In 2000, Reed Hastings offered Blockbuster’s CEO John Antioco what might have been the deal of the century—the opportunity to buy his less than three-year-old startup for just $50 million. But after sizing up Netflix as a “very small niche business,” Antioco turned Hastings down. Antioco was hardly a Luddite; he was already looking past DVD rentals to the as-yet non-existent streaming business. That same year, he inked an exclusive, 20-year agreement with Enron’s broadband service to provide pay-per-view movies to Blockbuster’s customers via DSL.
We will never know whether Blockbuster’s digital aspirations would have succeeded if Enron hadn’t imploded, but we do know that Blockbuster was wedded to a business model that it felt was too profitable to change. Blockbuster’s profit formula was dependent on late fees, which its customers hated (Reed Hastings says he was inspired to create Netflix’s subscription model after paying a huge late fee in a Blockbuster store). When Antioco belatedly eliminated the late fees and made deep investments in Blockbuster.com, an activist investor saw to it that he was fired. The new CEO restored the fees and Blockbuster descended into its death spiral.
Technology might have saved Blockbuster, but its outdated business model surely doomed it.
What exactly is a business model? Every successful business can be broken down into a stable system that consists of four elements that interact in consistent and complementary ways. First is a strong customer value proposition—a product, service, or combination thereof that helps customers more effectively, conveniently, or affordably do a job. The profit formula defines how the company will capture value for itself and its shareholders in the form of profit. Finally, key resources and key processes are the means by which the company delivers the value to the customer and to itself. These critical assets, skills, activities, routines, and ways of working enable the enterprise to fulfill the value proposition and profit formula in a repeatable, scalable fashion.
If Blockbuster’s story shows how an old business model can stifle the adoption of a new technology, Medtronic’s introduction of its pacemakers to India shows how a new business model can give new life to an older technology.
Though India only makes up 16% of the world’s population, it accounts for more than 50% of its heart disease. But India is an emerging economy, and its rural population is hampered by a lack of knowledge about heart disease, a dearth of reliable care pathways, and an absence of health insurance. Unlike Blockbuster, which was reluctant to change its business model, even to respond to a competitive threat, Medtronic changed the business model it used in the developed world so it could respond to a new opportunity.
To blueprint its new business model for India, Medtronic created a venture it called Healthy Heart for All, which was built on four pillars:
- Go direct-to-patient: Reach out to potential patients through a toll-free hotline posted on billboards, ads on trucks, in social media, and text messages, to raise awareness of free diagnostic events.
- Engage the ecosystem: Work with industry stakeholders to raise awareness and drive participation in the program.
- Manage the pipeline: Set up screening camps with telemedicine technologies such as wireless relay of ECG results and other tools that directly identify patients.
- Ensure affordability: Create the first-ever consumer financing plan for pacemakers.
Healthy Heart for All’s customer value proposition is obvious—the possibility of receiving life-changing (and life-saving) treatments. Its value for Medtronic is clear as well—access to a vast pool of currently unserved customers. As the world’s leading medical device maker, Medtronic had all the key resources and processes that it needed to serve those customers, including strong relationships with India’s providers and payers, and just as importantly, its banking community, which would provide the loans.
Medtronic knew that it couldn’t realize the same profit margins in India that it does in developed countries, but it understood that scale and velocity would make up for much of the difference. More than that, the business model it created in India is a template that will allow it to provide its life-saving technology in other emerging markets.
Technology can provide a platform for future growth – but just that. Seizing the white space of opportunity requires a well-thought-out business model—and a willingness to change an existing business model if necessary, whether to enable a new technology, unlock a new market, or both.
Mark W. Johnson is senior partner of the strategy and innovation management consultancy Innosight, which he co-founded with Clayton Christensen. He is the co-author of Reinvent Your Business Model: How to Seize the White Space for Transformative Growth.