We can gain helpful insights by winding organization models back in time to see how they emerged and progressed. When it comes to competing company models, we can examine the different results and perhaps appoint some domino effect analysis to analyze why one design variant performed much better than another. How do we do that? Through the method of entrepreneurial organization history.
Alan Payne conducts just such a historical organization design re-enactment in his exceptional book, Developed To Fail: The Inside Story of Blockbuster’s Unavoidable Bust (Mises.org/ E4B_116_Book). It’s the dynamic story of two contending organization models in one market, a contrast of outcomes, and the resulting development of a brand-new, third model.
Key Takeaways And Actionable Insights.
Business models are discovered by experimenting entrepreneurs.
The video cassette recorder (VCR) and playback gadget was a technological emergence in the 1970s. Movie studios saw the chance for new sales but worried about diverting profits from the theater channel and therefore priced movies-on-cassette rather high from a customer viewpoint (about $65). The experience of seeing motion pictures in your home was valuable to consumers however the exchange worth was not aligned with the cost. A couple of enterprising entrepreneurs found the rental option (do not purchase the cassette, lease it, and return it). The system rental price emerged at around $3. The video rental service was born. Private rental stores paid and some of the business owners started to open numerous shops and construct little chains.
Capital-advantaged investor value-focused owners recognize emerging business models that are scalable.
Alan Payne’s story of company model advancement in the video rental industry describes an excellent leap in industry growth led by another kind of business owner. Wayne Huizenga was a business owner experienced in a certain type of growth design. He had developed Waste Management, a Fortune 500 company, from a one truck trash collection path, mainly through acquisition and subsequent expansion of regional operators. He knew how to finance and run high development expansion of a templated operating system. He purchased Hit for $18.5 million and offered it nine years later on for $8.4 billion. That’s a big quantity of investor value generation.
Under Huizenga, the consumer worth experience did not improve. It was frozen. We understand that consumer experience is dynamic, not fixed; Huizenga’s Blockbuster let more and more consumers into a static experience (through geographical growth) but was not producing brand-new value for those or any other customers.
More consumer-oriented businesses progress more responsive business models.
In Alan’s story, HEB Grocery was a different type of entrepreneurial service that approached consumer value in a various method. Alan describes the company as “obsessed with being the best” at fulfilling the ever-changing preferences of food shoppers. An efficient grocery seller must be highly responsive to changing consumer requirements and skilled at providing selection and worth at low cost, with operational excellence in stock management and client service.
HEB decided they might offer video rental service in-store and brought their grocery operations abilities to bear on designing a consumer-preferred experience. They tested different worth propositions– Alan called their stores labs for the video rental experience– and let the customer choose which were the best. They try out stock (variety of motion pictures readily available), the in-store choice of new releases versus classics, different pricing schemes for various films, different return dates for various items, and offering snacks alongside motion pictures, among other variations. The result was a differently-tuned organization design, one that constructed a more satisfied and devoted user base and produced more income and more profit per shop than Smash hit.
Company designs are tools for financial expedition and improvement, so long as there is supervisory and organizational versatility to learn and improve.
When Alan Payne went to work for Blockbuster as an executive to run a panel of franchised shops, he moved the learnings from the HEB video rental business model. He demonstrated that the design could be applied successfully in this brand-new environment, attaining comparable levels of development, profitability and consumer satisfaction and commitment in his panel of shops.
The concern for Smash hit was not service model transferability, but the supervisory, organizational and decision-making environment into which it was transferred. Smash hit was a top-down hierarchy in which understanding streamed one method– from the top of the hierarchy to the stores in the type of commands. When there was discovering at the store level about new and better methods to arrange, to handle, to operate, to please customers and to make revenue, it was impossible to transfer it upwards and share it. Blockbuster lost money and went into bankruptcy even while a considerable number of stores in Alan’s franchised panel were operating beneficially and were growing.
Alan ultimately raised the cash to buy the franchised stores from Smash hit and run them separately, which he did successfully and beneficially for over twenty years. Smash hit never ever had the ability to learn any of his strategies, nor modify its business model to the more successful version that was in plain sight.
In some cases, an outsider from the market comes along to seize the opportunity of the next company design advancement.
Alan makes it clear that technological change did not kill Blockbuster or the video rental model. When DVDs were introduced to (ultimately) change video cassettes, Alan’s franchised stores prospered by offering both side-by-side and therefore attracting two sets of customers in one shop.
Netflix was able to prepare for a future in which the digital information kept on DVDs became streaming data downloaded in your home by customers. This was not a lot an act of prescience as one of exploration. The next brand-new video-at-home experience began to emerge and Netflix recorded much of the customer worth.
There is more value to be captured today because the customer finds brand-new experiential benefits in streaming, and the accompanying data analytics deliver insights that a consumer-centric firm like Netflix can utilize to more enhance the experience. The same opportunity would have been readily available to Hit, however their lack of business design agility and their failure to develop learning channels from the consumer back to the corporation indicated that they could not take it.
Additional Resources
Constructed To Fail: The Scoop of Hit’s Inevitable Bust: Mises.org/ E4B_116_Book
“Consumer Value vs. Shareholder Value Models” (PDF): Mises.org/ E4B_116_PDF