Planning for Disruption – Walgreens versus Netflix

by Adam Hartung

According to Crain’s Chicago Business, “Walgreen’s Same Store Sales Nearly Flat.” Walgreen’s has been Locked-in for 3 decades. Build more stores. Simple. Just like WalMart did for many years. Demand seemed insatiable, until there was a store on almost every corner. Build stores, turn the product fast and keep people coming in for prescriptions or something on sale. Their Success Formula worked, and it helped them grow and grow.

But then about 3 years ago growth slowed. A lot. Raising capital got a lot harder to build these stores, and the apparent need for more stores was a lot less obvious. But Walgreen’s didn’t attack it’s Lock-ins to the old Success Formula. Management kept defending it, and trying to extend by acquiring other chains they could convert into Walgreen’s. But as we’ve seen in same-store results, Walgreen’s has stalled. And we know that less than 7% of stalled companies ever consistently grow more than 2% ever again. Walgreen’s just refuses to realize that health care programs are forcing more people to drugs over the web, and that retailing is fast moving to on-line sales for both convenience and price. So the Success Formula keeps struggling a bit more every year, with hope that things will somehow return to the “good old days.”

A much better management team is in place at Netflix. Netflix has clobbered Blockbuster with their on-line model for movie rentals. You’d expect them to keep pushing hard for on-line rentals, in order to Defend & Extend the Success Formula – just like Walgreen’s management has done. In spite of the fact that everyone knows DVD rental growth is threatened by more people simply downloading movies. Thus, I was delighted to see Netflix publish this chart:

Planning for Disruption - Netflix Business Opportunity

Netflix has admitted that its “core” business will peak in 2013! How great. And what’s even better is that they are rapidly changing their model by investing heavily into streaming downloads. Where most management would say “we have to stop that transition, it will cannibalize our very profitable existing revenues” Netflix is planning for the change – and preparing to help the market move in that direction!

Only by allowing a streaming download White Space team to be formed 3 years ago is Netflix able to make this transition. It attacked its Lock-in to the traditional – and wildly successful model – in order to allow a team to have the permission and resources to figure out how to move into the new business profitably. That means Netflix has a really decent chance of keeping the company growing as the market shifts! Great news for investors, suppliers, employees and customers!

You don’t want to be like Walgreen’s management. They may have a chart showing the maximum number of stores needed in the USA – but they won’t publish it. Because they have no idea how they’ll migrate away from the old Success Formula. They have no Disruptions or White Space. They are fighting market transitions, and slowly seeing results falter. But the growth stall is a big sign that Walgreen’s has a lot of heavy problems ahead.

You do want to be like Netflix. Be honest about where markets are headed. Quit trying to protect an old Success Formula with arguments like cannibalization. Instead, attack the old Success Formula with Disruptions and launch White Space teams designed to figure out how you can grow with the market shift – even if price points are destined to deteriorate. Long-term its the only way to survive – and thrive.

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Adam HartungAdam Hartung, author of “Create Marketplace Disruption“, is a Faculty and Board member of the Lake Forest Graduate School of Management, Managing Partner of Spark Partners, and writes for “Forbes” and the “Journal for Innovation Science.”

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  1. I agree with the tenets of the article. Innovating incessantly is the only way to survive.

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