The Cost of Infrastructure – Environmental Scanning (Blockbuster vs. NetFlix)

12 11 2009

Last week in a workshop I was asked the question about Environmental Scans and Strategy Management.  The challenge was probably long overdue.  When I was first drawing up my framework on Performance Management, I specifically wanted to call out questions about how we look at the market.  I felt I had seen too much insular thinking within companies with the risk being much too high.  We need to be looking at the market on a regular basis, perhaps not with high frequency.

Let’s roll back the clock on the movie rental business to 1990.  In almost every suburban strip mall was a mom and pop, or small chain movie rental store.  We were able to rent a movies and watch them in the comfort of our on home.  There was no DVR (though if we could figure out the VCR we could have taped movies), there were not 427 premium movie channels, and cable was still in its infancy.  Over the next decade, Blockbuster moved in and wiped out almost everyone else in the industry – “opening one store every seventeen hours” (Wikipedia – no reference).  We loved the new model, and the fact that our membership card worked even when we were on vacation.  If we went back and looked at the analyst reviews, I am sure they had glowing views of how this was the model for the future.  Viacom jumped in and bought the business for $8.4 billion in 1994.

Oh, how internet time flies.  NetFlix with no brick and mortar costs jumps into the game (not to mention DVR, Pay-for-View, TiVO, etc) and what was once valued as a $8.4 billion dollar business was spun back off for a fraction of its original purchase price.  Today Blockbusters market cap is ~$160 million (compared to NetFlix $3.2 billion) and it continues to loose money.

What happened…you can spin this a number of ways:

  • They were too tied to their infrastructure
  • They were slow to react, or never really understood the threat before it was too late
  • They thought they were too big to fail

They were a great business model, let’s take a cottage industry and scale it.  And it worked great for a decade.  How do you think they would answer the question about the relevance to a more rigorous environmental scanning process?

Just think, perhaps even one conversation about “what would happen if someone figures out how to deliver movies via the internet” might have saved Blockbuster.  I know, I know, this could never happen to you as this was an isolated incident.  Think of the travel industry, General Motors, Enron, Compaq, CompUSA, TWA – and I am sure you could add 20 more…

Companies, like the products they often make, have shelf lives.  If we are not thinking of new ways to reinvent ourselves, it is highly likely someday we will become a “where are they now” business case.

  • What do you specifically do to challenge status quo?
  • When was the last time you had your best minds come up with the next generation business models?
  • When was the last time you identified the 3 largest threats to your business?
  • When was the last time you had a 3rd party provide a critique of the market you are in?
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