But times move forward. The experiences of the ’80s, ’90s, and noughties are not the same ones we have today. Blockbuster failed – and they failed for a number of reasons. The main one was the lack of innovation. So, we ask the question, how can businesses encourage innovation?
Blockbuster Had A Flawed Business Model – They Just Didn’t Know It
They had high overheads. Each store was a rental payment every month. The stores needed light and heat. They needed team members to take money from people and check the returned movies. Blockbuster had around 9,100 stores worldwide at its peak. That was both a sign of their endearing success and a portent of the failure that was about to follow. Each store carried all of those costs. That was 9,100 managers salaries, 9,100 assistant managers salaries, 9,100 electricity bills, water bills, business rates, maintenance costs, etc, etc, etc.
But it wasn’t just the fact that this huge company was carrying a burden of overheads with it. The fact that Blockbuster didn’t take up new technology was the real nail in the coffin. Legend has it that Reed Hastings, the founder of Netflix invited the CEO of Blockbuster, John Anitoco to a meeting in order to discuss a strategic alliance. Blockbuster would promote Netflix in stores. Netflix would be the face of Blockbuster online. It sounded like a match made in heaven. Netflix was rejected.
Changing Of The Guard
Within a few years, Netflix became a multibillion-dollar company and Blockbuster went bankrupt. Refusing to believe that the march of time includes your company is a dangerous game. Technology is moving at such a pace presently, with no sign of it slowing down, that a progressive business has little choice but to embrace it. Ignoring the developments from elsewhere is a dangerous game. Obviously, the big beast that was Blockbuster didn’t think that a little new entrant like Netflix could be competition. It laughed off the threat from this small business with a big vision. By the way, current estimates of the value of Netflix out it at around $100 billion. That’s around 40 times more than Blockbuster was ever worth.
One of the main sources of revenue for Blockbuster was the late fee. The dreaded amount of money that you would be charged if you returned your video or DVD late. Charging people a relatively small fee to borrow the movie in the first place meant that they gained market share and developed a customer base. Charging them high fees when they couldn’t get back to the store in time drove revenues. Penalising customers might bring in the cash. But it does nothing for generating loyalty. When the new kid on the block offered a service whereby you could only get a new movie when you sent the old one back (Netflix started as a postal service for our younger readers!) the late fee was given its last rites. Blockbuster wasn’t far behind. So, how can businesses encourage innovation?
Disruption As A Strategy
The early stories given by Reed Hastings were around being frustrated at late fees from Blockbuster. That story has since been discredited but the principle is the same. Disrupting an existing industry because it is broken is a strong and viable way to innovate. Sitting in a place at the top of a particular market does lend itself to thinking that you don’t need to innovate. Innovation is for those trying to topple you, not for the king of the castle. But in the child’s game, the king of the castle is deposed by the dirty rascal. Disrupting what is already working is a difficult game to play. Disrupting an industry because you can see that there is an inherent weakness is another story altogether.
Netflix looked at an industry that had got fat, heavy and didn’t seem to understand the technological advances that were springing up left right and centre. They thought that the business model that had served them well for the previous decades would continue. Obviously, looking back we know differently.
And they weren’t the only ones that got stale from this short-sighted attitude…
Kodak And The Digital Revolution
You might be forgiven for not even remembering Kodak. Paul Simon immortalised the brand in his hit single Kodachrome where he poked fun at the vividness or otherwise of their colours. They seemed to be just part of the landscape – a company that would be there forever. Then, in 2012, after years of struggles, they finally went bankrupt. They were finished as the entity that they had been. The story of Kodak is a really interesting one.
In the 1960s the company had sales in excess of a billion dollars for the first time. At their peak in the late 1980s, the company directly employed over 145,000 people. By 1996 they were valued at over $31 billion, with global revenues exceeding $16 billion. It is hard to believe how it all went wrong.
And from the outside, we all take the view that it was the rise and rise of digital photography that was the killer of this once great company. Digital images meant that film was no longer needed in anywhere near the same quantity it once was. But scratch the surface and you will see that Kodak had a large hand in their own downfall. It wasn’t simply that technology surpassed the business.
As far back as the 1970’s Kodak was developing digital cameras. They could see a vast potential for this way of taking and storing photographs. But the powers that be (or is that the powers that were!) decided that bringing out a digital camera would sound the death knell for their highly lucrative business of selling rolls of film to photographers all over the world. They decided that digital cameras were not their future and parked the idea to concentrate on the business that had served them incredibly well for decades before.
The company started in the late 19th Century by disrupting the industry. Wet plates were the only method of producing photographs back in 1877. So, the founder, George Eastman went about making dry plates that produced images with much less mess. This way of thinking didn’t follow through to the 1970’s leaders of the business.
Of course, we can now look back and see that this was a terrible mistake. But at the time it felt right for the heads of the company to protect what they had. A lack of innovation on their part saw the end of a once-massive company. So, how can businesses encourage innovation?
Borders And The Onslaught From Amazon
It is hard to imagine a world without Amazon. They are everywhere, pushing boundaries into new ventures all the time; at the forefront of innovation in retail. But we don’t have to look that far back to find a time where they were not the king of the booksellers. That title probably laid with Borders.
If you wanted to buy a book in the United States, then you headed over to Borders. They stocked a huge number of titles in their vast stores. And they found that their clients were loyal. The service they offered was second to none. Borders even expanded to stock large CD and DVD sections in their stores, to make the most of every visiting customer. Sound business practice. Once you have people walking through your door, it makes absolute sense to sell as much to them as possible. It’s much more cost-effective than going out there looking for completely new clients.
The company, like Blockbuster, had high overheads because of this presence. They subsequently had pretty high prices for books, DVDs and CDs. That didn’t matter at the time. Their only competition had the same overheads and the same price points.
Then Amazon arrived. They could undercut the price as they didn’t have anywhere near the same level of overheads. What’s more, they found a way to offer excellent customer service even though they were not stood directly in front of their customers. Borders lost their USP and couldn’t compete on price. They were doomed. The company was blown away by the phenomenon that was (and still is) Amazon. They went bankrupt in 2011, leaving behind a legacy but very little else.
And it isn’t just the threat from digital and online that can cause a company to end up going to the wall. Blockbuster, Kodak, and Borders suffered from a lack of innovation in the tech world. But not everything we do with regards innovation has to be based on embracing new technologies.
General Motors And The Threat From Overseas
Just as Blockbuster couldn’t see the competition even when it arranged a meeting with it, General Motors had a warped view of their place in the world. They believed that American consumers would continue to buy American cars. Many of the management team were connected to the Second World War, experiencing it either as soldiers or children. They didn’t believe for one second that the American people would do something at traitorous as buy cars from the Japanese – the country that instigated the bombing of Pearl Harbor.
It was tantamount to people going out and buying cars from the Taliban or Al Qaeda in the aftermath of 9-11. So, they continued doing what they were doing. The company was slow, didn’t respond to customer demand and spent less and less each year on innovation. They felt like they had the American market in the bag, alongside Ford.
One of the major ways that GM made their money was to sell the finance alongside the car. So, they didn’t need massive margins on each and every car. Instead of using this competitive advantage to make their production more efficient and either increasing margins or passing on the savings to customers, it was their excuse for having all of the above – the unwieldy and lumbering production process. It was inefficient. But if they didn’t need to make big money from cars then it didn’t need to change, right? Wrong.
The evidence was that the cars weren’t what the consumers wanted. People started to move away from GM. They believed that people would be back. As Japanese car makers improved their production techniques all the time and brought out models that were perfect for their target markets, they made inroads into the United States. GM management still thought through their fixed mindset that sales would return. Toyota, in particular, had a way of working that involved the workers in improving the production line by spotting issues and dealing with them at the time. This meant that the line got better, saved time and money and made the company more profitable. They didn’t need to rely on the finance of their vehicles to make money. That was an added bonus, another income stream.
Search the internet and you will find narrative on General Motors that will keep you in bedtime reading for the rest of your life. Simon Sinek speaks excellently about their problems in Start With Why. But something else interesting comes up time and time again when searching for information about GM online. The recalls. Just a quick search brings up headlines such as –
'General Motors Ignition Switch Recalls'
'General Motors Recalls Nearly 3.5 Pickups'
'General Motors Stability Track Problem'
'General Motors Steering Problem And Recall'
The issues in the production line have been longstanding and remain. Issues are not being spotted by the production team in real-time. When these issues slip through the net, the company spends big in putting it right. In terms of customer service, this is the totally correct thing to do. But what about a business that nips this in the bud before it gets out there with the public?
As we can see, there are bigger issues out there than simply missing the uptake of technology. General Motors filed for Chapter 11 bankruptcy in the United States in 2009. It still exists today but in a different format to the past. With this in mind, how can businesses encourage innovation? After all, if all of these massive companies didn’t innovate, then what hope is there for the smaller ones?
With all of this in mind, you are probably wondering what you can do to get innovation moving in your business. The last thing you want is to become another Blockbuster, another General Motors. There are many different ways to stimulate investment in innovation. But the one that concentrates the mind better than all the others is cold hard cash. Staying in business is a consequence of making these decisions. People don’t turn down a technological advance in the belief that turning it down will bury them. So, the fear factor doesn’t exist for innovation.
Looking at how to reward a business for innovation has come down to governments across the world. They understand the importance of innovation for the whole economy. As companies innovate, the economy becomes more diverse, more robust and grows. This has led to nations across the world introducing R&D tax credits. This rewards a business for spending some of their cash on innovation. It is basically a reward for taking a risk with investment. After all, we don’t know if an innovation will become successful from the outset.
In the United Kingdom, R&D tax credits are administered by the HMRC on behalf of the government. They were brought out to stimulate investment and make the UK economy more competitive. The government is looking to get companies to spend cash on research and development. Rather than offering vague promises and indirect stimuli, R&D tax credits are paid directly into the bank account of a business or as a rebate of the Corporation Tax bill. This means that a business that innovates will benefit in cold hard cash. It is a great way to focus the mind.
For your business, there might very well be an R&D tax claim waiting to be uncovered. The traditional views of research and development as being carried out by people in white lab coats, mixing strange concoctions are dead. R&D can be carried out by many industries, such as food & drink, software, and manufacturing. The UK government is looking to reward these and others with a cash injection. And there are no restrictions on how this money can be used.
The Long-Term Benefits Of Innovation
None of us want to become another Blockbuster. I’m sure we’d all like to experience a small portion of their success, but their failure was massive. To avoid this, we need to invest in innovation. It is the lifeblood of a healthy progressive business. But innovation for the sake of innovation doesn’t cut the mustard. Innovating to improve the resilience and commerciality of a business will help future-proof the company. There are other long term benefits of innovation.
Not going the way of Blockbuster is the overwhelming reason to innovate. It helps you to stay ahead of the game, find new customers and delight the existing ones too. But innovation has other facets. Increased productivity is a common feature of innovative businesses. You don’t just innovate in terms of bringing out a new product or service. This is where people get confused about the clear line between innovation and invention. You can innovate in terms of making your production line more effective or in terms of developing a new service as examples. This means that innovative companies are always looking to improve what they do. They make innovation a part of their culture, their beliefs and their way of thinking. It transforms the way the whole of the business sees what they do. In many ways, it is like the culture at Toyota that we briefly brushed on earlier in this article. They were determined to do things better all the time. General Motors were not an innovative company.
It also increases profitability. The fact that a business can improve what they do means two things –
- Their cost base decreases as they get more efficient
- Their value to customers increases as they provide innovative products or services that demand higher prices
Lower costs and higher revenues can only mean one thing – higher profits. This doesn’t just happen in the short term either. It future-proofs the business with more cash reserves and a constant eye on doing something better and better.
Innovative companies are much more interesting and exciting places to work too. As a business becomes more dynamic, employees are more likely to stay. Having an interesting and varied work role drives employee retention. And it makes hiring easier too. People are attracted to businesses that have a similar outlook on the world as they do. A company that innovates and keeps things fresh will attract like-minded employees. Saving money with lower staff turnover and an associated lower cost of attracting new talent are things that all business owners want to achieve. After all, they are not direct income-generating activities so draw away from the main focus of an organisation.
There are many benefits to staying away from the Blockbuster model of business management. As a business owner, we’re sure that you want the trappings of success associated with innovation and improvement. That’s how we answer the question - How can businesses encourage innovation?