(1/3) The simple question incumbents should be asking themselves: WHY NOW?
When faced with the constant threat of disruption, instead of searching for what’s next, innovative leaders should be finding new ways of asking why now. And if they’re not, then chances are that someone is doing more than just nip at their heels.
When Netflix co-founders Marc Randolph and Reed Hastings walked into a meeting room inside Blockbuster headquarters in the Renaissance Tower of downtown Dallas, Texas, they were already feeling out of place. Here was an industry giant with thousands of stores, a globally recognised brand, and billions of dollars in revenue. But in 2000, Randolph and Hastings were there to pitch the idea of the incumbent giant buying their three-year-old company and building the future of home entertainment, together.
Case Study: Blockbuster vs. Netflix
As a small group of senior executives walked into the room with CEO John Antioco, Netflix’s Randolph noticed that his shorts and t-shirt were a far cry from the beautifully tailored suits and expensive Italian shoes worn by the Blockbuster team. But it didn’t matter, they had a mission and they stuck to it. Randolph and Hastings stood up and begun their pitch.
Years before becoming a streaming giant, Netflix’s business model was pretty analogue:
- Browse and order the films you wanted to watch
- They mailed the DVDs to your home
- You watched them then package them up when finished
- Post them back to order the next set
Sound familiar? And yet, they still had one HUGE competitive advantage to Blockbuster: They didn’t charge late fees. Customers could hold on to the DVDs for as long as they’d like, and could only order again after having returned the existing ones. After Blockbuster collected $800m in late fees in 2000 alone, it was a pretty strong nudge for customers to switch over.
At the time of the meeting with Blockbuster, Netflix had around 300,000 customers (just 0.15% of the 200 million subscribers they have today). Yet, Hastings and Randolph were convinced that the spread of broadband internet would do more to transform home entertainment than the removal of late fees; they believed the time was right for the right kind of company to take advantage of it.
A regrettable thanks, but no thanks?
The meeting didn’t go to plan. According to Randolph, when CEO Antioco asked for a price, it didn’t take a detective to see the smirk on his face when he heard that they wanted $50 million for Netflix. Blockbuster passed on the offer.
Fast forward to 2005, Blockbuster had lost 75% of its market value. By 2010, the company filed for bankruptcy. What’s left of the company today? A long weekend stay in the last Blockbuster store in Oregon, that was recently turned into an Airbnb. Comparatively, two years after the meeting, Netflix went public and continues to grow, with more than 200 million paying subscribers and revenue in the billions.
The first-mover advantage
Netflix, Uber, Amazon, and Apple. All first-mover companies, ahead of most when it comes to new technology and product innovations that today, we marvel over and wonder how we used to get by without it. Making the first move has resulted in them acquiring more attention, brand loyalty, and knowledge in the categories they dominate.
First-movers scan the horizon
The Blockbuster and Netflix saga highlights the numerous challenges companies face in the midst of turbulent times, age-old business models, and sticking with the “that will never work” modus operandi. The notion of being first seems less about good management, industry knowledge, and clear forecasting.
Instead, it’s the company’s ability to scan where things are heading and move quickly. Giving dedicated people the space to experiment with new ideas, keep an ear to the ground, and respond to technological shifts.
The cost of being a first-mover
However, there are two sides to every story and the first-mover theory is no expectation. We’re never too far away from a ‘first but failed’ story. As Tim Leberecht, Co-Founder of The House of Beautiful Business, put it “nothing expires as fast as a product that was rushed to market.”
Running full speed ahead to get in first comes with its pitfalls. Launching a new product takes time, resources, training, and education for consumers on how to use the product, particularly if it requires a new way of thinking or behaving. It’s these investments, and hidden costs, that help to lay the grounds for a new market, with a stream of early adopters ready to buy. Perfect conditions for a startup to reap the benefits of new increased demand, and lower production costs, a phenomenon known as Wright’s Law.
What’s next? Scanning for possible why now’s.
At times when it may not pay to be faster, it always pays to be smarter. From our lens, the most successful businesses are those that are neither looking around at the next move of their competitors nor those that have a robust 5-year plan. Instead, it’s those that are willing to adapt, can scan the horizon to identify opportunities and not get caught up in those that they’ve missed. They come prepared, with an aim to identify a clear ‘why now’ that both, considers and prepares for an ever-evolving landscape.
The four types of futures
There are a seemingly infinite number of possible futures for any business. Whether it’s global trends or the competitive environment, the challenge is that they’re equally opportunities and threats, depending on the way you respond to them.
Possible: A future that might happen
Plausible: A future that could happen
Probable: A future that is likely to happen
Preferable: A future that you want to happen
The problem is that most organisations spend their time somewhere between Preferable and Probable, giving little time and attention to Plausible and Possible. Blockbuster’s downfall wasn’t because it missed the chance to acquire Netflix, it was a blindness to the rise in broadband and the plausible impact this would have on the future of home entertainment.
Live Case Study: Credit Cards vs Buy Now, Pay Later
How might we apply this to other industries? Let’s consider Finance. Few products have dominated the banking lexicon over the past fifty years more than credit cards. In June of this year, there were over 300 million transactions worth a whopping £16 billion made in the UK. And yet despite year on year growth, there’s also a new player in town: Buy Now, Pay Later (BNPL).
BNPL may prove to be another cautionary tale for incumbents; a modern David for the UK’s Goliath’s in banking. In terms of Possible futures, BNPL taking the dominant position as the preferred way for people to pay online is quickly evolving from Plausible to Probable. In Australia, the market is reportedly already close to flipping. The US and UK are seeing similar trends.
The Untapped Market in Finance
It’s not just customers that banks and credit companies are at risk of losing. There is also the possibility of missing out on an enormous untapped market–a rarity in finance. Yet, now we have one: People who can’t or won’t use credit cards. And it seems that they’re all flocking to BNPL.
Klarna, a leader in Buy Now Pay Later, has even seen traction in its wholly-owned propositions built on top of their payments infrastructure. They reported over 1 million customers and 25,000 merchants on its all-in-one shopping app launched in Australia last year.
Is there a big enough why now in BNPL to replace traditional credit cards?
The likelihood of BNPL replacing the entire payments market for online shopping is a scenario that many would say is a pipedream. But it also has the potential to upend a landscape that incumbents have had a hold over for decades. So, what can they do?
The best place to start is to identify the extremes of the possibility that, in the future, credit will be dominated by BNPL. We call these extremes “polarities”.
Planning for Alternate Futures
Imagine that you’re an executive at a large bank that’s worried about the rise of BNPL. Maybe you can see the potential for it to disrupt a large part of your business. While you hope for things to trend towards a future where BNPL is abandoned by merchants and consumers, how prepared are you if it doesn’t? That’s where scenarios come in.
The best way to find possible scenarios is to combine one possible future with another. For example: What are some other trends and emerging themes that might come true for your business? BNPL is one…so let’s imagine that there are signs that consumer credit spending is going to be turbulent over the next five years — what are two possible extremes of such a trend?
How to Find Scenarios Worth Exploring
The polar extremes of an uncertain future in credit is that demand either increases or decreases. So, what does this mean when combined with the trend towards BNPL? Hypothetically, let’s imagine that one extreme is the demand for consumer credit drops by 10% every year for the next five years, while the other is that it grows by the same amount.
To find scenarios worthy of exploring, you need a 2x2 grid. This will give you a simple framework for creating four unique futures to consider that factor in the two trends that you’re trying to understand.
Ultimately, these scenarios are how you decide whether you want to invest in new products, partnerships, or technology in the event that any one of them come true. And answer questions like: How confident are we that a future where BNPL becomes the only way to pay for things online and the market for consumer credit declined by 10% every year for the next five years is one that we’re ready for? And if not, what are the changes that need to be made in the event that any of these four scenarios come true? What opportunities might there be for us and our competitors?
Next issue: Exploring different scenarios.
Subscribe for the next issue in our three-part series where we dive into the weeds of using scenarios to identify emerging opportunities in one of the five why now themes, every business needs to be aware of.
