When an innovation caters to the unnoticed segments of a market, it creates a whole new market by itself, thereby disrupting the existing market and uprooting the already established key market players. Netflix is a great example of disruptive innovation. Before Netflix, video & movie rental market was dominated by Blockbuster, a video rental brick-and-mortar store.
Reed Hastings observed various drawbacks & voids left by the brick-and-mortar rental services as well as the customers’ expectations from the market. These were1. The brick-and-mortar store did not have any delivery option. The customers had to drive all the way to the store to get a movie.
2. These companies used to charge a very high late return fee on movies that were not returned on time.3. The rental system was predominantly based on VHS and had not adopted the DVD format4. The market also catered to only new movies & very few old titles were available for rent.He then started Netflix, a postal DVD rental service. The service was initially a pay-per rental system but later on turned into a subscription model.
It provided the customer with new as well as old models. Thus, through Netflix, the voids of the markets as well as the needs of the consumers were met. Following competition from Netflix, Blockbuster began to lose revenue in mid-2000’s and in 2010 filed for bankruptcy protection. Just like any other example of disruptive innovation, Netflix became a startup small brand that ended up disrupting the market and an established market player. It rarely happens that a company disrupts its existing business model.
But Netflix seems to have covered both the roads to disruptive innovation. In 2007, with the advent of 3G broadband internet and increased internet connectivity, Netflix decided to start their own video streaming service. Even though the streaming service was a relatively new concept, it catered to the needs of the customers who wanted a faster & cheaper method to view their movies. Even Clayton Christensen, the father of disruptive innovation theory, thinks that Netflix is great example of how disruptive innovation actually works. The main reason why Netflix is a disruptive tech company is because when it introduced its DVD rental service, it did not target the main customers of its competitor, Blockbuster.
The Blockbuster clients sought after new releases that too on request. And Netflix provided them with neither. Initially, Netflix only appealed to a very niche segment. These customers were movie buff who did not care about new releases, had already adopted into the DVD era and were online shoppers. According to Clayton Christensen, this is a symbol of disruption. A disruptive company focuses on those segments of the consumer group that have been ignored by its competitors and delivers an lower but better suited alternative, often at a lesser price.
Netflix thus, highlights the importance of innovation in not only establishing a brand’s competitive advantage but also maintaining it. It is also one of the few very few firms that have successfully disrupted themselves.