The biggest slipup in tech history may be when Yahoo missed chances to acquire Google and Facebook. But even more tragic was Blockbuster.
The former video-rental juggernaut balked at an opportunity to buy Netflix in 2000 and then ignored digital media until it was too late. Blockbuster finally launched a streaming service in 2004. “If they had launched two years earlier, they would have killed us,” Netflix CEO Reed Hastings told The New Yorker.
Blockbuster didn’t innovate. It maintained a business model that penalized customers with late fees and avoided the next best thing in media, and those decisions led to its failure. Its successor was able to capitalize on Blockbuster’s collapse by embracing transformation. In fact, Netflix is the standard for companies that have changed their strategy and reaped the benefits of business model innovation.
3 Companies That Have Changed Their Strategy Successfully
Research in the Harvard Business Review identified global companies that have made the highest-impact transformation over the last decade. After screening all firms in the S&P 500 and Global 2000, two panels narrowed down the list of frontrunners to the final 20. Here’s a quick look at the three top-rated companies for new-growth transformation and, overall, business model innovation.
Note that company growth figures are from the Harvard Business Review. They include a percentage of total business for the new growth area and stock compound annual growth rate (CAGR) since the base year of transformation.
Netflix was founded in 1997 but didn’t experience growth until a major business model change.
The first innovation came in the early 2000s when Netflix moved away from mailing DVDs and focused on streaming. Netflix launched its video-on-demand service with 1,000 films in 2007 as Blockbuster aggressively advertised its DVD-by-mail service, according to an Ars Technica article from that time. By the end of 2009, CNET reported how the service expanded to more than 12,000 movies and TV shows available for smart TVs and gaming and streaming devices.
The second innovation, and the subject of Harvard Business Review’s analysis, came when Netflix shifted from distributing digital content to producing original content. “We don’t and can’t compete on breadth with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google,” CEO Reed Hastings said in a 2013 company memo. “For us to be hugely successful, we have to be a focused passion brand. Starbucks, not 7-Eleven. Southwest, not United. HBO, not Dish.”
Changing business models once more impacted Netflix’s success. Since its most recent innovation, Netflix increased its profits 32-fold. On the Fortune 500 list for 2019, Netflix jumped 64 spots to No. 197 with a 35.1% boost in revenue.
- Original content – 44% of total business
- 59% stock CAGR since 2012
Adobe acquired online marketing and web analytics firm Omniture for $1.8 billion in 2009. In that acquisition, Brad Rencher joined Adobe to head its Digital Experience business.
With Rencher on board, Adobe acquired other companies — including enterprise content management company Day Software in 2010 and multi-channel digital advertising company Efficient Frontier in 2012 — to form the main components of the Adobe Experience Cloud (AEC) in 2012. AEC is a set of digital marketing and web analytics products that differs from the typical pay-beforehand model Adobe used in the past. The new plan was a subscription-based model. Back then, it was quite a business model innovation that impacted other areas of the company.
The transformation involved some tough decisions. For instance, Adobe abandoned some parts of the business and products like Adobe Flash. The company also laid off 680 workers in 2009 and 750 more in 2011, as VentureBeat reported. Yet, based on the results, business model innovation has turned Adobe into “one of the largest, most diversified, and profitable software companies in the world,” as Adobe CEO Shantanu Narayen told analysts in a post-earnings call at the end of 2019, according to TechCrunch. The report points to two billion-dollar acquisitions in 2019 that fit under the “Digital Experiences” revenue bucket (that accounted for $859 million in revenue for a single quarter). Of the companies that have changed their strategy successfully, Adobe is another model candidate for business growth.
- “Digital experiences” – 27% of total business
- 26% stock CAGR since 2009
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The Amazon Web Services (AWS) platform emerged from an idea to capitalize on one of the company’s biggest advantages: its infrastructure. By selling access to virtual servers, Amazon could make money on their strength. After a couple of launches in the early 2000s, a 2006 re-launch gave a clearer vision of what it would become. It then included cloud products that allowed businesses to build their applications via Amazon’s infrastructure.
The plan paid off. By 2009, AWS expanded into Europe and built partnerships with Dropbox, Netflix, and Reddit. Most notably, in 2013, the CIA signed a 10-year deal with AWS — not tech giant IBM — for $600 million, according to The Atlantic. At the time, CIA Chief Information Officer Douglas Wolfe called the deal “one of the most important technology procurements in recent history.”
There’s no question that AWS is a significant and successful part of Amazon. In 2016 at Code Conference, one of the world’s largest tech conferences, Amazon CEO Jeff Bezos said that AWS was one of Amazon’s three pillars, along with Amazon Prime and Marketplace. In July 2019, VentureBeat reported that AWS grew 37% to $8.4 billion in sales for the second fiscal quarter of the year. Remarkably, it was the first sub-40% growth rate since Amazon started reporting financial numbers for AWS (2015).
- Web services – 11% of total business
- 39% stock CAGR since 2009
How to Approach Business Model Innovation
Not all of the companies discussed previously faced failure if they didn’t explore changing business models. You could argue that Netflix may have suffered the same fate as Blockbuster — twice — if it didn’t embrace digital media and switch to producing original content. But Adobe and Amazon probably would have been fine. Then again, it’s hard to know for sure.
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