accounted for 16 percent of total revenues. Antioco knew that penalizing customers was no way to thrive long-term.
Soon, Blockbuster was on the march again, stealing nearly a million customers from Netflix each year. By 2007, things were so bleak for Netflix that Hastings sought and obtained permission from his board to begin merger talks with Blockbuster.2
On the brink of total victory, however, everything changed for Blockbuster. The board put a full stop to the direction Blockbuster was engaged in and forced out Antioco because they disliked many of the changes he had made, such as cutting out 16 percent of revenue by rescinding late fees. In Antioco’s place, they hired James Keyes. Keyes had been the CEO of 7-Eleven from 2000 to 2005, presiding over a remarkable thirty-six consecutive quarters of same-store sales growth, which by 2004, had resulted in global revenues of $41 billion. To the board, Keyes seemed like the perfect candidate to lead the company into the future because he more closely resembled the Blockbuster of the past.3 He had the experience of scaling and stabilizing a highly successful retailer that seemed to be on every street corner throughout the United States. That was the Blockbuster the board knew and understood.
Keyes’ vision was to make Blockbuster the 7-Eleven of video stores. He believed that stable growth in retail locations and expanded products within those locations would make Blockbuster successful.
Keyes’ vision was to make Blockbuster the 7-Eleven of video stores. He believed that stable growth in retail locations and expanded products within those locations would make Blockbuster successful.
After being named CEO, he quickly restructured his team, ridding the company of Antioco’s lieutenants as though they were a virus and promptly naming a new CFO, CIO, general counsel, and vice president of merchandising, distribution, and logistics.4 Then he redirected Blockbuster’s online business strategy to an in-store, retail-oriented model because he couldn’t see the potential value of a DVD-by-mail service, nor the relevance and opportunities that Blockbuster.com may have presented. “The Internet is worthless, and we’re getting out of it,” he declared.5 “I’ve been frankly confused by this fascination that everybody has with Netflix . . . Netflix doesn’t really have or do anything that we can’t or don’t already do ourselves.”6
Antioco had compressed some of the hierarchy at Blockbuster as part of his approach to modernizing the company and given retail clerks a lot of freedom to solve customer problems and see to their needs. Keyes put that hierarchy back in, reestablishing many layers of management between the top team and the customer. As a result, decisions were increasingly made without any direct experience of customer needs or their frustrations with the Blockbuster experience.7 Thus, employees at the prized retail stores—who had briefly enjoyed how good it felt to satisfy customers—became intensely frustrated by policies that got in their way. For example, to take breaks, under Keyes’ reign, retail employees had to clock in and out under extraordinarily strict guidelines, regardless of how busy the store may have been at the time. They also were mandated to restock damaged DVDs despite customer complaints and, to cut costs, were deliberately understaffed on peak weekend nights, so they did not even have time to restock or tidy shelves. They knew, better than anyone insulated at the top, that Blockbuster customers were eager for better alternatives, yet they were not allowed to do anything about it.8
Keyes was blind to these problems and probably believed his own words when he said, “Blockbuster is a turnaround explosion just waiting for a spark. If we exceed the expectations of our customers, we will in turn exceed the expectations of our shareholders.”
Of course, this statement reads like a bad joke today now that Blockbuster is gone and Netflix is worth more than ten times what Blockbuster was at its peak.
OLD WAY VS. NEW WAY
Why did Keyes stop Blockbuster from attempting a new way? I believe it was because he saw the traditional Blockbuster culture—a brick-and-mortar business model built to leverage scale and brand—as a permanent strength, and structured the organization and its strategy accordingly. But it was this same locked-in culture that didn’t allow the company to react and innovate when it needed to adapt. Keyes and his team refused to look at or internalize the current truths they faced in the marketplace, and they wouldn’t take the time to understand emerging technologies or shifting consumer behaviors that threatened to completely disrupt the home-entertainment industry. Keyes’ personal leadership style, best characterized as a “don’t question me and let’s execute” mentality, made it easy for everyone to put on blinders and plow ahead. And, whenever employees got glimpses of market truth, the company wasn’t positioned or structured to respond. In the end, changing its business model to survive in a new reality was going to cost money, resources, and creative energy that Blockbuster was unwilling and unable to spend.
As we all know, this narrative is not an isolated one. Many big companies that were incredibly successful in the twentieth century are failing and floundering in the twenty-first. Pundits and journalists usually point to a lack of execution and innovation. Yet it’s the organizational culture that large companies built in the process of becoming successful and powerful in the twentieth century that is now defeating them in this new era. Many such companies continue to fixate on doing more or better at what has made them successful in the past—offering a particular product or service at scale—while not yet recognizing that today the how of a company—what it stands for, what matters to it, how it tends to the changing needs of its people and customers—is infinitely more important.
Many companies fixate on doing more or better at what has made them successful in the past—offering a particular product or service at scale—while not yet recognizing that today the how of a company—what it stands for, what matters to it, how it tends to the changing needs of its people and customers—is infinitely more important.
Much of the inertia of traditional companies can be traced back to their cultural roots. Who were they when they first started? What were their goals? What was the mindset of these formidable pioneers? What worked in the twentieth century?
Winning in the twentieth century required getting big and then managing for stability. Companies were focused on the what—their strategy or their product. And they had plenty of time and resources to do the what well. The world moved much more slowly than it does today, so in general it was possible to pick a strategy, execute it well, and become successful as a result. Accordingly, twentieth-century companies built their organizations to meet quality, quantity, and cost drivers, and they produced products to meet clear demand, while distributing in a mass market, and standardizing all processes and outputs to maximize efficiency.
Enterprises operating this way today are clinging to the same mindset that James Keyes held on to—a belief that scale, mass, and efficiency will provide an eternal advantage. In contrast, Netflix has actually developed a theory to describe why success in business eventually leads to failure.9 Netflix believes that growth increases organizational complexity and the potential for chaos, and that companies naturally respond by specializing on a narrower range of success factors and putting more processes in place to dampen the chaos. However, this restricts what makes working for a particular organization interesting, creative, and engaging and drives talent and diversity of thinking out. The long-term outcome of failure isn’t seen at first because as this is all happening, the business continues to perform well or even better, and short-term outcomes are improved. But when the market shifts—as it is bound to do—the company is left without the talented people, emotional commitment, or creative range to respond. A focus on what has smothered the reliance on how.
Mark Parker, the CEO of Nike, sees cultural inertia as a very deadly, self-perpetuating, and existential threat. He says, “One of my fears is being this big, slow, constipated, bureaucratic company
