From Blitzkrieg to Blockbuster: Why Organisations Surrender Winning Advantages

Year: 2021

Introduction

One of the great innovations in military strategy in the 20th century, “Blitzkrieg” – literally meaning “lightning war” – led to a fundamental change in how wars were fought. Broadly speaking, Blitzkrieg was the act of sudden and violent attack on the enemy using mechanised tools of warfare, synonymous with the armoured tank, in particular. We all know what this looks like; scenes of German tanks rolling through hapless defences in Belgium, Holland and France at the onset of World War II are imbued in our minds from documentaries, books, websites and movies. The Germans, seemingly, had conceived of an original strategy that their Allied counterparts hadn’t foreseen and didn’t know how to deal with.

Figure 1: German column of panzers and mechanised infantry advancing through Ukraine, June 1942, typifying fast-moving combined arms forces of classic Blitzkrieg (Source: Wikimedia Commons)

The problem with this depiction of Blitzkrieg is that it is almost entirely wrong.

Yes, it was a brilliant innovation that changed the course of a World War, but when it was first devised, it was World War One its creator planned to influence, not World War Two. Moreover, the man behind Blitzkrieg, Major-General JFC Fuller, was very much not German, but a senior officer in the British army.[1] So how did the British manage to not only fail to take advantage of Blitzkrieg during World War I, but also found themselves on the receiving end of their own invention 20 years later?

By looking closer at this example, together with several more from the corporate world, I will seek to answer the question of why organisations often fail to capitalise on a position of significant strength and instead allow weaker competitors to overtake them. In doing so, I will interrogate whether this failure boils down to a lack of vision on the organisations’ behalf, or if the problem lies in how organisations value disruption.

Falling at the Final Hurdle: (In)Famous Business Missteps

It is not difficult to find examples of businesses that failed to take advantage of industry innovations that could have taken them to the next level. An oft-cited case is that of Blockbuster. At its height in 2004, Blockbuster was the global titan of rental media. It had more than 9,000 stores, employed 84,000 people worldwide and was valued at US$5 billion. Yet from what appeared to be an unassailable position, today Blockbuster is no more, having shuttered its final store in 2014.

Whole books have been written on all the reasons why Blockbuster failed, but one calamitous decision will forever be associated with its collapse – then-CEO John Antioco’s rejection in 2000 of the chance to buy out an obscure mail-order DVD business for US$50 million. The little upstart company they turned down was called Netflix, now the largest media company in the world, with 205 million users worldwide and revenue of US$25 billion in 2020. Needless to say, time has not been kind to that decision.

There is no shortage of similar examples. Eastman Kodak was practically the only name in the photography game through the 20th century, yet foundered in the face of the digital camera. Sony led the portable music space in the 1980s and 1990s with its ubiquitous Walkman, so why did the iPod come from Apple? Similarly, how did Apple and Microsoft steal a leap on more established players like IBM to dominate the personal computer market?

The Failure of Vision Fallacy

A common answer is that the disruptive companies were simply more visionary than the out-of-touch, arrogant industry giants. That Netflix’s CEO Reed Hastings just read the future better than John Antioco; Steve Jobs and Bill Gates caught the computer companies napping; and the British High Command just didn’t believe tanks would be a useful part in future warfare. Success or failure, as this argument goes, ultimately comes down to the ability to foresee trends and changes before they happen.

While we can appreciate the brilliance and creativity of the likes of Steve Jobs and Reed Hastings, there is much more to the story than vision – or a perceived lack of it – alone. After all, we can assume that industry leaders like Blockbuster must have had at least a handful of forward-thinking strategists among its 84,000 staff.

Blockbuster vs Netflix

Painting John Antioco as a myopic dinosaur would be an inaccurate caricature. Reed Hastings himself acknowledged that Antioco was “a skilled strategist aware that a ubiquitous, super-fast internet would upend the industry.”[2]  Antioco also got at least something right at that infamous Netflix meeting when he declared, “the dot-com hysteria is completely overblown”.[3] The dramatic bursting of the dot-com bubble over the next two years proved that he was capable of foresight after all. Another point that often goes unmentioned in the retelling of the Blockbuster story is that Antioco did lead an aggressive online strategy for the company in the mid-2000s, only for his successor, James Keyes, to nix the online service after taking over in 2007.[4] So while he may not have been as visionary as Reed Hastings, John Antioco was not the bumbling fool he is often made out to be.

Major-General Fuller’s Plan

Figure 2: Major-General JFC Fuller (Source: Wikimedia Commons)

Nor can we cite a lack of vison as the reason the British squandered Blitzkrieg and handed it to the Germans. In fact, it was quite the opposite. Major-General JFC Fuller was a senior officer in the Tank Corps during the First World War and played a key role in planning crucial offensives in 1917 and 1918 that utilised tanks. While the success of the tanks in those battles was limited, Fuller was encouraged to develop a strategy to use them more effectively. The plan he subsequently developed called for tanks to rapidly advance into the enemy’s rear, with support from air forces, targeting supply bases and lines. Significantly, his plan emphasised the strategic advantage to be gained by not destroying communications totally:

“… every available bombing machine should concentrate on the various supply and road centres. The signal communication should not be destroyed, for it is important that the confusion resulting from the dual attack carried out by the Medium D tanks and aeroplanes should be circulated by the enemy. Bad news confuses, confusion stimulates panic…”[5]

The strategy was bold and original, and held the promise of ending the bloody stalemate that had prevailed along the Western Front’s 500 miles of trenches for the preceding four years. Unfortunately for Fuller and the British army, “Plan 1919” (as its name suggests) had one fatal flaw – the war ended before it could be put into action.

Still, this does not explain why the strategy was not internalised and refined by the British, ready to be used in World War II 20 years later, or how the Germans, from a much weaker position, managed to make up so much ground in the intervening years. Whatever the answer – and we will come to that later – it certainly wasn’t down to a lack of foresight. Demonstrably, the British, thanks to Fuller, had a brilliant vision and strategy. Yet they still failed.

Digital Disruptions

This pattern emerges when we look closer at some notable cases of digital disruption. Kodak surrendered an incredible position of strength by failing to capitalise quickly enough on the digital photography revolution. Indeed, its failure almost deserves special opprobrium because the inventor of the digital camera, Steven Sasson, actually worked for Kodak, and developed the technology under their employment in the 1970s and 1980s. He created the first working prototype digital camera in 1975, which was patented in 1978 and called the electronic still camera.

Figure 3: Steve Sasson with the prototype digital camera (Source: The Visual Dictionary of Photography)

Ironically, until it expired in 2007, this patent earned Kodak billions of dollars over the years, as other companies licensed the technology to develop their own products.[6] Yet while their competitors were leveraging on Sasson’s vision to make strides in the digital marketplace, Kodak proved utterly incapable of using their own technology to create and market digital products of their own. When Kodak went bankrupt in 2012, few were surprised.

Sony, the Japanese electronics giant, had revolutionised how people listened to music with the iconic Walkman in the 1980s, yet had no answer to Apple’s all-conquering iPod in the 2000s. But Sony’s executives knew their market; when they released the Memory Stick Walkman in 1999 – two years before the iPod’s debut – many expected it to do for portable digital music what the classic Walkman had done for CDs and cassettes before it. Indeed, this product was seen as so visionary that the Irish Times gushed (rather charmingly) at the time:

“[The Memory Stick] is likely to be at the vanguard of Sony’s pursuit of the digital dream and its attempt to introduce a standardised product for digital storage. If Sony executives are to be believed, tapes, CDs and MDs and other music media will all shortly become antiques in a digital era to be ruled by PC, modem and its Memory Stick.”[7]

The same story played out in computing. Xerox PARC and IBM both spurned innovative developments that could have seen them dominate the personal computing market. The Xerox Alto (1973) and the IBM Personal Computer (1981) inspired both Steve Jobs and Bill Gates and paved the way for all PCs that came after them, yet neither Xerox or IBM left a dent in the booming PC market of the 1990s and beyond.[8]

So Why Did They Fail?

As we can see from these examples, the organisations were not slow to see change coming; indeed, they all had innovative ideas and strategies in mind just as early as their competitors did, if not earlier. But if a lack of vision was clearly not the defining reason they wasted great advantages and ceded territory to upstart competitors, then what was?

The Innovator’s Dilemma

To help answer this, we must look to Clayton Christensen’s book The Innovator’s Dilemma, first published in 1997. In this landmark work, the author argues that established, successful organisations tend to become established and successful because they have identified effective processes and “perfected” their business model over a significant period of time. Repeated success becomes a natural and convincing endorsement for all of the processes that were part of building that success. Year after year, these processes become more firmly entrenched and refined as the leaders pursue more customers, higher sales and ever greater profits.

This is all perfectly rational and sensible business practice – yet it is also dangerous. As Christensen says, many market leaders can become victims of their own success by behaving this way:

“The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies… Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive technologies – to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets – is akin to flapping one’s arms with wings strapped to them in an attempt to fly.”[9]

Leading organisations (or “incumbents” to use Christensen’s term) might be well placed to take advantage of small, predictable changes that come along as part of general market or societal development (“sustaining innovations”), but problems arise when innovations arise that dramatically change the picture, quickly causing an organisation’s structures and systems to become a liability rather than a strength – Christensen defines these as “disruptive innovations”.[10]

Valuing Disruptive Innovations

Disruptive innovations are difficult to manage for market leaders. They are new, often misunderstood, and messy. As we have seen, organisations are pretty good at foresighting the change to come and developing products and services in line with the change, but the critical failure comes when the organisation undervalues the importance of the disruptive innovation.

Successful companies become accustomed to success – the pressure for profitability trumps all else and percolates down the organisational chain of command. So when an organisation sets up a new department to look into newfangled things like digital photography, personal computing, or tanks on the battlefield, there is a lot of cynicism around. Other departments in the building come to see the upstart new department as a threat, a distraction, or a waste of time. ROI on new innovations is almost always low in the beginning, so big organisations will – understandably – focus on and value their reliable revenue drivers more instead. There is too much at stake to risk putting disproportionate resources into an exploratory innovation that is contributing significant losses to an otherwise pristine balance sheet.

The Profitability Paradox

Figure 4: John Antioco (and actress Jessica Simpson) at the launch of Blockbuster’s online rental service, Total Access, in 2006. This attempt to deal with innovative disruption was seen as too little, too late – and too expensive. (Source: Reuters)

This is precisely what happened with Blockbuster – not once, but twice. In 2000, when Reed Hastings asked John Antioco for US$50 million to buy out Netflix, Antioco refused. In his eyes, an online DVD rental company operating in an immature, niche market wasn’t worth that much. Later, in the mid-2000s when Antioco did develop a strategy to put an end to late fees and aggressively develop an online rental platform of its own, he was ousted in a boardroom coup and his plans were promptly scrapped. With a combined price tag of US$400 million, these moves were deemed too expensive – proving, once again, that Blockbuster had critically undervalued the innovative disruption.

Kodak’s demise, too, lay in valuing short-term profitability higher than the revolutionary innovation they had in their own hands. Kodak’s executives told Steve Sasson that while they could sell his invention, the digital camera, they wouldn’t. As Sasson himself relates:

“Every digital camera that was sold took away from a film camera and we knew how much money we made on film. That was the argument. Of course, the problem is pretty soon you won’t be able to sell film — and that was my position.”[11]

And so it goes in the stories of Sony, IBM and Xerox. They had foreseen the future, assembled teams and developed technology in readiness for the change – demonstrating that they did place some value in disruptive innovation – just not enough. When the Walkman Memory Stick didn’t deliver immediate financial success, Sony shrugged its shoulders; it had been worried about digital media cannibalising sales of its CD players and music rights businesses anyway. Similarly for the computer companies; they were too preoccupied making serious money in their everyday business selling mainframe computers and laser printers to worry about marketing and selling PCs to a tiny and nascent market, especially when internal wrangling between departments was causing extra trouble and distraction.

Horses > Tanks

Major-General JFC Fuller’s disruptive innovation also faced a problem of undervaluation, albeit on the battlefield rather than in the boardroom. The end of World War I in 1918 may have rendered his Blitzkrieg strategy unnecessary in the short term, but in the years that followed his enthusiasm for mechanised warfare continued to be broadly ignored by the officers around him – tanks were seen as cumbersome, unreliable and noisy. Aircraft were equally unloved for similar reasons. By contrast, one thing these officers did love was their horse, which was a trusty battlefield companion that provided better mobility than the tank and – more importantly to the traditionalists in High Command – better represented how the British did things. It was just more noble to fight astride a horse.[12] Hadn’t the British won enough battles over the centuries this way to prove that this method of warfare worked just fine?

In the end, Fuller retired from the British army in 1933 at the age of 55, disenchanted and frustrated by the British army’s failure to value his ideas enough to effect any change to the status quo.

Why Upstarts Succeed When the Market Leaders Don’t

What remains to be answered is why the likes of Netflix, Apple and Microsoft came to succeed when their more established counterparts didn’t.

To put it simply, upstart companies – unlike the established players – have nothing to lose. They have few (if any) customers to serve, no shareholders to answer to, and no real revenue to protect. All they have is a great new idea and an insatiable appetite to get it to market. This makes them much happier to operate at the bottom of the market where the big players have chosen to vacate. With the incumbent having turned their back on a niche, loss-making market, the upstarts (or “entrants”) step into the gap, aggressively refining their product and developing their customer base. Crucially, upstarts have a much higher pain threshold for low ROI in the early years than profit-obsessed incumbents.

Figure 5: Sustaining Innovations and Disruptive Innovations[13]

By the time the market matures enough for the incumbents to deem it worthy of their attention again, it is too late. By that point, the entrants have superior technical capability, better understanding of market needs and, significantly, much greater momentum. As Blockbuster learnt with online media and Kodak with the digital camera – once the cat is out of the bag, it is almost impossible to put back in again.

Eighty years ago, the world learnt these same lessons at a cost much greater than even the biggest business collapse. In 1933, when Hitler came to power in Germany, he inherited a military that had been stripped bare following World War I; it had no recent successful culture of warfare to protect and no status quo to defend – in other words, it had nothing to lose. With the “market” of mechanised warfare left widely ignored by the European Allies, Hitler was presented with the ideal conditions for an “upstart”. We all know what happened next: the Germans adopted Fuller’s ideas and committed wholeheartedly to the principles of mechanised warfare.[14] When German tanks rolled through Europe in 1940, the full potential and horror of Blitzkrieg had finally been unleashed, changing the world forever.

Conclusion

The fundamental lesson to be learned from all of this is that complacency breeds failure. No matter how established and successful an organisation is, it will never be invulnerable to the seismic shifts innovative disruption can bring to their industry. Even when organisations recognise the disruption coming and take proactive steps to respond to the change, including through both product development and internal reorganisation, we have seen that crafting appropriate strategies and tactics that effectively deal with innovative disruption is a devilishly complex challenge.

To go into detail on potential strategies to manage innovative disruption would command an article on its own, but it seems appropriate to end with a piece of insight from Clayton Christensen’s The Innovator’s Solution, his follow up to Dilemma:

“Competitiveness is far more about doing what customers value than doing what you think you’re good at. And staying competitive as the basis for competition shifts necessarily requires a willingness and ability to learn new things rather than clinging hopefully to the sources of past glory.”[15]

We can only wonder how different World War II would have played out had British High Command understood this when Fuller came calling with his bold new plan for tanks on the battlefield.

 

Glenn Wray is Associate Director of Global Marketing at the Future-Moves Group (FMG), responsible for the international brand development of the firm. Glenn enjoys contributing to FMG’s thought leadership pieces by providing new perspectives on familiar subjects, particularly those that intersect the areas of popular economics, strategy and history.
If you would like to find out how FMG’s expertise in strategy and management consulting can assist your organisation, connect with us at glennwray@future-moves.com

Notes

[1] https://timharford.com/2019/12/cautionary-tales-ep-6-how-britain-invented-then-ignored-blitzkrieg/
The Blitzkrieg case study in this article is inspired by this podcast by Tim Harford.

[2] https://www.marketplace.org/2020/09/08/ceo-reed-hastings-on-how-netflix-beat-blockbuster/

[3] https://www.inc.com/minda-zetlin/netflix-blockbuster-meeting-marc-randolph-reed-hastings-john-antioco.html

[4] Krishnadas, Devadas. FUSE: Foresight-driven Understanding, Strategy and Execution. Singapore: Marshall Cavendish Editions, 2015.

[5] Fuller, J.F.C. Memoirs of an Unconventional Soldier. London: Ivor Nicholson and Watson, 1936.

[6] https://lens.blogs.nytimes.com/2015/08/12/kodaks-first-digital-moment/

[7] https://www.irishtimes.com/business/sony-hopes-public-will-stick-with-walkman-1.254572

[8] https://hbr.org/1989/07/new-ventures-lessons-from-xerox-and-ibm

[9] Christensen, Clayton. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. USA: Harvard Business Review Press, 1997.

[10] https://claytonchristensen.com/key-concepts/

[11] https://lens.blogs.nytimes.com/2015/08/12/kodaks-first-digital-moment/

[12] https://timharford.com/2019/12/cautionary-tales-ep-6-how-britain-invented-then-ignored-blitzkrieg/

[13] https://claytonchristensen.com/key-concepts/

[14] Fuller published widely in the years following World War I and his views were widely respected among military strategists in Europe, including in Germany. More tellingly, in the 1930s, Fuller turned to Fascism, consulted regularly and directly with the German army, and was on friendly terms with Hitler himself.

[15] Christensen, Clayton M. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, Massachusetts: Harvard Business Review Press, 2013.