April 2, 2013
Businesses tend to think their major constraint is resources, when in reality it’s process. And the process constraint modern businesses need to over come hierarchy is agile.
Agile is a process designed to achieve difficult and rewarding innovations by priority, not by stockpiling resources. Agile is the process of full value thinking, not marginal thinking.
Besides, abundant resources tend to stymie innovation. If you don’t believe me, go work at a company that has piles of cash. There’s often no way to innovate while still conforming to their rule of marginal costs, a way of thinking widely taught in business schools and conventional economics classes.
Case Study: Blockbuster Video vs. Netflix
Back in the day, Blockbuster Video made 70% of its profits from late fees. Blockbuster made money the more its customers watched DVDs and returned them late. Netflix, a company that had no late fees, made more money the less its customers watched DVDs. The less they had to mail discs, the more their inventory could serve.
So both companies had different strategies, but why did Blockbuster fail and Netflix succeed?
When evaluating the opportunity costs, conventional economics says ignore the sunk and fixed costs, which have already been incurred, and base decisions on the marginal costs and marginal revenues of those alternatives. But that’s what Blockbuster did, and they lost big!
Blockbuster looked at the margins of DVD mailing (and, later, online streaming) and decided the marginal revenue was too small to worry about compared to the massive amounts of money being made on in-store rentals and late fees.
Netflix looked at the full potential of DVD mailing and online streaming, decided that was where the world was headed and was unencumbered by marginal concerns or the maintenance of existing margins.
Blockbuster also feared cannibalizing its own brick-and-mortar business. They thought the business alternative to not pursuing Netflix was to continue making huge 66% margins on billions of dollars in revenue.
In reality, Blockbuster’s business alternative was bankruptcy.
The Conventional Ideas of “The Right Stuff” for Business Success:
The New Idea of High-Flyers for Agile Business Success:
Marginal Thinking Is Fear and Conservatism
Marginal strategy aims to protect business. The problem is the business you protect will probably become useless or disappear, especially in competitive, quick-changing markets and technology. As soon as technological innovation got involved with movie rental, the world changed and the big companies like Blockbuster disappeared with terrible speed.
The way an agile business thinks is not marginal. Agile asks, “If we had no existing business, how could we best build a new one?”
Many start-ups have no existing business, which is a problem.
But it’s also the biggest opportunity they have, because producing on the margin may be cheaper and profitable in the short-term, but it doesn’t help develop new capabilities, which is what start-ups offer.
“Leveraging” what you have already put in place to try and retrofit it to a new opportunity is usually a sure way failure. It’s how disruptive forces overtake you in the market, because the full cost of doing business to a new market entrant is an established company’s marginal cost.
That’s how the small and agile do more with less.
Just This One Time Can’t Hurt
In his book How Will You Measure Your Life? Clayton Christensen says there’s a personal equivalent to marginal thinking, and it sounds like this: “I know this is wrong, but just this once I need to do it. One time won’t hurt.”
The marginal cost of doing something always seems lower than doing the full, hard way. But life—and business—is a series of “just this once” contingencies. Going 100% is easier than 98% of the time, Christensen says, because of all the time and effort wasted determining whether an situation falls into the 2%, “just-this-once” category or not.
Agile always pursues new opportunities 100%, but it makes small steps to test the situation along the way. If Blockbuster had not considered DVD mailing as too small and marginal to worry about—had they gone 100% in on testing the waters of mailing and streaming—they probably would have taken much of Netflix’s business before Netflix ever got off the ground.
Instead, they went extinct—not an agile move, at all.