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Blockbuster's stock isn't doing very well these days. That decline coincides with the rise in popularity of Netflix and its disruptive business model. As MG Siegler from Venture Beat observes that it is cheaper to buy Blockbuster stock than it is to rent a movie. Unfortunately, Blockbuster is one of those oft-repeated cautionary tales that public company CEO's seem to forget.

Blockbuster was the dominant movie rental business of the 90's and early 2000. Their business model was simple, build national brand by locating a brick & mortar rental store near every major North American neighborhood. Their strategy was speed. No other franchise was able to execute as quickly as Blockbuster and thus they were destined to be market followers. This strategy worked great until improvements in web technologies brought a threat to their business.

First, the internet enabled new entrants like Netflix to offer a wider catalog rentals to consumers. Second, it automated the regular routine of renting movies by allowing consumers to create a queue of the movies that they wanted to rent and immediately mailing a new movie when the renter mailed back their current one. Later, the spread of broadband would allow Netflix to offer streamed videos to its customers. Together, these factors combined to offer a compelling value proposition to Blockbusters most profitable customer group: Avid Movie Renters.

This threat did not come out of nowhere. Netflix was founded in 1997. It really doesn't impact Blockbuster's share price until 2004. Coincidently, 2004 is the year that Blockbuster finally decided to enter the online video rental business. So for a full seven years Blockbuster ignored this threat to their business! Why? Ask Kodak when digital photography was introduced into the 80's. Blockbuster was trapped by their business model that cultivated a myopic view of their industry. It took them  seven years to acknowledge the threat of online rentals. The good news is that their brand name and market position afforded them the ability to enter late and still win the market. Unfortunately, they did not learn their lesson and continued to make mistakes in this new competitive market.

After aggressively building an online customer base by using their brick&mortar stores to attract customers, they began to raise online pricing and removing benefits when they saw revenue and profits shrink as their brick&mortar business was being cannibalized by the lower margin online business. This short-sighted response had a double wammy effect of pushing the remaining regular customers it had just introduced to online rentals into Netflix waiting hands who had a more competitive offering. In other words, they had just moved their loyal, profitable B&M customers into their online business. Then, they changed their online offering to make it less competitive to Netflix thus pushing these good Blockbuster customers to their competitor. Netflix, understanding that the market is moving to on-demand video streaming, introduced a streaming service. Rather than trying to charge separately for each movie, netflix made it part of its subcriptions. This had the effect of improving their capabilities to stream movies (learning through doing) and introducing its audience to this technology at no risk to them.

Blockbuster responded by acquiring a video streaming service of their own. However, they were slow to integrate into its online offerring. Why? Because their executives built their company on the previous decades of renting by the movie - "Customers must want to do this". They did not know how the online business fit into their business model, so how could they know how would video streaming? Blockbuster is now moving to integrate streaming with its online rental business, but the damage is done. Netflix did not necessarily win the war as much as Blockbuster lost it because they could not adapt to the new market realities. So what lessons can we take away from Blockbuster?

1. Raise Awareness: Every few years conduct an exercise on how can new trends disrupt your business.
2. Shift Your View: Take the time step outside of your business to understand how the disrupters view your business. Dedicate a team to represent that point of view in the company.
3. Build a New Industry View: Accept that the industry that your core dominated is or will soon be changed. Ask yourself what business will dominate this new industry.
4. Accept the Impact on Your Core: Your core business will be destroyed by this disruption and you have two choices: 1) do nothing and harvest as much profit as you can until your core is destroyed; or 2) build a business to survive in the new market with full permission to destroy the core business.

I agree not the most attractive choices for multi-billion dollar, market leader and you can definitely ignore them. Of course, then you can be another cautionary tale like Blockbuster and Kodak.

1. Separate Group - HTC created an independent group of 60 "magicians" called "Magic Labs". Magic Labs is different from other product groups in that they do not have specific delivery dates for products. Makes complete sense - it is easy and necessary to have targeted delivery dates for v2, v3 and so on of your product. You can't really say make X product by Y date. I do think you can supplement this with miny target dates for certain prototypes.
2. Diverse Experiences - HTC populates Magic Labs with skills across functions (mechanical, software, UI, graphic design) and backgrounds (they even have a jewelry designer). This follows a case from 3M where they brought in focus groups of experts from diverse areas to stimulate creativity for a new sterile wrapping product (like a make up expert to shed a new perspective on cleaning wounds). Different perspectives bring about different ideas. I was surprised Wang did not reference marketing as I feel it is important to bring someone trained to deliver the voice of the consumer - and I am not referencing just asking what the consumer wants, I mean skilled at understanding their true needs and emotions.
3. An Oganization Designed to Fail - I love this! Yes, you read it correctly - an organization designed to fail! Exploration of new ideas requires alot of ideas that go nowhere to fuel success. As Wang puts it, "You want to be able to generate ideas very fast, very cheaply and fail very often but at very low cost." The cross functional nature of the teams builds a organizational competency at quickly building prototypes and tests to validate assumptions and risks of the promising ideas. This helps HTC to quickly, and cheaply, identify the best ideas to invest greater resources.
4. Support the Winners - When Magic Labs finds a great opportunity, the whole company supports it. This is show in their Touch Flo screen technology that is laid over Windows Mobile to make a better user experience. All of HTC's Windows Mobile phones quickly incorporated the technology into their product lines.

Ok, I hate writing in absolutes, but the title catches your intention. Now that I have your attention, let's say that HP's new innovation strategy is more likely to fail than succeed.

HP's New Innovation Strategy

HP's new innovation strategy is boiled down to fewer, bigger bets. Business Week has the article toting HP's vision here. Let me highlight some key quotes from the article.

1. On May 1, HP's new labs director, Prith Banerjee, plans to unveil a list of 20 to 30 major projects HP Labs will pursue, a dramatic cut from the 150 or so currently on its docket...The labs' $150 million annual budget will remain the same, but he'll group the most promising related projects while dropping those with little shot at a profitable payoff.
2. Researchers will compete for money and manpower by pitching projects, complete with written business plans, to a central review board that will approve ideas and monitor progress.
3. A new technology transfer office aims to speed promising projects into HP's product groups, and license those that it can't use itself.
4. Projects will focus on five strategic areas: intensive data analysis, building clusters of machines that can tackle complex problems, transforming analog into digital content, mobile computing, and environmentally friendly machines.
5. Accountability will also be stronger: Researchers who go for too long without a funded idea risk expulsion to more mundane product engineering groups. "If not enough progress is made, the plug is pulled," Banerjee says.

Innovation Is NOT a Pipe!

Last quarter, my Strategic Innovation class got a heads up about HP's change in innovation policy. A Finance Director for one of HP's business units talked about the innovation funnel and how HP was going to make it into a pipe stating "we need more correct ideas at the beginning". My immediate thought was "Spoken like a true finance guy". Unfortunately, we did not have time for follow up discussion after the presentation, so that comment stayed in the back of my mind and exploded when I saw the Business Week article.

My position is that innovation is a funnel. You will likely need 18 or 19 failures for every successful idea. Failure is not a bad thing, it provides you with powerful knowledge; a greater understanding of technology and your markets. The projects in HP labs likely will not hit market for 6-8 years. Think back 8 years ago, did you predict exactly how our technological landscape would look today? Sure, you go a few things right, but think of all those things you missed.

HP's Finance Director told of a story where 10 years ago two guys from Stanford came to HP trying to sell them on a search algorithm - the price $1 million! HP refused because it didn't fit in their view of the world and where technology was going. Today, that algorithm is the foundation for Google who has a market cap larger than HP! The point is that we never know what the next great idea will come from. It most certainly will not come from an area that everyone is expecting. Placing few big bets is equivalent to your company saying we know how the world will look in 8 years. The best practice is to place numerous small bets to find the ideas to make bigger bets. Sure you can make a bigger bet in areas you are confident about, but don't forget the small bets.

Too Much Accountability is Stifling

I love accountability - Just ask people with whom I've worked. However too much accountability will kill innovation. Point 2 requires business cases for new projects to get funding. Business cases are great, but not for early ideas. Cases require understanding of the market opportunity and costs. For product research 6-8 years out, often markets have yet to form; and who could guess input costs that far out (gas prices anyone?). There is a place for a business case in innovation, but not at the start.

Give your researchers the ability to explore ideas - just limit the initial investment. When they want greater funding, then have them build a business case that must show the technology's potential and that a market is forming. I promise you that in a year, HP will have a pile of business cases with ridiculous assumptions. The irony will be that the more ridiculous the assumption the more likely the project will be funded!

Look at point 5! Talk about creating a fear of failure in your company! Researchers who don't get ideas funded will face expulsion to more mundane projects! Let me translate this for you: Researchers who do not pump their business cases with ridiculous assumptions that match HP's senior leaderships view of the future will face expulsion to more mundane project groups! Hold your researchers accountable for improper research methods and control your investment on the small bets. Do not punish them for not having their ideas match HP's pipe vision - this is very, very wrong.

It's Not All Bad

After piling on HP, I would like to end on something position. Point 3 - the creation of a technology transfer team - is a great idea. Empowering a group to communicate all the great innovations coming out of the HP Research Lab to HP's product lines and the outside technology community is fantastic. I would also mandate them to connect with the outside community to bring new ideas or technologies to the research lab. Innovation is a flow, not a stock!

Conclusion

I am not saying HP will colossally fail. Their 5 main areas of research (point 4) seem to be growth areas from today's point of view. If they are right, they could be leaders in these spaces. However, by narrowing their focus the eliminate the possibility of stumbling into unknown. The great thing about the technology industry is that today's unknowns could be the Google's of tomorrow. So to sum up this lengthy diatribe:

• Innovation in a pipe assumes you can predict the future and that failures are bad - Two views that will hurt innovation
• Accountability in a research setting should only be for how they conduct the research. Punishment for not bringing ideas of management's view of the future is a sure way to stifle true innovation.
• Companies should have a conduit mandated to disperse innovations out of the research lab and bring new ideas in.

A classic example of how new technologies of the internet will force companies to rethink their preconceptions on how to manage brand. Here is a site of Ford Mustang enthusiasts who put together a calendar of pictures of their favorite member cars. Ford's lawyers have notified the internet company that offers the printing services, Cafe Press, that they must cease printing the calendar as the shots of the Mustangs violate Ford's Trademarks. Now technically they are correct. In the past, people would try to mass print calendars of automobiles (or create toys) and try to distribute them through retail stores. Ford is obligated to protect their trademarks and would take action to make them stop.

Now, today's internet and printing technologies have thrown a wrinkle into this strategy - the emergence of print on demand shops on the internet that enables people to connect and socialize in ways we could not dream of 15 years ago. These technologies are changing the game of brand management. As Jeremy Owyang astutely points out, the internet is causing brands to become decentralized. Our customers are taking ownership of our brand identity! This lack of control can be quite scary for traditional companies, but they need to consider the power of it. Nothing, and I mean nothing, will reinforce a brand identity like its customers promoting it. Real customers talking about and acting out what the brand means to them will resonate with potential customers in a way that no amount of prime time advertising will accomplish (think about Harely Davidson tattoos). Companies just need the leadership to let go.

There are some legal issues around this strategy. The law says that a owner of a trademark must always control its trademark. It also puts a positive obligation to enforce its trademark rights. Failure to do these things can result in the company losing the trademark. While there is no knowing how the courts would actually rule, a solution may be to have a public permission to use the brand in products subject to certain rules (doesn't reflect poorly on the brand, limits on sales, or profits must go to charity, etc.). These published rules could demonstrate that the company still controls its brand. It could still take action on any act that violates those rules. Might this policy have unintended consequences? Maybe. But at least it considers the technological realities of our society rather than create PR nightmares with a companies most devoted fans. Any thoughts on where brand management is headed in this area or what we should be doing?