How Companies Can Solve the Innovator’s Dilemma

By Michael Tushman and Charles O’Reilly III

Mike Tushman can be reached at: mtushman@hbs.edu; Charles O’Reilly is at: coreilly@stanford.edu.

In a volatile business environment, what does it take to survive?

In 2000, Reed Hastings, the founder of Netflix, flew to Dallas to make a proposal to senior executives of Blockbuster. Hastings, who had founded Netflix the year before as a DVD rental service, offered to become Blockbuster’s online service provider if Blockbuster agreed to purchase 49 percent of the startup.  With revenues of $5.5 billion, 40 million customers, and 6,000 stores across the United States., Blockbuster wasn’t interested.  If it so desired, the giant video retailer believed it could enter the mail-based video rental market as well as the online video streaming business without Netflix’s help. But in 2000, Blockbuster was laser-focused on its retail business, opening new video stores, penetrating new markets, and growing like mad. In 2003, with a 45 percent market share, it was three times larger than its closest competitor.  A short seven years later, the company was out of business.

What happened? Blockbuster was the classic victim of Harvard Business School professor Clayton Christensen’s famed innovator’s dilemma, where a lower-priced competitor launches a business that eventually overcomes the incumbent. Unable to see a shifting competitive landscape that favored renting DVDs by mail, Blockbuster was focused on winning a game that was soon to be irrelevant. Netflix, on the other hand, had a vision for the future that it timed and executed perfectly. It was the classic disrupter, creating a market that undermined Blockbuster.

Netflix is an example of what we call an ambidextrous organization, a company that can simultaneously manage its core strategy while navigating into new territory.  Like a switch-hitter who can swing from either side of the plate, an ambidextrous firm adjusts to the curveballs that the ever-changing marketplace throws its way. In turn, ambidextrous firms hurl curveballs their competitors have to try to hit. Though Netflix gained early success and visibility by mailing millions of DVDs to customers in its signature red envelopes, the company understood that digitally streaming movies and TV shows to people’s television sets, or more important, to their handheld devices, was the wave of the future. The startup invested heavily in technology to make sure it was first into the market. Add to that its decision to produce notable original content such as “House of Cards” and Netflix rendered Blockbuster a quaint memory. 

 Blockbuster’s demise is hardly unusual. Corporate mortality is on the rise, and only a tiny fraction of U.S. firms will survive to turn forty.  Consider Kodak, Circuit City, Radio Shack, Merrill Lynch, and Sears--all either defunct, acquired, or floundering.   In the age of enlightened, empowered consumers and the disruptive force of the internet, companies must find a way to simultaneously solidify their core business and move into new ventures, while avoiding the trap of disruptive competitors.

 Long-term corporate success is not for the faint of heart. We have spent years examining the reasons companies seem to be strong at short-term execution but too often fail in the long run. We call this the “success syndrome,” and it has become widespread in Corporate America.

 Simply put, companies succeed in the short term because they create alignment for their initial strategy. Blockbuster built a retail model based on meeting consumer demand with a bigger selection of DVDs, more locations, persuasive branding, and customer loyalty.  But over time, as markets shift, consumer behavior changes, and new technologies emerge, strategy and alignment no longer mesh. To make matters worse, success blurs executives’ vision when it comes to future consequences.  To avoid succumbing to the success syndrome, corporate leaders must be ambidextrous.

Even as we tout Netflix’s credentials, the company is being tested. Having expanded its reach to 190 countries, signed up more than 80 million subscribers, and produced award-winning original programming, Netflix had been riding high. But recently analysts have begun to worry that it faces a tough task in sustaining its growth.  In April, its shares dropped when the company announced that it would add just two million new subscribers outside the U.S. in the second quarter, less than analysts had expected. At the same time, competition has heated up, with Amazon Prime, Hulu, HBO, Comcast, Apple, and Google taking direct aim at building competing services.

Is Netflix or any other high-flying player capable of transforming its strategy and remaining ambidextrous in such a dynamic and volatile global marketplace? Ambidexterity is fragile. It needs to be constantly renewed. To revive growth, Hastings and his team must go back to their earlier playbook and seek potential breakthrough innovations. To get to those, they must separate these efforts from existing businesses and build new internal organizations to work on the innovations. They must hold these new efforts to different standards and metrics but to a common set of aspirations. And when one of these experiments begins to gain traction, they then have to move it to scale.

Ambidexterity requires senior-level courage, along with an ability to stay consistently inconsistent. There must also be an organization-wide comfort with paradox.  Armed with an ambidextrous strategy of renewal, shrewd corporate leaders can hold off their demise and take aim at  long-run success.

 

Michael Tushman and Charles O’Reilly III are professors at Harvard Business School and the Stanford Graduate School of Business, respectively, and authors of Lead and Disrupt: How to Solver the Innovator’s Dilemma (Stanford Business Books).

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