“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” — John Maynard Keynes
A client asked me recently, “What is the difference between management and leadership?” To answer this I often tell the following simplistic story by Steven Covey.
“Management is doing things right; leadership is doing the right things.” — Peter Drucker
There was once a group of workers cutting their way through a jungle with machetes (not a good story in our era of earth’s destruction, but that is not the point). They are the producers, the problem solvers. They are the ones working in the business. Management is pushing them, following processes, sharpening machetes, writing policy documents and procedure manuals, holding muscle development sessions to improve efficiencies, seeking improved technologies, and setting up working schedules and compensation programs for the machete workers.
Meanwhile, the leader is the one working on the business. The leader climbs the tallest tree, surveys the entire situation, and yells, “Wrong jungle!” Management is very focused, as are the ever-efficient producers. Changing course is the last thing they want, so they respond, “Shut up! We’re making progress.” Management is focused on the now. Leadership is focused on the future.
Leadership is constantly on the lookout for new jungles and asks the question if there should be a focus on jungles at all?
Herein lies the great challenge for companies and leaders today. If the profits of today’s business are declining or under threat, how do I afford to invest resources in other possible directions, some of which may not yield fruit? They must recognise that no business is safe from disruption, every business and everything has a decay rate.
The Blockbuster v Netflix story is widely cited as a case study in disruptive innovation. The story begins with Netflix founder Reed Hastings proposing a partnership with Blockbuster and getting laughed out of the room. Hastings’ proposition was that Netflix would represent Blockbuster online, while Blockbuster focused on what it excelled at, running the bricks and mortar retail business but would promote Netflix in its stores.
We all know what has happened since. Blockbuster went bankrupt in 2010 and Netflix is a global phenomenon.
Handing over the online keys to Netflix, while promoting Netflix in store, would be business suicide for Blockbuster. First, Netflix would learn all they could while building the digital model, while Blockbuster would learn nothing. Second, Blockbuster would offer Netflix exactly what they were lacking: product awareness to their target customer. At the time, Netflix was a niche product, popular with early adopters, but growing steadily towards widespread adoption.
(Attempting to) Succeed Unconventionally
“I firmly believe that if our online strategy had not been essentially abandoned, Blockbuster Online would have 10 million subscribers today, and we’d be rivalling Netflix for the leadership position in the internet downloading business.” — John Antioco
What we do not often hear in this story is the details behind the disruption. Blockbuster did not laugh at Netflix and decide to do nothing, in fact, Blockbuster had developed a growing digital business, run by a top executive. In addition, Blockbuster had a strategy to remove penalising customers with late fees, which would remove revenues of $200m per year. Further still, the business had assigned an additional $200m towards the growth of their digital business Total Access.
Blockbuster was run by CEO John Antioco, who had a stellar career turning around failing businesses and had proven his worth with Circle K and Taco Bell. Antioco had realised Netflix was a threat and had proposed a viable plan. However, at the time Viacom owned 80% of Blockbuster and didn’t think Antioco’s strategy aligned with its own strategy, so it sold its stake in Blockbuster. Due to the proposed $400m investment, the Blockbuster stock plummeted and this allowed investor Carl Icahn to enter the fray and the board of directors with two directors of his choice on a board of only eight. As Antioco tells it, board meetings became justification meetings and the boardroom became a battlefield.
The Status Quo is Strong
“The human mind treats a new idea the way the body treats a strange protein; it rejects it.” — Sir Peter B. Medawar
By its very definition the status quo is hard to change, when it is attacked it does not give up easily. This is why the role of changemaker can be a dangerous role, as Antioco was soon to find out.
The Blockbuster ecosystem was very dependent on the franchisees who ran the stores, removing late fees and building a digital business would hit them in the purse strings to the tune of $400m. The franchisees were like the producers in Steven Covey’s Wrong Jungle story, they had grown accustomed to what they did and they did it very well. You can empathise with them, right? Here comes the CEO with some fancy new ideas that would change their business model, change how they produce and change is hard to process.
Antioco was akin to a business revolutionary and whenever there is a revolution it ignites a counterrevolution. Because the status quo has a revenue stream, a proven business model, s system in place and has enjoyed success in the past, it has power. This power can be yielded to end a revolution, which is what happened to Antioco. Antioco was ostracised by a combination of franchisees, who were understandably resistant to a change that appeared risky and costly and board members and most likely pockets of c-suite executives who sided with Icahn so they would keep their roles under the new regime.
“I sold my stock and bought a bunch of Netflix shares, which were then priced around $20. It wasn’t an emotional investment. I could see that Netflix was going to have the whole DVD-by-mail market handed to it, along with a direct path to streaming movies into homes — which is exactly what Netflix has done. I thought I was a genius when I sold my shares at about $35. Today they’re over $200.” — John Antioco
And so we come to the point of the story, where Jim Keyes becomes CEO. Keyes did not hesitate in reversing all the brave, informed decisions that Antioco had made. He decided to focus on bricks over clicks by doubling down on the in-store proposition and in doing so, appeased, the franchisees, the board and of course Icahn.
When questioned if Netflix was a competitor in 2008, Keyes said: “Neither Redbox or Netflix are even on the radar screen in terms of competition”. In 2010, Blockbuster went bankrupt.
We must bear in mind that Keyes nor Icahn are the villains of the story.
The reason I share this story is to illustrate that it takes immense effort to disrupt your own business model, even if you know it is under threat. We do this in life all the time, we do not take action until we feel the pain. We look after our health predominantly after we experience some health scare or setback or when someone close to use prompts us to do so. In a similar way, businesses only take action when they feel the financial pain and even then it takes immense persuasion, effort and pain to change the mental models in order to change the business models.
You may have come across the phrase that “Netflix did not kill Blockbuster, ridiculous late fees did”, that is a simplification and a good one that illustrates a good point. However, what really killed Blockbuster was a failure to convince the networks of people within the business who would make the change. By convincing the networks inside your business you create a “cascade” of change (as Greg Satell tells us). That is a momentous task and the failure to embrace this task will sink many businesses in the future for many decades to come. To hear more about this and what Blockbuster might have done differently, listen to the brilliant Greg Satell on this week’s innovation show where we discuss:
Cascades: How to Create a Movement that Drives Transformational Change
Debunk the Blockbuster v Netflix story
Success v Failure and why
Boston v Silicon Valley
Occupy v Otpor, what worked and what did not
How to build a change network
Using a network to defeat a network
Nobody is an island
Genome of values
Have a Listen:
More about Greg here:
His Ted Talk here: