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Blockbuster vs Netflix

Discuss about the IT Innovation for VHS and DVD Industry.

An incumbent can be described as an individual who is responsible for his or her office in a governmental or organizational position. The concerned person has the obligation to the position or the office he or she holds. Thus, an incumbent from a business perspective is generally referred to a leader or a person who is being discussed. The incumbent in a specific industry can change in the responses to bring changes in the market. An incumbent can also be referred to as the business relationship like those that exist between a supplier which is providing materials to another business. A challenger can thus be described as the firm or a leader which has a low market share or a person which is aiming similar leadership position. Challengers are the competitors that are aiming towards for the power and authorities which is already held by an incumbent person (Ansari & Krop, 2012).   This study is based on the incumbent vs challenger; a brief description on the Blockbuster vs Netflix and a literature review on why the incumbents are beaten up by the challengers in business.

Blockbuster once used to be an icon for both the VHS and DVD industry and presently it is the least profitable movie distribution company in the United States.  The main point of an argument is that how this Blockbuster got reduced to a loss-making company. One of the best answers can be the rise of the other company like Netflix. There are surely other reasons that led to the rise of the Blockbuster and the rise of the Netflix. There were reasons like late fees that of 40 dollars for the ones that failed to return the videos before the deadlines. These reasons definitely contributed to the loss of the huge customer base of Blockbuster, however, these were not the root cause of Blockbuster's downfall. When the winds of change came to the video and movie industry, the Blockbuster remained reluctant to adopt the change (Christensen, Raynor & McDonald, 2015). In the year 2000, Netflix approached Blockbuster for a buyout deal which was priced at 50 million dollars. Blockbuster refused to accept the deal. It is important to mention that Netflix started to transition from the renting the DVDs to online streaming of the media content in the year 2007. The main goal of Netflix is to bring a technological revolution in the internet usage and personal computing. Thus, Netflix is considered to be the first successful corporate entity to adopt such a new technology. Later on after watching the success of Netflix, Blockbuster too took such similar steps. However, the fact is that Netflix already had a major customer base which is Blockbuster had already lost. The time that Blockbuster took to take the market till then Netflix already had gained a complete control over the new industry (Brescia et al., 2014).

Incumbent vs Challenger

According to a study conducted by Magnusson et al. (2012), the distinction between the challenger and the incumbent, it has been seen that the incumbent service-oriented model emphasises on the delivery of the services as a whole package. In this kind of business, the incumbents target the product and base customers. The core competencies of the incumbents are the implementation methods, software development, and marketing. The incumbents do not all together bundle the costs along with their offer. Thus the incumbents provide a breakdown of the costs according to the categories of investment (initial costs, networks and hardware), costs associated with operating/maintain a system, third party or vendor licensing. Also, the incumbents provide or facilitate the customers a dynamic pricing level that is entirely based on the number of users and service levels (Wassermann, Reeg & Nienhaus, 2015).

The challenger business model emphasises on delivering the customer value to a niche market. The challengers have a different strategy and it emphasizes not to capture a particular market segment but to target the customers that are willing to accept a complete standardization. The main aim of the challengers is to become a product leader through the delivery of a particular product. The reason being that challengers want to make their products as independent and unique from the other players in the same field. One of the vital parts is that the challengers do not sell their products along with the professional services. The challengers integrate a hub into the infrastructure so that the services are also integrated into the services that are delivered by the external suppliers. The challengers control both the technological matters and the technical matters including the revenues that are flowing from the external suppliers (Baden-Fuller & Haefliger, 2013).

Thus, it can be said that there exists a distinct difference between the challenger and the incumbent business models. Considering the perspective of institutional logic, the analysis is opened up into a new arena. The table below shows the how the incumbent and the challenger takes into account the various business model building block (Magnusson et al., 2012).

Business model building block



Core competency

The packaging of the solutions and software development.

Implementation methodology, software development and sales. 

Value configuration

Business is enhanced and value is created via the adoption of the product by the customers.

Value is created through the adaptation of the product and dialogue with the implementation consultants.


Web-based maintenance and implementation, limited contact with the customers and also includes monthly billing.

For the purpose of sales and implementation, a direct contact is maintained with the customers. This is done through the partner network consultants or through the own network.

Distribution channel

Basically, it is web-based and it has a low threshold for testing the products and too for free but only upon registration.

Primarily it uses an enterprise resource planning sales along with the conferences and conventions.

Target customer

Medium or small sized enterprises through the Chief investigating officer or equivalent.

Medium sized enterprises through the chief executive officer or equivalent.

Value proposition

Delivery of limited, niched and highly standardized bundle of services.

Delivery of the customized services that are owned by the vendors.

It has been put forwards by Ansari & Krop (2012), that radical innovations have transformed to a great extent the industrial landscapes and it takes into account reconfiguring the leadership position that is vital for the economic and organizational growth. The technological innovations like business model innovations and digital imaging, often bring in the new entrants or the challengers against the well-established incumbents for the purpose of market leadership. Thus, the business models and the existing technologies are continuously challenged. Major examples that can be cited with respect to this context are: Google and Apple brought a new mobile operating system and this challenged Nokia, who was a market leader. The same way Netflix challenged other companies like Blockbuster and brought a new experience of online monthly movie subscription and an enhanced customer experience. Thus, Google, Apple, and Netflix all acted as challengers and challenged the incumbents like Nokia and Blockbuster. One major question that arises here and it is highlighted by Norman & Verganti (2014), that what are the major issues that the hinder the incumbents from taking up radical steps and innovations. It is often seen that the incumbents are reluctant to new value networks and the newer technological paradigms, this provides a chance to the new entrants or the challengers an increased chance of success. There are several copious examples like solid-state semiconductors, jet engines, diesel-electric locomotives, electronic calculators. Another big example is that the Swiss watchmakers were devastated when a transition took place from mechanical to quartz watches took place. The tire industry incumbents that specialized in the bias ply tire technology also suffered to a great extent from the invention of radial tire technology (Giada Scalera et al., 2014). Cultured pearls that were created on the farms proved to be fatal for the natural pearl industry. Sony being the inventor of the Walkman completely lost to the Apple through the launch of the online distribution system and the digital music player. Thus, the suffering of the incumbents can be related to the unwillingness to innovate any new technology and continuing with the existing one. The core capabilities of the incumbent companies turned into rigidities that led to the inability to adopt the disruptive innovations. The incumbents try not to tamper and tinker with the existing stable environment and acts to impede the ability to adapt to the newer technologies. The incumbents both encounter and experience a lot of formidable challenges and is even be upstaged by an innovation. It has been argued by King & Baatartogtokh (2015), that the incumbents are able to fend off the competitive threats. When the mobile telephony industry is taken into account, the incumbent vendors were successfully able to incorporate the same into the service offerings either by building their own networks by taking into consideration the dedicated subsidiaries or by co-opting for a wireless technology. Another big example is the Microsoft itself and it was able to maintain the market leadership by adopting and adapting the various ideas that enhanced the platform ecosystem. Also established incumbent company like Hasselblad was able to maintain the manufacture of the high-end professional cameras through the acquisitions and collaborations.

Literature Review

According to Ansari & Krop (2012), why the incumbents from adopting the disruptive models are by having differential responses from adopting the disruptive innovations. There are several factors like luck, organizational link with the complementary assets and new technology, related market evolution, government policies, stock market pressure, institutional environment, transformative costs associated for the challenger, management’s cognitive model, government subsidies, demand structure, commercialisation of the innovation, complementary assets, incumbent size. It has been argued by Baker (2012), that the concept of the competency-destroying innovations and the competency –enhancing innovations are both useful in explaining the success of the incumbent firms. It has been seen that if the innovation is competence destroying, then it has the capability to change the metrics of basic performance. This also affects the firms that are competing and renders the established technologies obsolete and along with it destroys the linkages of the incumbents with the existing customers. It has been pointed out by Van Wijk et al. (2013), that the radical innovations affect the incumbents and challenges. In a certain instance, the Xerox was displaced by Canon in the photocopy industry. The existing capabilities that are followed during the times of stability have rendered the incumbent firms to be less responsive to the changes. Cognitive biases and the misaligned incentives have rendered the managers clueless about the changing rules of competition which is emanating from the niches that follow a technological shift. The incumbents try to manage the trade-offs by controlling the various product platforms and along with it incentivises the third parties in the creation of the complements. Thus, in order to gain an advantage over the new entrants (challengers), a developed complementary system is developed for the purpose of innovation. Thus, the success of an innovation depends a lot on the how the innovation fits into the complementary service and product including the industrial architecture. A new type of market is created by the incumbents which are hard for the new entrants (challengers) to emulate and will also prove to be hard for the existing technologies to catch up (Eggers & Park, 2018).


Thus, from the above discussion, it can be concluded that the competition between the incumbents and the challengers is an old one. The incumbents have proved to be the losers in the long run while the challengers take up the opportunity and gained a major momentum by developing a new technology that ultimately helped the humans and society as a whole. Several big companies which were the first entrants and were the pioneers, later on, failed to maintain and adapt to the changing demands and scenarios. This led to the challengers to gain the market space and take up the lead position. 


Ansari, S. S., & Krop, P. (2012). Incumbent performance in the face of a radical innovation: Towards a framework for incumbent challenger dynamics. Research policy, 41(8), 1357-1374.

Baden-Fuller, C., & Haefliger, S. (2013). Business models and technological innovation. Long range planning, 46(6), 419-426.

Baker, J. (2012). The technology–organization–environment framework. In Information systems theory (pp. 231-245). Springer, New York, NY.

Brescia, R. H., McCarthy, W., McDonald, A., Potts, K., & Rivais, C. (2014). Embracing disruption: how technological change in the delivery of legal services can improve access to justice. Alb. L. Rev., 78, 553.

Christensen, C. M., Raynor, M. E., & McDonald, R. (2015). What is disruptive innovation. Harvard Business Review, 93(12), 44-53.

Eggers, J. P., & Park, K. F. (2018). Incumbent Adaptation to Technological Change: The Past, Present, and Future of Research on Heterogeneous Incumbent Response. Academy of Management Annals, 12(1), 357-389.

Giada Scalera, V., Mukherjee, D., Perri, A., & Mudambi, R. (2014). A longitudinal study of MNE innovation: the case of Goodyear. Multinational Business Review, 22(3), 270-293.

Heiskanen, E., Apajalahti, E. L., Matschoss, K., & Lovio, R. (2018). Incumbent energy companies navigating the energy transitions: Strategic action or bricolage?. Environmental Innovation and Societal Transitions.

King, A. A., & Baatartogtokh, B. (2015). How useful is the theory of disruptive innovation?. MIT Sloan Management Review, 57(1), 77.

Magnusson, J., Enquist, H., Juell-Skielse, G., & Uppström, E. (2012). Incumbents and challengers: conflicting institutional logics in SaaS ERP business models. Journal of Service Science and Management, 5(1), 69.

Norman, D. A., & Verganti, R. (2014). Incremental and radical innovation: Design research vs. technology and meaning change. Design issues, 30(1), 78-96.

Van Wijk, J., Stam, W., Elfring, T., Zietsma, C., & Den Hond, F. (2013). Activists and incumbents structuring change: The interplay of agency, culture, and networks in field evolution. Academy of Management Journal, 56(2), 358-386.

Wassermann, S., Reeg, M., & Nienhaus, K. (2015). Current challenges of Germany’s energy transition project and competing strategies of challengers and incumbents: The case of direct marketing of electricity from renewable energy sources. Energy Policy, 76, 66-75.

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