The Innovator’s Dilemma

Best Buy lost about 40% of its stock value in 2011.That’s a sad statistic. Its market cap, at around $9 billion, is a tenth of Amazon’s. How could a company with such vast experience in retailing, marketing, supply chain management, and customer service be outdone by a nimble web competitor that got its start as a bookseller? Many analysts point to the innovator’s dilemma. Clayton Christensen coined the phrase to refer to the quandary that many big successful companies find themselves in when an innovation threatens to disrupt a prevailing market.

At the start, the successful companies don’t realize how unsettling the new technology is. The second mistake they usually make is avoiding the innovation altogether and instead doubling down on their outdated (but still highly profitable) business model. This second step seems like it wouldn’t be taken by companies, but it is. The reasoning behind the move is fairly straightforward as well: the new innovative service or product commonly cannibalizes the old revenue stream. Take a look at Blockbuster, for instance. When Netflix arrived on the scene in 1999, Blockbuster was ripe with profits and had unmatched brand loyalty. Blockbuster was so concerned with preserving its existing business, though, that it failed to see that the customer experience pioneered by Netflix was far superior to its own. In Best Buy’s case, the company failed to recognize how important online shopping would be for the average person. Indeed, the idea of a standalone electronics big box chain surviving in the internet age kind of goes against reason. But Best Buy, instead of using its valuable resources and dwindling brand loyalty to invest in its online properties, decided to expand into the UK and China. Amazon, for its part, is constantly innovating in the online and digital space: it has expanded into streaming movies, created its own tablet reading devices, nurtured a book publishing platform and has lead the way in innovative shipping/delivery programs. The last stage of the innovator’s dilemma is usually associated with the formerly successful company finally recognizing the errors of its ways. It usually spends its remaining resources on chasing the small competitors that have already run rings around it. This strategy is rarely successful. Again, see the Blockbuster example.

The analysts know something that Best Buy executives might not want to admit to themselves: the business that they are in, with its high cost brick-and-mortar stores, is dying. Proof? Best Buy’s P/E (price to earnings) stock ratio is 8.7. At Amazon it is 130.
- Read more about it here: Forbes