Shock & Awe : Shifting Models & Changing Times
The year is 1998. Marc Randolph and Reed Hastings had just launched Netflix, a company that would go on to transform the way we rent movies. It wasn’t long after they started before they were courted by Amazon. Amazon had wanted, through the acquisition, to accelerate their move into videos but Netflix decided to grow the company on their own and focus on rentals.
In the early 2000s, they had a meeting with Blockbuster to sell the company for $50 million. The sale would have given Blockbuster a leg up in the changing landscape of video rentals. As the story goes, John Antioco, Blockbuster’s CEO, struggled not to laugh. Blockbuster was presented with an opportunity to adapt to changes in its market. They failed to see the potential impact and adapt or innovate their way past the shift. By 2014, Blockbuster no longer existed and today the Blockbuster brand is mostly retired.
In our previous article we mentioned some of the events that are typically catalysts for change and innovation: shifts in technology, major industry changes, economic shifts, and crises. Specifically, we talked about the current crisis affecting us all, the impacts it is having, and the expected aftermath. In this article we want to focus more on events that we see happening more and more in industries around the world: shifting models and changing times.
The story of Netflix and Blockbuster is not unique. Everyday companies are coming up with new innovations for industries all over the world that cause ripples and shifts, some small and some large, within their industries. It is the companies that make innovation part of their culture that can read the shifts and adapt to change. They tend to find ways to be more resilient, to grow and to thrive despite the currents of change.
So, how can you learn to ride the currents or, better yet, be the catalyst for a shift in the currents? The solution is to foster a culture of innovation. But before we dive into that topic, let’s dive into some stories of rises and falls that could have been avoided.
Why should I care about Innovation?
Cautionary Tales of Delay
Each of the tales below are complicated. Each company’s story is not fully expressed below. However, the outcome for each is pretty much the same. Without innovation, "Short Term Gains" produce "Long Term Decay" which results in the erosion of revenue and profit.
The Story of Big Blue’s Fall
Root Issue: Slow to Adapt to technology advancements and capitalize on future opportunities
In 2012, Ginni Rometty was crowned CEO of IBM. In the first year she took the company from a Market Cap (MC) of 198 (B) to a respectable 240 (B) (+21%). While increasing Free Cashflow from 11.8 Billion to 18.2. She increased Cash by 50% and as a result moved the stock prices up by 14%.
Fast forward to Jan 2020. A share of IBM is barely pushing $135 and their Marketing Cap is less than half its value seen in 2013. How did Big Blue, a company which ushered the world into the technical revolution, fall so fast?
According to several financial analysts, it was the failure to move with changes in the technology sector. Microsoft, Oracle, and even newbies like Amazon and Google, all restructured, their organizations. They morphed their business models and structured their companies and services to be in line with Cloud Based offerings and support services.
Impact: In 8 short years.
- 50% loss of Stock Value
- 44% loss of Market Capitalization
- Position Loss as a Leader in Technology
On a bright note IBM recognized this about 2 years back. Today, they are playing catchup. However, such a restructure may require the sale of a couple divisions to cover the cost of re-org and Digital Transformation.
The Story of a Small Business That Forgot to Market
Root Issue: Too Focused on Business for Today and ignoring change and innovation for the Future.
In 2010, a Small local Carpet Cleaning company was just breaking out. Recession caused them to tighten their belts & trim fat. Now the market was returning, and they added two new routes. However, the perfect storm was brewing.
Since the early 2000s, they ignored prospect marketing and their brand image and marketing messages were disjointed. They had and still offered premium cleaning services and superb customer support. So, their customers loved them. They truly were the premium Cleaning Service in Chicago. However, they heavily relied on Phone Book and Coupon Mailing programs for Prospecting.
The issue did not start to reveal itself until 2012. Quickly the performance and RIO of Phonebook ads and Coupon Mailers diminished. The organization started losing money. New marketing opportunities & avenues arose. Groupon and Angie’s List came to the rescue. But at a high and hidden cost.
Over the past six years, instead of re-inventing the Brand and truly adopting a healthy digital marketing strategy, they opted to acquire leads from Angie’s List, Groupon and Home Advisor. By not building their online presence as The Premium Cleaning Service in Chicago, they plateaued in revenue. At first glance you would not know it. They had work and the company seemed to make a profit for the owners.
So where is the damage? In 2012, their average sale was $225 and returned a healthy profit. In 2020, their average sale dropped over $100. They were doing more for less. Over the same 8 years equipment, operational, servicing and labor costs all increased. To make a profit, they took shortcuts, cut back on essential services. Reduced fringe benefits. Profit margin shrunk drastically.
Impact: In 8 short years.
- 60% reduction Sales Per Servicing
- Disproportionate increase of costs vs income
- Position Loss as a Premiere Carpet Company
Business Issue:
1) Lack of valuing their position in the marketplace in 2012.
2) Lack of understanding the importance of Prospecting in the new socially digital world.
3) Lack of investment in proper marketing strategy and healthy digital marketing
4) Lack of new service offerings, market growth, and technical adoption.
The Story of a Brick & Mortar Store Losing Touch with Change
This is a very short story about Carson Pirie Scott. Brick & Mortar Retailers all over the country and the world… BEWARE!
JC Penny, Sears, Kohls, Macy’s and many other organizations like them are struggling to make a profit. But why? Not because of Amazon. Not because of the internet. Their business model is the primary issue. The model of a Marshall-Fields business is no longer appealing to a technical savvy, relational, and principled consumer.
Such companies are not willing to GUT their business. They need to change their business models to authentically connect their brand, service, story and consumer together.
Impact: In 6 short years.
- Profitable Business to 2018’s gutting, liquidation and closure in just 12 weeks.
Business Issue:
1) Bon-Ton’s Over Extension in Brick and Mortar Stores in 2012 -2014
2) Lack of innovation (Technology, Location, Product, Data and Message)
3) Ignoring the signs of changing times. The following types of innovations would have supported such a transformation for Carson’s.
Their story ends there however below are some of the innovations Brick & Mortar Retailers will need to consider over the next couple years.
Technology Innovation: Adopt and Develop Technology
a. to better support the Online and In-Store customer experience.
b. to streamline the sales process
c. to build a customer relationship management system with communication management.
Physical Space Innovation: Reduce & Leverage space more effectively.
a. Digital Fitting Room Mirrors with save image capabilities
b. Digital Measuring & Sizing Technology
c. Rapid Purchasing & Return Tools (Nordstrom have walking tellers to help guest purchase in seconds.)
d. Personalized Fashion Consulting (for higher end brands)
Product Innovation: (The opinion here is more geared toward a particular
Find partners to offer exclusive, environment friendly, socially responsible products.
Consumer Data Innovation: Capture and Capitalize on Behavioral Purchasing by consumers.
Marketing & Message Innovation: Tell the story about how this technology, consumer friendly products and re-innovated customer service will better support customers’ experience, life, and the community.
Lessons to Learn
You may have noticed the obvious lessons in the stories above. But really it is not that obvious. The common issues are rooted deeper in the nature of our human psyche. We believe that what has worked yesterday will work tomorrow. As leaders, we need to keep growing, by learning how to understand and leverage change. We are here today, stating what should be obvious.
#1 CHANGE IS CONSTANT
#2 WHAT WORKED YESTERDAY WONT LIKELY WORK TOMORROW
To overcome this, we need to adjust how we are adapting to change. We have philosophies and processes within our decision-making hierarchy that prevent and deter innovation. We need to deal with our aversion to change by shifting our internal philosophies. We are simply saying… Time for a Mind Shift.
Minds Shift #1 – Tactical vs Strategic
Each one of us tend to lean on one side or another. We are either Tactical or Strategic.
1. Tactical: Focused on Business for Today, often reactionary.
2. Strategic: Focused on Business for the Future, planned actions with a long-term focus.
Often businesses, whether they intend to or not, fall into one of two traps. The first is focusing on the tactical. In this trap, businesses get caught in a cycle of reaction and often fail to find a way to break the cycle and make real strides forward. The second is focusing on the strategic. In this trap, businesses design grand plans, but fail to focus enough on execution. They also fail to react to the shifts of today in order to stay focused on moving the needle forward.
So how do you avoid these traps?
By intentionally splitting your focus between both or assigning the appropriately skilled individuals to each area you can poise yourself and your company to act tactically when necessary without losing your strategic focus. Avoid prioritizing one and sacrificing the other.
This is obviously easier said than done. You may even need to divide your board of directors and advisors into two camps. A Group focused on running the business. While another group is focused on strategically guiding the business toward long term objectives to strengthen and grow the organization.
Carson Pirie Scott had several opportunities to restructure their organization. In one 2014 board filing it is mentioned the board considered an option to drastically reducing the footprint of current stores and modernize product presentation. The board decided to stay the course. A year later they selected to continue with the Large Brick & Mortar Department Store model and open 11 new stores in 2015 - 2017. They filed for bankruptcy in 2018 and closed their doors.
Mind Shift #2 – Strengthen Your Core
Business Consulting Firms have convinced us that if we are a perfectly tuned and well-oiled machine, our organization will maximize profit. What does this mean?
If we correct all the problems we can identify, the cost of operations will reduce. Reduced operational costs, will increase our profit margins. Too often, it is surprising that an Executive Management Team is structured to address problems, prevent issues and mitigate risk. They are not structured to maximize their organization’s strengths. In fact, it is common that Executive Management is designed to support the status quo (The Well-Oiled Machine). Organizational Strengths, Opportunities and the Future are relatively ignored. As a result, Opportunity Loss increases dramatically.
So where are you in all of this.
Do you focus on honing your strength or are you a fire fighter?
Neither is bad. In fact, your organization needs both. IBM forgot to invest in its core. Instead it trimmed fat to increase profit margins. A good move, temporarily. The real mistake was not appropriately re-investing the profits into their core business and business model for the coming shift. Over the next 5 years, guess what they will be doing. Digital Transformation. Before they do, it’s my guess they will have to sell off a couple units to cover the costs.
Mind Shift #3 – Read tea leaves.
Tea is the most popular drink in the world. Just not in the US. Here, Coffee is king. I am sure you already knew that. In fact, that is exactly what we are eluding to. 2012 was a very important year. It is when relational marketing, social media and local businesses converged. The internet changed. It now had a local impact on our lives. It moved from Global messaging to daily local living.
For businesses, 2012 marked the year when Marketing Online became more important than marketing offline. We moved into the digital life. Online communities were popping up everywhere. Relational marketing tactics were growing more effective every month. Businesses were now able to directly communicate with their potential clients in a highly engaged manner. Technology costs decreased while internet access and bandwidth speeds increased almost overnight. Distributed systems were starting to pop up everywhere. Netflix, Hulu and Amazon Prime were ushering in a new form of Entertainment.
All of this meant that traditional business would have to change (morph and digitalize). Change is inevitable. Change was and still is coming. Change or slowly fail. That is the message we heard. Many of us ignored the message, while others read tea leaves and changed. They looked at their business and realized that the future had opportunity, but tosdfasdf capitalize on the opportunity they had to prepare for it.
Domino's sShifted their marketing and sales tools to meet the consumer appetite and order behavior
McDonald's
Transformed their in-store POS (with kiosks) and customer (mobile) apps to reduce costs and increase sales.
IKEA
Is revolutionizing how consumers Shop at Home for Furniture
Amazon (aka founded as a Online Book Store)
Is the largest hosting company in the world. (Just ask Netflix)
Microsoft
Is re-inventing their offerings (almost daily)
In this new digitalized world, there is plenty of opportunity. We all saw it coming. It was obvious. The question is not, do we need to shift. The question is “How do we get started?” In next week’s article we shift the conversation from identifying change, to start the retooling process of making our organizations into a “Culture of Innovation”.
Previous Article:
About Article Series: SHOCK & AWE
Shock & Awe is a series of articles written by Nick Rich and Don Brown on change and innovation. In this first article we hear about the impact of a crisis on business, the economy, and our lives. In article two we will dive into some of the other types of events that are catalysts for change and innovation in business.
About the Authors:
Nick Rich: As Chief Strategy Officer at EEI (Enrich Enterprises, Inc.), Nick Rich helps drive change and corporate strategic initiatives for both clients and partners. In addition, he is a writer & speaker on Innovation Strategies, Digital Transformation, Data and the future of Scalable Workforce.
Don Brown: Currently the Director of Software Engineering at Premier International. Passionate about technology, innovation, software development, and sci-fi, he believes that technology can be a force for change within any organization. He also advocates that partnerships between technology departments and leadership are a growth multiplier.
Tags
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Senior Manager | Premier International. Do you need help managing data risk? Let's connect and discuss if my analytical skills and a passion for coding can help.
4yI noticed that shifting your model doesn't mean sacrificing who you are - and your list of positive examples emphasize this. For example, McDonald's weathered criticism while holding fast to most of their classic menu items. Meanwhile they deserve credit for innovations around POS (which you note) and for offering benefits to working students (which I'd like to add to your list).
All go, no quit | Technology Leader | Problem Solver | I turn technology into solutions to business challenges
4yToday, more than ever, businesses need to be vigilant and constantly ask themselves where they think the market is going next. These are turbulent times where change can happen in an instant. In order to thrive amidst the chaos, you need to be looking for the opportunities that are arising all around us. I'm looking forward to moving this series into practical steps for creating a culture of innovation so that we can avoid the trap of complacency.