Kodak, AOL, Yellow Pages, Dell, Microsoft, Blackberry, Nokia, Blockbuster…an uncomfortably long list of big, once successful businesses that failed or are failing to disrupt themselves and in so doing watching new entrants claim their markets. In fact, it is easier to find case studies of capitulation than it is regeneration.
However, blogger and PwC director Richard Blundell recently wrote about the self-disruption of Netflix, from DVD to online streaming subscription services.
Realising the market was moving away from DVDs, Netflix did two remarkable things. They:
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- switched customers to lower priced streaming subscriptions, taking a hit to revenue, and
- bolstered their content so that the customers would receive a great experience, taking a hit to their cost base.
Blundell charts the transition, but the short story is that the pain they swallowed by re-engineering their business is now paying off big time. Australian accounting software company MYOB is similarly transitioning from pure software to cloud services as its market shifts.
Why don’t we all self-disrupt?
It is easy in hindsight to point to companies that have failed to adapt. Surely they must have known?
Having worked for two large organisations whose business models were dying, I can say yes, they must have known. We all knew.
But it wasn’t a question of awareness; it was a question of behaviour.
Overcoming behavioural blockers
To be self-disruptors like Netflix, we need to overcome the following behavioural biases in ourselves and our workplace culture.
Loss aversion: fear of losing is stronger than desire to gain
- For example, a business might choose to offset revenue declines through customer attrition by increasing prices on outdated product plans for those customers remaining. In Netflix’s case this would have meant keeping customers on higher priced DVD subscriptions rather than moving them to lower priced plans with greater longer term potential.
Short-term bias: preference to act for now rather than later
- Making decisions to dress the financial year results rather than address viability beyond that exemplifies short-term bias. Often compounded by bonuses and rewards based on short-term results, short-term biases in decision-making mean we risk never getting around to re-engineering like we should.
- Beware Bandaid solutions that attempt to mask a haemorrhage and “Quick Wins” like price hikes that are superficial. Netflix could have raised its DVD subscription price and coasted on good top line performance…right up till the time it found it had no customers left and no future.
Sunk cost: it’s hard to walk away from something in which we’ve invested time, money or effort
- We get used to how things are and build processes, systems and habits around them. Stepping away from anything that is entrenched (including beliefs) is psychologically and financially difficult. Netflix had a portfolio of DVD titles that it had to walk away from, as well as a known customer engagement model and yet they overcame this in order to re-engineer their business.
Time to disrupt yourself
So what kind of case study do you want your business to be: capitulation or regeneration? If you are in a business that is stuck in status quo while your market is changing around you, if you are frustrated that your leaders or staff are not responding with the urgency and commitment to change you need then look to engage people like me who can bring an external perspective to your situation and chart a course forward. Disrupting your business is hard work, but closing your business is harder.
Bri Williams runs People Patterns Pty Ltd, a consultancy specialising in the application of behavioural economics to everyday business issues such as financial decision-making, website conversions, marketing effectiveness and change management.