by Tiffani Bova
A telling moment, for the purposes of our story, occurred in 1972, one hundred thirty-five years after John Deere was founded, with the introduction of the company’s “Sound Idea” generation of tractors. Mechanically, the Sound Idea line was almost identical to the prior New Generation models but with a modernized approach. The crucial difference was what could be called a shift to a “software” orientation. This was not to say that John Deere was going to abandon its “hardware” by any stretch of the imagination. Rather, it knew that the proven John Deere hardware with new software capabilities would be a game changer for the future of the business.
In particular, the driver’s experience for the first time took priority. The shift was not to a Product Expansion growth path, but within the Product Expansion path: a shift from a product-centric to a customer/user experience–centric approach.
Or: they had already deployed the Product Expansion path, but they decided to combine it with the Customer Experience path. It moved from a product-led to a customer-led design paradigm, which was a radical shift, not only for John Deere but for an entire industry. Now there was no going back.
The new tractors featured enclosed cabs, heaters, radios, and adjustable seats. To our eyes, these may seem like minor changes, but at the time they were significant product enhancements—and ones that set the company on a brand-new, very lucrative growth path.
Customer Experience (the farmer) was actually becoming the product—not the tractors. Most important, these decisions had set the company on a trajectory toward the digital age.
JOHN DEERE
KEY TAKEAWAYS
John Deere could have resisted the change in market context, believing that its long-standing history in the farming community would continue to engender customer loyalty. Instead, it realized that the proven John Deere hardware with new software capabilities would be a game changer for the future of the business and would help it keep pace with what twenty-first-century farmers wanted.
Maybe the biggest shift for John Deere was to put the farmer, the customer, first when developing its products in a much more holistic way. The shift was not to a Product Expansion growth path, but within the Product Expansion path: a shift from a product-centric to a customer/user experience–centric approach.
Any company must be willing to disrupt itself before it can ever hope to respond to a market being disrupted around it. John Deere put everything on the line. The definition of a “product” has forever changed. With its push into digital, it is now both a product and a platform company. It has opened the door to compete not only with other farm equipment manufacturers but with AgTech companies as well.
Selling new products into existing markets requires a deep understanding of the market itself, including the customers. Capturing data about its equipment can help identify ways in which it can improve performance. Capturing customers’ usage patterns, on the other hand, will help it to further extend its customer-driven Product Expansion efforts.
STORY
3
BLOCKBUSTER
“BE KIND, PLEASE DON’T UNWIND OUR BUSINESS”
OK, Houston, we’ve had a problem here.
—JACK SWIGERT, NASA command module pilot of Apollo 13
THERE SHOULD BE NO QUESTION that Blockbuster owned the video rental category—until it didn’t. The company opened its doors in Dallas in 1985. Nine years later, Blockbuster was acquired by Viacom for $8.4 billion. It is almost difficult to remember now, but a decade ago Blockbuster, with its ubiquitous, brightly lit stores, was a centerpiece of American weekend life. Every Friday, tens of millions of people jammed into the company’s stores to rent videos and DVDs—and fight over the latest releases. It had a stronghold on this industry, with the full support of all of the major movie studios, and a formula that worked—it was a license to print money.
Unfortunately, over a ten-year period (1987–97), its rapid hyper-growth and aggressive expansion, as well as M&A activity, began to take its toll. Blockbuster found itself in a growth stall. In an attempt to course correct, it began conducting joint promotions (Partnerships) with Domino’s Pizza and McDonald’s. It began ad campaigns. It pushed into international markets (Market Acceleration). It began to offer video game equipment and Sega Genesis video games at some of its stores. The company considered selling audiocassettes and CDs. It even acquired the right to market tapes of the 1992 Olympic Games (Customer and Product Diversification). It was an all-out blitz. In the United States, it had opened its twelve hundredth store by June 1990; new locations were opening at a rate of one a day.
At the same time as it was fully committed to all of these various initiatives, a slowdown in the video rental industry was becoming evident. Even though the company’s earnings grew an astronomical 114 percent in 1988, it contracted to a still-impressive 93 percent rate of growth in 1989, followed by a rate of 48 percent in 1990. In keeping with this trend, first-quarter financial results for 1991 were disappointing.
There was no question that all of this growth had made Blockbuster the market leader, the de facto video rental choice for families around the United States. With a strong brand, it was able to acquire customers easily and was able to keep them coming back due to its large inventory, but much of that may have been due to the fact that there was no alternative. Launching loyalty cards is one thing. Engendering loyalty among one’s customers is another. Serving approximately three million customers per day in its ninety-one hundred stores in the United States, its territories, and twenty-four other nations isn’t easy. Just ask Starbucks. It’s hard to tell for sure if it ever pivoted to Customer Experience as a way to increase rental frequency or the number of movies rented with each visit, but from the outside looking in (and as a former customer), that didn’t appear to be the case.
The experience of renting a movie could be somewhat frustrating due to the lack of inventory (hot new releases), and it could be time-consuming for the customer walking up and down the aisles as if on a scavenger hunt, hoping the movie was in stock. When the movie was found, the customer had to check that the box matched the movie inside and that the movie was actually rewound. If it was the right movie, the customer would take it home for a two- or three-day rental and then have to go out of the way to return it, often returning it late. Customers began to push back on excessive late fees, which in some cases were actually more than the movie rental itself. It may have been those very late fees that were the catalyst to customers turning away from Blockbuster in the first place and looking for an alternative.
YOUR LATE FEES ARE WAIVED
While Blockbuster had standardized the video rental market, and entertained families for a decade, the company was about to face a challenge that would forever change the company’s history and legacy. First and foremost, Blockbuster wasn’t prepared for the speed with which the context of the market would change around them. The Internet was making its way into homes across the country and consumer preferences were changing right along with it. These circumstances opened the door for alternative, competitive threats.
Neither RedBox nor Netflix are even on the radar screen in terms of competition.
—JIM KEYES, former CEO of Blockbuster
The company leading that change was a Silicon Valley start-up. In 1997, a man named Reed Hastings returned a late copy of Apollo 13 to his local Blockbuster Video store. He was assessed a $40 late fee. A year later, inspired to eliminate late fees once and for all, he founded Netflix. Netflix’s beginnings were humble: it was one of the first during the dot-com boom to disrupt an incumbent by targeting the same customer base with an innovative business model and product offering leveraging newly developed Internet technology.
Netflix began by attacking Blockbuster where the latter company was already feeling the pain. Netflix provided an easier way to rent and return movies, which removed many, if not all, of the friction Blo
ckbuster was causing its customers—especially with its highly profitable late fees.
Netflix was very early in analyzing user preferences, past rentals, and wish list data (similar to what Amazon does today) to recommend movies to its customers. This move was actually a masterful usage of the second growth path—Customer Base Penetration. The company stayed committed to its core, movie rentals via mail, and found ways to entice customers to spend more with it, more frequently, all of which produced their early success.
We don’t have any concern there. Netflix is a great service, it’s a great in-home service. They’ve had other movies. Netflix is very much a television network and not unlike what HBO and Showtime have done for years, they have some original product that goes out there. So it’s not playing in theaters, it’s playing on Netflix and we hope they have great success with it but I don’t see it as an issue relative to the theatrical business. It’s not one really that we talk about.
—MARK ZORADI, CEO of Cinemark
As Netflix was gaining ground, Blockbuster remained in denial about sweeping changes in technology and consumer preferences. In 2004, five years after Netflix’s founding, Blockbuster at last entered the online DVD rental market. In November 2006, Blockbuster began its Product Expansion, right in Netflix’s sweet spot—launching Total Access DVD, where customers could rent movies online, receive DVDs by mail, then return the DVDs to a Blockbuster Store in exchange for a “free rental coupon.” But it was too little, too late. By 2007, Blockbuster counted 2 million online subscribers, while upstart Netflix raced ahead to 6.3 million.
But Blockbuster didn’t have to die—especially for the reason it did. Previous acquisitions and partnerships showed that Blockbuster had the appetite and willingness to expand its product offerings. In 2000, it partnered with Enron in an attempt to create a video-on-demand service. Initially, the partnership was supposed to last for twenty years. However, Enron chose to terminate the deal only a few months later over fears that Blockbuster could not provide sufficient films for the service.
The unfortunate coda to this story is that Blockbuster had all that same information that Netflix did, if not more, yet did little with it—even with its history of Product Expansion (Blockbuster Music, Blockbuster Block Party, Total Access DVD rental service, and Entertainment with Republic Pictures and Spelling Entertainment Group), Blockbuster was unable to see the need to make one more crucial decision—it turned down a chance to purchase the still-fledgling Netflix for $50 million in 2000.
Blockbuster feared change and hung on too long—the context and the customer got too far away from it to recover, and Netflix continued to gain new customers, many at the expense of Blockbuster. This is where Netflix began to make strides and gain market traction, putting huge pressure on Blockbuster. The sequence in which Netflix made these decisions is critical. Had it bypassed mailing DVDs and jumped right to streaming video rentals, it may have found the same fate as many others during the dot-com bust. Netflix captured customers in a proven market—DVD rentals (which still has four million–plus subscribers)—and became highly operationally efficient in that business producing significant profits.
Having beat Blockbuster at its own game, Netflix today faces even more formidable competitors in the business of content creation and delivery—notably from the likes of Disney, following their $52.4 billion acquisition of Fox in 2017: “Disney’s chief executive, Robert A. Iger, is steering the company into streaming services to compete with Netflix, Apple, Amazon and Facebook.”
BLOCKBUSTER VS. NETFLIX
KEY TAKEAWAYS
From the beginning, Blockbuster seemed not fully to understand what its “product” actually was and what value it had for its customers. It assumed the product was the movie customers came to the store to get, so it built a large selection of movies to choose from and set up a massive distribution network for the movie studios’ product. What it missed was that its customers were buying the experience of watching a movie with family and friends. This meant it was completely exposed if customers started wanting to get/consume/use the product in different (distribution channels) ways.
Blockbuster’s success resulted in its complacency. Being the longtime front-runner in video rentals impaired its ability to see the looming shifts in market context, and thus the potential threat that Netflix posed for the future of its business. At the turn of the new millennium, customers had started looking for easier, more effective ways to get things done through technology. As a result, companies from every industry were having to rethink their entire value proposition and go-to-market approach, giving serious consideration to the possibility that their biggest rival might not be the competitor down the street but rather a faceless, virtual store with lower overhead and a clear understanding of how the Internet and its users work.
Blockbuster wasn’t just slow to enter the world of online video rental; it also failed to capitalize on its unique selling proposition once it arrived. With a large customer base, Blockbuster should have entered the online arena like a gangbuster, touting the obvious advantage it had over Netflix—rent online, return at the store. Instead, Blockbuster made its grand entrance by copying what Netflix had already done . . . except that Netflix was doing it better and more cheaply and had already begun to chip away at Blockbuster’s customer base.
Pursuing multiple growth paths simultaneously requires thoughtful attention to sequence. When Blockbuster found itself in a growth stall, it was trying multiple paths trying to course correct. The combination of too many growth paths meant it wasn’t really committed to any one of them but beholden to all of them.
PUTTING IT ALL TOGETHER
Great companies are built on great products.
—ELON MUSK
IF YOU ARE GOING TO pursue this growth strategy, it would be valuable for your product marketing and market intelligence departments to constantly look for opportunities that can be filled by new products, enhance existing offerings, or even form new partnerships to gain access to new customers.
It is true that new product introductions are always risky endeavors, but less so now with the new twenty-first-century definition of a “product.” In a Product Expansion growth strategy, the particular challenge is to not confuse your current customers with a fundamentally new product that, cognitively, doesn’t quite fit with the core products they associate with your company. Rather, think about staying close to your core and choose adjacencies to your existing base.
The Product Expansion growth path, when successful, opens the door to two of the most exciting combination paths, both of them relating to working with other companies—even competitors—and they are Partnerships and Co-opetition. This may not seem intuitive, but keep in mind: bringing a new product to market is often a very cost- and labor-intensive activity. Expenses may include research and development, prototyping, laboratory testing, field testing, establishing manufacturing lines, Internet protocol (IP) filing, training a dedicated sales force, new service programs, manuals, marketing, and advertising.
Thus, even when the potential for reward is great, so, too, is the risk. The best way to minimize that risk—even if it means losing some of the potential revenues—is to share it with others through Partnerships, especially those with unique or established skills that your own company may not (yet) have. Some of those new competitors have more complete distribution channels and retailer relationships, and deeper understandings of customers than you do. There is no time to go slow—and doing so will not reduce risk but likely increase it. The profit advantage you gain by being first in the market will soon be gone. Move quickly—the best way to do that is to work with others. In such a scenario, even your worst competitor can be your best friend—at least for a while.
WHAT WORKS—AND POTENTIAL PITFALLS
It is a bad idea to expand your product offering when you haven’t thought through the implications of doing so. B
ut when you do think it through, it can lead to growth. For example, initially McDonald’s did not launch All Day Breakfast—a Product Expansion—despite huge demand in the marketplace, until it was first able to operationally implement the expansion across its massive network and supply chain. Otherwise, McDonald’s would risk getting in over their head and failing to keep up with customer demand, which could have resulted in serious reputational brand damage.
COMBINATION: PATH 4—
Product Expansion + Path 8—Partnerships
In Product Expansion, you are just as likely to adopt this or the other combination path almost immediately. The reason is that, as just noted, a new product cannot achieve its true potential until it is surrounded by an entire supporting ecosystem (i.e., service, sales, and marketing).
This combination path is the template for creating that ecosystem by locating, and associating with, companies that can fill in the “holes” of your company’s go-to-market program for a new product or portfolio of products. That can include expanding your company’s sales footprint by establishing original equipment manufacturer (OEM) relationships with other firms or licensing sales in particular vertical markets you are unlikely to exploit for a long time to come.
If your proposed product is going to require an expensive development effort, you may want to enter into a codevelopment contract with an aging company that has more capital but less innovation. You might also partner with a company that already has established and robust distribution channels but lacks products to fill it. Or you might partner up to get access to another company’s already extensive user base in your newly targeted market.