Shuffle Up and Innovate

Posted by Saul Kaplan on April 26, 2009

Innovation is a better way to deliver value.  Often it doesn’t require inventing anything new, just recombining existing capabilities in new ways.  CVS Caremark and Blockbusters offer two contrasting stories.

CVS has come a long way from having 17 drugstores in 1964.  Today, the company has over 6300 drugstores in the U.S. and is very good at store operations and integrating new stores into the network after several large drugstore chain acquisitions.  CVS has to work its bricks and mortar business model hard to deliver customer value, continue to grow, and to stay ahead of Walgreens and other retail competition.  But that is not the entire story. 

Tom Ryan, Chairman and CEO, told me that while CVS must be focused on growing within its current business model, it is also imperative to explore new ways to deliver customer value even if it requires doing business in a very different way.  For CVS that means thinking beyond being excellent in store integration and operations.  Tom challenged his executive team to expand their thinking about CVS as a drugstore chain to imagine how they could deliver value to their customers as a leader in the healthcare industry.

It is that kind of market making mentality that led CVS to acquire MinuteClinic in 2006 and to merge with Caremark Rx in 2007.  These bold strategic moves provide CVS Caremark with a broader set of capabilities enabling the company to experiment with new ways to deliver customer value both within and outside of their current store infrastructure.

CVS Caremark is a business model innovation success story.  In 2008 its revenue was over $87 Billion, net income was $3.2 billion, and it currently has over 200,000 employees.   They have come a long way from having 17 drugstores in 1964 and are positioned as an exciting healthcare growth company.

Contrast the CVS Caremark story with Blockbusters, an example of a company that has been unable or too slow to recombine capabilities in new ways to deliver customer value.

Blockbusters opened its first store in 1985.   Ironically, its early growth was fueled by business model innovation.  Instead of paying a large upfront fee to buy videos from the studio (up to $65 per video) they entered into a revenue sharing model with the studios (little to no upfront costs per video) giving them a huge advantage and fueling explosive growth.   Blockbusters focused on its retail store business model and grew its store network to over 5000 in the U.S.

I would love to have been a fly on the wall at Blockbusters’ headquarters to know if senior management saw the opportunity to think beyond network expansion and store operations to deliver customer value in new ways.  Did they see the Netflix (DVD in the mail) opportunity and decide to stick with the bricks and mortar approach?  Or did they just miss it because they were so busy pedaling the bicycle of their current business model that they didn’t think about and experiment with potential new ones?   Either way Netflix recombined existing capabilities in a new way to deliver value to Blockbusters’ customers and by the time Blockbusters could react it has been a defensive and tough battle for them.

Blockbusters lost $3.8 billion from 2002-04.  More recently the company is closing unprofitable stores and while it now has its Total Access offering to compete with Netflix, Blockbusters continues to lose money posting a loss of $360 million in the first quarter of 2009.  It is working on restructuring its debt and was listed tenth on U.S. News and World Report’s “15 Companies That Might Not Survive 2009.”

The CVS and Blockbuster stories drive home the importance of business model innovation and the power of recombining capabilities in new ways to deliver customer value.  They also demonstrate that the job is never done.  No matter how good your current business model is, if you aren’t thinking about and experimenting with a better one, rest assured that your future competition is. Shuffle up and innovate.