When a game changer enters a market, it can spur incumbents to new heights of innovation and competition. It can be a dramatic story, as new and old firms fight it out for revenue and for customer loyalties.
Unfortunately, many incumbents react with panic, denial, and failure to see the obvious. They surrender before the first shot is fired. Secure in their places, it just doesn’t register that the old assumptions they have relied on have changed dramatically – sometimes with great speed.
Here are four short examples of firms whose philosophies as the key market leader (or important player in the market) failed to assess and act on the risks and opportunities available when responding to new ideas, technologies, and consumer wants.
/ Drop the future if someone hands it to you
Blockbuster was a behemoth distributor of for-rent home video, with over 9,000 stores at its peak. Today, they are almost completely gone. Once, they were so powerful in the marketplace they could dictate video release terms to movie studios. Their model, which worked very well for them, was to purchase huge amounts of the newest, most popular films, then collect per-use fees as well as large late fees, which drove a large portion of their revenue. Stores in every town and large fixed inventory drove their massive expansion and dominant market position.
Reed Hastings, founder of Netflix, came up with the idea of rentals by mail with no late fees in response to how unhappy he was paying Blockbuster late fees and being limited by what was in his local rental stores. When Netflix was a new startup in 2000, he offered his company to Blockbuster several times at $50 million. He also proposed that Blockbuster keep the stores and their rental model, and Netflix would handle the by-mail and eventually the streaming portion, expanding the business model.
Blockbuster was not interested. Today Netflix has a market cap of $50 billion, and is disrupting television networks and movie studios by generating their own high-quality content. In 2004, Blockbuster began playing catch-up, but with the wrong thing – by-mail DVD rentals just as the DVD market began its long decline. Their leadership was completely unable to see that the physical media model was rapidly disappearing. As the company spiraled into bankruptcy and irrelevancy, they tried to build partnerships to deliver streaming content, but it was too late and they chose the wrong partners – such as Enron Broadband Services, right before their infamous scandal hit – rather than figuring out a pivot that made sense.
Blockbuster got a preview of the future of their business, but they refused to believe it.
/ Fear cannibalization more than disruption
For more than 100 years, Kodak was a leader in imaging. All segments of the market, from casual users to big Hollywood studios, relied on Kodak film. They had near-universal brand awareness and a reputation for providing high quality products and results.
Kodak invented many of the technologies used in digital photography in 1975. However, their business model depended on repeat purchases of film, paper, and chemicals used for developing photographs.
Despite being perfectly positioned to lead the digital photography revolution, Kodak could not bring itself to jeopardize its main revenue streams. It suffered devastating business losses, as the photography business transitioned from software and consumables, to a hardware-focused industry.
Kodak spent so much time worrying about their existing product lines, that they refused to transition their customer base into the next technological stage.
/ Good enough for us
TiVo was a great product that was loved by early adopters, and, for a time, they did time shifting in a new way that drastically changed the video recording market. TiVo was also one of the first firms to offer an interface to stream Netflix. But the UX design for using non-TiVo providers was clunky and difficult to use.
In 2007, Apple released the first generation Apple TV as a “hobby” to judge the market. As the product evolved, the interface and technology vastly improved. Now, Apple offers Apple TV at a very low price point ($149 versus $299 for a TiVo Bolt), no subscription fees to use the device, and unlimited cloud storage capacity as nothing is stored directly on the device.
Despite TiVo’s efforts in making software changes to allow for universal search across available providers and increased storage space, it’s very hard to compete with Apple’s simple, excellent design, well crafted (by comparison) interface, much lower price point, seamless integration with iTunes, and lack of additional fees.
TiVo may have had the best solution for a cable-TV dominated world, but that model is shrinking dramatically. They couldn’t react fast enough to technological and cultural advancements, because they were wedded to their proprietary box – and television is a software business. Attempts to integrate with DVR devices provided by cable companies have not been very successful.
In 2015 TiVo added the capacity for customers to stream their recorded content to their Apple TV, but why would someone want to do this? Most content providers now have their own apps available, where live recording is not necessary. If you want to watch a movie on HBO, you don’t need to set up a recording; you can simply watch it any time you want on your phone, smart TV, Apple TV, or even a video game system. Although TiVo’s model worked well for them for a while, ultimately, it was only “good enough.”
/ Obsess over sunk costs
Volkswagen has been in the news recently for misrepresenting the performance of its “clean diesel” technology. In December 2015, the scandal was still under internal and external investigation, but it’s become known from leaks by current and former employees that there was a culture of high pressure to make clean diesel a worldwide technology – despite very different emissions priorities in the European Union and in the United States. Volkswagen was the most prominent seller of diesel passenger cars in the latter.
Someone at Volkswagen decided that since a solution that would work well for both US and EU markets could not be delivered, and Volkswagen never put the resources into alternate cleaner technologies such as hybrids and electric vehicles, it was better to protect the firm’s investment by installing software that gave fraudulent emissions results. Everything was riding on the performance of a technology that just wasn’t able to do what it needed to.
Let’s contrast this to the approach taken by Tesla. Both Volkswagen Diesel and Tesla are very small players in the huge US auto market. But, beyond the fraud, there is an important difference between the two. Tesla is deeply invested in battery technology and has staked everything on developing not only better cars, but also being the leader in power storage.
Tesla has looked at what they have to work with, and instead of trying to force everything onto the back of their automotive program, they are also expanding into home power storage and even industrial applications. They thought about extensions and innovations to mitigate some risk. Their plans are important to the future of the firm, but they also understand the importance of being able to pivot if necessary.
When Volkswagen chose the path of “this must work no matter what,” it gave their sunk investment and development choices complete domination over the entire future of the company. Time will tell what the final fate of Volkswagen will be, but it will be a difficult scandal to recover from.
David Klahr is an independent consultant and strategist. He is based in New York, United States.
Photo credit: Trebomb on Flickr