INFS 774: Enterprise Architecture

Blockbuster Videos Inc

Failure Case Study
Devika Ashok, Puneeth Reddy Challa, Raghu Vamsi Sirasala, Sravan Ghanta, Varsha Gorrepati

2016
Contents
Introduction ............................................................................................................................................ 3
Failure Analysis using Zachman Framework ............................................................................................. 6
What ................................................................................................................................................... 6
Executive Perspective ...................................................................................................................... 6
Business Mgmt Perspective............................................................................................................. 7
How..................................................................................................................................................... 7
Executive Perspective ...................................................................................................................... 7
Business Mgmt Perspective............................................................................................................. 8
Who .................................................................................................................................................... 9
Executive Perspective ...................................................................................................................... 9
Business Mgmt Perspective........................................................................................................... 10
When ................................................................................................................................................ 11
Executive Perspective .................................................................................................................... 11
Business Mgmt Perspective........................................................................................................... 11
Why................................................................................................................................................... 11
Executive Perspective .................................................................................................................... 11
Business Mgmt Perspective........................................................................................................... 12
Evaluation of Blockbuster Videos during its peak and decline using Zachman Framework...................... 14
Summary ............................................................................................................................................... 19
List of Figures ........................................................................................................................................ 20
References ............................................................................................................................................ 20

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Introduction
Blockbuster was one of the most significant global provider of in-home rental, retail movie and
game entertainment, which had approximately 9,100 stores in United States and 24 other countries
as of December 31, 2004. Their goal was to extend the mission of providing their customers with
easy access to media entertainment along with movie and game entertainment, which was
delivered in many methods of distribution like in-store, by-email, vending kiosks and digital
devices. It was founded by David Cook in 1985 and was available in the market a year later. The
first store was opened in Dallas in 1985. In 1987, founder David Cook left the company by selling
one-third of it to the former associates of Waste Management, Inc. In 1994, it became a complete
subsidiary of Viacom Inc. After 1994, blockbuster faced many challenges in the market by new
ownership, competition and soft market for videos[1][2].

Looking at the journey of Blockbuster Videos , it is evident that even a giant like Blockbuster can fail
without an ever-evolving, holistic strategic direction and business practices. Discussing the growth
and fall of Blockbuster, will help determine the reasons for its failure.

Rise of Blockbuster Videos : An Immediate Hit in Mid-1980s

David cook first founded a company called Cook Data Services, Inc., in 1982. This company was a
supplier of computer services to Texas’s oil and Gas Industry. The company didn’t work well
because of the lack of strong customer base. This is when Cook wanted to enter into the video
rental business. [3]

After several months of research into the video rental industry, David Cook opened his first
Blockbuster outlet in Dallas. It had a very large inventory with 8000 tapes, covering almost 6,500
titles, which was a massive undertaking at that time for any competitor. Computers were used to
track inventory and a laser scanning system for theft detection in stores, which reduced the time for
transactions. Blockbuster became a huge success the same year. He discovered that there was much
demand for renting video movies in the market. In 1986, he expanded Blockbuster to three
additional stores. But, when it was all set for further expansion, a financial columnist wrote an
article about Cook’s history in oil industry and the company’s lack of practical knowledge in the
video field. This led to the cancellation of the equity offer. Ultimately, Blockbuster was left with no
moneyand was closed with a loss of $3.2 billion.[3]

In February 1987, Cook sold one-third of Blockbuster to three investors, who were partners in
another company called Waste Management Inc. At the time, Wayne Huizenga was the co-founder
of the Waste Management Inc. Later, John Melk, the president of Waste Management’s international
division, invested in the Blockbuster franchise, followed byits chief financial officer. Together, they
invested $18.6 million in Blockbuster’s stock. [3]

Expansion of Blockbuster Inc under the New Management

After the huge investment, Wayne Huizenga had major control over Blockbuster. Cook, then
completely surrendered the company to Huizenga and Blockbuster's head quarters was moved to
Fort Lauderdale, Florida shortly. While Cook's business approach was growth through franchising,
selling Blockbuster's name and computer system to individual entrepreneurs, Huizenga foresaw
company ownership of stores.At this point of time, Blockbuster had 15 stores and had franchised 20
others. Huizenga included some of Cook's policies for the company, like store hours to be run from
morning 10 a.m. to midnight and 3- day rental policy which made blockbuster always available to
the customers. The company also bought 60 percent of the franchised outlets for expansion. In
addition, they had 70 percent revenue from non-hit movies, which were bought at lower prices

3
from the distributers.Thereby, breaking the myth that rental business was running on hit movies.
Huizenga, to further expand the company, bought other dominated video markets like Southern
Video Partnership and Movies to Go, Inc. of St Louis for $14.5 million. By the end of 1987,
Blockbuster had 133 stores and was fifth largest video chain in revenue perspective. The sales
showed a sudden leap from $7.4 million to $43.2 million. [3]

In November 1989, The United Artists Entertainment Company, sold 12 percent of the holdings of
the company and 28 franchised Blockbuster stores to make their own company efficient. By then,
the video rental business had already hit the saturation point, which affected Blockbuster to a great
deal.

International Expansion of Blockbuster Inc in 1990s

Blockbuster now wanted to expand its market outside the United states. For this, John Melk started
a British subsidiary with the intention of opening the first foreign store in South London called The
Ritz. They, then started a concept of video “superstore” which was an option to copy the video in
order to increase the customer base and hence the market share. Additionally, Blockbuster opened
1000 stores and expanded its market outside the country like Australia and Western Europe. Then,
the firm had a phenomenal growth of approximately one store per day.

In October 1990, it decided to cooperate with Den Fujita, who ran franchises for McDonald’s in
Japan, to franchise video rental stores in that country. It had a rapid growth in that year but
thereafter saw adecline in video rental market. Its earnings had a decline from 114 percent in 1988
to 93 percent in 1989 and a strong decline to 48 percent in 1990. Facing all these, it started to sell
gaming consoles and video games in stores. They also started selling audio cassettes and CDs. It
kept expanding its markets outside United States by buying other companies like Music plus, Sound
Warehouse from Shamrock holdings for $185 million. In 1992, it set up megastores in United States
which not only rented videos but also sold, rented music and computer games. By 1993, it had
3,400 video stores worldwide. [3]

Decline of Blockbuster Inc

In September 1993, Huizenga's Blockbuster transformation of the products with new formats,
video-on-demand and satellite TV, and the revision from rentals to lower-priced tapes, hit the peak
when the company proposed a $4.7 billion merger with the media giant Viacom Inc. Blockbuster
invested to a great extent in Viacom for its acquisition of Paramount Communications against rival
QVC Network Inc. By April 1994, Blockbuster's and Viacom's stock had tumbled dramatically
because of shareholders lost confidence in regaining the investment drained into Viacom. This was
the first step to Blockbuster's fall in addition to internal confusion, poor leadership and industry
changes.

Soon, Wayne Huizenga was replaced by Steven Berrard followed by Bill Fields. Leadership at
Blockbuster changed continually, which led to multiple company re-structuring. For a while,
Blockbuster's main purpose was side-tracked and stores were converted to whole entertainment
centers, selling t-shirts, toys, snacks, books, magazines, and CDs as well as selling and renting
videos. Also, the company's head quarters was again moved to Dallas. This was a big hit to the firm.
By 1996, Blockbuster and Viacom saw a stock price decrease of 50 ($4.6 billion) and 60 percent
respectively from 1993.

In 1997, again the leadership changed and this time John Antioco took over the struggling
Blockbuster Inc. With its cash flow down to 70 percent, Blockbuster curtailed its expansion and
came back to its core business which was video rentals. The firm concentrated on improving its

4
state-of-the-art distribution system, using the customer database to determine store sites and
inventory based on consumer preferences. At this point, the company still dominated 25 percent of
the $16 billion a year home video market. After they signed 'revenue sharing' agreements with the
major Hollywood studios, making them financial partners, the firm saw a brief period of revenue
stability by orderly downsizing of the store based rental business while developing the online
business. But, the FCC quashed the deal because they believed it would give Blockbuster
monopolistic power [4]. They started expanding the business overseas again with some
acquisitions and saw an increased share of 31 percent in early 1999. The firm soon went into
losses, around $336.6 million in 1998, because video market was shrinking, dropping to 2.6 percent
in 1998 and 8.4 percent in the first half of 1999. Later that year in 1999, Viacom held an initial
public offering of Blockbuster shares on the New York stock exchange which raised only $465
million.Following this, the company changed their business model to increase its market share by
moving to VHA/DVD tape, disk rental and new distribution channels like e-commerce options.[3]
In 2000, Netflix made an offer to manage Blockbuster's online business, which was rejected by
Blockbuster management[5].In 2001, Blockbuster had accumulated tremendous amount of debt
from Viacom. In 2004, Carl Icahn invested in Blockbuster buying 5.8% of the company’s Class A
shares for $83.8 million. From 2003 to 2005, Blockbuster lost 75% of its market value and annual
late fees(compared to $500 million earlier)due to the competition.The competitor, Netflix created a
better business model with no-late-fee policy, and then Redbox kiosks and the whole digital
phenomenon eliminated the need for consumers to go to a separate DVD store, ending the era of
Video cassettes.[4][6]

In late 2007, Chairman and CEO John Antioco left Blockbuster and Jim Keyes took his place which
led to an increase in share of $4.46 apiece. The following events finally led to the bankruptcy of the
firm:
• "By 2010, competition from Netflix haddestroyed Blockbuster and a heavy debt
burden left the company struggling to reorganize.
• In a March 10-K filing, Blockbuster warned that it could be forced into Chapter 11
bankruptcy protection if restructuring efforts fall short of increased liquidity needs.
Icahn resigned from the board on Jan. 28, 2010, which brought the Blockbuster
shares down to 91% since Keyes took over.
• A March 31 SEC filing indicated that the fund manager slashed his holdings in the
company’s Class A shares to 5.1%, down from 16.9% at the end of January.
• The stock exchange notified Blockbuster in late March it is not in compliance with
listing requirements that call for a company to have a market capitalization of at
least $75 million over 30 trading days. With Blockbuster shares floundering around
25 cents apiece, the company’s market cap was just $55 million.
• Blockbuster posted its fourth consecutive quarterly loss in early May as the likes of
Netflix continued to eat away at its revenue.
• In May,Icahnsold off all of his 10.5 million Class A shares, worth $7.1 million, but
retains 3.3 million Class B shares, worth just $619,000. Even George Soros cut off his
major stake. After slashing his equity stake for much of 2010, the billionaire bought
a sizable chunk of Blockbuster’s debt in a bid to exert greater control over its
looming bankruptcy.
• Blockbuster filed for Chapter 11 bankruptcy protection on Sept. 23., declaring $930
million in secured and unsecured debt. The plan was for the chain to shed even
more retail locations to refocus on its digital presence and move away from brick-
and-mortar stores, historically a major advantage, but ultimately turned to a
burden.

5
 • Dish Network, run by billionaire Charles Ergen, won the bankruptcy auction for
Blockbuster with a bid of $320 million ($228 million in cash) in April 2011. The
satellite TV company planned to continue operating at least some of the movie
rental chain’s locations. Dish’s bid beat out others from liquidators, bondholders
and a group led by Icahn.Foile Dish Network offered Blockbuster on Demand, but
eventually renamed Blockbuster@Home to "Dish Movie Pack" [6]

Blockbuster failed miserably because of too much debt, too many stores, competition and changes
in the industry.

Failure Analysis using Zachman Framework

Blockbuster Inc can be analyzed through Zachman framework enterprise Ontology to study the
multiple areas of its failure. The different vertical components are analyzed below.

What
Executive Perspective
Blockbuster failed because of boardroom infighting, lack of clarity and one of the most disastrous
CEO changes in American business history. Some CEOs insisted Blockbuster was an entertainment
company and others insisted it was a retail company.

In the beginning, the main inventory of Blockbuster video was the Video Cassettes of all the rental
movies managed by the state of the art database, IT processes, distribution and inventory
management, which was hugely profitable. This is what brought the firm to its peak success phase.
Then they lost sight of the purpose of the company that made it great in the first place and included
add-on retail [7][8]. In 1995, after the financial loss incurred by the firm because of loss of customer
traffic in the stores," transaction basket” concept was introduced. This was the process similar to
Walmart where the stores were filled with lots of candy, throw-away toys, and other “impulse”
purchase items, displayed at little kid's height so parents would be forced to buy it. Then the CEO
was replaced with 7-Eleven former CEO and they transformed the Blockbuster video Inc to a
convenient store[9]. They lost sight of the main purpose of Blockbuster Inc.

Their inventory focus moved from Video Cassettes to Add-on Retail goods. Blockbuster should have
stayed in entertainment distribution business with video cassettes and embraced new
technological changes (like digital videos, DVDs and video streaming) suggested by market
research. Instead of taking the new technological revolution as an opportunity, they saw it as a
problem and fought it for years. This was one of the main reasons for the failure of Blockbuster Inc .

Although many changes were made to the firm during each of the CEO's management, the necessary
changes in-line with the technological changes and market direction, were not implemented. For
example, Blockbuster's competitors like Netflix had already moved to DVDs and online streaming
which were more profitable and manageable strategies.By the time Blockbuster implemented it,
their customer base had already moved to their competitors' service. It would have been profitable
and a strategic advantage if Blockbuster Inc had re-invented their inventory in-time, had added
more DVD's for mailing and data centers to support steaming services[9].

6
Business Mgmt Perspective
Business teams (Finance and marketing teams included) responsible for Business Process Re-
engineering (BRP) and Business Process improvement(BPI) should have suggested moving from
Video Cassettes to DVDs and online and data streaming options to maximize profit and make the
existing processes like mailing to customers easier. It was already existing technology which was
tested and proved by the competitors. If BPI was continuously updated with technological , market
and inside organizational research, then these inventory shortcomings could have been rectified
before it was too late.

How
Executive Perspective
In 1995, Blockbuster noticed that customers were leaving the stores empty-handed if the hit
movies weren't available. To lure them back to the stores, Blockbuster had to sharply increase its
spending on multiple copies of the movies. Also, to increase their profits, Blockbuster implemented
a late fee policy, which became majority of its income source. Meanwhile, Hollywood studios had
started slashing prices to encourage tape sales and in-turn, Blockbuster lost business as customers
bought cheap videos at discount stores such as Walmart [10].

Blockbuster was lacking in terms of a management program, analysis and design method. As a
management program, they failed to strategically align the activities and processes to their goals.
During its life cycle, at multiple periods, Blockbuster lost focus and moved to retail and
entertainment instead of focusing on their primary objective of video cassettes distribution.
Blockbuster videos also failed in decision support after the merger with Viacom. Financial control
over the enterprise had failed to a great extent and the fact that Blockbuster went into debts soon
after Viacom merger proves the same. Even the fact that Video Cassettes proved costly to mail than
CDs (a major reason to move to CDs financially) was ignored for almost four years.

Blockbuster's Enterprise architecture as an analysis and design method also fell short in its future
views and EA management plan. Blockbuster Inc's views of to-be strategies, processes and
resources were flawed because they were not able to assess the potential of accepting the newer
technologies and dealing with the competitors. They fell behind in researching and incorporating
the newer technologies (like CDs , online streaming) and newer business ideas (like subscription
models and no late fee model) into the to-be strategies and planning the gradual move to newer
technologies and business options.

The company which was once the leader of the movie rental industry failed miserably due to the
lack of a solid Enterprise architecture and the unwillingness to make the necessary move to newer,
better technologies. Transformation is very essential and a company has to transform itself
successfully before it can compete to win at a next business level or in a new business landscape.
Blockbuster’s transformation failure lead to its downfall and made it bankrupt. A solid enterprise
architecture and strong EA practices are required for the transformation of the company [11]. Lack
of a concrete methodology to measure and monitor the EA artifacts combined with a lack of clear
future state assessment and unclear analysis of the business, technological and EA advancements in
the market, lead to the failure of Blockbuster. [11]

It was a different story when Blockbuster Inc was founded by Cook. Then the firm was built on a
strong EA structure with the state-of-the art technology, a clear vision of current and future states ,
forming a well-integrated strategy, business and technological perspectives. The firm has a solid
expansion strategy even after the Waste management executives take it over. It is a number of

7
wrong turns like merger with Viacom, rejecting the Netflix offer, takeover by Icahn and multiple
CEO changes that drove the firm to large debts. There was no clear link between Business Strategic
Planning and Budget process which is clearly visible in Blockbuster’s investment in Viacom to
purchase Paramount Communications [3]. This lead to the fall of Viacom stocks in 1994[3].
Second practice was the lack of analysis and decision-making capability that gave birth to its
competitors like Netflix. The late fee system in Blockbuster left behind disgruntled customers. Even
after many complaints from customers and the employees at lower level, Blockbuster executives
didn't take any step in removing that policy until 2005. Due to this, one of the Blockbuster’s
customer Reed Hastings started a video rental by mail service without late fees and captured most
of the blockbuster’s customer base by 2005 when Blockbuster finally removed its late fee policy
[12]. Apart from these issues, the continuous change in the CEO's and the different ideas they
brought along coupled with a weak EA, led to the negative change in Blockbuster over time.

Blockbuster filed Chapter 11 in 2010 after $1.46 billion debt. Then, the main challenge of
Blockbuster was to come out of the financial crisis. In 2011, Dish Network took over Blockbuster
and started its efforts in paying back the debt of Blockbuster [13]. In 2012, Dish Network started its
plans to make Blockbuster a tough competitor to Netflix [14]. If Blockbuster had identified the flaws
in its EA structure, realized the importance of an EA and had taken steps to implement a solid EA
program, then the firm could have come out of debts and gained back the position which it enjoyed
a couple of decades ago. The competitors, technological and business process lags in the EA(the
future challenges of the organization) were too strong and ultimately lead to the demise of the firm.
Dish network tried to keep the brand name alive for a while by offering "blockbuster on-demand
video package" and "Blockbuster@Home television package" but finally changed the name to "Dish
Movie Pack". The future of Blockbuster faded when in November 2015, Blockbuster On Demand
was shut down and all customers were redirected to Sling TV.

Business Mgmt Perspective

Blockbuster had late-fee payment policy which generated enormous amount of money and it was
also vital part of Blockbuster’s revenue model [15]. In 2000, Blockbuster collected nearly $800
million from the late-fee payment system, accounting for 16 percent of its revenue [16].Customers
hated the late fees charged by Blockbuster, but it did not change its practice even after numerous
customer complaints[12].

In 2008, global economy faced recession and struggled a lot. In response to these challenges,
Blockbuster executed a number of steps:(i) reduced general and administrative expenses, resulting
in a $333 million decrease of administrative expenses in 2009; (ii) closed unprofitable and
underperforming domestic stores; (iii) evaluated the divestiture of certain of its international
assets; (iv) completed two refinancing transactions in 2009 to extend debt maturities and
amortizations schedules; (v) negotiated the release of significant restricted cash associated with
letters of credit relating to historical lease guarantees; and (vi) granted certain studios a security
interest in the assets of its Canadian operation in exchange for enhanced credit terms.
Consequently, from 2009 to 2010, Blockbuster closed 1,061 domestic company-operated stores
[17].

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Who
Executive Perspective
The organizational units present in Blockbuster video were [18]:

• Media Development and Studios

• Merchandise, Logistics and distribution
• Human Resources Division
• Store Operations Division: This division deals with managing the stores and related staff
functions.
• Game Rush: In order to increase its customer base, Blockbuster opened Game Rush stores
which adapted store-within-store concept. Here video games and related accessories would
be rented and sold. Instead of implementing business model which would enable it to
compete with video rental competitors, Blockbuster focused on video game rental business.
• Digital media Division

Blockbuster was successful at the early days because of its profound inventories consisting of new
movie releases. Its executive management followed “heads-down” management approach. In this
approach, the future consequences of the decisions would not be taken into consideration and only
delivery of current services are required. This approach lacks innovative decision making skills.
Example of such kind of decisions is late fee payment which made the enterprise lose its customer
base and ended up in dealing with lawsuits [19].

From 1997 to 2007 John F. Antioco was CEO and from 2007 to 2011 James W. Keyes was CEO of
the enterprise. Lack of coordination between Keyes and other management team and board room
altercations showcased the problems in executive team which effected the business decisions of the
enterprise [19].

9
Business Mgmt Perspective
Prior organizational structure of Blockbuster video:

Figure 1 : Prior organizational structure[2]

Changed organizational structural chart of Blockbuster video:

Figure 2 : Changed organizational structural chart[2]

In the early days of its business, Blockbuster manifested its dominance in video rental industry with
profound presence of new movie release and better quality videos. But internet and subscription
services emerged to challenge this brick-and-mortar
brick based business.
ess. The management was unable
to take aninformed decision to shift video rental
ntal giant to enterprise supporting online on-demand
on

10
and streaming business model. Blockbuster had expanded its business over a large span of
locations. Its deep and nested organizational structure made operational change difficult to achieve.

When
Executive Perspective
Blockbuster video was leading video rental industry during 1999-2003. Few bad investment
decisions at Executive management level, led by John Antioco(CEO) , affected the company’s
revenue. In 2000, Netflix approached Blockbuster for partnership. Executive management failed to
assess the innovative online sales opportunity that would have enhanced the firm's revenue.
Instead of analyzing current market trends at that time, they invested more in their store-led
approach by selling books, toys and introducing video game rental business[20].

Also, Blockbuster invested $1 billion in Circuit City in 2008as part of their Capital planning. The
next year,Circuit City was bankrupted and the debts severelyburdened Blockbuster[21].

Business Mgmt Perspective

Video rentals were core business for Blockbuster. Hence its survival depended on monopolizing the
industry and business. Blockbuster was late in responding to technological changes occurring in the
industry when compared to its competitors like Netflix, Walmart and Redbox. In 1999, Netflix
started its first online subscription service and in 2007 introduced video streaming services [3]. In
2004, Redbox entered the video rental industry and started automated kiosk model for renting
DVDs. Its low prices and convenience attracted customers [22]. But Blockbuster was still testing
online business model in 2008 and could not implement that until the end. This performance gap
reflected on their market share and ultimately their business.

Why
Executive Perspective
The video industry giant's catchy advertisement phrases were "Never be without a movie" and "
Make it a Blockbuster Night "[23][24]. And their most recent vision and mission statements were:

Blockbuster Mission Statement:

"Our corporate mission is to provide our customers with the most convenient access to media
entertainment, including movie and game entertainment delivered through multiple distribution
channels such as our stores, by-mail, vending and kiosks, online and at home. We believe
Blockbuster offers customers a value-prices entertainment experience, combining the broad
product depth of a specialty retailer with local neighborhood convenience."[25]

Blockbuster Vision Statement:

"Blockbuster global vision is to advertise that they have the most popular movie titles in stock and
to provide future direction to deliver home entertainment to consumers directly via a variety of
media. Blockbuster is developing a new way of bringing movies directly to people's homes
including a range of alternatives from physical home delivery and near video on demand, digital
streaming and satellite T.V. Blockbuster focuses on improving its brand and advertising
globally that they are better than their competitors by having new movies as soon as they come out
and having their prices lower than their competitors."[25]

Blockbuster Perspectives:"We help people transform ordinary nights into BLOCKBUSTER nights
by being their complete source for movies and games."[26]

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The Enterprise executives did not align their business with these vision and mission statements.
The mission statement said that the mission of Blockbuster videos was to "provide our customers
with the most convenient access to media entertainment ". In the beginning, Blockbuster videos,
with state-of-the-art database management and IT technology, sold video cassettes in multiple
locations making it convenient for customers to avail the service easily, but they did not keep
themselves updated.

By late 1900s and early 2000s, the technological innovations like DVD (in 1998) and online
streaming (in 2007) were driving the industry in a different direction[27]. Blockbuster Inc's
principal competitors Hastings Entertainment Inc. , Movie Gallery Inc. and Netflix Inc had already
embraced and implemented the new technological innovations[1]. Netflix had implemented DVD
distribution by 1998(3 years before Blockbuster) and Online Streaming by 2007(years before
Blockbuster implemented it). Blockbuster Inc did not adapt to the industry change and was late in
implementing the new technology. They stuck with Video Cassettes till 2001, which proved
costly(high mailing costs) and less convenient(slower delivery, old technology) than online
streaming provided by competitors. Customers no longer needed to go to stores to rent movies.

Also, the Blockbuster Video's mission was to offer customers a "value-prices entertainment
experience". But their late fee charges were very high(Compared to no late fee charges for the
competitors) and so it ultimately turned out to be costly for the customers(proved opposite to value
pricing). In its 2004 advertising, Blockbuster had failed to reveal that customers who kept an item
more than seven days would be charged the current selling price for the item. If the item was
returned within 30 days, the customer would receive a refund, but would be charged a $1.25
restocking fee. Due to this, Blockbuster Inc had to pay $630,000 to settle the litigation. This
ultimately turned out to be costly for the firm. The chief Financial and marketing officers could have
aligned the company processes to its mission and saved the company a lot of money.

The vision statement said "Blockbuster focuses on improving its brand and advertising
globally that they are better than their competitors by having new movies as soon as they come out
and having their prices lower than their competitors.". This was in contrast to the reality in a way
that the competitors were much better in pricing their products. They also did not have the extra
late fee amount charged by Blockbuster.

Business Mgmt Perspective

The business team of Blockbuster Videos did not research about the upcoming , latest technologies
being implemented by competitors. They were unable to visualize and suggest a compelling case to
bring these changes to the executives of the firm.

Monthly subscription is one example. Monthly subscription made it easy for customers to view
unlimited number of movies with a limited monthly charge. Blockbuster's main competitor, Netflix
implemented it in 1999. The business team of Blockbuster Videos took four more years to
implement the concept of monthly subscription (implemented in 2003). This again is in contrast
with their mission of " provide our customers with most convenient access to media
entertainment".

Another example is Late Fees. Customers could avail services from Blockbuster's competitors with
no late fees. Blockbuster's management team did not analyze and align the business practices with
the mission to provide customers with the best experience. Management did not cancel the Late
Fees till December 2005, which is one of the main reasons for the failure of the business.

12
Blockbuster Inc was unable to adapt to changing technologies and market dynamics due to
incompetent business leaders and policy managers. This ultimately led to decrease in business
value and customer dissatisfactions and finally its end.

Even though they brought the latest movies first to their customers, Blockbuster's main execution
plan was based on late fee charges, stagnant technology(they stuck to Video cassettes even with the
new DVD and streaming options in the market) and more growth(through overseas expansion and
acquisitions) than internal improvements. When the business was going down, they based their
profits on Game Rush and add-ons in retail, moving away from their original vision and mission
targets.Additionally, the dissimilar and in-effective operational management of the different CEO's
did not keep in line with the strategic goals of the firm.

In all the above mentioned cases, Blockbuster Inc steered away from its organizational mission and
vision.Their actual execution plans were not appropriate and relevant to the organization's
published mission and vision plans.

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Evaluation of Blockbuster Videosduring its peak and decline using
Zachman Framework
Evaluating Blockbuster Inc's successes and failures in executing ttheir
heir plans at different time
periods especially at its peak and decline can be analyzed using Zachman Framework
Enterprise Ontology.

Figure 3 : Blockbuster during its peak until 2005

Being the first mover in the video

video-rental industry, Blockbuster was able to monopolize the
market with its impressive collection of movies and distribution centers. Thefounder, David
Cook was able to incorporate a very successful business.
business Even
ven their next CEO,
CEO Wayne Huizenga,
lead the company towards rds its success
success, with about 9,100 stores in 24 different countries
countries,
increasing the product distribution vastly. They never faltered with their main mission i.e. the
video rental business. At the time Blockbuster wa
wass one of the few organizations which was using
u
computers to track their inventory.

But, even at its peak, the business strategy of Blockbuster had

ha a fatal flaw in it, which is the
concept of late fees(contributed
contributed to 16% of their entire revenue).

14
 Figure 4: Blockbuster during its decline from 2005

But when Mr. Huizenga sold Blockbuster to Viacom, theCEOs of Blockbuster were changed,
which resulted in an instability in the management. Each
E of them had different views
view and ideas
onhow theorganization
organization should work. They trailed away from the actual product and mission of
Blockbuster(Video
(Video distribution),changing
distribution) the merchandise to a whole new entertainment model
which increased their investment.
investment Viacom also invested in Paramount Communications
Communication which
wasa failed investment decision.This, further did not improve the sale of actual merchandise of
Blockbuster. In 2002, instead of focusing on video rental competitors Netflix and Redbox,
Blockbuster spent the turn of the century expanding into the videogame rental market.
Blockbuster
uster purchased competitors in this market, like game station[28]
station[28]. They also did not
change their flaw of late fees , instead tried to portray an illusion that they eliminated the late
fees , but just changed them as additional day fees. So, a law suit was filed against them as a
result, which is an additional expense.

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The competitors, Netflix and Redbox, introduced subscription model without late fee policy.
Blockbuster just couldn’t keep up with them because even when they changed into subscription
model, they stuck with the concept of late fee.[29]

But Blockbuster still had few advantages. They were still the first ones to get thelatest movies.
They got it on the day of the release while their competitors like Netflix and Redbox got the
copies after a period of 28 days[28][30].

Analyzing the successes and failures of Blockbuster based on the timeline,Zachman frameworks
indicating the peak and fall of the firm were developed and portrayed in figures 3 and 4
respectively. The timeline analysis is explained in detail below.

1985 — In the midst of a sharp downturn in the oil and gas industry, David Cook developed a
software to manage their database. He then, re-used this model for the video industry and
started Blockbuster Inc. This is a good example of a sucessful Executive-How perspective
(depicted as Green in the Figure3, Blockbuster during its peak)because David Cook was able to
identify a successful business strategy and use it to improve the video-rental business by
including the concept of computers and databases.

1987 — Blockbuster was sold to a trio of investors, including Waste Management Inc. founder
Wayne Huizenga, for $18.5 million.This is a good example of a successful Executive-Who
perspective (depicted in Green in the Figure3, Blockbuster during its peak) because the three
investors from Waste Management Inc. took Blockbuster to its peak by expanding the stores and
strong management.

1992 — Blockbuster was the undisputed video rental leader, with over 2,800 stores worldwide.
The company’s growth was driven by acquisitions of other retailers such as Britain’s Ritz, US
chains Major Video and Erol’s Video.This was a good example ofsuccessful Where-perspectives
(depicted in Green in the Figure 3, Blockbuster during its peak)because they improved the firm's
reach and hence improved accessibility to its customers.

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1994 — Viacom buys Blockbuster for $8.4 billion.This is an example of a bad Executive-Who
perspective(depicted as Red in the Figure 3, Blockbuster during its decline) since the business
idea of selling Blockbuster to Viacom marked the start of its decline.

1997 — Silicon Valley veteran Reed Hastings found Netflix, partly out of frustration after being
fined $40 by Blockbuster for being late in returning “Apollo 13.”This is an example of a bad
Executive-Who perspective(depicted in Red in the Figure3, Blockbuster during its decline) since
declining the offer from Netflix wasa bad decision taken by the executives. Blockbuster
executives and business management teams were unable to assess the potential of online video
streaming. Also, Netflix soon rose to big heights and became a major competitor to Blockbuster.

1999 — Viacom takes Blockbuster public, retaining its stake in the firm in order to take
advantage of its steady cash flow through other than video distribution channels.This is an
example of a bad Executive-Why perspective(depicted as Red in Figure3, Blockbuster during its
declin)e since they were going away from their actual mission and loosing focus.

2000 — Blockbuster collect almost $800 million in late fees, which accounts for roughly 16% of
its revenue, according to the Associated Press.This is an example of a bad Business
Management-How perspective(depicted as Red in the Figure 3, Blockbuster during its
decline).They were so dependent on the concept of late fees, that they did not forsee it to become
one of the major reasons for its demise.

2002 — Netflix goes public.This marked the upcoming of a major rival with whom they could not
keep up.

2004 — Blockbuster was at the peak of its powers, with about 9,000 stores globally. Carl
Icahn invested in the stakes of Blockbuster.This is a good example of Where, in all the

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perspectives (depicted as Green in the Figure 3, Blockbuster during its peak). It is because of its
multiple locations and distribution channels that attracted investors.

2007 — Blockbuster CEO John Antioco steps down after a conflict with Icahn.This is an example
of a bad Executive-Who perspective(depicted in Red in the Figure 4, Blockbuster during its
decline) since instability in management and boardroom infighting lead to disarray in the
organization. This further led to confusion and poor management.

2010 — Blockbuster filed for bankruptcy protections in September, trying to clear around $1
billion in debt. As a senior bondholder, Icahn received a large equity stake. This is an example of
a bad Executive-Who perspective (depicted in Red in the Figure 4, Blockbuster during its
decline). This shows that the financial management of the firm was weak because they had
transformed a successful firm with strong customer base to one holding a debt of $1 billion.

2011 — DISH Network bought the assets of Blockbuster for $234 million in cash at an
auction. The deal included more than 1,700 retail locations, which it had expected to close over
a period of time.This marked a new beginning for Blockbuster, but it was too late because its
competitors, Netflix and Redbox, had become a strong competition pulling customers away from
Blockbuster.

2012 — Dish announced plans to close some of Blockbuster stores, withroumors about using
the real estate as a place to sell mobile phones.

2013 — Blockbuster announced plans to close its remaining US stores.[31]

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 Figure 5 : Netflix Revenue vs Blockbuster Revenue

In 2004, online business was flourishing. But blockbuster was still primarily operating on
traditional store-based
based rental model. Its competitor,Netflix, availed the advantage of online
streaming and subscription services. While Netflix’s U.S. revenues grew from $682 million in 2005
to $3122 million in 2011, Blockbusters’ U.S. revenues declined from $2400 million to just $970
million during the same period.[32]
period.

Summary
This Case study deliberates on how Blockbuster was responsible for its own failure at every level.
The mainn purpose of this research was to unearth the numerous reasons behind the failure of
Blockbuster Inc . usingZachman
Zachman framework as a base line.

One of the pivotal reasons behind the failure of Blockbuster

Blockbuster videos was found to be their late
l fee
policy. None off the competitors of the firm had this policy of penalizing the customers for late
return. This posed a threat to their customer base and hence the revenue.

Another major reason for failure was their unresponsiveness to the market trends and current
technological
nological innovations. When the trend was moving towards light-weight,
light weight, easy to use and
portable DVDs Ds or online streaming with subscription, Blockbuster was hesitant to adapt to the
change and update their inventory according to the latest customer demands.Blockbuster
demands did not
react to technological revolution (like DVDs and online video streaming instead of VCDs in 1999- 1999
2004) for four years.TheyThey enforced the new technology after years of their competitors
implementing it. This further led to the loss of cust
customers to competitors. Additionally, around early
2000's, new and improved business processes like,subscriptionmodel
like,subscriptionmodel and no late fee policy, aligned
to a complete EA framework, were implemented by the primary competitors(Netflix and Redbox) of
Blockbuster. But Blockbuster, again, was at a disadvantage because they did not keep up with these
trends till 2008.

Furthermore, sticking
ticking with VCD
VCDs increased their mailing costs,made
made it inconvenient and slow.
slow.The
firm had a deep organizational structure which made it very difficult to adapt to change.

19
Apart from the above mentioned executive and business decision flaws, there were multiple cases
where the firm could not take the right stand. Two such cases werethe bad investment in Circuit
City and merger with Viacom, which led to a substantial amount of loss to the firm. Moreover, the
expansion plans during the low demand period led to losses. Another case is rejecting the primary
competitor, Netflix's offer to work together, decreasing the competition and increasing the market
coverage. This shows failure of the company at executive level in analyzing the requirements and
trends of the market. Instead, they chose to invest more in already existing stores with the add-on
retail features.

Additionally, frequent changes in the management led to constant remodeling of the company
structure and business operations. This led to inefficient operations and ineffective employee
management. The new CEOs lost focus and were not successful in aligning the business with the
main mission of the enterprise. This further led to confusion among stakeholders, reduced trust in
the firm and steep drop in stock price.

Moreover, the socio-economical changes didnot help the firm.Overtime, the social behavior of
customers changed and so did the industry perspective and culture. Instead of one leading firm
monopolizing the entire video rental industry, by 1999 many smaller firms ,implementing newer
technologies and business processes, started emerging with the demand [3].In replacement to
traditional brick-and-mortar structure, the industry competitors started an aggressive battle to
provide the best customer satisfaction(to bring the products to customer's doorstep) and quality.
Also, the customers preferred watching unlimited movies at the convenience of home and time and
many loyal blockbuster video customers started moving to competitor's services. The 2008
recession made things worse for Blockbuster Inc, driving them to their debts and demise.

It can be concluded that the above mentioned facts are the major reasons for the decline of
Blockbuster videos according to the analysis conducted in this Case study using Zachman
framework.

List of Figures

Figure 1 : Prior organizational structure (Marcus & Schaefer, 2011)....................................................... 10

Figure 2 : Changed organizational structural chart (Marcus & Schaefer, 2011) ....................................... 10
Figure 3 : Blockbuster during its peak until 2005 .................................................................................... 14
Figure 4: Blockbuster during its decline from 2005 ................................................................................ 15
Figure 5 : Netflix Revenue vs Blockbuster Revenue ................................................................................ 19

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