Discussion: please post a short summary of your economic model (or the entire Excel file) so that others may learn from your plan and provide feedback. Please begin this post with a one or two sentence overview of what your project is in order that others can more easily make a connection.
Assignment: Note – It is highly advised that you carefully read Chapter 13, Economic and Strategic Value in the textbook, Doing by Learning, before beginning this assignment. Doing so will provide perspective on how to quantify the value to your project and monetize incremental revenue (or avoided costs) and incremental costs (or lost revenue) to demonstrate your project’s true value.
Overview
One of your most important skills as an MBA graduate is the ability to define value. Doing so allows you to truly integrate elements of Accounting, Economics, Forecasting, Operations, Strategy, Capital Budgeting, and your own intuition.
Incremental Value
This week, you are asked to build an Economic Model of your proposed change or new business idea. Your analysis needs to be specific to your project and clearly show the incremental value as a result of your project. Said another way, it is generally not acceptable to submit a departmental or your organization’s annual income statement. This model is your opportunity to think concretely and in detail about the change resulting from your project.
General Process
This begins with identifying either increased revenues or lowered costs. In either case, there is always some measurable positive change that needs to be estimated before being monetized. Identify what will change, how to measure those changes, and add dollars to them. Look wide and deep for any positive changes that might be included. Think of positive changes as “revenue.”
After estimating the revenue, it is time to think about your costs. Virtually every change has costs associated with it, so be sure to think things through from all aspects of the organization. Again, ask yourself what the changes are, how they will be measured, and then attach dollars to them. Think of these as your costs, even if they are very indirectly related to your change.
Both your revenues (positive changes) and costs of your proposed change need to be bundled into a "model" of how your change will play out over time, typically about three years. The end result is that your model will show the economic value or net benefit that is created by your change.
You may be thinking that many of your numbers are not actual or even “hard” numbers based on well-documented forecasts.
For now, it is more important that you have a model with reasonable assumptions that can be changed over time. Remember that any new project, by definition, has little historical data associated with it. Your numbers need to start with the best assumptions available and will be subject to change based on new information and through negotiation. What is most important is to have a model that represents your best guess at how things will play out. This is especially true if your project is entrepreneurial!
Format
Because you are quantifying value, this assignment should be done as a worksheet in either Excel (preferred) or Google Sheets. If Google Sheets is used, you should download, save, and submit as a file in Canvas. Many students prefer to take the key information from their Excel model and also include a short write-up in a Word document, as well. If you feel better about your work with this included, you should know that this isn't wasted effort, since it's needed for your final report anyway.
A good rule of thumb is that a model such as this should be able to stand alone. By that, I mean that the file’s recipient (instructor or other stakeholder) should be able to open up the file and make sense of what it is you are trying to convey in the absence of any written document (just looking at the worksheet). This means that you should document what each line is, label column headings, and structure the tables or other information so that it looks "readable." The worksheet’s professionalism, like good writing, is important.
Excel Tips
If you haven't done much work in Excel, you should know that, despite being called an “Economic Model”, it doesn't need to be complicated. That said, it should be designed to allow some flexibility to change assumptions, scenario planning, etc. Consider putting any assumptions about changes or costs in an input area, and then have your calculations and final summary tables as separate areas.
Draft is not Final
This is a DRAFT document, and my goal is simple: to get you up and running with an Economic Model now, so I can provide feedback at about the mid-point of the term. This way, you have time to revise it and get subsequent feedback from me over the next few weeks. The process of structuring your thinking, collecting/creating quantitative data to support your project, and assembling all of the pieces into a model is extremely important to your learning at this point in developing your Capstone.
Stress and Coaching
Unfortunately, for many students, the Economic Model is one of the most stress-producing elements of the Capstone, but it doesn't have to be! By doing a Draft now, without the pressure of the end of the term around the corner, I hope to reduce that stress considerably. Consider this assignment as an opportunity for some coaching and mentoring rather than as something to be "graded." Also, if you have a "Draft of your Draft" early in the week (or anytime) before the due date and would like some preliminary feedback, just send it my way via the Canvas email.
That's all for now!