Too Big to Fail? What we can learn from Blockbuster about market strategy
Jonathan Davenport’s blog was recently published on LinkedIn, in which he explores businesses that “were too big to fail”. This month he briefly examined Blockbuster.
“Blockbuster was hugely successful; it had a global turnover of $6bn in 2004, was active in over 25 countries and employed more than 60,000 people. But, just six years later it was bankrupt. I will explain how they could have built a market winning strategy.
So what happened to Blockbuster? Amongst other issues, there are three elements on which I believe the company failed to focus that contributed to bankruptcy in 2010:
1. It ignored a market disrupting technology
In 2004 when its revenues began to decline, Blockbuster owned/leased thousands of premises, had loyal customers renting movies and its revenues still exceeded $5bn.
However, the market was moving away from the high street. Initially this happened through DVD mail order. Then as home broadband penetration-levels increased, the distribution of films and TV using streaming became possible.
It looks as though Blockbuster faced what Clayton Christensen called the Innovator’s Dilemma: they did not want to risk today’s profits in order to create sustainable revenues in the future. The physical stores, which they had grown out and invested in, suddenly became its biggest weakness. The market was changing, video streaming (a new disruptive technology) was being adopted, but Blockbuster failed to adopt the new skills and infrastructure needed for the changing competitive landscape.
2. It lacked customer focus
It appears as though ultimately, Blockbuster, a brand loved by its customers, lost its way by failing to remain customer centred. I believe the company thought that it understood the customer; that having a physical store to visit was an attraction of using the Blockbuster service and that this had become part of the night out. Whilst this may have been true in the past, the market was changing.
Blockbuster weren’t unaware of this; it had experimented with offering DVD mail order and online streaming, but later closed these services down as they were unprofitable. Instead, Blockbuster refocused on retail. In doing so, it lost its focus on serving the customer and instead retrenched to offering what it knew, what had worked in the past, rather than what its customers wanted now and in the future.
3. It underestimated the competition
Finally, the company may have underestimated the competition and as a result Blockbuster’s leadership made the wrong decisions. In 2007, amidst declining revenues, the company recruited James W. Keyes (former president and CEO of 7-Eleven) as the new chairman and CEO. He introduced a new business strategy that included de-emphasizing the unprofitable Total Access online service, in favour of an in-store, retail-oriented model.
This gave Netflix the opportunity that it needed to enact a market winning strategy that targeted the right market segments at the right time, which eventually led to Blockbuster’s bankruptcy in 2010.
Blockbuster needed a better long-term strategy
What the leadership team at Blockbuster needed was a market forecast model. This would have highlighted the scale of their folly and explained why continuing to invest in DVD rental stores was a mistake. Using this deep understanding of the changing market dynamics would have supported the creation of a new long-term direction for the business.
The market model might have had a structure that looks like this:
A model would have allowed the future dynamics of consumer and then competitor behaviour to be explored and documented for each target country. We see here, that the model can be drilled into and analysed. This creates a very detailed and rigorous analysis of the future competitive landscape, which would have clearly shown the declining consumer demand for physical DVD rental. Not only this, it would have also calculated Blockbuster’s unsustainably declining market share.
We have found that when a leadership team is presented with data like this and believes the findings, the market forecast model becomes a powerful tool for developing a market winning strategy”.
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