Why Waiting Until A New Business Model Is Proven Doesn't Work

from the it's-why-you-need-to-start-early dept

One of the criticisms of our business model discussions here is something along the lines of "but how will this replace the $x billion already made." Or, alternatively "well, how can you expect anyone to switch until you show that it will replace what they already are doing?" The answer, of course, is that by the time you know that a new business model will work well enough, it's too late. It means one of two things have happened: either a competitor has figured it out and taken over the market or your existing business model is too decimated to have enough left to make the switch. This is the nature of so-called "Creative Destruction."

This point is highlighted in a recent NY Times article about how Netflix tries to avoid creative destruction by experimenting with new models well before they need to, and well before the old model has lost steam. The article compares Netflix to Blockbuster, which highlights this perfectly. Even though Blockbuster did see the success of Netflix and how the market was changing, it was very slow in embracing it, and never did so whole-heartedly. And even though it has a service quite similar to Netflix's, it has a lot fewer users and is struggling financially.

The article highlights this with Kodak as well:

Kodak saw digital photography coming. It even invented some of the earliest such technology, in 1975. Kodak just misjudged how fast consumers would give up on film and start snapping up digital cameras. And it misjudged its ability to outrun both trends.

Indeed. In 1997, I did work with a professor who was consulting for Kodak, and we did a detailed report on why Kodak needed to embrace digital now. The response? Kodak told us "yes, yes, digital is important, and we'll be ready to switch, but right now, chemical processing of photos is so much cheaper, there's no reason to change yet." And, they were right that it was a lot cheaper, but they were wrong about the time to start switching.

There are a few reasons for this:

1. Companies always misjudge the speed of trends, especially the rate of change. Things like digital revolutions start out slowly, and the quality seems bad. So companies in legacy businesses figure they have a long time to make the change. But the rate of change increases rapidly, especially once it "tips" and reaches a critical threshold. At that point, if you're not fully invested in the new business, you're, way, way, way behind.
2. It's difficult to really understand the new technology/market unless you're playing deeply in the space. This is the same thing we noted with people who claim that patents are necessary because once a good idea comes along others will just copy it. In many cases, that's not possible. That's because the truly innovative ideas require some real hands-on experience. Watching others do it is not the same thing.
3. It's very difficult, culturally, to build up businesses that cannibalize your existing cash cows. The skill sets may be different, and people begin to recognize that these "new" people may be working on projects that replace the "old" people. That leads to a lot of resentment and makes it really difficult to actually hire the good new people -- since they recognize they're going to face those kinds of institutional restrictions. For them, it's just easier to go to a "native" company that has bet entirely on the new offering.

All of this impacted Kodak:

Even when Kodak wanted to change, it couldn't, said Mr. Lucas, who has studied the company. "It was so large and had been so successful for so long that it was difficult to bring in people with a digital background."

Kodak has had to take draconian steps to survive. It closed labs and factories and laid off 60 percent of its staff of 60,000.

Indeed, Kodak is impressive in that it actually has been able to shift... even if it took a lot longer than necessary, and even now it's considered to remain behind other players in the space.

This is, of course, the typical Innovator's Dilemma, but it helps explain why so few companies are able to survive the innovator's dilemma. Even if they know about it, they think they can wait. They think that they shouldn't invest heavily in those new technologies and new markets until there's a clear path to profitability, or a clear plan for how it "replaces" what's already there. The problem is that by the time they have the answers to those questions, it's too late.

Filed Under: business models, creative destruction, markets, waiting
Companies: blockbuster, kodak, netflix