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Do or die: reinventing business models for the digital world [Part 2 of 3]

This blog is the second part of a three-part series. Click to read Part 1 and Part 3.

Who’s in the crosshairs?

A brand once associated with family entertainment and a cozy Saturday night in is now a prime example of an incumbent unseeded by digital disruption. Of course, that brand is Blockbuster. Netflix, the disruptor, has become such a force that it has become a millennial colloquialism – “Netflix?” is now synonymous with entertainment.

Blockbuster’s decline and Netflix’ rise to cultural phenomenon is no accident; rather, it is the byproduct of timing, execution, and circumstance. Could Blockbuster have seen this coming? As Columbia Business School professor Rita Gunter McGrath shows through her research, companies like Blockbuster certainly can see it coming if they track three key signals:

  1. Boldness of innovation
  2. Emerging innovative substitutes
  3. Financial performance

1. Boldness of Innovation

To be bold in innovation means exploring new technologies, business models, and markets to deliver a whole new experience and grow the business. Products of serious innovation “wow” their users and elevate their brands to household names synonymous with their product (think Kleenex).

If your company’s R&D efforts are producing product after product that fails to “wow” customers and push the envelope of what’s possible, chances are you are not making bold attempts at innovation and are leaving the door open for incumbents and challengers to eat your lunch.

Take Blockbuster for example, it had just renegotiated its agreements with the movie studios and positioned itself for better margins when Netflix came on the scene. At that time, the mass commercialization of DVD technology allowed for a product that was cheaper, more user friendly, and perhaps most importantly, allowed opportunities to expand to a home delivery model.

Unfortunately, Blockbuster doubled-down on their existing model instead and added onerous late-fees to drive revenue, instead of exploring new innovative offerings now possible with DVD technology.

The crosshairs were beginning to wave over Blockbuster…

2. Emerging Innovative Substitutes

Substitutes exist for almost every good product or service on the market, from the personal computer to public transportation to dish soap, there exists a product or service that competes to meet customer needs. However, when substitutes to your product become particularly innovative, think Uber to yellow cabs, attention and investment are needed.

To return to the story of the once-formidable Blockbuster, when Netflix came knocking at its door in 2000 for an opportunity to collaborate and create an online presence, Blockbuster declined, dismissing the threat of the online model to their traditional, time-tested business.

Before long, however, Netflix established a serious business which allowed customers to skip the store and get their DVDs without leaving their home, giving customers a better experience, better product, at a better cost. Another company to join the mix was Redbox, a DVD rental vending machine placed in grocery stores and fast food restaurants offering the access of Blockbuster without the overhead for only a $1 a day. These new, innovative competitors took a vastly different spin on the movie rental model that Blockbuster was so determined to defend.

The crosshairs were zeroed in on Blockbuster…

3. Financial Performance

Profit and revenue are undeniably the objectives of all companies (non-profits aside). However, when companies are at the top of their game, making money hand over fist based on tried and true models, they are significantly vulnerable to disruption.

In the world of digital disruption, even companies with enduring peaks of profit / revenue are not immune. Being on top is actually a top indicator for being disrupted! When you are making money easily, it’s easy to dismiss the need for significant, often revenue-cannibalizing innovation.

Blockbuster was a victim of the “winner’s curse” in the midst of its growth saga of the early 2000’s. Blockbuster was at its peak revenue in 2004 and focused on what it did best, stay the course and cut cost.

Meanwhile, challenger Netflix was busy refining its online delivery model and slowly began tipping the scale. Blockbuster’s then-CEO John Antioco, was keen enough to recognize that the company was in the crosshairs and about suffer the consequences.

As we would expect a seasoned veteran to do, Antioco put forth a bold plan to cannibalize revenue and increase R&D to compete with Netflix in the online arena. Unfortunately for Blockbuster, Antioco’s plan was cut short as Antioco was let go after a series of struggles with management who didn’t see eye-to-eye. The rest is history.

Blockbuster fell victim to digital disruption as it saw Netflix’ market share skyrocket and its sales plummet. Had management paid attention to the three key indicators of digital disruption, as Antioco had, perhaps Blockbuster would still be around today and we would be telling a very different story.

Certainly, some companies do survive digital disruption and thrive in the face of competition. We now know what these companies need to be aware of, but how do they define a strategy for success and execute it to stay on top?

We’ll showcase these and other traits of “innovative incumbents” in Part 3 of ‘Do or die: reinventing business models for the digital age’.

About the author

Chase Croft and Edan Golomb
Chase Croft and Edan Golomb
Chase Croft :

Chase is a Senior Consultant based in New York City. He specializes in business unit transformations, analytics, and innovation with extensive experience in financial services and energy.

Edan Golomb :

Edan is a Consultant based in New York City. He is experienced in global financial services and pharmaceuticals and specializes in transformation program design, governance design, and process improvement.

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