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From .com to .profit: Inventing Business Models That Deliver Value And Profit

From .com to .profit

Inventing Business Models That Deliver Value And Profit

By Nick Earle and Peter Keen

From .com to .profit: Inventing Business Models That Deliver Value And Profit is a thought-provoking book for entrepreneurs who want to build major, Internet-based businesses or who want to understand more about the business models of larger, Internet-focused companies.

Earle and Keen write that: "A business model is the basic blueprint for a company, into which it fits its Internet business priorities, strategic plans, and execution." A business model is simply a way of doing business, which will hopefully convey advantages to a company. Where can a company gain competitive advantages? What must a company do so that it is not at a disadvantage relative to the competition?

The authors discuss six "value imperatives," which they feel successful Internet companies must have in their business models. These imperatives are:

  1. "Perfect Your Logistics"
  2. "Cultivate Your long-term relationships"
  3. "Harmonize your channels [of distribution] on behalf of the customer"
  4. "Build A Power Brand"
  5. "Transform Your Capital And Cost Structures"
  6. "Become a value-adding intermediary"

From .com to .profit devotes a chapter to each topic. The book gives many examples of companies adopting the imperative. One of my favorite chapters was "Perfect Your Logistics," where Earle and Keen give many examples of how companies have used the Internet to save money and significantly reduce their operating costs. The Internet allows companies to be more efficient.

Earle and Keen tell us The National Purchasing Association estimate that it costs about $150 to process a purchasing order at a larger company, while online the cost is only about $25.

Boeing, which created PART, a web site for its spare parts suppliers, is saving money this way. Earle and Keen point out, while online part-ordering currently only accounts for 13% of Boeing's part orders, Boeing has reduced its overall order processing costs by 25% via PART.

Further, Earle and Keen say that cost savings are relatively small compared to the other advantages of PART. Parts are shipped faster, lessening aircraft downtime. The errors in parts orders have been substantially reduced. Customer relationships are improved. The Internet is replacing EDI (Electronic Date Interchange) as the way for companies to communicate and work with their suppliers.

Earle and Keen say that improvements in logistics will be a huge advantage of the Internet. While consumer-based Internet companies have captured the most public awareness, the biggest benefit of the Internet to businesses will be greatly increased efficiency in doing mundane things, such as ordering paper clips. Business-to-business transactions will probably create more savings and opportunities than business-to-consumer transactions.

From .com to .profit does an excellent job discussing business-to-business hubs and portals (web sites where businesses can come to broker supplies and services).

"There's growing evidence that the next era of Internet businesses will be dominated by hubs: power brand portals and intermediaries. It will be they that control the interaction between suppliers and customers as dynamic brokers, information coordinators, trusted third-party advisors (value-adding intermediaries), and they that will be the places where customers choose to park on the web (portals). ... Everyone else will be a spoke into hubs," write Earle and Keen.

To be successful, sites must be value-adding and not value-taking. Earle and Keen wisely observe that "The Internet also eliminates the edge that a number of industries have used for decades in controlling prices: the information gap between buyer and seller. Even ten years ago, it was very hard for someone to find out, say, the best price on a car with specific features, the best deal on a flight, or the best variable life insurance coverage. The auto dealer, travel agent, and insurance agent had better information than the customer. In business-to-business dealings, brokers and distributors similarly could base their fees and commissions on the information gap between providers and customers."

Too many present intermediaries are value-taking, getting high commissions for no added value or service. One site that I like as an example of an excellent consumer portal-hub is bankrate.com which allows consumers to hunt for the best mortgage rates in their state. Such sites will, by no means, always find a customer the best value. But, they are a definite improvement over the phone!

The book's discussions of branding, value-added intermediation, partnerships, and relationship building are also excellent. "Collaborate or die. Build relationships or die. Reach communities or die," say Earle and Keen.

However, there is also much to disagree with in From .com to .profit. For example, Earle and Keen claim that money spent on marketing is a form of capital investment, so the authors claim that it should be capitalized from an accounting standpoint.

"Internet players' investments in marketing and infrastructure... are the capital investments today that generates tomorrow's value. As long as investors see the value path, they'll bid up the company's valuation. [Wanna bet?] As many commentators have pointed out, Amazon, which spends over 20 percent of its revenues on marketing-more than it spends on technology-could become 'profitable' in the accounting sense of the term in six months or so; all it has to do is stop spending money on marketing. Would it be a stronger company if it did this? The jury is out. ..." write Earle and Keen.

However, "investments" in marketing have a highly dubious payoff. Who's to say Brand X will dominate Brand Y, when both are spending wildly? While it is possible marketing will lead to a powerful brand, it is probably equally possible the money spent will lead to no advantage.

The rule of accounting conservatism says that dubious "investments" must be expensed and not capitalized. That way they don't appear as valuable assets on the books, when in fact, there is no value. (This is true for money spent on research and development [R&D] in technology and medical companies, also. The payoff from the investment is just too speculative to capitalize.) This accounting convention is necessary to protect investors from companies which claim great internal wealth exists where it doesn't.

Earle and Keen go on to say: "Ironically, it may be in Amazon's and other expanding firm's interests that marketing costs are an expense. If it were able to capitalize them, it would become profitable earlier than it would otherwise be under existing accounting rules. But, that would mean it would pay taxes on those profits. Instead, it's able to retain the cash flow surplus from its operations."

This has an element of truth. But, from the investor's standpoint, there have been far too many companies in the past which have been "tax-efficiently" losing money to "create" wealth in the future, claiming the same argument, right up until the company's bankruptcy.

Similarly, Earle and Keen write in their Chapter, "Transform Your Capital And Cost Structures" the following: "Acknowledge the Internet's capital revolution and move toward negative working capital. ... Show a path to .profit that establishes a Price/Vision premium in investors' valuation of the company's future, so that you can obtain the investment capital needed to be a major player in the upcoming Internet eras."

The Chapter might better be titled, "How To Trick Investors Into Giving You Their Money, So You Can Get Rich Without Creating Anything Of Value." The logical argument in From .com to .profit is pure B.S here. The Internet has not created a "capital revolution." It has created an investment mania.

Earle and Keen go on to glibly write, "There is no correlation over the longer term between market value and any standard accounting measure of profitability. ..." Ah, can we have some evidence, please? This seems an incredibly silly remark to make without supporting evidence! Unprofitable companies over the long-term tend to disappear from the stock market.

The authors observe that once you have highly-valued stock, it can be used as currency to acquire intellectual capital and other assets of real worth. This is true. And, as Earle and Keen point out, not having highly-valued shares to trade for intellectual capital is a disadvantage of privately-held companies. But, let's not legitimize funny money as a way to build a business!

In short, I believe what Earle and Keen write to justify the reasonableness of the ultra-high valuations the stock market has given to new, untested, Internet companies is seriously flawed. The market is not focusing upon Price/Vision of the business model in a rational, long-term view as the authors claim. Rational Price/Vision valuations on Internet companies would not drop as drastically as they have recently. For the vision and the opportunities haven't changed. So, investors should ignore the logic of stock valuations given in From .com to .profit: Inventing Business Models That Deliver Value And Profit.

Overall, From .com to .profit: Inventing Business Models That Deliver Value And Profit offers a lot of great insight into business models and into what separates customer-focused, successful business operations from less successful operations, making it worth a read.

From .com to .profit: Inventing Business Models That Deliver Value And Profit
From .com to .profit:
Inventing Business Models That Deliver Value And Profit

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