Wednesday, November 2, 2011

Reinventing the Business Model--What Blockbuster should have done.

I read about reinventing business models in the reading material and was interested in digging deeper about how relevant it is in the industry today. To say that technology changes quickly in today’s time would be an understatement. And as technology and products change around us ,so do the consumers , which is a huge incentive for companies to rethink and reshape their strategy from time to time. We discussed in class that the essence of strategy is doing different activities or doing similar activities differently. Since technology is a fast changing commodity in today’s market , the emergence of new tools provide companies with the opportunities to change the way regular activities are performed.. No company today can afford to chalk out a 30 year plan without reshaping and restructuring it periodically in the wake of changing markets and emerging competition. While this may seem obvious , in the real world its easier said than done.

Let’s take the example of Blockbuster ,a video rental store ,valued at 8 billion dollars in 1996 which recently went bankrupt with a valuation of just 30 million dollars. Blockbuster had more than 5000 brick and mortar store all over US and was supposed to have the widest collection of movies amongst its competitors. It was also the oldest ,most successful and dominant player when most of its current competition had just started their business. So where did blockbuster go wrong? A number of places, but mainly it just didn’t have a strategy in place to deal with the change in market landscape and dynamics in the video/movies rental industry. Blockbuster lost most of its customers to Netflix and other competitors which used the internet technology to meets their customers’ demands. Block buster should have recognized the change in the business logistics, adopted the new technologies available, and leveraged its current stores and customer base to do better than its competitors. It should have in short re-invented its business model. It however failed to notice the threat that live streaming posed to its business and continued building on its existing business model. The management inability to foresee the changes in consumer behavior, identify new key competencies such as internet presence and react effectively when its sales began to decline , cost blockbuster dearly in terms of market share and profits.

A plausible reason why the management of a company may fail to see the need to change its business model is the inability to differentiate their Core values from their operational methods. In the above case blockbuster for a long time thought that its core values lay in being the ‘go to’ store for families on weekends to pick up movies and they thought that American’s would prefer that over renting videos online. It failed to realize that its core value lay in providing entertainment, how it did that was just an operational detail and not a core value.

Sarah Kaplan mentioned that the goal of a good strategic development process should be to develop prepared minds which are the foundation upon which good strategic decisions can be made and implemented. The strategy developers of the company need to have discussions not just about how the company has been operating but should also challenge assumptions about the market and explore potential opportunities and risks. By the time the management at blockbuster realized that they had missed the technology bus it was too late, and even then when they tried to catch up , they forgot one key point i.e. Leveraging their core business and strength’s while reinventing their business model. They blindly aped the mail delivery model that Netflix had adopted. They did not try to leverage their 5000 plus brick and mortar stores, their customer base or their diverse movie collection. If however they had a strategy development process which would have prepared their managers to make decision’s (read prepared minds) in the event of a huge change in market dynamics, perhaps they would have made different choices.

Companies should think about changing their business models not because they have to but when they feel that the needs of the consumer has changed. The goal of the company should be to increase their CPI i.e. consumer value proposition. Mark W Johnson and Clayton M Christensen pointed out that to increase the value offered to a consumer or the CPI , a product or service should break at least one of the four barriers - access, insufficient wealth, skill or time. Netflix successfully broke three of the above four barriers and hence was preferred by consumers over blockbuster. Since they did not have physical stores their movies were less expensive than blockbuster’s. The internet was easier to access than physical stores and hence saved the customers more time. Even when the management at blockbuster realized that the technology to kill their business was out there and that their profits would decline , they could never figure out how to effectively use their strengths and the available technology to beat the competition. It’s like the question “What do we do now” was never answered.

By Kailash Pande

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