A warning: This is one of my least favorite chapters in the text because it is so disjointed. If you look at the bottom of the first page, you see this is pulled from one of Applegate’s papers. It may have been a good paper, but it is an odd chapter.
What is the chapter about?
What do those three topics have in common? I am still wondering about that. Nevertheless, there are some key points in each section that I would recommend.
We all understand the industrial model at a visceral level. While the network business model is still evolving, there are two key points in this section of the book. First, economies of scope are vastly improved for network companies (the Covisint example), but there are limits (the trouble Amazon had when it tried to move past books to other kinds of retail). Second, economies of scale follow a different growth curve. The long quotation on the bottom of page 268 and top of 269 is interesting reading. If 40% of the market provides no value to you, this is a different ballgame. Give me 40% of an industrial market and I would be one happy man.
Much of this section seems like a rehash of the last chapter. I can’t figure out how it fits in this chapter. If anyone has suggestions as to its purpose, I would love to hear them.
As a lifelong computer nerd, this is my favorite part of the chapter. I can sum it up quickly – we are cool, give us money. As a professor, however, and therefore someone who is supposed to be objective (and boring), I am a bit disappointed that the authors would present only examples of real homeruns enabled with IT and not mention any of the companies that are still pouring money into IT projects that will never make a return on the investment.
Lastly, if you haven’t yet taken your graduate finance course, or have trouble remembering some of the terms, you may want to look at the appendices on valuation, especially 4B. Since EBITDA is in the business news every day, a reminder of how it is calculated may be useful.
What should we talk about this week? Lets apply five pages of the chapter to the Internet Securities case. Pages 264-269 describe economies of scale and scope. Put yourself in the position of the founders of Internet Securities.
Caution – while I am asking chapter questions about the case, if you do a case memo this week, continue to use the standard issues/recommendations format, not these three questions.