Blockbuster's Plight Exposes a Broader Corporate Creativity Problem [Update]

According to reports, Blockbuster (BBI) will likely file for Chapter 11 bankruptcy in the near future. [Update: The company has officially filed.] Given the difficulties the company has had, it isn't a big shock. Between Netflix (NFLX), Hulu, and other Internet-delivered sources of entertainment on one side, cable video on demand, and Redbox pushing on the physical media side with its rental kiosks, the company seems to have nowhere to go.

There's a lesson here for other companies. The knee-jerk reaction is to say that Blockbuster wasn't innovative enough and to anticipate or, at worst, counter what came about. But it may be that the issue isn't a lack of innovation so much as the wrong type.

I've recently been speaking with creativity researchers and experts who approach the topic not from a touchy-feely let's-let-our-hair-down-and-wear-tie-dye view, but from cognitive neuroscience. Some of the results have interesting potential explanations for some of the things that went wrong at Blockbuster -- and that go wrong at many companies.

One is that there are different forms of creativity. According to Sandy Cormack, a professional development consultant, a simplified model has two types: adaptive and innovative. The first refers to using creativity to improve what already exists. Innovative results in breaking completely new ground. It's not that one is better than the other. Both are necessary. Look at Apple as an example. The invention of the original iPhone was an act of innovative creation. However, the studied improvement over several generations became adaptive creation.

Focus only on innovative creation and you can't operate effectively. Every product tries to overthrown what you've done before, so you can't get economies of scale, you have to educate the public with every release, and, importantly, you never work the problems out from the last product. You could say that the legendary Xerox (XRX) Palo Alto Research Center -- Xerox PARC -- was a prime example of an organization that was almost purely innovative but not adaptive. It was notorious for brilliant inventions that never became marketable products. At least, not for Xerox.

Blockbuster is almost completely the opposite. "They were an adaptive innovation of the channeling and business model of the mom and pop business store," Cormack says. However, that lack of balance between adaptive and innovative creativity left the company a sitting duck because it would be almost incapable of understanding the implications of a radically different business model.

Although most of the focus on Netflix today is on downloaded video, originally its innovative change was to take the store out of the rental process. The company developed a way to largely automate the rental transaction by having people make their choices online in advance. Some additional interesting use of U.S. Post Office services allows them, according to sources I've spoken with in the past, to know the minute a returned DVD hits the return mail. That's how the company can get the next selection out so quickly -- because it doesn't have to wait until the package actually returns.

Similarly, Redbox found a way to automate rentals following the 80-20 principle -- carry the small fraction of DVDs that are responsible for the bulk of the rentals. "It doesn't need people to run it. It requires no floor space," Cormack says. "It requires only the inventory that gets the biggest bang for the buck."

Blockbuster responds only by trying to adapt its existing model in ways to put off competition. Or it will add something like mail service or kiosks long after competitors have introduced a service as window dressing. But it doesn't make the really big changes it would need, because that requires innovative creativity.

Like a Blockbuster or Xerox PARC, any organization will be somewhere on the balance between two types of creativity. It's a matter of culture. Depending on the state of the industry and competitors, a company may need one blend or another of adaption and innovation. However, I've almost never heard of managers doing a creativity audit to see if strategic planning, marketing, R&D, and other functions have the right blend of approaches. Pity -- it seems like a good way to pinpoint and possibly eliminate problems before they occur.

Related:

• Google Will Stream Video, Which Should Worry Apple and Amazon
• Verizon: Screw Mobile Net Neutrality, We Wanna Sell Video
• Seth Godin: A Canary in the Coal Mine for Publishers and Book Retailers
• Why Microsoft Should Buy Blockbuster (Seriously)
• Netflix Wants That Money (But May Not Get It)