Business growth: Go long and short – Inside INdiana Business

“When you come to the fork in the road, take it,” said Yogi Berra, the famous New York Yankee baseball player of the 1960s. While many are lost on his words, in many respects, no truer words were spoken.

Most business owners or managers will be confronted with having to make many decisions in their careers. Some will be easy. Others, not so much. Planning and execution for the long run is more beneficial for firms, as opposed to just addressing short term tactics, at least according to Harvard Business School Professor Clayton Christensen, in his book How Will You Measure Your Life?

It is much easier to consider short term issues instead of developing long term constructs because there is more information with which to make informed decisions, Christensen says, “If we can’t see beyond what is close by, we’re relying on chance—on the currents of life —to guide us.” In business terms, he proceeds to delineate how concentrating on short term revenue and marginal costs, without considering other alternatives or opportunities as they arise, can lead to the demise of a business.

His analysis of Blockbuster and Netflix from the 1990s is a perfect case study of short term/marginal thinking. Blockbuster was the leading movie rental company of the day. Its brick and mortar stores were located across the entire landscape of the United States. Blockbuster charged for each movie rental. Its investment of inventory for videos to place in those stores was substantial.

As Christensen says about Blockbuster “obviously, it didn’t make money from movies sitting on shelves; it was only when a customer rented a movie that Blockbuster made anything. It therefore needed to get the customer to watch the movie quickly, and then return it quickly, so that the clerk could rent the same DVD to different customers again and again. It wasn’t long before Blockbuster realized that people didn’t like returning movies quickly, so it increased late fees so much that analysts estimated that 70% of Blockbuster’s profits were from these fees.”

Netflix, on the other hand, entered the movie rental market with an entirely different approach. It was going to eliminate the need of brick-and-mortar store investments by dealing with its customers directly, through the mail. Netflix members paid a fee each month which, as Christensen says “made money when customers didn’t watch the DVDs that they had ordered. As long as the DVDs sat unwatched at customers’ homes, Netflix did not have to pay return postage-or send out the next batch of movies that the customer had already paid the monthly fee to get.”     

In the first decade of the 21st century, Blockbuster was clearly the biggest kid on the block while Netflix was viewed as the young upstart in the neighborhood. Blockbuster had stores located in practically every good sized city in the country, along with thousands of employees, and as Christensen explained unsurpassed “brand recognition.” Surely, they could deal with the “David going against the Goliath of the movie rental industry.”

But Blockbuster ignored Netflix and their impact on the market. In fact, Blockbuster did not consider pivoting or even trying to compete in the lower cost and better margined space created by Netflix. Blockbuster made the following comment in 2002: “We have not seen a business model that is financially viable in the long term in this arena. Online rental services are ‘serving a niche market.’”

Not only did Blockbuster miss the opportunity to pivot into a more lucrative profit space, they also shot themselves in the foot by not considering a non-bricks and mortar business model and a different subscription process.

Christensen goes on to explain, “This doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future. If we knew the future would be the same as the past, that approach would be fine. But if the future’s different— and it almost always is— then it’s the wrong thing to do. As Blockbuster learned the hard way, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not.”

When it comes to growing your company, you need to consider future areas of growth, while continuing to capitalize on your present market position. Thinking ‘outside of the box’ or in this case, the mail-in envelope, your missed opportunity could end up hurting your company…or worse.

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