Wednesday, May 12, 2010

Take nothing for granted

I was thinking recently about what a great service NetFlix is.  No longer do I have to schlep down to the corner Big Box movie rental place and be completely disappointed by their selection.  Now I have a full range of choices that are quickly and easily delivered to my doorstep, with the added benefit of no late fees.  In fact I thought NetFlix had the perfect business model until I read the news recently about the terrible condition of the US Postal Service.  What has been a critical piece of NetFlix's business model could be unraveling.  If the US Postal Service has to curtail delivery on certain days or to certain locations, or has to increase the cost of delivery, NetFlix's delivery model seems to be a bit more suspect.  But who would have ever thought that the mail system could be in doubt?

Most interesting disruptions happen when a firm or industry has one or more "blind spots" or reliance on systems, methods, processes that almost seem to be a given.  I can't tell you the number of times we've been told that "federal regulations" prohibit certain types of insurance or health care delivery, as if "federal regulations" don't change on a regular basis, and aren't subject to lobbying.  I'm not going to argue in this post that NetFlix has taken the regular, low cost delivery of the post office for granted, but imagine the impact to their business model if the postal service reduces delivery or increases prices.  Suddenly the NetFlix model for home delivery is less sustainable, and the on demand portion of their business is much more attractive.  Problem is that while everyone has a mailbox, the number of people with reliable high speed internet connections is a lot lower.

External actors in any market have two choices when entering - accept the status quo and adopt the accepted norms and processes of the existing players, or attack and disrupt something that the existing players have agreed is "bedrock" or foundational.  Disruptive innovators are constantly seeking to overturn or subvert these blind spots because they are intricately intertwined with the incumbent's business model.  What your strategy and business model takes for granted - what you expect won't or can't change - is the exact target for those seeking to disrupt your business.  And while any established rule, process or service may seem intractable and impervious to change, everything changes, and we can easily establish that in an environment like ours the pace of change is ever increasing, and established norms are now looked at with suspicion rather than with trust.  Look no further than the banking industry if you want to see how quickly trust can be eroded.

Too often incumbents build their strategies and models based on what they are willing to assert won't, or can't change, while the innovative disrupters are seeking to subvert those exact components of the model.  Because if the factors that the strategy is based on are disrupted or proven wrong, the innovator has advantages in terms of trust and nimbleness that the incumbent doesn't have.  Just as NetFlix disrupted BlockBuster by attacking the "just down the street on every corner" retail model, the Postal Service may inadvertently subvert part of NetFlix's model by increasing the cost of mail service or decreasing delivery dates and locations.   Did NetFlix examine the possibility that the Postal Service would be unreliable?

These factors should lead any right thinking business to two conclusions:  first, given the rapid change in the environment, trend spotting and scenario planning should be a given.  Change is happening too fast to simply wait and react, and seismic change can happen more frequently than we'd like to admit.  Using these tools helps the firm understand what changes may happen and begin to deal with them proactively.  Second, question every assumption, every factor that defines or shapes your business model and strategy.  Any factor that your business "counts on" and assumes will be reliable and unchangeable is a blind spot in your strategy and the one place good innovators will attack first.
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posted by Jeffrey Phillips at 5:46 AM


Anonymous Anshul Gupta said...

Rightly pointed out. Checking out your dependencies is great thing to do for sustainable future.

11:39 PM  
Blogger SunMan said...

Your point is right on, but you should have used a diff't example. Netflix knew they had to move to online distribution (not necessarily b/c of post office, but they knew physical media is dieing) and are the leaders in this.

6:13 AM  
Anonymous Anonymous said...

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6:23 AM  

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