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Case Pointers
 The first Blockbuster store opened in 1985. At its peak in 2004, the
company operated 10,000 stores and had a market value of $5 billion.
 2500 title per store – hit movies, new releases
 Purchase model and revenue share model
 Locations were chosen based on customer concentration & proximity to
competition, focusing on high-visibility stores in heavily trafficked retail areas
 Staffed with part-time employees
 As rental demand for a particular title dropped, the stores remarketed used
copies to reduce their inventory
 Late returns led to increased levels of stockouts, costing Blockbuster
incremental rental opportunities as well as reduced customer satisfaction
 Did not recognize demand for DVD by mail – Blockbuster online in 2004, BTA
 Cancellation of late fees in 2005 - Loss of $600mn revenue
 By late 2013, Blockbuster’s new parent, DISH Networks, shuttered all stores.
 Case Pointers
 When Netflix launched in 1997, its business model was DVD
rental by mail. – Targeted people who had DVD players
 Only appealed to a few customer groups: "movie buffs who didn't
care about new releases, early adopters of DVD players, and online
shoppers.”
 Netflix was able to appeal to Blockbuster's core audience by
providing, "a wider selection of content with an all-you-can-watch,
on-demand, low-price, high-quality, highly convenient approach."
 Recommendation systems for movie enthusiasts
 Competition with local DVD retail rental / sales stores - Prepaid
subscription service
 “All you can eat” - Unlimited rentals – New Vs old Movies rental
issues
 Case Pointers
 Demand mapping proprietary algorithm driven recommendation
 Revenue-sharing model with major studios and increased
distribution centers with low cost investment with target of one
day delivery
 Profitability and reach increased for low-profile movies –
acquired distribution rights for movies
 Moved to a “technology company” & shift came with the rise of
streaming video.
 Started “View Instantly” and “original Content” like House of
Cards
 Competitors - Vongo, CinemaNow, MovieBeam – offering
VOD through stand-alone channel, setup-box to TV
 Issues related Qwikster and Netflix –Stock price crash
 Case of Netflix 2011
 What was Blockbuster's value proposition before Netflix
came along
 Describe blockbusters resource allocation strategy
 Describe blockbuster's profit formula
 What was Netflix's value proposition when they started
 What drive the change to Netflix's "all you can eat"
subscription model
 How would you compare Netflix resource allocation
strategy Vs that of Blockbuster
 Why was Blockbuster so slow to respond
 Case of Netflix 2011
 What insights we can glean from Blockbuster's response
to Netflix? what was the BB's management thought
process
 Did the subscription model even make sense for
Blockbuster? Who might find subscription model more
attractive
 Blockbuster duplicated Netflix's online system.Was that
helpful or not and why?
 What should Blockbuster have done?
 Do you think Netflix success in streaming is sustainable?
 Key takeaways from the case
Technology Innovation

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 Technology Innovation
Taking the lessons, skills & overall
technology and applying them within a gives birth to
different market. Increases new customers new industries
as long as the new market is receptive (or swallows
existing ones)
and involves
creating
revolutionary
technology

"Stealth innovation"
- involves applying
new technology or
processes to the
company’s current
market and often be
Use existing technology inferior to existing
& increase the value of market technology
customer within your in its initial form
existing market

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 Sustaining Vs Disruptive Innovation
 Companies pursue “sustaining innovations” at the higher tiers of their
markets - charging the highest prices to their most demanding and
sophisticated customers at the top of the market, companies will achieve
the greatest profitability.
 However, by doing so, companies unwittingly open the door to
“disruptive innovations” at the bottom of the market.
 The term coined by Clayton Christensen describes a process by which a
product or service takes root initially in simple applications at the bottom
of a market and then relentlessly moves up market, eventually displacing
established competitors.
 Allows a whole new population of consumers at the bottom of a market
access to a product or service that was historically only accessible to
consumers with a lot of money or a lot of skill.
 Characteristics - lower gross margins, smaller target markets, & simpler
products & services that may not appear as attractive as existing solutions
 Clayton Christensen Disruptive
Innovation Framework (VIDEO)
 Case of Uber
 When it launched, Uber didn't go after overlooked segments of
the population, or provide a cheaper alternative to taxis.
 Uber just made a more convenient taxi system using your
smartphone, going after the taxi companies' core business right
from the start.
 Uber has gone in exactly the opposite direction: building a
position in the mainstream market first and subsequently
appealing to historically overlooked segments.
 While Uber does now serve people living in areas often
overlooked by taxis, they moved more downmarket than
upmarket - the opposite of a disruptive company like Netflix.
 Uber is innovative, sure, but not completely disruptive in the
way
Disruptive Technologies –
Winners & Losers
 So what causes a Technology Innovation
to fail?
 Majorly two reasons
 Hype - attracting the early part of the product adoption curve - Solely focusing on
the Innovators, as we talked about above.
 When traditional companies who are still stuck in norms testing try to fit a
product for maximum appeal to a broad audience.
 Too much focus is placed in the middle of the curve, say with the Early Majority
and Late Majority. This leads to a failure to launch.
 Coca-Cola launched Coca-Cola BlāK
 64% of Americans over the age of 18 drank coffee and 50% Americans drank soda daily.
The natural conclusion had been to combine the two into one beverage.
 But apparently 0% of people actually wanted to drink coffee and soda together, which
made the product a disaster.
 Google Glass - A phone people could wear on their faces, projecting the phone’s
functionality and connectivity into the user’s field of view at all times.
 Customers didn’t understand the social impact they were having by wearing Glass
on their faces. - In social scenes, other people were uncomfortable with it, and the
product ultimately failed to catch on.
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 Summary Thoughts
 A disruptive company targets segments of the population that have been
overlooked by its competitors, delivering an inferior (but more tailored)
alternative, often at a lower price
 Disruptive innovations originate in low-end or new-market footholds
 Disrupters start by appealing to low-end or unserved consumers and then
migrate to the mainstream market
 Disruption is a process from fringe to mainstream
 Disruptive innovations don’t catch on with mainstream customers until
quality catches up to their standards
 Disrupters often build business models that are very different from those of
incumbents
 Subsequent versions of iPhone post 2007 connecting application developers
and phone users
 The mantra “Disrupt or be disrupted” can misguide us
 Incumbents should strengthen relationships with core customers while also
creating a new division focused on the growth opportunities