eLearning Blog

What Blockbuster Can Teach Us About The Cost Of Change

This week Blockbuster began selling off inventory of their last remaining stores in the state of Minnesota, with the rest in the country soon to follow. The closing is bittersweet since a favorite childhood memory of mine was scouring the store on Friday for either a new release or classic movie I'd yet to discover. Yet I'm also part of the problem since I haven't rented a DVD from Blockbuster since high school.

It wasn't long ago that Blockbuster was king of all rental videos. Shortly after they arrived in my home town, one movie rental store went out of business while the other hung on for a year or two before eventually closing. At their peak in 2004, Blockbuster had over 60,000 employees and over 9,000 stores. It was a long fall from the top.

What caused the collapse of Blockbuster?

It wasn't that Blockbuster wasn't aware of Netflix and the online video market. In 2000, Blockbuster had the opportunity to purchase Netflix for $50 million, but turned down the offer. In 2002, a Blockbuster spokesperson was quoted saying, “Obviously, we pay attention to any way people are getting home entertainment. We always look at all those things... We have not seen a business model that is financially viable in the long term in this arena. Online rental services are ‘serving a niche market.’”

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Clayton Christensen, author of The Innovators Dilemma, suggests that the root failure of Blockbuster was that they suffered from marginal thinking. At the time, they saw the online rental business as only a niche market with marginal returns. Blockbuster had the "sunk costs" of thousands of stores and employees so they saw the shift as a distraction not worth the time or effort. In reality, the decision wasn't between getting into the online rental business or keeping their existing business; the choice was between the online rental business and bankruptcy.

In the book, How Will You Measure Your Life?, Christensen writes:

The right way to look at this new market was not to think, “How can we protect our existing business?” Instead, Blockbuster should have been thinking: “If we didn’t have an existing business, how could we best build a new one? What would be the best way for us to serve our customers?” Blockbuster couldn’t bring itself to do it, so Netflix did instead. And when Blockbuster declared bankruptcy in 2010, the existing business that it had been so eager to preserve by using a marginal strategy was lost anyway.

This is almost always how it plays out. Because failure is often at the end of a path of marginal thinking, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not.

It's not that Blockbuster wasn't capable of change, it's that they weren't willing to change. Perhaps loss aversion kept them from admitting that the world was trending toward online rentals because then they'd have to significantly shift their business.

Had Blockbuster considered the full cost of not getting into the online rental business, the decision would have been obvious. Change for Blockbuster would have been expensive and online rentals would have cannibalized their in-store business, but change would have saved them from bankruptcy.

Are you willing to change?

Even when we know the change we need to make, it doesn't necessarily make change easy. Beyond marginal thinking, the emotional elements make change difficult.

Kevin Kelley is a high school football coach in Arkansas who isn't afraid to challenge the traditional way things have been done. It's worth taking six minutes of your day to watch the inspiring video below.

Coach Kelley ran the numbers and everything told him that his football team shouldn't punt. Instead, it would be advantageous for them to go for it on fourth down. Even though he came to this conclusion in a rational manner, it's still an act of courage for him to take a stand and be willing to face any backlash if a critical play doesn't work out. Even though he may have a revolutionary way of coaching high school football, most coaches wouldn't be comfortable doing the same unless they knew most of the other coaches were playing that way.

Change is hard.

Even when you're assessing the full cost of change and not changing, it's still hard to move in a different direction. For large organizations, it's like running with a medicine ball and suddenly changing directions. The momentum that's pulling you forward makes it difficult to change, even when it's really the only choice available. Change can be expensive, but refusing to change can be fatal. Reflecting on Blockbuster closing this week reminded me of a favorite quote from Jon Kabat-Zinn, "You can't stop the waves, but you can learn to surf."