How to avoid going bust like Blockbuster

Last month saw the dramatic failure of a brand that was once was the dominant leader in its market, with a 50% share: Blockbuster went bust, filing for Chapter 11 protection in a US court. The decline and demise of the movie rental business shows what happens when a brand leader fails keep pace with changes in the marketplace. Blockbuster was way too slow to react as the movie rental market moved from store-based retailing to home delivery, then online streaming. Blockbuster now has a 22% share of US movie rentals compared to Netflix's 36%. And online, the picture is even bleaker. Blockbuster's website had 2.9 million unique visitors in July, down 72.6% since 2007, according to Comscore. In contrast, Netflix had 21.7 million visitors, up 132.9% over the same.

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What went so badly wrong for Blockbuster? Professor Mark Ritson suggests the problem was "marketing myopia", where a company defines its market too tightly and so misses out on new opportunities. "If only Blockbuster had realised what business it was really in," he says. "Blinded by its own definition of the category it got what was coming to it." In reality, market definition was not the issue here, nor is it in many other cases where brand leaders suffer from a decline in their core market.

I was part of a consultancy team working with the board of Blockbuster back in the 1990's. We helped them come up with a great re-definition of their market. Instead of thinking of the "video rental" market, they agreed to compete in the "great night in" market. This opened up their eyes to opportunities to sell food and drinks, an excellent source of extra revenue. They also launched home video delivery so you didn't have to go to the store. And they could see the threat of cable and satellite channels. They had this clarity of vision over a decade ago, before Netflix had even started business. So, what really went wrong?

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Blockbuster's demise, and that of other leaders like Kodak, had more to do with execution than vision. They could see the market moving. However, they struggled to react as they had so much money, expertise and energy tied up in their own business model. Blockbuster had over 6,000 stores in the US alone with thousands of employees. The problem was not marketing myopia, it was "marketing inertia". They put most of their effort into defending their existing distribution model, rather than aggressively building the new ones, such as home delivery and online streaming.

So, what can brand leaders do to avoid going bust like Blockbuster? First, as we did with Blockbuster, leaders need to define the market in terms of consumer benefits, not products. The harder step is to then play a leadership role in driving this market change, rather than being slow to react and behaving like a follower brand. One option is to create a "spin-in" business unit, where a separate group enter and grow the new market, in Blockbuster's case online movie streaming. I call this "keeping the cannibals in the family". The challenge here is that often company leaders favour the dominant current business and starve the new business of resources, like a father favouring his eldest child. An alternative approach is to borrow the options model from financial markets. This involves investing in start-ups operating in the new market space early on to give you the option to compete in the future. If the new market grows you are well placed for growth. If the new market stays small your loss is limited as you invested early. In Blockbuster's case they could have tried to buy a controlling share in Netflix, rather than ignoring it.

In conclusion, leaders need to not only have a vision of how the market is moving. They need to the courage and conviction to turn their vision into action by competing in the new market space sooner rather than later.