Competitive advantage is key if you want to survive and thrive irrespective of market conditions. The collapse of Blockbuster teaches a valuable lesson in staying relevant and evolving in the right direction…
Having a competitive advantage reduces the risk of becoming a commodity… And one secret to your competitive advantage can be discovered through INNOVATION.
Give the market something that it hasn’t seen before, and consumers will laud you for it.
But innovation isn’t easy, and for many companies, it results in complete failure.
That’s exactly what happened to Blockbuster Video.
The Failure of Blockbuster
Blockbuster Video founder David Cook opened his first store in 1985. Just three years later, Blockbuster became the leading video store chain in the US with 800 locations.
In the 90s, the company hit many milestones. It went public in 1992 with 6,000 stores across the globe.
Then came 1997, when Blockbuster had its first worthy opponent in Netflix.
Angry at Blockbuster for the late fees, Reed Hastings founded Netflix. Initially, the company delivered DVDs straight to customers’ homes by mail.
Rather than charging on a per rental basis like Blockbuster, Netflix used a subscription model where customers got to keep a certain number of DVDs and return them at their own pace. This essentially got rid of late fees.
In the next few years, Blockbuster made mistakes that cost the company everything, all due to their unwavering reliance on the original business model.
The company also managed to miss a fateful opportunity in 2000. Rumor has it that Blockbuster could have bought out Netflix for $50 million, but declined.
Yet Blockbuster was still a cherished company at the time… In fact, 2004 was the peak year for the company. With 9,000 stores and $5.9 billion in annual revenue, Blockbuster was still the indisputable king of video rental.
But there was little else to grow. Most Americans already had a store nearby…
All that was left was for Blockbuster to go online – an arena where Netflix was way ahead.
Due to the rapid proliferation of the internet, more and more people ended up leaving Blockbuster for Netflix. In the midst of this disruptive change, Blockbuster’s market capitalization fell by 75% from 2003 to 2005, even as the overall US stock markets were going up.
In the following years, Blockbuster did all it could to survive, but the writing was on the wall.
Blockbuster is today down to a single store in Bend, Oregon – which is doing good business, by the way. A lot of it, however, is for the sake of nostalgia.
Failing to Make Hard Choices
Blockbuster failed because the leaders at the company couldn’t make the hard choices.
They wanted to stick with “business as usual,” rather than outpacing the innovators that snapped at their heels. Over time, this led to their competitive advantage slipping away.
In talking about companies that fail, acclaimed management consultant and author Peter Drucker says:
“The companies that refused to make hard choices, or refused to admit that anything much was happening, fared badly.”
…And Blockbuster is not the only business to succumb to this issue. Sadly, this story is only a drop in the bucket.
If you don’t want to follow suit, you’ve got to do better to stay ahead of the competition.
Start by asking questions.
The Five Questions You Must Ask Every Year
The factors that have created your current success may not continue to do so in the long run. Because of this, you must always challenge your competitive advantage. If not, you can count on the competition to pass you by.
To guard against losing your advantage, ask yourself the following questions on an annual basis:
1. Why are you in business?
What’s your company’s vision and ultimate goal with respect to what you want to achieve?
You must have an ambitious and clear answer to this question. Otherwise, it’ll be hard, if not impossible, for you to tell if your business is moving in the right direction.
That vision should act as the North Star of your business. If you can see it clearly, you’ll know where to go to turn your vision into reality.
2. Who are your clients?
Each year, we look at the top 20% of our clients in terms of revenue. We use the following questions in the review:
- Who are they?
- What issues are the most important to them?
- What needs to be addressed to drive better results?
Armed with the answers, we adapt our client avatar so that we can better target clients similar to the existing top 20%.
It’s imperative for you to have a similar framework. The main takeaway is that you have to target the prospects that will respond the best to your company.
3. How can we become the most expensive competitor in the industry and still have people lining up to do business with us?
This question forces you to think about differentiation and puts the focus on value (not price). It inspires innovation.
Review your competitive advantage and strengths each year.
Keep in mind that the goal is to make your advantage more dynamic, so you can maintain the number one position. By the time the copycats get there, you’re already offering something more exciting.
4. What’s your top objective for this year?
A lot goes into building a successful company, but it’s unrealistic to achieve all of it in one year.
You can, however, break it up and concentrate on a theme every year.
You could be growing your revenue or client base one year, and adding a new product (and positioning it properly) in the next. It’s up to you.
The important part is choosing one objective that you’re going to focus on for the rest of the year… And sticking to it.
5. What are the most important activities/key results that you must focus on this year?
With your goal of the year in hand, you’re going to have to work on moving closer to it. That means you have to first identify the key activities involved.
Go through your processes and identify the activities that will get you closer to the goal. You may find it helpful to eliminate distractions so you can better focus on these activities.
Change Is Inevitable
The markets and consumer behavior change with the times. Blockbuster saw this first hand, and didn’t make the necessary moves to keep up.
The question is, will the changes in your industry be going for you or against you?
You get to choose the answer and take the actions.
With the help of these five questions, you’ll be able to determine what you have to do to stay ahead. Remember that you should always question your competitive advantage, and work diligently on improving it.