Monday Mornings with Madison

The Butterfly Effect on Business, Part 2

Word Count: 1,947
Estimated Read Time: 8 min.

In Poor Richard’s Almanack[1], Benjamin Franklin once wrote:  ““For the want of a nail, the shoe was lost.
For the want of a shoe, the horse was lost.  For the want of a horse, the rider was lost.  For the want of a rider, the battle was lost.  For the want of a battle, the kingdom was lost.  And all for the want of a horseshoe-nail.”  Franklin — a man of both faith and scientific study — was describing the Butterfly Effect, long before it was demonstrated by a weather algorithm three centuries later.  The Butterfly Effect says that a small action, change or decision can have a broad and profound impact on other things later.

Now imagine how that horseshoe-nail might translate into today’s business culture.   Seemingly small decisions that business leaders and owners make can have huge repercussions on them, their business, their careers, other people’s jobs, and the success or failure of other businesses.  And the ripple effect continues on and on.

Butterfly Effect can have great impact on businesses, large and small.  In everyday operations, business owners, leaders and managers are making changes or decisions.  Each of these activities has an influence on general business operations.   Sometimes the effect is seen and felt immediately.  But often the changes and decisions are infinitesimally in the grand scheme of things and it seems like those decisions have no effect at all.  In reality, the effect is not felt right away but over time as it causes a chain reaction.  Small changes in one process or policy can have great effect on the whole business.

The Butterfly Effect can work in two distinctly different ways in business:

  • A small decision or change can bring about big positive effects down the road; or
  • A small decision or change can bring about major negative effects at a later time.

There are countless examples of seemingly small actions or decisions – as tiny as the air generated by the delicate flutter of a butterfly’s wings – that have had a HUGE impact later.  But, more often than not, the Butterfly Effect is spoken of as a cautionary tale of how careless or callous actions can have huge consequences.  Here is one such business example to illustrate the point.

Tiny Decision, Huge Negative Impact – Blockbuster and Netflix

In 2000, Reed Hastings and Marc Randolph — founders of Netflix — flew to Dallas, Texas to discuss partnering/merging with Blockbuster.  At the time, Blockbuster employed (by some accounts) about 84,000 people worldwide, including about 58,000 in the United States and about 25,000 in other countries, and had 9,000+ stores in total, with more than 4,500 of those in the U.S. [2] At that time, Blockbuster had a market cap of $5.1 Billion.  Netflix was a fledgling DVD mailing service.  Their snail-mail approach to delivering entertainment videos was still in its infancy.  It was like a meeting between David and Goliath.  Hastings proposed that Netflix could run Blockbuster’s brand online and that Blockbuster could run Netflix’ brand in their stores.  Netflix was seeking $50 Million from the merger.  (which is roughly about $70 Million today.)  It was a daring proposal for a tiny company to want to take over a giant’s online operations and be paid $50MM for the opportunity.  According to Barry McCarthy, Netflix’ former CFO, “John Antioco, Blockbuster’s CEO, and their leadership team just about laughed us out of their office”.[3] The decision to turn down upstart Netflix was a tiny decision by Antioco.

Fast-forward 10 years.  By 2010, Blockbuster filed for bankruptcy and in November 2013, it closed most of its remaining stores.  One store remains open in Oregon today.  Meanwhile, Netflix was listed #105 on Forbes’ Global 2000 list of Growth Champions and ranked #55 in the world’s most valuable brands.  Netflix’ market cap now is about $141.9 Billion and the company has 130 million streaming subscribers in 40 countries.  That one small decision by Antioco had ripple effects that lasted over 13 years, impacted tens of thousands of employees, affected thousands of shopping center owners that leased space to Blockbuster, and cost investors billions.

However, to truly grasp the Butterfly Effect, one should go further back in time to an even smaller decision by a manager at one of their stores.  Blockbuster’s pricing model was based, in part, on fining customers for late return of video rentals.  Late fees accounted for a large part of Blockbuster’s profits.  Customers’ fines were often higher than if they had purchased the video.  Customers who refused to pay Blockbuster’s exorbitant fees were referred to collection agencies, which then affected their credit rating (causing them to pay higher interest rates for financed purchases!).  It was a poisonous and punitive policy putting profits over people and placing Blockbuster in constant conflict with its customers.  Blockbuster managers almost never waived late fees.  That was the case in 1995 when a Blockbuster store manager refused to waive a hefty late fee incurred by none other than Reed Hastings.  Hastings has said the idea for Netflix came to him after paying Blockbuster $40 in overdue fines for returning Apollo 13 well past its due date.  The fine was twice the cost of buying the video new, even if sold at a profit.

The store manager’s refusal to waive the late fee was the small decision that had a HUGE impact.  It caused Hastings to come up with a better business model, founding Netflix in 1997.  Even after getting a second chance to correct the policy in 2000, ameliorate customers and improve its service offering, Blockbuster rejected merging with Netflix.  By 2004, Antioco had realized that the late fee policy was hurting the company and put a stop to it.  However, other Blockbuster leaders together with the Board of Directors and major investors balked at Blockbuster’s steep drop in profits due to the end of late fees.  Late fees were reinstated.  By 2005, Antioco was let go.  At that point, it was too late to stop the Butterfly Effect.  One could say that the decision not to waive a $40 fine by a Blockbuster store manager in 1995 led to the demise of the $5 Billion dollar Blockbuster organization by 2013.

Of course, the Butterfly Effect can also cause a small decision to have enormously amplified positive result as well. James Hunter, author of The Servant: A Simple Story about the True Essence of Leadership, wrote “How we behave as the boss at work today affects what goes on around the dinner table in other people’s homes tonight.” The actions leaders take, the words used, decisions made, and even the priorities set can trigger the Butterfly Effect in the lives of staff, colleagues, clients and everyone they, in turn, cross. Leaders and managers have more of an impact than they realize.  A seemingly small decision taken at work can have a huge impact on someone’s life, be it rejecting someone for promotion, or asking him/her to relocate to another area of the business.   The attitude of leaders, managers and employees can have a significant effect on a company’s progress and achievements.

Tiny Decision, Enormous Positive Impact –

Here is an example of an infinitesimally small decision having a massive business impact.  A voice message led to the formation of online shoe retailer Zappos.  In 1998, 24-year-old Tony Hsieh sold his company, LinkExchange, to Microsoft for $265 million. A year later, he met a younger entrepreneur, Nick Swinmurn, who had an idea no investor would touch.  Swinmurn wanted to sell shoes on the Internet.  In an article written by Hsieh about the history of Zappos[4], he wrote “I almost deleted the voice mail. Nick left a message saying he wanted to start a company that sold shoes online. I didn’t think consumers would buy shoes sight unseen, and Nick didn’t have a footwear background. It sounded like the poster child of bad Internet ideas.  But, right before I hit Delete, Nick mentioned the size of the retail shoe market–$40 billion. And, the more interesting thing was that 5 percent was already being done through mail order catalogs. That intrigued me.”  That small decision to listen to the message and explore the possibilities led Hsieh to invest $500,000 in ShoeSite.com.  They later changed the name to Zappos, after zapatos, which is Spanish for “shoes”.  Within six months, Hsieh and Swinmurn were running the company together.

They decided they wanted the Zappos brand to be about providing the best service; a service company that just happens to sell shoes.  For that to happen, every small decision was made with that goal in mind.  They sought to control the entire customer experience.  They expanded the warehouse to 77,000 square feet and stopped having manufacturers ship directly to customers. They decided to run the warehouse 24-7, despite the fact that it was neither cost effective or cheap, because it allowed them to get shoes out more quickly.  They offered a 365-day return policy with free shipping both ways.  They had to retrain call center employees that had the bad habit of wanting to minimize the time they talked to customers.  They had employees direct customers to other websites when they wanted to buy a shoe that was out of stock.  They moved the company to a location that had a larger population of call center employees available to ensure that they could service customers.  Every tiny decision had ripple effects.

Fast-forward a decade.  In July 2009, Amazon acquired Zappos it in an all-stock deal worth $1.2 billion.   Being open to listen to a message that was “the poster child of bad Internet ideas” led to a $500,000 investment which then revolutionized how shoes were sold on the internet, created thousands of jobs, and continues to generate over $2 Billion in revenue annually.   That is a classic butterfly effect of one tiny decision rippling out in positive ways for 20 years in major ways.

Heeding to the Butterfly Effect

Business owners, leaders, managers and coworkers should keep in mind that each action – even the tiniest ones – can have a big impact.  There is a lot of responsibility that comes with vetting ideas, managing staff, expanding services, interacting with customers and changing policies and processes.  Sometimes the tiniest decisions can reverberate long, far and wide.

Here are some tips to help leverage the butterfly effect for the good.

1. Be a Good Role Model

Everyone is watching a leader’s behavior, watching how issues are handled and decisions are made. Decisions should reflect impartial thinking and rational facts, not bias.

2. Keep it Professional

Personal problems and insecurities can affect mood, increase stress and make it hard to deal with people and situations.  But, that can unintentionally cause a negative environment affecting innocent people who have no idea what is happening on a personal level.  It is important to leave personal issues outside the workplace in order to keep from spreading any negative emotions.

3. Pay It Forward.

Money and benefits are great, but nothing compares to small acts of appreciation and empathy.  The productivity of an employee increases when he/she understands his/her importance to the system and feels invested in the company.

4.  Always Do Right.

Companies don’t always have to do the right thing.  But they always should do the right thing even if they don’t have to.  The consequences of those bad actions have a ripple effect.  In the case of Blockbusters’ late fee policy, that callous disregard for what was fair to the customer eventually caused the company’s downfall.

5. Keep an Open Mind.

Business leaders need to realize that good ideas can come from even the most unlikely places, and that sometimes the worst idea is just a diamond in the rough.

Quote of the Week

“Small shifts in your thinking, and small changes in your energy, can lead to massive alterations of your end result.” Kevin Michel

 

 


[1] Franklin, Benjamin, Poor Richard’s Almanack, http://www.benjamin-franklin-history.org/poor-richards-almanac/.

[3] July 17, 2015, Chong, Celena, Business Insider, Blockbusters CEO once passed up a chance to buy Netflix for only $50 Million, https://www.businessinsider.com/blockbuster-ceo-passed-up-chance-to-buy-netflix-for-50-million-2015-7

[4] September 1, 2006, Tony Hseih, How I Did It, E-Commerce, Inc Magazine, https://www.inc.com/magazine/20060901/hidi-hsieh.html

 

© 2018, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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