Yikes! Putting your core business in discovery mode: BlockBuster & Circuit City
The unsolicited attempt by video rental chain Blockbuster to take over electronics retailer Circuit City looks like a pretty desperate move. In short, a company that prospered with the rise of the whole rent-it-out couch potato ethos that began to flourish in the 1980’s, hasn’t been willing or able to renew its core business, even as its advantages were eroding under pressure from competitors with different business models (such as Netflix), buying DVD’s and greater availability of alternatives, such as movie downloads and video on demand from cable companies.
Blockbuster’s CEO (who came out of retirement to turn the firm around after doing a good turnaround job at 7-Eleven) feels that cost savings and efficiencies will make the aggressive, indeed, bet-the-company move successful. Interestingly, at least at this stage, there doesn’t seem to be any compelling new business model in the offing. Circuit City stores would likely offer videos and games for rent (woo hoo - now there’s a big innovation) and Blockbuster stores might be able to sell hardware such as portable media players (ditto). He seems to think that the movie rental and consumer electronics businesses are ‘converging’ and cites the Apple stores as a case in point, even going to far as to note that Apple’s stores could be a model for the post-merger Circuit City/Blockbuster bid.
I’m not one to ever say ‘never’ but this one has me scratching my head.
Missing: Clearly defined customer segment with clearly defined needs
For starters, where is the market segment with a compelling need that this combined company will address? Apple stores are not just stores—they are complete retail experiences that showcase truly breakthrough products in a dramatically different way than competitors. Wal-Mart’s segment doesn’t value experiences so much as good value, so that is differentiating for them. Best Buy has been brilliant at customer segmentation and has gone so far (with its acquisition of the Geek Squad and the emphasis on product knowledge among its ‘blue shirted’ employees) as to make the retailing-purchasing-installing-using experiences far superior to those at other retailers. There doesn’t seem to be much customer focus here.
Assumption of ‘convergence’ or denial of reality?
A recent Wall Street Journal article notes that CEO Keyes believes that convergence between video consumption and consumer electronics is underway and that the merger will facilitate the postioning of the combined company to benefit. Convergence? Hardly. What’s happening here is that the core of Blockbuster’s business—movie rentals—has been in decline for some time and is likely to simply erode as a source of future profits and growth. Sure, there will be some customers who continue to use the service—just as for decades after deregulation meant you could purchase phones there were customers still renting them from Ma Bell—but if investors and other stakeholders are looking for growth, clinging to an increasingly obsolete core is not the answer.
Not being smart or disciplined about managing a full growth portfolio
The Blockbuster saga, to me, is a repeat of what happens to many a successful company over time. With the growth and success of the core business, more and more focus is placed there. It’s all too easy to keep pumping investment and people resources into that business. Financial tools and other conventional management practices make investments anywhere else look unattractive. When conditions change, competitors copy or leapfrog and customers’ desires shift, a company that has over-invested in the core can find itself with few choices. The next step is usually a desperate one—typically, the company will be acquired by another firm, often not for its declining core business, but for its other assets - such as brand, talent, or intellectual property. Sometimes the lure is simply assets such as real estate! The Blockbuster approach of Circuit City is simply this same process with a twist, the twist being that the CEO presiding over the declining-model company will be the one designing the strategy for revival (hmmm...).
The upshot: Invest in growth options before you need them!
What should the good folks over there at Blockbuster have done differently? Well, if there is trouble in the core business, the obvious answer is that you have to discover or find adjacent businesses to renew or create a new core. How do companies do this? I’ve argued that they need to think about investing in portfolios of opportunities. The chart gives an illustration.
If you think of your investments as distributed across dimensions of uncertainty, with market uncertainty extending across the bottom of the graph and technical or capability uncertainty going vertically to the left of the graphic, you have a way of picturing the activities you are investing in. Each boxes’ worth of activities serve different strategic purposes.
- Core enhancements are clearly those things you do to keep the current core business healthy. That’s essential, as without a healthy core you don’t have a lot of other options (as the Blockbuster scenario makes all too clear)
- Platform launches are next-generation businesses - you can think of them as candidates to form a new core business
- Options, just as the name suggests, are small investments you make today that give you the right but not the obligation to make a bigger investment going forward
My guess is that Blockbuster (and Circuit City, which isn’t in great shape itself) under-invested in the options that could have been crucial to the discovery of a new business model. Now, it’s trying the risky and difficult route of putting its core business into discovery mode - a practice that is likely to lead to expensive disappointments rather than the small, contained-downside, experiments that options represent.
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- Posted Rita McGrath on April 16, 2008
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Follow up on payment systems - RadioShack and Western Union’s money-transfer offer
In a recent post, I noted that many companies are trying out different ways to change how we make payments, with American Express having decided that apparently key fobs is not the way. Just today, Western Union and RadioShack announced a new payment program in which special purpose phones can be used to transfer pre-paid cash amounts of up to $200 within Western Union’s network. Just as we would advise, the national rollout begun today (April 1) follows a year of testing the phones in locations that have large numbers of ‘unbanked’ folks who might be interested in transferring funds to people back home, let’s say.
While I haven’t studied the concept in detail, a few elements of the business plan strike me as slightly problematic. First, people have to go to a RadioShack store and sign up for a Trumpet pre-paid phone (Trumpet being the wireless company who creates the payment service stream). They can’t use cell phones they may already have, which creates a sunk cost problem. Then they have to pre-pay for the service and load the phone with the money to be transferred. For people who are cash-strapped, that may be a lot to swallow in one chunk. The recipient has to have a compatible system or else use the Western Union network. And many obstacles to success will be internal to Western Union - as in, creating an entirely new kind of business that conceivably threatens their existing ways of working.
The good news about the plan is that if it does get adopted by large numbers of people, it could increase the convenience of transferring money. In addition, I would expect the service to evolve so that those without a banking relationship or credit card can enjoy many of the conveniences those have to offer. And, eventually, such technologies (when freed from a single phone platform) could be highly destabilizing to established remittance markets right in their core business.
Let’s see what happens next.
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- Posted Rita McGrath on April 01, 2008
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FotoNation: Why new entrants to an industry often see opportunities incumbents don’t
This past Friday’s Wall Street Journal reported on a terrific little Irish-based company, FotoNation, that has achieved breakthrough growth by using software algorithms to solve problems that have bedeviled the photography industry for years. Red-eye, auto-focusing on empty spaces when there is more than one face in the picture, and plain old snapping photos when your subjects aren’t ready have been fairly intractable problems. FotoNation’s breakthrough idea was to use software algorithms to manipulate the images.
Take red-eye, which occurs when flash photographs reflect back the color of blood vessels in people’s eyes. FotoNation was able to develop an algorithm that can recognize when red-eye occurs and correct the image before it is even stored on the camera. This first breakthrough product was legitimized by Nikon’s inclusion of the software in its CoolPix product line in 2003. According to the Journal, last year 80% of the 100 million plus digital cameras had red-eye reduction installed. Another innovation gives camera makers a way to improve the way pictures of faces are shot. Face tracking software allows for some interesting innovations, such as beign able to keep two faces in focus even when they are not at the center of the picture. Eran Steinberg, the firm’s founder, notes that 80% of consumer photos have faces in them. Also in development: Software that recognizes when people are smiling and warns the photographer not to shoot the photo if they aren’t.
, FotoNation recently was sold to Tessera Technologies of San Jose for a reported $39 million. As part of Tessera, the group hopes to extend its reach beyond digital photography to medical devices, automobiles and even home security.
The reason I find this story fascinating is that it combines several themes having to do with breakthrough growth.
Incumbency blinders. The first is that photography incumbents simply didn’t see the opportunity in software to solve their problems. Why not? As Eran Steinberg notes, “Traditional camera companies look at improving image quality with glass. We asked, “how can you do things to the image?’”. This is a classic example of how opportunity can be created by looking at solving problems in a different way than incumbents in an industry do. Often, problems and solutions become part of a standardized recipe - it isn’t until some newcomer demonstrates a radically different approach that growth takes off. In the most serious case for incumbents,such a shift can lead to the destabilizing ‘disruptive business models’ that our colleague Clayton Christensen has made so recognizable. In this case, the innovation actually made the offering better for incumbents, even to the point that consumers might purchase a new camera just to gain the performance improvements.
Changing the attributes in a customer’s experience. A second theme that this case illustrates is that there are often rich rewards to be gained by eliminating negatives in a customers’ experience. In this case, amateur photographers have for years put up with red-eye, fuzzy faces and the like simply because no one found a way to eliminate these negative aspects of the experience. With software, these negatives can be eliminated, turning a ‘tolerable’ feature that people put up with to one that is actively dissatisfying. If our theories are right, eventually these dissatisfying features will become enraging, making red-eye reduction and so forth a ‘non-negotiable’ in the product category.
Deep innovation in the core business. A form of innovation that doesn’t get nearly the amount of attention that it deserves is when major innovations in technology, process, or business model serve to reinforce and sustain the core business. In this case, FotoNation’s products are ways in which the traditional core business of camera companies can be strengthened, even though it is a radical departure from the traditional technologies they use.
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- Posted Rita McGrath on March 30, 2008
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Innovation and the last gasp of dying technologies
In the January, 2008 edition of the Harvard Business Review, Daniel C. Snow shared some research he’s been doing on product transitions—when one dominant design or conventional product gives way to a different or more up to date version. A phenomenon that he has studied is a pattern in which the performance of threatened older technologies rapidly improves, extending their life cycles and simultaneously slowing down the adoption of new technologies. Examples of such “last gasps” include manual versus computerized typesetting, CISC versus RISC architecture for computer processors and steel versus aluminum bicycle frames.
The conventional wisdom about such performance surges is that the managers in charge of processes based on older technologies, when threatened, invested urgently in improving them. Snow’s research finds otherwise. Instead, he finds that the last gasp phenomenon stems from two overlooked mechanisms.
A retreat to defensible ground. What happens here is that markets in which the older technologies perform poorly are the first to adopt newer methods. This leaves the older technology working in markets for which it is better suited—and makes the performance appear to improve as a result. In other cases, retreating from some markets allows greater focus—and subsequently greater learning—in those that remain, which has the effect of actually improving performance.
Use of the new to improve the old. In this situation, the older technology borrows innovations developed to support the newer technologies, again improving their performance.
These explanations surrounding new technology adoption and the persistence (or decline) of older technologies have important implications for technology-based venturing. For one thing, the managers of new ventures need to be quite explicit about their assumptions regarding how quickly a new technology will displace an older one, and deliberately figure out how to test those assumptions. Failing to anticipate the reaction of competitors is a major reason new ventures fail. Secondly, managers in charge of older technologies are highly likely to mistake the improvement of financial and technical performance during a ‘last gasp’ for long-term health. This happened in the case of integrated steel mills coping with mini-mill competition. As mini-mills gobbled up the low end of the steel market, the performance of the integrated mills improved, since they were selling higher-margin steel. But this performance was not to last - eventually, the steel mills were subject to a massive restructuring of their entire industry.
It’s interesting to speculate about whether such transitions as the move to ‘cloud computing’ from a PC base will reflect this pattern.
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Staples “M Line” an effort to escape brutal commoditization
As a long-time fan of stationery supplier Staples, I was intrigued to note that they are adding a whole new, more upscale, line of products called the “M Line”. The goal is to create a differentiated offer at a higher price point (though the prices seem pretty reasonable) to attract those among us who can use a lift to our mundane office lives. Business Week featured the line in a recent story.
A couple of points about this development intrigue me. Firstly, this is a great example of what we might call ‘attribute innovation’ in which companies target new offers at customer segments that are prepared to make different tradeoffs than others. In this case, Staples is designing items with a tad more style and cachet, at a higher price point, hoping that the new attributes will attract enough customers to make the extra design and distributions costs worthwhile.
Secondly, and this is supremely ironic, Staples is trying to escape the very commoditization they sparked when they basically put local retail stationers out of business. When I was starting my career (in the dark ages) stationery suppliers were mom and pop operations, who bought everything at huge markups from these huge, colorful catalogs. The prices were high, the selection usually not so great, and often you had to order materials to be delivered some time later. The 1986 opening of Staples, for stationery junkies like me, was like Christmas coming - huge variety of goods, much lower prices than I was used to, and long opening hours were all ‘wow’ factors. The founder was, just like me, frustrated with having to depend on small local stores for critical supplies.
Over time, however, the easy competition folded, and Staples began to have to duke it out with later competitors like OfficeMax and OfficeDepot who essentially copied its business model. Today, customers take low prices, convenient hours and lots of in-stock items for granted, leading the company to need to do something else. Too early to say yet if the new, upscale, offers will have the desired effect, but I wouldn’t be surprised if they do well, particularly among customers who would enjoy a little more pizzazz in their workaday surroundings.
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- Posted Rita McGrath on March 16, 2008
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