ic_excursion Excursion 4

A new "business model" for value creation? Lessons of the dot-com crash.

The "business model" was, as academics might say, a “term of art.” It had entered the language of management practice as a way for business people to refer to firm-level value creation while at the same time taking into account certain high-level operational patterns. But it clearly meant different things in different contexts to different people. And the advent of the internet, and so-called “e-businesses,” would turn the nascent conversation about business models into a Tower of Babel.

Otherwise very smart and insightful people began suggesting that some internet companies portended the advent of a “new economy” utilizing entirely new business models. Firms using these new business models couldn’t be valued using traditional metrics (such as profits, growth, or other standard financial ratios). In a December 1999 HBR article explicitly about “The New Economy is Stronger than You Think” eminent Harvard Professor William Sahlman argued that internet-based cost reductions would lead some companies “to go one step beyond free and start paying people to use products or services” because the “combination of entrepreneurship and the Internet has allowed new economy companies to achieve those very efficient business models they were after.

Sahlman suggested that inflated stock prices for dot-com companies were entirely justified, and the only thing in the way of effectively indefinite growth was government regulation or higher interest rates.

The nay sayers of the new economy argue that the stock market has run amok and that doom looms ahead. Yet from a different perspective, the "irrational exuberance" of the stock market has actually played an important role in increasing productivity and decreasing inflation. Why? The more money that flows into the disruptive companies of the new economy, the better the new economy's inefficiency-busting, inflation-crushing model works. Sahlman

The peak of the dot-com bubble was only 3 months away; global stock markets would proceed to shed approximately $5 trillion of value between March 2000 and October 2002. While Sahlman was clearly right about the long-term potential for growth and internet-based businesses, it seems likely that the article placed too much emphasis on the idea of a new “business model” freeing firms from traditional measures of value.

"Buy the book! Amazon.com or Amazon.co.uk"

Here is the link to the book on Amazon.com:
and on Amazon.co.uk: