It Won’t Happen To Us – Learning from Failure: 2 case studies
Here is the story of two such companies that we in TomorrowToday often use as examples in our keynote presentation, ‘TIDES of Change – five disruptive forces shaping the future’
Example 1: Blockbuster Video
This iconic American brand filed for bankruptcy in 2010. At the height of their success (2004) Blockbuster employed 60 000 staff and had over 50 million members. By 2010 the company that had been worth over $8 billion was worth a mere $24 million with $1.1 billion in revenue losses. In April 2011 Dish Network acquired their remaining 1700 stores at auction for $233 million and the assumption of $87 million in liabilities and other obligations. By the July of that year Dish closed 200 stores, a further 500 in early 2012 and another 300 in 2013. An empire decimated.
The Blockbuster story is unavoidably intertwined with that of Netflix and as the former went into a death spiral, the latter surged to a company that is today worth $28 billion. The failure of Blockbuster is often categorised as one of a failure to adapt to new technologies on offer and, whilst there is certainly truth in this, it isn’t the whole story. Monumental failure is seldom down to a simplistic single cause. In 2000, Reed Hastings, the founder of Netflix met with Blockbuster CEO John Antioco and proposed a partnership that would have clear benefits for both parties. Essentially Hastings suggested that Blockbuster use it’s 9000 outlets to promote Netflix whilst Netflix would incorporate and promote the Blockbuster brand online. His proposal was dismissed out of hand. An interesting subplot was that in 2000 Blockbuster enjoyed a significant revenue stream ($800 million) from penalties charged for the late return of their videos. This policy had two significant consequences: (1) It was by being charged $40 for the late return of a rented video (Apollo 13) that led Reed Hastings to come up with the Netflix concept! (2) In a change of heart Blockbuster reversed this policy to appease their customers. What did they get from this? Customers countrywide sued them for policy misrepresentation!
(Netflix had got around the ‘late fee charge’ by building their business model on a subscription basis – customers could be in possession of a video for as long as they desired, rather that on a hire model. A simple yet profound shift in the standard practice at the time)
Here’s the real story as told by author, coach and leadership consultant Dain Dunston:
In 2006 and 2007, Blockbuster had Netflix on the ropes and Netflix CEO Reed Hastings was asking them to acquire his company. No, Blockbuster didn’t fail because of the competition; it failed because of boardroom infighting and one of the most disastrous CEO changes in American business history. At a conference call with analysts in 2007, Netflix CEO Reed Hastings mentioned Blockbuster 22 times. He admitted they had not yet formulated a plan to stop Blockbuster stealing their customers at the rate of a million a year. He said Blockbuster had thrown everything at them but the kitchen sink. The next day a large box arrived in Hasting’s office: a kitchen sink with a note from Blockbuster COO Nick Shepherd: “Here’s your sink.”
By 2007, unable to fight any longer, Hastings received permission from his board to begin merger talks with Blockbuster. In the end, Blockbuster decided they didn’t need Netflix, their growth was that strong. Netflix was on their way down. They had nowhere left to go.
And then something astonishing happened. Blockbuster blinked. A boardroom dispute resulted in a change of CEO. The new man didn’t understand what business Blockbuster was really in. He started changing the game plan, including pulling out of their Internet efforts. Within 18 months, he had lost 85% of the capital value of the company. Within two years, he lost it all.
When a once successful company loses touch with the purpose that made it great, disaster follows.
Clarity of purpose matters most. When leadership becomes dislocated from the underline purpose on which the operational aspects are built, the end is within sight. Purpose should both shape activity as well as provide the platform for operational agility but all too often the exact opposite is true. The operational policies and behaviour assume a ‘life of their own’ and soon the focus is on maintaining the operational norms rather than a clear understanding of, ‘what is it we want to achieve together? It is easy to lose sight of purpose and keep busy doing stuff that looks like we are fulfilling our purpose when in reality, it is obscuring or worse still, moving us away from our purpose. In the case of Blockbuster the sense of purpose was lost in the Boardroom. Through a succession of CEO’s (6) they couldn’t decide whether they were an entertainment company or a retail company. The retail strategy that was adopted was blindly followed year after year until the company collapsed.
The Action Question:
Ask a select cross-spectrum of your staff, ‘what is our purpose?’. The answers might surprise.
Example 2: Borders
Founded in 1971 by brothers Tom and Louis Borders in Ann Arbor, Michigan, Borders was for millions, a haven from the stresses and cacophony of noise that made up their world. A place you could retreat to and delightfully absorb oneself in books of all genres whilst enjoying a quiet coffee. By 2003 Borders had 1,249 stores worldwide and over 19 000 employees. They had created an innovative inventory management system that was the envy of their competitors. Yet, 2006 was the last year that Borders posted a profit and over the next 4 years their annual income haemorrhaged by $1 billion until they finally filed for bankruptcy in the February of 2011.
The cracks had first appeared when Borders UK went into administration in 2009 and when attempts to find a buyer failed, all 70 UK stores were closed. During this time Borders had begun experimenting through the launch of several concept stores including a Digital Centre that offered select electronic devises such as MP3 players, digital photo frames and the Sony Reader. In 2009 Borders replaced five of the eight members of the Board of Directors who had quit – an indication of the leadership turmoil within the company, as well as a change of CEO with Ron Marshall replacing George Jones, who for his trouble received a comforting $2.09 severance package.
It all proved to be too little too late, as essentially Borders had failed to adapt to not only the digital tsunami but to respond to a shift in the consumer dynamics that accompanied such technological innovations. Alongside this was the strategic error Borders made in outsourcing their website to Amazon (essentially a rival) from 2001 to 2008 which in effect emasculated their own online presence. Blindsided by consumer shifts and saddled with a brick and mortar façade, Borders simply couldn’t survive the future.
Real innovation goes beyond product and service innovation; real innovation demands that there is a willingness to change the business model. (This of course could also be applied to Blockbuster). Borders failed to recognise the shift in consumer dynamics as digital became both accessible and desirable. Furthermore their infrastructure meant that they couldn’t compete on the pricing and so their stores became places where customers would see what they wanted before going online to purchase the very same product at a lower cost. That holds true for current bookstores and the final irony is that in many cases the customer uses the stores own online network to make the purchase!
The Action Question:
‘What could disrupt our business model?’ Murphy’s law holds that if something can happen it will. Be sure that your business model will be disrupted and that it isn’t a matter of ‘if’ but rather one of ‘when’. Best be ready and the way to do that is to get out in front of the disruption and being willing to be the disruption! Make this question an item on your next leadership agenda and don’t settle for superficial or obvious answers. Dig deeper and engage your best minds around the question. You might even want to float the question at a different level within your organisation – a good place being in your talent pool.
Let us know if you would like more information on how we could help you make sure you can survive the future. Our latest presentation Being Future-Fit could be the perfect starting point for the leaders in your organisation in preparing yourself for the future.