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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Business model innovation is the new strategic imperative for all leaders
Blockbuster's executives saw Netflix coming. Yet they stuck with their bricks and mortar business model, losing billions in shareholder value. They were "netflixed." Business models don't last as long as they used to. Historically CEO's have managed a single business model over their entire careers. Today, all organizations must be capable of designing, prototyping, and experimenting with new business models. The Business Model Innovation Factory provides leaders with the survival skills to create a pipeline of new business models in the face of disruptive markets and competition.
Avoid being netflixed. Your organization must be a business model innovator to stay competitive in today's turbulent world.
- Author Saul Kaplan is the founder and chief catalyst of the Business Innovation Factory (BIF), a real world laboratory for exploring and testing new business models and social systems. BIF has attracted a global community of over five thousand innovators and organizes the internationally renowned BIF Collaborative Innovation Summit
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Seitenzahl: 322
Veröffentlichungsjahr: 2012
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Contents
Cover
Praise for The Business Model Innovation Factory
Title Page
Copyright
Dedication
Acknowledgments
Introduction
Part I: What You Have Always Done Isn't Working Anymore
Chapter 1: Don't Get Netflixed: Your Current Business Model Isn't Going to Last Much Longer
Blockbuster Gets Netflixed
Even Netflix Is in Danger of Being Netflixed
Chapter 2: Business Models 101: Creating, Delivering, and Capturing Value
How Does Your Company Create Value?
How Does Your Organization Deliver Value?
How Does Your Organization Capture Value?
Putting the Entire Business Model Story Together
Chapter 3: Why Organizations Fail at Business Model Innovation
10 Reasons Companies Fail at Business Model Innovation
Part II: Connect, Inspire, Transform: 15 Business Model Innovation Principles
Connect: Business Model Innovation Is a Team Sport
Inspire: We Do What We Are Passionate About
Transform: Incremental Change Isn't Working
Chapter 4: Connect: Business Model Innovation Is a Team Sport
Principle 1. Catalyze Something Bigger Than Yourself
Principle 2. Enable Random Collisions of Unusual Suspects
Principle 3. Collaborative Innovation Is the Mantra
Principle 4. Build Purposeful Networks
Principle 5. Together, We Can Design Our Future
Chapter 5: Inspire: We Do What We Are Passionate About
Principle 6. Stories Can Change the World
Principle 7. Make Systems-Level Thinking Sexy
Principle 8. Transformation Is Itself a Creative Act
Principle 9. Passion Rules—Exceed Your Own Expectations
Principle 10. Be Inspiration Accelerators
Chapter 6: Transform: Incremental Change Isn't Working
Principle 11. Tweaks Won't Do It
Principle 12. Experiment All the Time
Principle 13. Off the Whiteboard and into the Real World
Principle 14. It's a User-centered World—Design for It
Principle 15. A Decade Is a Terrible Thing to Waste
Part III: Creating a Business Model Innovation Factory
Chapter 7 :R&D for New Business Models
Innovate through Connected Adjacencies
Chapter 8: Leading and Organizing a Business Model Innovation Factory
Staffing a Business Model Innovation Factory
Skills and Experience to Staff a Business Model Innovation Factory
Wanted: Business Model Designers
Resourcing a Business Model Innovation Factory
Overcoming the Politics of Business Model Innovation
Chapter 9: Experimenting with Business Models in the Real World
Give Me Rhode Island
A Better Place
Putting the Customer in the Business Model Driver Seat
Part IV: Business Models Aren't Just for Business
Chapter 10: Nonprofits Have Business Models Too
Chapter 11: R&D for New Social Systems
Measure Innovation Outputs
Education Rant
Chapter 12: What's Your Personal Business Model?
Stay on a Steep Learning Curve
Embrace Vulnerability
Blessing and a Curse
About The Author
Index
Praise for The Business Model Innovation Factory
“Saul understands the scale of change needed in our times and the ways to breakthrough innovation. The creative skills that will carry us there will come from design-centered approaches instead of traditional business ones.”
—John Maeda, President, Rhode Island School ofDesign and author, The Laws of Simplicity
“This is a timely and compelling book. It shows us a path in pursuit of a more powerful form of innovation that has been largely ignored by executives. We will continue to ignore it at our peril. This book shows us how to turn mounting pressure into expanding opportunities for value creation and value capture.”
—John Hagel, co-author of The Power of Pull andco-chairman of the Center for the Edge
“Over the years Saul has brought together an amazing band of innovators to explore the nature, content, and direction of their work. Anybody interested in innovation has benefited enormously from his work. Now he presents us with what is certain to end up a well-thumbed “bible” of innovation of all kinds. The world needs this book!”
—Len Schlesinger, President, Babson College
“Every year I look forward to attending Saul Kaplan's incredible Business Innovation Factory conference to learn more about creativity, innovation, and the wonderful art of storytelling. Now Saul is bringing together those stories plus all his real-world experience as a full-fledged entrepreneur, government policy-maker, and “innovation junkie” to offer us the gift of a remarkable book. Saul is dead-on in saying that incremental innovation won't hack it in the twenty-first century. Every CEO needs a business model innovation factory.”
—Bruce Nussbaum, former Assistant Managing Editor,Businessweek and Professor of Innovationand Design at Parsons School of Design
“In established corporations, disruption has been like the weather—incessantly discussed, never deployed. Now Saul Kaplan—plainspoken, practical, and pugnacious—documents the principles, the tools, and the stories that prove business model change can be part of an organization's repertoire. This is the handbook for those who will no longer settle for the incremental.”
—Chris Myer, founder, Monitor Talentand author, Standing on the Sun
“Forget episodic or incremental innovation. The Business Model Innovation Factory by Saul Kaplan shows how your future rests on business model innovation. Learn the 15 principles that are critical to success.”
—Stephen Denning, author of The Leader'sGuide to Radical Management
Copyright©2012 by Saul Kaplan. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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ISBN 978-1-118-14956-0 (cloth); ISBN 978-1-118-22590-5 (ebk);
ISBN 978-1-118-23914-8 (ebk); ISBN 978-1-118-26389-1 (ebk)
To my wife Susan,for encouraging this grateful innovation junkie
Acknowledgments
This book would not have been possible if it wasn't for the encouragement, insight, irreverence, and contributions of the entire Business Innovation Factory (BIF) team. As I write this everyone is waiting for a winning Power Ball ticket holder to step forward and claim a $336 million prize. I don't have the ticket. But even if I did I can honestly say that I would still gladly come to work every day at BIF. Our team of energetic, creative, and hardworking innovation junkies teach me what innovation really means every day. I am proud to be part of this incredible team and grateful that they humor me on this life-long journey to seek a better way. The lessons and insights in this book are really due to their efforts and great work. I'm just the messenger. My deepest gratitude to the BIF team:
I am also grateful to the entire BIF community of innovation junkies from around the world. Over the years I have been inspired by your optimism and passion to try new approaches. You have taught this dinosaur many new tricks and exposed me to a knowledge flow that allows me to learn every day. If the goal is to get better faster, you shine a light on the path and provide the not-so-subtle nudge to dare to try. There are far too many of you to mention by name. There have been over 200 storytellers willing to share their personal transformation stories at our annual Collaborative Innovation Summit. Over 2,000 participants have attended the summit bringing inspiration, joy, and hope for a better future, and many thousands more connected through social media platforms that keep the innovation conversation active, vibrant, and relevant. We have a steep learning curve ahead of us, but you provide me with a powerful sense of optimism that together we can change the world.
—Saul Kaplan
Introduction
Sometimes tweaks aren't enough. Sometimes nothing short of reinventing yourself, your organization, or your community is called for. The beginning of the twenty-first century is one of those times. If anything is certain about the new millennium, it's the pace of change. New technology relentlessly hurdles into our lives. Ideas and practices travel around the world at Internet speed. Social media enables individuals to self-organize and reorganize in ways unimaginable in the twentieth century. We also live in anxious times marked by economic uncertainty, but one thing is clear: relevancy is more fleeting than ever. How to stay relevant in a changing and uncertain world is one of the most important questions of our time.
Thriving in the midst of today's frenetic pace of change requires a new set of approaches and tools. Incremental change may have been enough at the end of an industrial era marked by “me-too” products and services, process reengineering, best practices, benchmarks, and continuous improvement. We have built institutions that are far better at share taking than at market making. We have become really good at tweaks. There are tons of books, experts, and tools to help us make marginal improvements in the way things work today and to fight it out with existing competitors for one more share point. But how do we become market makers? Incremental change may be necessary but it isn't sufficient for the twenty-first century, which will be defined by next practices, disruptive technologies, market making, and transformation.
The Business Model Innovation Factory is a book for all leaders who recognize that incremental change isn't enough. It's a book about transformation. It doesn't matter what type or size of organization or community you lead or aspire to lead. It could be a for-profit or nonprofit company, a school, or a government agency. It could be a nation, state, or city, or maybe even an online community. Or maybe you are one of a growing number of free agents working across projects and networks. Regardless of organization type or leadership role, all leaders need to learn the art and practice of transformation to stay relevant in a changing world. The most exciting and best opportunities require entirely new business models or ways to create, deliver, and capture value. The challenge all leaders face is how to reinvent a business model while the entire organization is working hard pedaling the bicycle of the current one. The twenty-first century screams for transformation, not tweaks. The Business Model Innovation Factory is a book for transformers.
I was inspired to write this book after spending thirty-plus years as an innovation junkie with every imaginable black and blue mark that comes from being a diehard change agent. I have been a student and innovation practitioner across the public and private sector, industries, and disciplines. I have observed hundreds of organizations and thousands of innovators attempt to do transformational things and settle for doing incremental things. The patterns are clear and the need for business model innovation seems obvious. I wrote this book to share my experience and ideas on how you can create a business model innovation factory to stay relevant in a changing world. The book is organized in four parts:
Part I
The book's first part establishes the basic building blocks of a business model and makes the case that business model innovation is the new strategic imperative. The goal for all leaders is to avoid being “netflixed.” If netflixed isn't a verb it should be! Blockbuster saw DVD technology and Netflix coming. The United States Postal Service saw e-mail coming. University presidents see online content and social media platforms changing the way students learn. Yet when faced with the obvious and growing threat of a disruptive competitor, organizations remain stuck in their current business models. It's amazing how few organizations can clearly articulate their business model. Can yours? If you ask any 10 people in your organization to describe your current business model, will the answers even be close? Most leaders know there are alternative and potentially better ways to create, deliver, and capture value but struggle with how to change their business models.
In the face of a serious disruptive threat most leaders do what they are comfortable with and know how to do—they strengthen and become even more entrenched in their current business models. They add new products and services to the current model, deploy technology to strengthen current capabilities, extend the current business model into new markets, and they try to create favorable laws and go to court to block new business models. These strategies may create value in the short-term but none of these efforts to strengthen existing business models are effective for long in the face of a disruptive competitor that is changing the way value is created, delivered, and captured through an entirely new business model. Disruption is now the norm instead of the exception.
Leaders could get away with blindly focusing on a single business model in the twentieth century, when business models rarely changed. Most industrial-era leaders never had to change their business model. One model worked throughout their entire careers. They could focus on improving their market position and competitiveness by making incremental improvements to the existing model. Disruptive threats were rare and could be safely ignored. Not so in the twenty-first century, when the half-life or longevity of a business model is decreasing. Business models just don't last as long as they used to. New players are rapidly emerging, enabled by disruptive technology, refusing to play by industrial-era rules. Business model innovators aren't constrained by existing business models. Business model innovation is becoming the new strategic imperative for all organization leaders. But how do you transform a business model while still living in the current one?
The book's second part provides innovators with a set of actionable principles to guide business model innovation efforts. It provides 15 actionable principles based on the observations of this innovation junkie throughout a 30-year career—practicing innovation while meandering across industry, consulting, government, and nonprofit leadership roles, and the over eight years of work with an incredible team at the Business Innovation Factory (BIF), a nonprofit I founded and lead as its Chief Catalyst, focusing on enabling real-world labs for business model and systems-level transformation. I have had the privilege of connecting, convening, exploring, and creating with some of the most inspiring innovators on the planet, and the principles of business model innovation detailed in this book come from this wonderful innovation journey.
Fifteen business model innovation principles are organized into three main themes: Connect, Inspire, Transform. Business model innovation is a team sport. It's bigger than any one of us. It's a collaborative act and connections are key. It requires all of us to build stronger collaboration muscle. The best value-creating opportunities are in the gray areas between us. We must become more comfortable in the gray area and get much better connecting across silos, disciplines, and sectors. The most exciting new business models are networks connecting capabilities across boundaries.
Successful business model innovators are inspiration accelerators. People excel at and commit to what they are passionate about. Transformation can only happen when people are committed to the hard work of change. People must be inspired and emotionally vested in cocreating a new future. Without inspiration business model innovation doesn't happen. The path to inspiration is through storytelling, one of the most important tools for any business model innovator. It's the best way to create emotional connections to new business model concepts and innovations.
Sharing stories is how to create a network of passionate supporters that can help make new business model ideas a reality. We remember stories. We relate to stories and they compel us to action. A business model is the story of how value is created, delivered, and captured.
Transformation is hard. We have to make it easier by creating the conditions for ongoing experimentation. It's easy to sketch a new business model on the whiteboard. It's much harder to take the concept off of the whiteboard and put it in to the real world. We spend far too much time thinking and planning and nowhere near enough time experimenting in the real world to see what works. We need to try more stuff. We can't possibly know if a new business model idea will work sitting in a conference room. We have to create the conditions in the real world where we can do R&D for new business models. If we want to stay relevant in the twenty-first century we have to experiment all the time. Leading organizations will have several business model experiments going on at all times.
New business model ideas come not by looking through the lens of the current business model, but by learning how to look through the lens of the customer. Transformational business models must be designed around ways to improve the customer experience, not around ways to improve the performance of the current business model. Business model innovation starts by bringing the voice and experience of the end-user into the center of an iterative design process.
When woven together, these 15 business model innovation principles provide guidelines to enable entirely new ways to create, deliver, and capture value. They enable transformation.
The book's third part provides an implementation road map to create a business model innovation factory. It answers the key operational questions: How do you conduct R&D for new business models? How can your organization establish a business model innovation factory? Business model innovation is the new strategic imperative and yet most leaders say they don't have the organizational capability to design, prototype, and test new business models.
Innovation is a better way to deliver value. Innovation is different than invention. It's only an innovation when it has actually delivered value or solved a problem in the real world. Invention is great but it's just an input to innovation. Innovation is about delivering value and requires a business model. Business model innovation is about new ways to create, deliver, and capture value. Many new business models don't require any invention at all. Often new business models just combine and recombine existing technologies and capabilities in different ways to change how value is delivered.
The real trick is creating a business model innovation factory where technologies and capabilities can be remixed in new combinations to deliver value. The imperative is to do R&D for new business models. Not just concepts on a whiteboard or in a consulting deck, but R&D in the real world to explore the viability of a new business model in real market conditions. Not just tweaks of the current business model, but entirely new ways to create, deliver, and capture value. Organizations need a business model innovation factory to explore new business models unconstrained by the current one.
A successful business model innovation factory has the autonomy and resources to explore even those business models that might disrupt the current one. At the same time it's connected to the core business in order to access existing capabilities to enable and accelerate business model experimentation. Easier said than done! The practice of R&D to develop new products and technologies is well established. Most organizations know how to develop new products that can be commercialized by the current business model in order to create new top line revenue growth. The new imperative is to establish the capability to do R&D for new business models, even those that might disrupt the current one.
Important implementation questions addressed in this section of the book include: How do you organize, staff, and resource a business model innovation factory? How do you test new business models in the real world? How do you manage the inevitable organizational conflict between a business model innovation factory and the core business? How do you scale a promising business model and deal with the threat of cannibalization to your current business model?
The book's fourth part demonstrates that business model innovation isn't just for business. One of the biggest surprises from the time I spent working in the public sector is how strenuously social sector organizations resist the notion that they have a business model. Nonprofits, government agencies, social enterprises, schools, and nongovernmental organizations (NGOs) consistently proclaim that they aren't businesses, and therefore business rules don't apply. Well, I'm sorry to break the news, but if an organization has a viable way to create, deliver, and capture value, it has a business model. It doesn't matter whether an organization is in the public or private sector. It doesn't matter if it's a nonprofit or a for-profit enterprise. All organizations have a business model.
Nonprofit corporations may not be providing a financial return to investors or owners, but they still capture value to finance activities with contributions, grants, and service revenue. Social enterprises may be mission-driven, focused on delivering social impact versus a financial return on investment, but they still need a sustainable model to scale. Government agencies are financed by taxes, fees, and service revenue, but are still accountable to deliver citizen value at scale. The idea that business models are just for business is just wrong. Any organization that wants to be relevant, to deliver value at scale, and to sustain itself must clearly articulate and evolve its business model. And if an organization doesn't have a sustainable business model, its days are numbered.
Perhaps the most important reason for developing common business model innovation language across public, private, nonprofit, and for-profit sectors is that transforming our important social systems including education, health care, and energy will require networked business models that cut across sectors. We need new hybrid models that don't fit cleanly into today's convenient sector buckets. We already see for-profit social enterprises, nonprofits with for-profit divisions, and for-profit companies with social missions. Traditional sector lines are blurring. We're going to see every imaginable permutation and will have to get comfortable with more experimentation and ambiguity. Economic prosperity and solutions for our big social system challenges require business model innovation across sectors. All organization leaders must learn how to do R&D for new business models. Nonprofit, social enterprise, school, and government leaders aren't exempt. Business models aren't just for business.
It's a great time to be a business model innovator. This is the innovator's day. The good news is that during turbulent economic times everyone looks to innovators for new solutions. The bad news is that we have turned innovation into a buzzword. Everyone is an innovator and everything is an innovation. And of course when that happens no one and nothing is. We have to get below the buzzwords. The Business Model Innovation Factory is for all leaders who want to stay relevant in a changing world. It makes the case for business model innovation as the new strategic imperative, shows how organizations can reinvent themselves by doing ongoing R&D for new business models, and provides an implementation road map for all business model innovators who want to go from tweaks to transformation.
I
What You Have Always Done Isn't Working Anymore
Chapter 1
Don't Get Netflixed: Your Current Business Model Isn't Going to Last Much Longer
The nuclear industry measures how long a radioactive material will retain its potency by its half-life, which is the time it takes for the material to lose half of its radioactivity. For instance, the half-life of Uranium-235 is 700 million years. No wonder nuclear proliferation is so feared! During the industrial era the half-life of a business model has been measured in generations. Business models have always lasted a long time. Business models rarely changed and were handed down from generation to generation. Most business leaders have never had to change their business model. Most CEOs have led a single business model throughout their entire career. They never learned how to change a business model in business school or from their peers, who also have never had to change their business models.
During the industrial era once the basic rules for how a company creates, delivers, and captures value were established they became etched in stone, fortified by functional silos, and sustained by reinforcing company cultures. All of a company's DNA, energy, and resources were focused on scaling the business model and beating back competition attempting to do a better job executing the same business model. Companies with nearly identical business models slugged it out for market share within well-defined industry sectors. There was a mad rush to copy so-called best practices in order to not be left behind by industry leaders.
It should be no surprise that if you ask executives and corporate employees to define the term business model and to share their company's business model story you tend to get a lot of blank stares and very different stories from across the organization. For most, their business model has probably been in place since the business was started—before most employees joined the company. It hasn't changed. It is implicit. No one talks about it. No one shares business model stories because they are taken for granted.
Industry definitions are also taken for granted. As if industries were clubs with exclusive admission criteria and secret handshakes only revealed to companies that agree to play by understood rules. The industrial era has been defined by clearly delineated industries, making it easy to identify which sector every company is competing in. It was all so gentlemanly, as if competition was governed like boxing by a code of generally accepted Marquess of Queensberry rules. Companies were all conveniently assigned a numerical Standard Industrial Classification (SIC) code (now North American Industry Classification System, or NAICS) identifying which industry sector they fit into. Within each industry sector companies all migrated toward an identical business model competing for market share within the sector. Business models rarely changed.
Those days are over. The industrial era is not coming back. The half-life of a business model is declining. Business models just don't last as long as they used to. In the twenty-first century business leaders are unlikely to manage a single business model for an entire career. Business leaders are unlikely to hand down their businesses to the next generation of leaders with the same business model they inherited from the generation before. Leaders are either going to learn how to change their business models while pedaling the bicycle of the current one or they are going to be netflixed. The challenge in the twenty-first century for all leaders is how to avoid being netflixed.
If netflixed isn't a verb it should be.
netflix; netflixed
verb
Blockbuster Gets Netflixed
Blockbuster started out with a compelling business model. Its value proposition was clear—enabling consumers to watch hit movies in the comfort of their homes. Blockbuster established an extensive value delivery network with stores conveniently located on every corner. Its first store opened in 1985 and it quickly grew to have over 5,000 retail outlets and 60,000 employees. It also had a smart financing model to capture value. It rented hit movies at a price consumers found attractive relative to the price of going out to the movies. Instead of paying a large upfront fee to buy videos from the studio (up to $65 per video) Blockbuster entered into a revenue-sharing model with the movie studios including little to no upfront costs per video, which gave them a huge advantage, and fueled explosive growth. Blockbuster started out on a roll. At its peak in 2002 Blockbuster's market cap rose to $5 billion. In 2010 it filed for bankruptcy. So what happened? Blockbuster was netflixed.
It wasn't as if Blockbuster didn't see Netflix coming. They were just so committed to their bricks and mortar business model they couldn't see or act beyond it. They were stuck in their business model. It became a straitjacket that eventually took the company down. You didn't have to be a fly on the wall of Blockbuster's headquarters during those years to imagine the management debate that took place on what to do about the emerging competitive upstart, Netflix.
As is often the case, the Blockbuster business model story starts and ends with technology playing a leading role. Initially, technology enabled and then ultimately disrupted Blockbuster's business model.
Early versions of the videocassette recorder (VCR) first appeared in the late 1950s and through the 1960s, but it wasn't until the late 1970s that they began to have any mass consumer market success. Who doesn't remember the great format war between Sony's Betamax and JVC's VHS competing videocassette standards? VHS won out due to a longer two-hour recording time with the ability to extend the recording time up to four hours. The last obstacle to broad consumer uptake of VCRs was overcoming the resistance of movie studios. Like any industry facing a business model threat, whether real or imagined, the movie industry fought hard to block the spread of VCR technology. Jack Valenti, head of the Motion Picture Association of America, implored Congress to protect the movie industry from the “savagery and the ravages of this machine.” In Congressional testimony Valenti said, “the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.”1 The case went all the way to the Supreme Court ruling in Sony Corp. of America v. Universal City Studios, Inc. that VCRs were allowable for private use. Ironically the movie industry ended up finding a significant new revenue source by distributing video recordings of their movies.
With consumer acceptance of VCRs expanding after the favorable Supreme Court ruling in 1984, Blockbuster opened its first store on October 1985 in Dallas, Texas, and never looked back, or over its shoulder, for that matter. Wayne Huizinga saw the potential to scale Blockbuster nationally, as he had previously done with garbage collection at Waste Management, and bought the company in 1987, starting with a few stores and quickly expanding through acquisitions and new store openings to become the largest retail video chain in the United States. In 1994 Huizinga sold Blockbuster to Viacom for $8.4 billion.
How smart was Huizinga, because in 1995 the DVD was invented. It was inevitable and easy to see. During the same period (in the late 1980s and early 1990s) that Blockbuster was capitalizing on consumer acceptance and demand for video recordings of hit movies, the demand for CD music recordings was also exploding. In 1982, Billy Joel's 52nd Street was the first record album released on CD in Japan, where Sony also launched its first CD player. In 1983 CD players were commercialized in the United States, along with 16 CDs released from CBS records. By 1988, 400 million CDs were manufactured in 50 plants around the world.
It was only a matter of time until the same optical disc storage technology enabling CDs to displace vinyl records would also displace videocassette recordings of movies. It happened in 1995 with the invention of DVDs, which had the storage capacity for an entire feature length movie. DVDs quickly gained consumer acceptance in the market over videocassettes. DVDs offered higher quality, more durability, and introduced an attractive interactivity feature allowing viewers to go directly to chosen scenes within a movie. As the price of DVD players quickly came down in the market, DVDs soon became the favored home movie format.
Blockbuster didn't see the emergence of DVD technology as a threat to their business model. They didn't see it as a disruptive technology. They saw DVDs as a sustaining technology to improve the performance of their current bricks and mortar business model. DVDs would sit alongside videocassettes and be just another product offering to their retail customers. Blockbuster didn't see DVD technology as a possible enabler of new business models or ways to change the way they created, delivered, and captured customer value. That all changed in 1997, when Reed Hastings got pissed off because he was charged a late fee by Blockbuster after failing to return the movie Apollo 13 within the due date. Turns out, Reed Hastings was not alone in hating to pay Blockbuster's late fees. While consumers had no convenient alternative to renting movies from Blockbuster, the company extracted over $500 million in late fees from customers like Hastings. Blockbuster was so focused on expanding its current business model it had no clue it was about to be netflixed.
Netflix didn't invent any new technology. DVD optical disc storage technology had already been invented. What Netflix invented was a new business model. Netflix recognized that DVDs were small and light enough to mail using first-class postage. Netflix thought it could trump Blockbuster's value proposition, enabling consumers to watch hit movies in the comfort of their home by delivering movies directly to a customer's home by mail, allowing them to avoid a trip to the corner store. Initially, the rest of Netflix's business model was identical to Blockbuster's. In the beginning Netflix captured value in the same way as Blockbuster with a pay-per-rental pricing model. The only difference was the ability to order a movie online and have it delivered directly to your home by mail. The original Netflix business model even had the same late fee as Blockbuster for not returning the movie on time. Uptake was slow initially as people preferred the convenience of renting and watching a movie at the last minute without waiting for it to come by mail. Blockbuster initially saw Netflix as a niche mail order business that didn't represent a significant competitive threat.
That all changed when Netflix introduced its real business model innovation. In 1999 Netflix moved away from Blockbuster's pay-per-rental model and introduced a subscription model where customers paid a flat fee for unlimited rentals without due dates, late fees, or shipping and handling fees. Netflix's business model story was to enable consumers to watch as many movies as they wanted in the comfort of their home for a fixed monthly price. The new business model caught fire, with annual sales going from $1 million to $5 million in its first year. Within five years Netflix was a $500 million business and within eight years it had reached $1 billion in sales. In 2002 Netflix had 1 million subscribers, growing to over 5 million in 2006 and over 14 million in 2010. Hardly a niche business!
So did Blockbuster see Netflix coming? Did senior management see the opportunity to think beyond its bricks and mortar network expansion and store operations to deliver customer value in new ways? Did management see the disruptive potential of DVDs? Did they see Netflix coming and decide to stick with their bricks and mortar approach? Or did they just miss the opportunity because they were so busy pedaling the bicycle of their current business model they didn't think about and experiment with potential new ones?
I think the evidence is clear: Blockbuster saw Netflix coming and chose to ignore them at first and then reacted way too slowly. You may be surprised to learn that Blockbuster had the opportunity to partner with Netflix before the upstart really took off. John Antico, Blockbuster CEO, actually received a visit from Netflix founders Reed Hastings and Marc Randolf in 2000. The founders traveled to Blockboster's headquarters in Dallas to deliver an interesting offer to Antico. According to Barry McCarthy (Netflix CFO at the time), who joined Hastings and Randolf on the trip, the founders proposed that Netflix and Blockbuster collaborate. In an interview with The Unofficial Stanford Blog, McCarthy recounted the meeting saying, “Reed had the chutzpah to propose to them that we run their brand online and they run our brand in the stores and they just about laughed us out of their office. At least initially, they thought we were a very small niche business. Gradually over time, as we grew our market, his thinking evolved but initially they ignored us and that was much to our advantage.”2
Blockbuster made the mistake most companies make in underestimating the disruptive threat of new technologies and innovative business models until it is too late. Blockbuster remained stuck in their bricks and mortar business model, naively treating Netflix as a niche player that they could ignore. They underestimated Netflix at their own peril. They attempted to react, but it was too late. The constraints and pressures of their existing business model proved too great to overcome. Blockbuster was netflixed.
As Netflix took off and began to look like more than a niche competitor to Blockbuster CEO John Antico, he began to push very hard to respond to the threat with significant investment in an online platform and offering of Blockbuster's own called Total Access. The new platform, with direct attention from the CEO and resources to grow, gave Blockbuster a credible offering to counter Netflix. Antico's move was late but may have worked given Blockbuster's considerable resources, strategic relationships with movie producers, brand recognition, and substantial market share. But Antico ran directly into a conflict with none other than Blockbuster investor Carl Icahn. In 2004 Icahn took a significant ownership position, owning 11.5 million shares (or about 9.6 percent) of the company. Icahn wanted Antico and the company to ignore Netflix and continue to scale its bricks and mortar business model, adding more stores to the network. Icahn was upset with Antico and was publicly critical about his focus and investment in an online platform. Icahn won, convincing the board to replace Antico as CEO.
