Sunday, December 21, 2008

What is a blockbuster business model?

The term blockbuster, originally a bomb that could destroy an entire city block, refers to an unusually successful product or service with huge sales. Within the pharmaceutical industry the average drug is expected to deliver only 5% return on investment whereas a successful blockbuster drug can yield returns 10-20 times as large. A blockbuster product or service are of course great when you happen to get one, and multinational companies have been built around the success of single products.

No-one can predict a blockbuster and finding one can be seen as finding a needle in a haystack. However, companies such as P&G in consumer goods, Pfizer in pharmaceuticals, and Disney in entertainments, have found successful recipes on how to regularly launch and manage billion dollar products and services. A risk facing companies built around a single blockbuster product is to get too focused and dependent on the revenues it generates, founding itself caught short without new projects or products to keep sales growing.

The Blockbuster business model refers to a method of spending large amounts of money in own research and/or development, to find many of the projects in dead-ends, hoping for some to turn out as successful blockbuster generating high returns. The model is commonly used in the entertainment and pharmaceutical industries where development costs, risks and potential rewards are high.

An important factor to secure the high investments made in development and marketing of new drugs such as Lipitor, or franchise movies such as Batman, is the control over the profit stream from being reduced by competitors once it has been launched.

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