We all know startups are nothing like enterprise companies, which is why people mistakenly assume that innovation is best left to the entrepreneurs. But the truth is this: businesses with enough heft can be as innovative as any startup – maybe even more so – as long as they avoid some common mistakes.
Furthermore, enterprises are in even greater need of innovation these days. Without it, they’re destined to follow the same perilous, disappearing path as Blockbuster. Remember Blockbuster?
Why mention Blockbuster instead of dinosaurs? Because there simply is no better or more (in)famous example of how failure to innovate will destroy even the largest market behemoth. As we follow the path of Blockbuster’s notorious descent, there are a number of glaring examples of common enterprise blunders in innovation.
Pride Goes Before the Fall
It’s easy to see how arrogance was bred into Blockbuster due to its domination of the US and UK markets. In 2003, a Blockbuster spokeswoman was quoted by Forbes as saying, “Frankly, we see online subscriptions as a niche business.” At one point, Blockbuster boasted 40 million customers, a market capitalization of $2 billion and a whopping 40% of the rental market. But the entrenchment of arrogance, despite warning conditions, led Blockbuster to plummet 97.5% to a mere $50 million market capitalization in only a few years and is an important contributor to why the company is now obsolete.
We all know how the story of Blockbuster ends… but it didn’t have to be that way. At one point, Blockbuster had Netflix on the ropes. The real tragedy is that, during its downfall, Blockbuster had numerous opportunities to not only salvage its business, but to dominate the market. In 2007, Netflix CEO, Reed Hastings, tired of losing a million customers a year to Blockbuster, finally got permission from his board to begin merger talks. Ego battles in the Blockbuster boardroom led to a change in CEOs and the successful campaign to destroy the competition was wantonly abandoned before the final blow was struck.
Deafness or denial? Lessons from Blockbuster
When large enterprises let their egos get the best of them and stick their fingers in their ears, it’s time to sell your stock. Whether they are refusing to listen to their customers, their employees or just the market at large, it’s a huge warning sign that the egos involved have become more important than the actual business. As we’ve already seen, that path leads only to destruction. So how do you know when an enterprise has stopped up its ears? Let’s look again at Blockbuster….
Three times during its life cycle, Blockbuster shifted its innovative focus on providing entertainment to a conservative focus on retail. Each time, the company’s profits tanked and the company nose-dived towards disaster.
The first CEO blunder happened under Blockbuster’s visionary owner Wayne Huizenga. In 1991, Huizenga hired Joe Baczko, number two at Toys R Us, as President and COO of Blockbuster. When Baczko arrived, he declared that Blockbuster would increase profits through merchandising and becoming a retail powerhouse. Having unwaveringly plugged his ears to all external input – 23 months, 12 vice presidents and innumerable fleeing customers later, Baczko handed in his resignation. Huizenga realized his mistake and promptly declared that Blockbuster was not and would never be a retailer. “We’re an entertainment company and we always will be.”
Unfortunately, this declaration only lasted 5 years – when Blockbuster merged with Viacom. Then Viacom’s Sumner Redstone drove out Blockbuster’s Huizenga and Redstone announced their replacement: Bill Fields, the number two man at Wal-Mart. When Fields arrived at Blockbuster, he didn’t ask questions and refused to learn the intricacies of his new company. Instead, he spent 6 months behind closed doors creating a strategy to maximize sales. Does this scenario ring a bell? By December of that year, Fields realized his approach was a failure and he was scrambling to escape the ship he’d crippled.
But that wasn’t the end of the story. It turns out the third time was the charm. After a brilliant comeback, Blockbuster was only successfully scuttled when its board chose to install a final retail CEO, John Keyes, who then deftly guided the company to bankruptcy. Keyes didn’t want to hear anyone’s ideas and banned talk of the past. He declared that “the Internet is worthless” and proceeded to undo all the gains the entertainment giant had made. Within 90 days, all the employees who had brought Netflix to its knees resigned. Employees and customers scrambled to leave the sinking vessel and 18 months later Keyes had lost 85% of Blockbuster’s market capitalization.
Fear Leads to Failure
It was only under “innovative” CEOs that Blockbuster thrived. It was the innovators who thwarted upstart competition not by dismissing the threat, but by leveraging the enterprise’s assets. They had more capital, they had a large customer list and they used the intelligence of their employees. They surveyed customers and responded to criticisms. They valued employee input and employed their deep pockets to counter every move the competition made. Blockbuster was winning until fear of losing its innovative gains repeatedly caused the company to pull back from its mission, change CEOs and alter strategies. By trying to guard its territory instead of conquering new lands, Blockbuster let entropy set in. It was only returning to innovation that allowed Blockbuster to recover from these defensive strategies. By stubbornly returning to a defensive stance, Blockbuster’s innovative dominance of the market eventually eroded.
Stop Pretending to be Something You’re Not
Blockbuster kept pretending to be a retailer instead of an entertainment company. By modeling themselves after Wal-Mart, Toys R Us and 7-Eleven, Blockbuster attempted to navigate waters where it didn’t belong. As Huizenga figured out, Blockbuster’s business was “entertainment” not retail. When Blockbuster focused on creating an experience and simplifying access, they boosted the bottom line. People went to Blockbuster because it was occupying a niche it created. As Blockbuster moved away from that niche and attempted to duplicate “retail” stores, it lost the very thing that made it unique and moved into a different space where the competition was fierce and well entrenched. Netflix and Redbox’s innovative delivery methods created a whole new model for their businesses, allowing them to thrive while Blockbuster collapsed.
Remember, innovation allows startups to grab a toehold, but a solid enterprise corporation has more resources than any startup. If you are willing to leverage your capital to invest in innovation, you can continue to dominate your market and expand your bottom line for decades to come.