Volume 11 Letter 2

Even the most successful products will sooner or later run out of steam. As commoditization sets in, the demand curve flattens and profits get squeezed the need becomes urgent to “reinvent” and rejuvenate the market. Most companies wait until it’s too late…. Blockbuster did.

When the oil industry crashed in the 1980’s David Cook sold his business and started Blockbuster Video. His first store in Dallas was an immediate hit and the business grew like crazy. In 1987 Wayne Huizenga (co-founder of Waste Management) purchased Blockbuster and it was he who orchestrated the impressive growth strategy that fueled Blockbuster’s rapid expansion and drove many local video stores out of business. The strategy was brilliant yet simple. Blockbuster outlets stocked a deep volume of current hit movie titles keeping weekend movie watchers happy and stock outs to a minimum. As these movie titles aged they became the backbone inventory of the next new store. Blockbuster grew across North America as happy customers flocked in. The video giant rode its successful superstore model all the way to the top operating from 6500 locations across North America and controlling over 25% of the video rental market. Business was good until along came Netflix.

Netflix changed the competitive landscape by introducing a business model that delivered videos and later DVD’s by mail. Netflix’s market share grew but almost immediately the young company started to reinvent themselves. Foreseeing the digital revolution, Netflix obtained digital streaming technology and today Netflix is the largest provider of DVDs by mail as well as a major player in online streaming. Unable to reinvent itself, Blockbuster filed for bankruptcy protection in Sept 2010.

The time from product launch to product maturity and commoditization seems faster than ever. To survive it’s imperative to get ahead of the curve:

  1. Start the reinvention process early: well before the current business starts to commoditize.
  2. Involve your “best managers”: your best people must be driving the reinvention process
  3. Innovate quickly and often: even a minor upgrade can differentiate your product forcing competitors to match you.
  4. Create a unique customer experience that differentiates your product: Getting a DVD in the mail differentiated Netflix.
  5. Segment: mature markets can often be divided into profitable and price driven segments. Find the customers segments who still value your product’s attributes.

Blockbuster has recently announced they will provide streaming video but their future remains uncertain. The time to reinvent is when times are good – not when you’re in bankruptcy. Don’t wait – innovate now!

Tim Breene & Paul Nunes Jumping the S-Curve: How to Beat the Growth Cycle, Get on Top, and Stay There (Harvard Business Review Press, 2011)
Prof John Quelch HBR blog Feb 2011

Recent Posts