Business Skills for Chemical Scientists

The Basic Rules of Business

Every Business Starts with a Plan!

The business plan gives credibility to your proposal A statement of business goals The reasons these goals are attainable The plan for reaching those goals over the next 3 – 5 years

A business plan typically contains: Background information about the company & management Background information about the product/service Analysis of the market and a marketing plan Business strategy i.e. how you will implement the plan A forecast of the financial profit and costs

Basic Business Plan Structure Title, legal notices, company details etc. Executive Summary The Proposition – description of the product/service/technology Market Research – size, structure, drivers and competition Market Validation – proof the customer will buy your product at your price Marketing Plan – how you will get your product to the customer

Advertising, PR, promotion, sales, sales forecast Beating the competition, IP protection, patents

Operational Plan – the nuts and bolts of your business Manufacturing, distribution, premises, personnel, management team etc.

Exit Strategy – timescale, forecast etc. Financial Plan – cash flow, P&L, balance sheet, investment needed and when Appendices – full CVs of management team, external reports etc.

See hand out for an example

Communicating Your Plan

There are many methods of communicating your business plan The ‘Elevator Pitch’ Pitching to investors (e.g. the ‘Dragons’ Den’ pitch) Written report (typically 20 – 40 pages)

Every business plan is different and must be tailored to it’s audience. Typical audiences include: Investors (e.g. banks, venture capitalists etc.) Customers Internal management

Learning OutcomesThis presentation aims to introduce some of the basic skills,

concepts and understanding you need to develop your business plan

Many of these skills will form the basis of your group’s ‘Dragons’ Den’ Pitch at the end of this course

These skills include: Market awareness (i.e. market need) Business strategy – understanding your capabilities Project management Reward and risk management Considerations for gaining investment Methods of commercialising your idea

We all have ideas, but how do we: Pick winners? Maximise progress and financial return? Minimise the risk of failure?

Market Need

Market Need

Your Capability

Reward£

Success!!

Success starts with understanding the

needs of your market

Market Need

Megatrends in society drive market need Growing & Aging Population Energy Demand & Climate Protection Disease and Urbanisation Mobility and Transport Technology Changes….etc.

You can only sell things if people want to buy them

People (largely) don’t want things, they want what those things do for them

Understanding Your MarketYou need to understand:

What is the problem that you are addressing? What is your solution? Who is your market (i.e. who benefits)? Where is your market, what is it’s size and can you access it? Is your market growing or declining? How long can you stay in this market? Who are your competitors in this market? Are there significant regulatory costs & requirements? How much money can you expect to make?

It takes much research to get a good picture of your market

Prozac Prozac is an anti-depressant drug developed by Eli Lilly in 1974.

It was submitted to the FDA in 1977 and approved in 1987.

It came off patent in 2001.

Q. What was the marketing position of Prozac in 1987?

What is the problem is that Prozac addresses? It improves the quality of people’s lives Major depression, OCD, bulimia nervosa, panic disorder

What is Eli Lilly’s solution? Make (through considerable R&D) a new anti-depressant drug

Who is the market for Prozac (i.e. who benefits)? Society & the people with depression and other related disorders

Where is the market for Prozac? What is the market size? People worldwide suffer from depression 17% of Americans have major depression Typically 8 – 12% of the population worldwide, or 500 – 800 million people

worldwide

Can the market be accessed? Yes, but drug regulations will restrict access to different markets worldwide

Is the market growing or declining? Prozac is the first and only treatment for depression on the market The market will grow through better awareness and diagnosis of depression

How long can Eli Lilly stay in this market? Eli Lilly can dominate this market until the patent expires in 2001

Who are Eli Lilly’s competitors in this market? None in 1987 – Eli Lilly had a patent stopping others making Prozac Other, non-related anti-depressant drugs may be developed

Are there significant regulatory costs & requirements? Yes & these costs are significant (R&D, clinical trials, patents etc.) These costs need to be recouped before profit is made

How much money can Eli Lilly expect to make? Predicted to be no more than $70 million per year in 1987

Prozac – Looking Back from Today

In it’s first year, Prozac took $350 million in sales

Between 1987 – 2001 Eli Lilly made $21 billion from Prozac sales

Prozac came off patent in 2001 Eli Lilly could not longer exclusively make Prozac A range of generic drugs were released onto the market This cost Eli Lilly $2.4 billion per year in sales

Prozac generics are still popular today In 2010 there were 24.4 million prescriptions of Prozac generics Still the 3rd most prescribed anti-depressant

Summary – Market Need

You must understand the needs of your market/customer This takes considerable market research

Key points….

You can only sell things if people want to buy them

People don’t want things,

they want what those things do for them

Capability

Market Need

Your Capability

Reward£

Success!!Your capability to develop and deliver your product to your market

Business strategy to achieve your goal and make money

CapabilityDevelopment of your concept

Do you have a proven technical concept with unique attributes? Do these attributes match the market need? Will it sell?

Can you manufacture, distribute and market your product?

Are there any regulatory issues to overcome (e.g. FDA approval)?

Do you have freedom to operate from patents? Do you have a sustainable competitive advantage?

Is your technology protected through patents? How will your competitors respond?

Does this product fit in your existing product portfolio?

Assessing Your Capability

SWOT analysis is a strategic planning method used to assess your capability to develop and deliver your product to the market

It assesses the Strengths, Weaknesses, Opportunities and Threats to a project or business

HELPFULto achieve the objective

HARMFULto achieve the objective

INT

ER

NA

L O

RIG

INE

XT

ER

NA

L O

RIG

IN

Strengths What advantages does your company have? What do you do better than anyone else? What do people in your market see as your strengths?

Weaknesses What could be improved? What are people in the market likely to see as weaknesses?

Opportunities What interesting trends you are aware of? Useful opportunities can come from megatrends e.g. social patterns (population,

lifestyle changes etc.), markets, government policy, changes in technology etc.

Threats What obstacles do you face? What is the competition doing? Are the required specifications for products or services changing? Could any of the weaknesses seriously threaten the business?

Summary – Capability You must understand the capability of your company to

develop and deliver your product to your market

A SWOT analysis assesses the Strengths, Weaknesses, Opportunities and Threats to a business or project

These SWOTs are influenced by both internal and external factors, some of which are helpful and some harmful to your business

What next….?? A SWOT analysis must lead to the development of an ACTION plan or set of recommendations to achieve your chosen goal

Project ManagementProject management is the planning, organising and management of

resources to achieve a specific goal

Projects are usually constrained by time, funding (budget) and resources

Stage–Gate Model of Project Management

The project is divided into manageable stages separated by gates

A Stage Specific planned actions take place to achieve planned deliverables Analyse the deliverable, and propose an action plan for the next stage

A Gate

This is a decision point Go. Kill. Hold. Recycle. Assess the quality of deliverables – does the project make business sense?

Stage 1

Idea

££

Gate 1 Initial screen

Preliminary InvestigationAnalyse the product, market & competition

Business CaseProduct definition, market research, production costs, legal & regulatory etc.Estimate time, personnel, financial resources FEASIBILITY REVIEW

Stage 2

DevelopmentExecute plans from stage 2 – make a prototype and develop a marketing and sales plan

Stage 3

Testing & ValidationValidate the project the product (field testing), manufacture, customers, financial merit

Stage 4

LaunchPlan marketing, sales, distribution, pricing, estimate the initial demand

Stage 5

KILL or RECYCLE

Review of the project

Gate 2 Second screen

Gate 3

Gate 4

Gate 5

KILL or RECYCLE

Failure….?

Don’t be scared to exit or recycle a project if it doesn’t make business sense

1968 – Dr. Spencer Silver, a 3M chemist was trying to develop a strong adhesive glue – this project failed resulting in a low-tack, reusable adhesive

For five years, Dr. Silver promoted his invention within 3M 1974 – A 3M colleague, Art Fry, came up with the idea of using the adhesive to

anchor his bookmark into his hymnbook Fry developed the idea within 3M 1977 – The "Press 'n Peel” note was launched – but it’s sales were disappointing 1980 – Following market-research, the “Post-It Note” was launched 1985 – sales topped $100 million per year 1989 – sales topped $1 billion per year

The yellow colour was chosen by accident; a lab next-door to the Post-It team had scrap yellow paper which the team initially used!

Summary – Project Management

Project management is the planning, organising and management of resources to achieve a specific goal

Projects are usually constrained by time, funding and resources

A Stage–Gate Model divides the project into a series of manageable action stages separated by decision gates

Do not be scared to exit an idea/project or recycle it if the project no longer makes business sense – it may save your company in the long run!

Financial Reward

Market Need

Your Capability

Reward£

Success!!

Estimating your financial reward is a balancing act…

Money taken vs

Outgoings over time

Money taken = market need How many could we expect to sell? What would the customer pay?

Outgoings = capability costs How much will it cost to develop, protect, manufacture, promote, distribute? Capital investment, operating and IP costs? How long will you have a competitive edge?

Cost, Price and ValueCost “How much it cost you to produce/manufacture”

Price “How much you are selling the product for”

Value “How much the customer is prepared to pay for it”

The value to each customer depends upon

their specific situation

You “the seller” have bought 10,000 barrels of crude oil

You have identified three potential “buyers” for the oil A commodity trader The owner of an oil refinery A Middle-Eastern Sheikh

Who will you sell your oil to?

The Seller

You, the “seller”, have bought 10,000 barrels of crude oil at a price of $90 per barrel

Q. What is the cost of the crude oil to you?

$900,000

Q. What would be an acceptable profit for the sale of 10,000 barrels?

$ 50,000 (~ 5% profit)

Q. At what price ($ per barrel) should you aim to sell the crude oil?

$95 per barrel

Buyer 1 The Commodity Trader

Situation

The trader wants to make a quick profit – he see the oil as a tradable asset

He does have expertise in oil so knows that the current value of oil is $100 per barrel, but is constantly rising allowing him to make a profit

Q. If he offers $100 per barrel how much will this cost him?

$1M

Q. If the seller accepts $100 per barrel what would his profit be?

$100,000

But the trader says that he can’t get the money until tomorrow…!

Take a deposit

Negotiate a percentage of his profits

Buyer 2The Owner of an Oil Refinery

Situation

The oil refinery has the capability to refine the oil into more valuable products with a final market value of $200 per barrel

Q. What is the total market value of the refined barrels of oil?

$2M

Of the refined products it costs the refinery:

10% of the market value for the refining process

5% of the market value for marketing and distribution

10% of the market value in sales tax

Q. What are the total costs (inc. taxes) payable by the refinery?

$500,000

Q. If the oil was bought for $100 per barrel, how much profit will the refinery make from the 10,000 barrels of crude oil?

$500,000

$200,000

$100,000$200,000

Buyer 3 The Sheikh

Situation

The Sheikh owns one of the largest oil reserves in the world – 10,000 barrels is insignificant to him

It costs him:

$5 per barrel to lift his oil from the ground

$5 per barrel to drill for new oil supplies

$10 per barrel in taxes

$10 per barrel in marketing, distribution and other costs

Q. What is the Sheikh’s breakeven cost per barrel of crude oil?

$30

Q. Will he buy your crude oil at a price which is acceptable to you?

No

Who would you sell to at this point…?

It is most likely that you would sell to the oil refinery at this point

Gives you a profit of $100,000 which is greater than your target of $50,000 There is room for further negotiation to enhance this (i.e. cut into their profit) They have the money to give you unlike the commodity trader

Before buying the oil, the owner of the oil refinery

insists upon testing the crude oil for quality….

These tests showed that what you thought was crude

oil was in fact refined aviation fuel

Situation

The oil refinery sells refined aviation fuel at a price of $140 per barrel

It will still cost $20 per barrel for them to sell the fuel (marketing and tax)

Q. What is the total market value of the refined barrels of fuel?

$1.4M

Q. What are the total costs (inc. taxes) payable by the refinery?

$200,000

Q. If the fuel was bought for $100 per barrel, how much profit will the refinery make from the 10,000 barrels of aviation fuel?

Cost $1M + $200,000

Value $1.4M

Profit $200,000

Buyer 2The Owner of an Oil Refinery

Situation

The trader does not have expertise in aviation fuel so he does not know the current value of this product. He will not pay more than $100 per barrel

But he now has the money available

Q. If the trader offers $100 per barrel how much will this cost him?

$1M

Q. If you, the “seller” accept $100 per barrel what would your profit be?

$100,000

Q. The value of aviation fuel is in fact $140 per barrel – what would the traders profit be if he sold at this price?

$400,000

Buyer 1 The Commodity Trader

Situation

While the Sheikh had no interest in your crude oil, he does however own his own private jet. He buys aviation fuel at a price of $140 per barrel

To him 10,000 barrels has the value of $1.4M

Q. The Sheikh would happily pay $130 per barrel. What is the total cost to him?

$1.3M

Q. How much money will this save the Sheikh?

$100,000

Q. What would your profit as the “seller” be on this sale?

$400,000

You would sell to the Sheikh

Buyer 3 The Sheikh

Summary – Cost, Price and Value

Many factors affect the cost, price and value of an item

Customers are buying the (perceived) benefits of the products

not the products themselves

Consider: The buyers criteria The sellers criteria The product criteria

Understanding of the buyer’s, seller’s & product’s criteria is key to securing the best deal and maximising your financial return – this may require considerable research

Managing RiskSuccessful innovation is about managing risk

Risk is made up of commercial and technical unknowns

Commercial Unknown (Market Need) How well do we understand our market?

Technical Unknown (Your Capability) Are we sure we can develop, manufacture and distribute the product? How strong is the threat that our competitors will get there first? How well does it fit with our existing business activities? What additional resources will we need?

You need to balance the risk against the potential reward and your commitment (time and £) – this involves investment

Risk, Reward & Investment…An Example“When this building was built, a metal box containing cash was buried under the grass outside….”

Q. Would you go and find the box?

A. No. There is high risk that you may not find the box and the reward is unknown

What if I told you the box contained £500,000?

A. Yes you would look, but still there is a high risk that you may not find the box

What if I gave you £200, how could you improve this situation?

A. Invest the £200 in a metal detector and a spade – this decreases the risk giving you a better chance of finding the £500,000

Risk and Investment

The result of good risk management is that as we increase investment, the risk decreases rapidly

Investment comes in many forms e.g. capital (£), your time and resources

RiskLevel

Investment

Good

Bad

How to Gain Investment

Who are typical investors? Founders of the company Family members Employers Banks Business Angels & Venture Capitalists

What do investors typically look for Strong management team Proposal with sustainable competitive advantage

Intellectual property rights, patents and freedom-to-operate Growth markets An exit strategy

This will all have to be demonstrated in your business plan

Every Investor Has Different Needs

Banks Regular interest repayments, trading business, personal guarantees

Venture Capitalists (VC)

Shareholder, board position or appoint a Director, will take a business from A to B and want a exit strategy agreed at the start of the investment

It is important to understand your investorA VC is looking to make a 10x return on their investment in 5 years

An exit strategy is very important as this is how they get their money back

Tailor your proposal to the investor you are targeting

Key Financial ReportsProfit/Loss Statement (shows past performance) – like a bank statement

Shows the performance of the business over a given time period

The Profit/Loss = Total Income – Total Expenditure

Balance Sheet (shows present position)

The balance sheet is a summary of the financial balances of a business on a specific date, such as the end of the financial year. It typically includes a list of the business assets, liabilities and ownership equity

Cash Flow Forecast (shows future liquidity)

Describes the short-term cash requirements of a business to ensure the future availability of a suitable quantity of liquid cash

Liquid (available) cash = cash in the bank + short-term investments – short-term debts (e.g. bills, payroll)

Why are these Important?

Investors will look at each of these financial reports to assess if a business is a viable and ‘safe’ investment

These repots show: The past performance of the business (Profit/Loss Statement) The current financial position of the business (Balance Sheet) The ability of the business to stay afloat (Cash Flow Forecast)

Many businesses make a profit but fail because they run out of CASH to pay running expenses (e.g. invoices, salaries and make purchases)

“CASH IS KING”Without cash your business can’t operate

Summary – Finance & Reward

Reward = Money taken vs Outgoings over time Is it worth it??

Managing risk is critical to the success of your business Risk can be reduced to an acceptable level through investment

Investors are different, but they look for similar things in your business plan

Accurate financial information is one of the keys to gaining investment

Methods of Commercialisation

In-House Commercialisation

(Owning a house and living in it) Develop and sell a product through the inventors existing company Inventor must have access to the required capability and market

Advantages Retain full control and maximises the inventors reward Potential for Rapid development

Disadvantages Bear all risk, costs & effort Not the core business

Joint Venture – i.e. Find a Partner

(Sharing a house) Inventor has some capability and access to market Partners have the missing elements

Advantages Share of risk, costs & effort

Disadvantages Need to find appropriate partners Some loss of control Sharing of the reward

Licensing Your Product / IP to a 3rd Party

(Renting a house) Inventor has little capability or access to market License the intellectual property to another party

Advantages Licensee bears all the risk Minimal input from the inventor Cash immediately & on-going royalties

Disadvantages Need to find appropriate partners Loss of control Lower share of reward

Assignment of your IP

(Selling a house) Inventor has no capability or access to market Sell the intellectual property to another party

Advantages Cash immediately No risk

Disadvantages Loss of IP No further share of reward

Form Your Own Company

(Building your own house) Inventor assembles capability (acquisition or investment) Inventor has credibility, drive and commitment to succeed Reward must be high enough to warrant the effort, investment & risk

Advantages High reward for the inventor Retain control

Disadvantages High risk Huge investment of time and effort

Summary - Commercialisation

There are several methods of commercialising an idea:

In-house development Joint venture License your IP Assign your IP Form your own company

It is key that you choose the method which…

MAKES YOU THE MOST MONEY!!

Now Back To Your Business Plan…. Title, legal notices, company details etc. Executive Summary The Proposition – description of the product/service/technology Market Research – size, structure, drivers and competition Market Validation – proof the customer will buy and at your price Marketing Plan – how you will get your product to the customer

Advertising, PR, promotion, sales, sales forecast Beating the competition, IP protection, patents

Operational Plan – the nuts and bolts of your business Manufacturing, distribution, premises, personnel, management

team etc. Exit Strategy – timescale, forecast etc. Financial Plan – cash flow, P&L, balance sheet, investment needed

and when Appendices – full CVs of management team, external reports etc.

MARKETNEED

CAPABILITY

REWARD

AuthorsDr. Trevor Farren, Dr. Simon Mosey & Dr. William Drewe

OrganisationSchool of Chemistry, University of Nottingham, U.K.

Supported by: