Dramatic Challenge to Barnes & Nobles Business Model

This one of the most vivid examples of challenges to the existing business model of a firm. The Wall Street Journal reports:

After nearly 17 years of consistent growth, Barnes & Noble is stumbling. Revenue fell 3% to $5.12 billion for the fiscal year ended Jan. 31, 2009, while earnings dropped about 45% to $76 million.

When it launched the iPad last month, Apple championed a new approach to e-book pricing. Earlier this year, most large publishers agreed to establish a so-called agency model, where the publisher receives 70% of the digital price while e-book sellers act as agents and receive 30%. While some best sellers remain at $9.99, many major authors are priced at $12.99 or $14.99.

More...

Google’s New Search Homepage: Integrating Quantitative and Qualitative Data as well as Intuitions

Duplicity

Rarely is a Hollywood movie such a great teaching instrument. Duplicity gives a wonderful picture of how far large companies go in figuring out what their competition is up to. What’s more, the principles of game theory are very well illustrated by Julia Roberts and Clive Owen, who make a wonderful pair. I recommend that every Strategic Management student watch this film.

Rolls-Royce: Transforming its Jet-Engine Business Model

The Economist reports how Rolls-Royse figured out a different way to make money in the jet engine business:
The big pay-off from getting engines under more wings comes from selling spares and servicing them. This is because selling aircraft engines is like selling razors. The razor and engine make little if any profit; that comes later, from blades or spare parts and servicing (see chart 3). Gross margins from rebuilding engines are thought to be about 35%; analysts at Credit Suisse, an investment bank, estimate that some makers of jet engines get about seven times as much revenue from servicing and selling spare parts as they do from selling engines. Many analysts suspect that Rolls-Royce (and others) sell engines at a loss. Judging this is hard, though, because of the way Rolls-Royce accounts for long-term contracts, often by booking a profit on the sale for income that will be received only over many years. Rolls-Royce says that, on average, engines are sold at a profit. The trouble with selling razors at a loss is that someone else may make the blades to fit them. And the juicy margins in engine maintenance have indeed attracted a swarm of independent servicing firms (and engine-makers after each other’s business).

More...

What the Financial Crisis Taught us about Human Decision Making

David Brooks writes in the NY Times:
Once there was just Newtonian physics and the world seemed neat and mechanical. Then quantum physics came along and revealed that deep down things are much weirder than they seem. Something similar is now happening with public policy.Once, classical economics dominated policy thinking. The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior. Markets tend toward efficiency. People respond in pretty straightforward ways to incentives. The invisible hand forms a spontaneous, dynamic order. Economic behavior can be accurately predicted through elegant models. This view explains a lot, but not the current financial crisis — how so many people could be so stupid, incompetent and self-destructive all at once. The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it front and center. In this new body of thought, you get a very different picture of human nature. Reason is not like a rider atop a horse. Instead, each person’s mind contains a panoply of instincts, strategies, intuitions, emotions, memories and habits, which vie for supremacy. An irregular, idiosyncratic and largely unconscious process determines which of these internal players gets to control behavior at any instant.

More...