CIOs Can Help Their Companies Survive Industry Disruption

Business models are constantly in jeopardy. Netflix, for example, played the role of disruptor as it whacked Blockbuster, but now Netflix is facing stiff competition from Amazon, Hulu and others. The lesson for business leaders: Disrupt or be disrupted.

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CIOs are learning some hard lessons about how industry leaders can be knocked off by out-of-the-blue competitors. Look at that quintessential business disrupter, Netflix. In 1997, the upstart launched a fast, convenient DVD-by-mail rental service that relied on highly efficient supply-chain systems, well-situated distribution centers and, of all things, the U.S. Postal Service. Mixing existing technology and service tools in a new way let Netflix create a fresh business model in video rental that eventually displaced Blockbuster, Hollywood Video and other stalwarts that relied on physical stores.

Today, however, Netflix struggles to maintain its supremacy. Lots of companies with streaming video have invaded its territory, including YouTube, Hulu and Cablevision. Perhaps the biggest threat, in part because there appear to be no bounds to its ambition, is Amazon. The $48 billion e-commerce company offers streaming and downloadable video for many devices--exactly the future Netflix imagines for itself.

Netflix is aware of these challenges and is trying to boost its streaming business and revamp for an all-digital market. But new pricing plans and an attempt to separate its by-mail and streaming subscriptions in 2011 got customers mad. The company admits in recent financial filings that it has seen "higher than expected customer cancellations" and that those customers aren't coming back quickly. Churn for 2011 was 4.9 percent, up from 3.8 in 2010. Vehement customer reaction led Netflix to reverse changes to its subscription business, though it stood firm on its controversial pricing policy.

We don't know how the Netflix story will end. But as so many business models in so many industries come to depend on IT, CIOs need to heed the law of the business jungle: Disrupt or be disrupted. It's a familiar pattern--disrupter moves in, flies high, then becomes disrupted as markets and technologies evolve. Competitors emerge from unexpected places. Some customers vacate to more appealing companies while others resist your attempts to change. Every business model must eventually come to an end, but the trick is to recognize your own impending demise--plan for it, even.

CIOs who anticipate trouble can show colleagues how to avoid it, or fight it when it comes, says Gartner analyst Dave Aron. "You want to escape conventional thinking."

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