email protected], http://drc.arizona.edu/. You must register and request that the Center or DRC send me official notification of your accommodations needs as soon as possible. Please plan to meet with me by appointment or during office hours to discuss accommodations and how my course requirements and activities may impact your ability to fully participate. The need for accommodations must be documented by the appropriate office.

Classroom Behavior: The course involves a variety of subjects that may result in the expression of various attitudes, beliefs and opinions. As a result, it is absolutely necessary that these opinions are respected by all students in the class. Any comments directed personally at an individual or group that would be considered offensive or hurtful will not be tolerated. Any student exhibiting this behavior may be subject to university disciplinary procedures.

Due to a variety of issues over the past few semesters, THE USE OF THE FOLLOWING TECHNOLOGIES ARE NOT ALLOWED IN THE CLASSROOM UNLESS AN ACCOMMODATION IS REQUIRED BY UNIVERSITY POLICY FOR A SPECIFIC STUDENT:

• Computers (unless specifically required for an in‐class activity as noted by the instructor) • Cell Phones (ALL cell phones must be either turned off or put away during class time unless otherwise required in class as determined by the instructor)

In addition, the following behaviors should be avoided: ƒ Peer conversations with other students during lectures or presentations in the class ƒ Showing up for class late or leaving early without prior approval by the instructor ƒ Using any other electronic device (e.g., iPods) or exhibiting other behavior that would disrupt the class in any way.

Academic Dishonesty: Students are encouraged to share intellectual views and discuss freely the principles and applications of course materials. However, graded work/exercises must be the product of independent effort unless otherwise instructed. Students are expected to adhere to the UA Code of Academic Integrity as described in the UA General Catalog. See: http://web.arizona.edu/~dos/uapolicies/cai2.html

Students w/Disabilities: If you anticipate issues related to the format or requirements of this course, please meet with me. I would like us to discuss ways to ensure your full participation in the course. If you determine that formal, disability‐related accommodations are necessary, it is very important that you be registered with Disability Resources (621‐3268; drc.arizona.edu) and notify me of your eligibility for reasonable accommodations. We can then plan how best to coordinate your accommodations.

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Subject to Change: Information contained in the course syllabus, may be subject to change with advance notice, as deemed appropriate by the instructor.

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Case Studies: Basic Descriptions

All cases are available from Harvard Business School at www.harvardbusiness.org. They cost $3.95 per case on Harvard Business’ website.

NOTE: DO NOT PURCHASE YOUR CASES UNTIL YOU HAVE SELECTED THE TWO CASES IN THE DOODLE POLL WHICH WILL BE PROVIDED AT THE START OF CLASS. IF YOU BUY IT BEFORE YOU MAKE THIS SELECTION, YOU MAY UNNECESSARILY BUY A CASE AS THE NUMBER OF STUDENTS PER CASE WILL BE LIMITED.

Neiman Marcus (A) http://cb.hbsp.harvard.edu/cb/access/6462396

The management of Neiman Marcus, a highly successful luxury goods retailer, is considering ways to grow the business and continue to return in excess of 15% on capital. Among the options on the table is a jewelry store concept called The Galleries.

Costco Companies, Inc. http://cb.hbsp.harvard.edu/cb/access/6497241

Costco Companies, one of the major players in the wholesale club industry, has developed a new class of membership that offers discounted services‐‐auto, health, and home insurance, business credit card processing, real estate services‐‐in exchange for a higher annual fee ($100 vs. $40). The case poses two questions: 1) how should the new membership be marketed, to whom, and how much should be spent on the effort? and 2) what are the potential risks and benefits for Costco, which generated $22 billion in 1997 selling products in bulk, in offering services? Which question is emphasized depends on whether the case is taught in a marketing or a retailing course.

Sears and Roebuck, Co. http://cb.hbsp.harvard.edu/cb/access/6462371

Arthur C. Martinez, newly appointed CEO of Sears Merchandise Group, must decide how to turn around Sears' slumping retail sales performance. After decades of dominance, Sears had lost its top retailing position to Wal‐ Mart. Martinez's task is to determine whether Sears should expand its most successful product lines, switch to higher‐margin lines, or tout its strength as the last true one‐stop‐shopping department store.

Dollar General (A) http://cb.hbsp.harvard.edu/cb/access/6462376

Dollar General Corporation (DG) operates one of the leading chains of extreme value retailers in the United States. 2006 revenues reached $9.2 billion, making DG the 6th largest mass retailer in the country. With revenues growing at 9% annually over the five‐year period up to 2005, DG had the distinction of being only one of three retailers to outperform Wal‐Mart in both revenue and profit growth in that time. Life in a Dollar General store paints a vivid picture of the roots and historical focus of the company. Opportunistic buying has given the stores an eclectic merchandise mix. Analysts often referred to this category as "treasure hunt" SKUs. Offers an opportunity to examine a company's business model, particularly since DG has been so successful competing with Wal‐Mart where so many other retailers have not. While it started out as a family business in the five‐and‐dime tradition, it evolved to a close‐out retail model where its unique low‐overhead operations were advantageous. As it added highly consumable categories its mix shifted, but it managed to retain its low‐overhead model. Interestingly, the mix shift was likely more an emergency strategy driven by store level operations than by top‐down driven strategy. Frames the growth options available to DG's CEO as he grapples with how to maintain growth.

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Marsh Supermarkets, Inc. (A): The Marsh Super Study http://cb.hbsp.harvard.edu/cb/access/6497303

In response to recent trends in grocery retailing, Marsh Supermarkets has completed an intensive 65‐week study of the activity at 5 superstores in the midwest United States. The study tracked the sales, profits, space, and promotion dynamics of the entire store: dry grocery, general merchandise, health and beauty care, and perishables. (These data are provided in the case exhibits.) Management hoped the study would provide insights on how and why products sell, identify product categories of greatest strategic importance, and spot inefficiencies in store operations.

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Company Business Model Paper Due: Friday, October 22 by 9:00pm in Dropbox

Purpose: The purpose of this exercise is to apply the material related to the concept of a business model to an existing retail company. It is intended that the exercise will further clarify and reinforce this material.

Company Selection: Students, in instructor‐assigned groups, will be required to write a comprehensive paper regarding a retail company’s business model. Each group must select a company on which it will write its paper. The company selected must meet specific criteria and be approved by the instructor prior to submission of the paper. The basic criteria that must be met are that the company must:

• Be generally accepted to be a retail or direct‐to‐consumer company (e.g., Apple and Dell, though largely developers and manufacturers of products do sell direct‐to‐consumer so they may be considered for this assignment). • Be a publicly traded company (this is required so that the group will have access to more in‐depth information about the company including its financial statements) • Have either a physical presence in Tucson or be a pure online company (e.g., a company that does not have a store in Tucson but does have a website does not qualify; Amazon, which has no stores, would qualify)

Report Contents/Structure: Each paper must contain three general elements or sections. These include:

• Description of industry and company target market: Describe the basic retail market niche of your selected company. This should include a description of the major competitors, overall product or service offerings in the niche, and typical business formats (e.g., mall‐based, standalone, web‐based, multi‐ channel) of competitors and selected company. This section should also briefly describe your selected company’s target market. This may be based on your group’s assessment of the target market as well as company and other relevant articles that may address this particular question. • Description of the selected company’s business model: This section should cover all the basic elements of a company’s business model as presented in the various course lectures and the Afuah text. These should include the customer value proposition, profit model, key resources and activities, and management model. A specific outline of sections will not be provided as understanding what a business model is and explaining it as it relates to your selected company is the express purpose of this exercise. In completing this section, you should base your analysis on: 1. visits to your selected company’s stores in Tucson, 2. review of their website, catalogs and other related marketing information, 3. analysis of the company’s published documents and financial information (e.g., most of this type of information should be available on the company’s website under “Investor Relations”), and 4. review of any third‐party articles available in typical retail and business journals. • Evaluation of the business model: Once your group has described your selected company’s business model, you should present a basic evaluation of its appropriateness and effectiveness. This evaluation should relate to the competitive landscape and general industry environment as described in the first section of the paper. In other words, does the business model appear to be positioned appropriately to the dynamics of the market and competitive environment? If not, how could it be changed? If it is, do you see any challenges to it in the future?

Basic Format: The paper may not exceed five (5), single‐spaced pages. The paper should be single spaced, have a minimum type font of 11 points, and have margins no narrower than 0.75 inches on any side. Each student’s name should be typed on the upper left of the first page along with the name of the selected company. It is strongly suggested that you use section headings that correspond to the three sections and the appropriate subsections outlined above. They will be submitted via Dropbox in D2L.

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Evaluation: The reports will be assessed based on their 1) level of comprehensiveness of each of the three sections outlined above, 2) use of various materials and store visits for understanding the business model, 3) clarity of your evaluation of the business model’s appropriateness and effectiveness and 3) the use of proper grammar and essay structure. Each student will also complete a brief evaluation of the other members of their group. A student who receives a poor evaluation may, at the instructor’s discretion, be given a lower grade on this assignment.

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Business Modeling Project

Purpose: The purpose of this exercise is to develop a basic competency in developing the structure of spreadsheet‐based business modeling that includes identifying the key drivers of a business or project, constructing the appropriate relationships between inputs and outputs, and evaluating the appropriateness of the opportunity.

Project Deliverables: There are three elements that will make up the final grade for this project. Each deliverable has separate due dates.

Element #1 – Spreadsheet Model Drivers Instructions [Due: Friday, November 12]: A key element in building a spreadsheet model is to understand all the drivers that impact the four key elements of a model. These elements are price, quantity, unit cost, and expenses. If one can identify all of these elements for a specific project, one will have a solid foundation on which to build a sophisticated spreadsheet model.

Each student will be required to identify all the quantitative and qualitative drivers that impact these four elements for their particular project. In addition to this list of drivers, students will have to also identify a very specific related spreadsheet model input that can be used in the first stage of model building. This input must be something that can be quantified as a spreadsheet, naturally, can only operate with numbers. For example, one driver that can impact both price and quantity is brand loyalty. A consumer may very likely be inclined to purchase a specific product because of the brand as well as be more favorable to paying a higher price due to that brand loyalty. That said, the term “brand loyalty” is not one that can be quantified easily for use within a spreadsheet. One must find a way to express this concept numerically. For instance, brand loyalty would likely increase market share – something easily quantified as a percentage – and a premium price which could also be expressed numerically. Finally, many of these drivers may impact – as with brand loyalty in the previous example – more than one of the four model elements.

One this comprehensive list of model drivers is identified and then translated into an exclusive list of quantifiable inputs, these items should be refined so that there are no duplicates or unnecessary overlaps between inputs. An example of this latter point is that one need not have both “target gross margin” and “product cost” as drivers as they both would be used in a similar fashion to find the total gross profit for a project in any given year. One would only need one of these in a model; not both.

A specific form will be made available within Content in D2L on which this assignment can be completed. The class will also do one or two in class exercise to help define and refine this step. One must complete this step before completing element #2 below.

Element #2 – Spreadsheet Model Input Estimates and Flow Chart [Due: Wednesday, December 1]: After element #1 is completed, students will have to complete a second element that involves researching specific values for each of the identified drivers/inputs. This research will utilize a variety of tools which will be covered in class and via online materials. Each inputted driver in a spreadsheet must have a reasonably researched value which can come from a variety of sources including the target company’s and its competitors’ financial statements and websites, market research reports, industry news, data aggregators, and other sources. In addition, it is important to understand that much of the data used in these models is not entirely known or specific to how it is needed in a model’s format so a student will often have to create their own educated and reasonable estimates. In addition to creating these specific driver estimates, students will be expected to create a model flowchart that shows how each of these inputted values interrelate with one another to ultimately calculate the financial profile (e.g., revenues, costs, profits) of the project. Additional detail will be provided in class and within D2L and, as well, this step will also be the focus of in‐class and homework assignments.

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Element #3 – Final Spreadsheet Model Instructions [Due: Wednesday, December 15]: Based on the previous two elements, each student must develop a spreadsheet‐based business model similar in form and function to the examples provided in class and in D2L. The basic components in the spreadsheet that must be present include: • Input, working and output tables: Each spreadsheet model must include, at a minimum, at least one of each input, working and output tables. Depending on the specific project and one’s approach to it, more than one specific table type may be appropriate. • Input table: Input tables must: o identify the specific business drivers that impact the specific opportunity or project [e.g., population, population growth, customer’s purchase volume, and market share all may impact total revenue]. This should include both primary drivers (e.g., price directly impacts revenue) and secondary drivers (e.g., population impacts market size which impacts units sold), o provide estimates for each scenario for all business drivers (e.g., market share estimates are 5% and 7.5% for scenarios 1 and 2, respectively), o use range names for each of the inputted values for the business drivers, and o provide individual cell comments for each input/driver listed on one’s input table(s). These comments should provide a source of one’s estimates and be attached to the row heading. For example, assuming you were to use total number of households in Arizona in your input table as a model input, a correctly formatted comment would be “U.S. Census Bureau, Annual Estimates of Housing Units for Counties – April 1, 2000 to July 1, 2008; Table 4.” A general comment like “U.S. Census Bureau” is not sufficient. [Note: on a PC, comments may be inserted by placing your cursor over the row head, right clicking and then selecting “Insert Comment”] • Working table: The principal requirement of the working tables is that they include formulas that exclusively use the values from the input tables (exception is for values that never change such as days in a week, hours in a day) and use the name ranges developed on the input table(s) • Output table: The main requirements of the output table(s) is that it o must provide a minimum of five years of projections, o compute revenue, cost of sales, gross profit, individual operating expenses as suggested by the project, operating profit, taxes (assumed 35% of operating profit), net income, capital expenditures (as suggested or required by the project), and free cash flow, and o computes net present value (=NPV) assuming a 15% discount or interest rate.

Other Requirements: Beyond the specific elements outlined above for the spreadsheet model, the following additional elements are also required. These may be provided in a separate MSWord document. • Basic marketing plan description: As a part of your assignment, you should write up a very brief synopsis of a marketing plan that should not exceed 300 words. This should include brief explanations of a target market, pricing, product/service descriptions, promotional activities, and any relevant operational activities. • Scenario descriptions: One should write short narratives of each of one’s developed scenarios that should not exceed 150 words each. One should provide at least two different scenarios for your project. For additional explanation of scenario development, please refer to the in‐class discussions and the required business modeling textbook. In addition, an article about scenario development written by McKinsey and Company is provided in D2L.

Grading Matrix: The spreadsheet business models will be graded based on the following key parameters. • Model structure: The overall structure of the model will be assessed based on the use of input, working and output tables as required by your project and marketing/operational plan. In form and function, it should be similar in the basic structure of the examples provided in class and include all the requirements outlined above. • Formulas: Formulas, particularly on the working and output tables, will be assessed based on their use of range names, use of reference values from other worksheets rather than directly inputted values, their ability to be easily understood by someone other than the author, consistency across years, and their accuracy/correctness given their intended function.

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• Input Sources: Input values will be assessed based on, to the greatest extent possible, their use of reliable sources. These may include government agencies, company documents such as annual reports, competitor sources, market research reports, and others. In the absence of such sources, reasonable assumptions may be made but must be explained in the cell comments as described above. • Scenarios and marketing plan: The narrative of the scenarios and the marketing plan will be graded based on the proficiency of the writing including proper grammar and spelling and logic and completeness of the statements and arguments. • IMPORTANT NOTE: Spreadsheets that mimic in form and function either entirely or in large part the examples provided in class and in D2L will not be graded and will receive a score of zero. Submissions will not be graded negatively if certain elements are similar. This only applies if the majority of the model, as defined by the instructor, mimics the examples.

Checklist: Consider the following list of items in completing your business model:

† Developed and wrote narratives for at least two scenarios † Wrote short marketing plan for project † Used input, working and output tables in spreadsheet † Created range names for all business drivers on input table † Provided values for the business drivers for at least two different scenarios † Used both primary and secondary business drivers in my input table(s) † Created formulas in working table that included nearly exclusively range names and values from the input table(s) † Created sections on the output table that included revenue (gross and/or net), cost of sales, gross profit, operating expenses, operating profit, taxes, net income, capital expenditures, and net income. † Calculated (using =NPV function) the net present value of the project assuming a 15% discount rate.

Final Project Component Deliverables: Students will be responsible for providing the following items by the due date in the Dropbox (both files should be uploaded to the single Dropbox for the project). Both items must be provided in file formats readable by a PC; not a Mac. Files not readable will not be graded so ensure that they are compatible prior to submitting. • One Word file with the basic marketing plan and scenarios (include your name on the top of this document) • One Excel file with all worksheets of your spreadsheet‐based business model (include your name on each sheet of your spreadsheet in the upper left cell – A1)

15 RCSC216 Syllabus – Fall 2010/University of Arizona |