Monday, December 14, 2009

Don't get caught sitting on your business model

It's hard to stop doing something that makes money, until it doesn't, and then it's usually too late. Three examples:
Blockbusters had its sector's dominant brand, and a stranglehold on the video business, but was slow to transition from the old "come and get it" model to new distribution methods. While the former champ closes 960 stores this year, innovators like Netflix are taking large bites out of the video pie, as are video-on-demand services from the cable and satellite TV outfits, and websites like YouTube and Hulu. The company has been producing losses for more than a year ($116.8 million in the most recent quarter), and survival is questionable.

America Online was the 300-pound gorilla of the internet in the 1990s, appealing to technologically-challenged users with a simplified interface, incessantly mailing its ubiquitous CD-ROM discs to all corners of the free world, and charging premium prices for what was little more than internet access and an e-mail account. Of course, the internet got simpler and cheaper, thanks to better browsers, search engines, and high-speed connections, and users got savvy. An opportunity to leverage a famous brand was squandered by complacency and the diversion of management attention by the ill-advised Time Warner marriage. The divorce was announced last week amid estimates that AOL's worth is just 1% of its peak value.

The recording industry ruled the distribution of music for a century. Then the internet and the iPod changed everything. The record companies fought a prolonged rear guard action against downloading, eroding goodwill by suing 13-year-olds for exhorbitant sums and bullying everyone within shouting distance. Instead of having their legal departments bat leadoff, they should have been acquiring or emulating the Napsters that were stealing their lunch. Having failed to understand that consumers were now calling the shots, and that the $25 album con was over, they were "rescued" by Steve Jobs, and forced to let him sell songs for 99 cents.
There are lots of other examples of industrial dinosaurs stuck in the tar ponds of business models that no longer work. When you are king of the hill, it's hard to see the need to change.

It gradually dawns on executives and directors that they have people with the wrong skills doing the wrong things with expensive equipment and facilities that are unsuitable for the activities now required for survival. There is widespread nostalgia for some of these businesses, such as newspapers, but their demise is certain, nonetheless.

Finally, panic depresses creativity, so breakthrough thinking is unlikely as the full horror of the situation is recognized.

Creative destruction is a wondrous, or fearsome thing, depending on whether you are the destroyer or the destroyed.

Change is hard. Death is worse.

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