How Amazon and Netflix Destroyed Their Own Businesses
“He not busy being born, is busy dying” – Bob Dylan
What are the thoughts that keep business leaders awake? The nightmarish thought that a competitor could make their business irrelevant. As Apple did to Nokia, Blackberry and Motorola and Amazon is attempting to do to Walmart and Tesco!
What should you do to bullet-proof your enterprise from such a catastrophe?
The answer may surprise, even alarm you: you have to become your own fiercest competitor and disrupt or destroy your own business before competition does and reinvent it to make it more formidable. Because if you do not embrace this counter-intuitive strategy, the fate of Nokia, Blackberry, Motorola awaits you. You will be rendered irrelevant and eventually decimated. Watch the video in this Episode 12 of the New Rules of Business. You can also continue to read below.
Indeed many admired enterprises have successfully executed this strategy.
Take Amazon. In early 2000, Apple was revving under the innovative leadership of Steve Jobs. Jeff Bezos, the Amazon boss, feared Apple might come up with a device that will disrupt its successful online book retailing business.
As Brad Stone says in his book, The Everything Store: Jeff Bezos and the Age of Amazon, in 2004, Bezos “…started a secretive Silicon Valley skunkworks with the mysterious name Lab126. The hardware hackers at Lab126 were given a difficult job: they were to disrupt Amazon’s own successful bookselling business with an e-book device while also meeting the impossibly high standards of Amazon’s designer in chief, Bezos himself. In 2007, Amazon unveiled the result of this effort. Kindle.”
Kindle is the child of Amazon’s efforts to disrupt its own business before other companies could do it to Amazon. Today, it is an important artillery in Amazon’s product range.
Let us move to Netflix, the on-demand content streaming platform, which also adopted the strategy of destroying its own successful business to reinvent itself into a more formidable avatar.
Netflix’s business model involved sending DVDs by mail to its customers. Customers could get the next DVD only after they returned the previous one.
Netflix witnessed unprecedented success, but it did not rest on its laurels. It had the foresight to realise that physical delivery of DVDs would soon become obsolete and would be replaced by streaming content over the internet. So, instead of waiting for a potential competitor to take the lead on delivering content over the internet, it proactively destroyed its own mail order business and adopted the streaming-over-internet business model.
The result was tumultuous and triggered a free fall in its share price. It slipped from $137 to $69 (March 2010).
But Reed Hastings, Netfilx’s flamboyant founder, was determined to pursue this strategy. Results started showing later in 2010 and Hastings was nominated Business Person of the Year by Fortune magazine. Netflix’s stock price has rocketed to $456 (March 2015) since then.
If the disrupt /destroy strategy has so many advantages, what is stopping companies from embracing it? There are several reasons, chief among them are:
1. The belief that past success is a guarantee of future success: This is akin to driving a car looking into a rear view mirror. Today, many companies are realising, much to their chagrin, that strategies that succeeded in the past are no guarantee of future success.
2. Sunk cost: Big companies would have invested heavily in factories, infrastructure, training their talent and many other tangible and intangible assets. Even if they wish to disrupt themselves, they find it difficult to overlook these sunk costs. Or at least their chief financial officers keep reminding them.
3. Cannibalisation: Dominant players fear that executing disruptive strategies would lead to cannibalisation of their own brand.
4. Measuring competition with their own yardstick: Companies often measure competitors’ products by the rules they hold dear. They sneer at their competitors if the latter’s products fail these tests. For instance, Nokia’s engineers turned up their noses at Apple devices because they failed the ‘five-foot drop test’ – where a device survives and remains in working condition after being dropped from chest height.
Are there other, less violent strategies to quell competition? Yes, simply buy out the enterprise that has the potential to disrupt your business. Just like Facebook bought WhatsApp, for a whopping $19 billion. WhatsApp was acquiring users at a faster rate than Facebook. It had acquired 450 million active users in only four years; Facebook took six years to reach this milestone.
The lesson for enterprises is to constantly disrupt and destroy their own business before others do and reinvent themselves to become more formidable. If this strategy seems too risky, simply buy out the competition which has the potential to destabilize you. Embracing these strategies will ensure that your enterprise continues its dream run.
- To stay ahead of the curve, become your own strongest competitor and be prepared to destroy your business; it’ll give you a fresh perspective.
- Else, simply buy out the competition.
(Reproduced with permission from Founding Fuel Publishing Pvt Ltd. This episode is part of a special weekly show The New Rules of Business, hosted by business strategist Rajesh Srivastava for Founding Fuel, a new generation digital media and learning platform for the entrepreneurial community. Rajesh has a related column with every episode, which can be accessed here)