BlockbusterInc.

ADMN404:Assignment#3

JohnDoe 1234567

BlockbusterInc.

ExecutiveSummary
BlockbusterInc.istheworldsleadingvideorentalcompany.Itopeneditsfirststorein1985inDallas, Texasandtodayhascloseto10,000storesaroundtheworldrentingVHStapes,DVDs,andvideogame cartridgesandsellingrelatedmerchandise. Thecompanyhasachieveditssuccessbymakingthevideorentalprocessconvenientandenjoyable.In addition,ithasfoundthenecessaryoperatingefficienciestobeabletoserviceitscustomersbetterthan itscompetitorswithouthavingtochargehigherprices. Despite its success to date, the future viability of Blockbusters business model is currently in doubt. With the industry having matured, rivalry among existing competitors is becoming more intense. But evenmoreimportant,severalnewtechnologieshavethepotentialtodelivermoviesandotherforms of digital content directly to customers homes, thereby eliminating the need for video rental stores likeBlockbusters.Thus,Blockbusterneedsastrategywithwhichtoconfrontthesechallenges. OnestrategywouldbeforBlockbustertoadopttheroleofindustryconsolidator.Thisstrategywould see it increasing its market share through a variety of means and, in the process, strengthening its balancesheetasitwaitsforthefutureofvideoondemandtobecomeclearer.Asecondstrategywould beforthecompanytopushtotheforefrontofvideoondemand,providingthetechnologicalsolution thatbecomestheworldwidestandard. Whiletheforegoinghavetheirmerits,therecommendedisforBlockbustertorepositionitselfasasales organization rather than a rental organization. Simply put, the company should define itself as the premier destination for the purchase of video, games, and related equipment. Toward this end, the companyshouldadoptafunctionalstructure,enhanceitsalreadyserviceorientedculture,andrefineits controlsystemsinwaysthatallowittotrackandimproveuponthelevelsofserviceitisproviding.

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Introduction
BlockbusterInc.isatheworldsleadingvideorentalcompany,havingthousandsofstoresinnumerous countries. However, the intensity of rivalry in its industry is increasing, and the industry itself faces considerable uncertainty as videoondemand technologies continue to improve. As a result, the companyisinneedofaclearandappropriatestrategytoguideitoverthenextfivetotenyears. ThisreportreviewsBlockbustershistoryandcurrentsituationtoarriveatthreedistinctstrategiesthe company may want to consider. It begins with a brief history of the company. This is followed by a review of its external environment and, more specifically, the competitive and macro environmental forces that are shaping its industry. The internal environment is considered next with the focus being theresourcesandcapabilitiesonwhichitsdistinctivecompetenciesdepend.Inthesectionthatfollows, the three strategies are described and, in the final section, a recommendation is made and implementationissuesareidentified. In reading this document, it is important to note that it is based almost entirely on the information contained in Blockbuster in 2002 (Jones, 2004). This has been supplemented with the authors personalknowledgeofthecompanyanditsindustrycirca2002.Thus,itisimportanttonotethatthis reporthasbeenpreparedwithoutaccesstothecompanysfinancialstatementsandwithoutthebenefit of any industry data. For this reason, it is highly recommended that the reader seek access to this informationbeforeactingontherecommendationscontainedherein.

CompanyOverview
Blockbuster Video opened its first store in 1985 in Dallas, Texas. Its founder, David Cook, sought to capitalizeonthewidespreadadoptionofVCRsandtheresultinggrowthofvideorentalstores.Forthe most part, this was a highly fragmented industry, with most of the 19,000 stores in 1985 being independents.Inaddition,Cookfeltthereweresignificantshortcomingsinthebusinessmodelofmost stores. He thought their hours were too short, their selection was too limited, their membership fees were inappropriate, and their business practices were cumbersome. His response was a video superstorethatrectifiedtheseproblemsaswellasothers. ThefivekeyelementsinCooksconceptwereasfollows.First,thephysicalpremiseswerelarger(3,800 10,000squarefeet)andmoreattractive(brighter,highlyvisible,standalonestores)thanmostother video stores. Second, the variety of tapes available far exceeded competitors, with each store having between7,000and13,000titles.Third,athreedayrentalperiodprovidedcustomerswiththeflexibility theyneededtoavoidlatefees.Fourth,thecompanywasclearlypositionedasafamilyentertainment storewhich,forthemostpart,meantthatitdidnotstockadultmovies.Finally,thestoresmadeitmore convenienttorentvideos.Thiswasaccomplishedthroughlongerhoursandafasterrentalprocessthat reliedheavilyontechnology. Blockbusterhasdoneextremelywellwithitssuperstoreconcept.Injustoveradecadefrom1985to 1996itwentfromasinglestoreto4,500stores.Today,itdominatestheUSmarketforvideorentals andisamajorforceinCanada,UnitedKingdom,Japan,andelsewhere.Inrecentyears,thecompanyhas 3

BlockbusterInc.
transitionedfromVHStapestoDVDsandisalsoderivingagrowingportionofitssalesfromvideogame rentals. Moreover, it has become increasingly effective at marketing complementary merchandise withinitsstores. Despite its success, the future of Blockbuster is uncertain. The companies that produce movies have been using lower prices to encourage viewers to purchase rather than rent their movies thereby reducing the need for video rental stores. But even more important, technological developments allowing for videoondemand (VOD) could soon eliminate the need for physical disks and the video stores altogether. Blockbuster has taken some steps to address this threat, most notably establishing alliances with some of the merging players. Nevertheless, the company has not yet established a strategythatcanensureitslongtermsuccess.

Mandate
From the time its first store opened in 1985, right up until 2002, Blockbusters mission has been providing its customers with easily accessible, family entertainment. In carrying out this mission, its visionisforittobetheworldsleadingproviderofhomeentertainment. There is little in the available materials that speaks directly to the core values or guiding principles of Blockbuster.Nevertheless,thereisatleastsomesupportforthefollowing: Family: The company will seek to assist families in finding entertainment options that bring them together and to avoid those that may be considered inappropriate, particularly for youngerfamilymembers. Profitability:Thecompanyseekstocontinuouslyimproveitsfinancialperformance. Innovation: The company embraces product, procedural, and technological innovations that havethepotentialtoimprovecustomerandemployeesatisfactionorfinancialperformance. It would appear that Blockbusters most important stakeholders are its shareholders, customers, and employees. Needless to say, its shareholders and particularly Viacom expect that their shares will increase in value over time. Its customers expect it to conduct is affairs such that they comply with applicable laws and regulations and, in addition, with general understandings of what is and is not ethical.Itsemployeespresumablyexpecttobetreatedwithrespectand,tothedegreepossible,tohave stabilityintheiremploymentaswellasopportunitiesforadvancement.

ExternalAnalysis
Thevideorentalsegmentofthemovieindustryisheadedfortumultuoustimes.Thecompetitiveforces within the industry suggest that a shakeout may soon occur. And perhaps more importantly, macro environmentalforcescouldsooncompletelyeliminatethedemandformediarentals.Nevertheless,the newsisnotallbad,astheseforcesmayalsoyieldsomesignificantopportunitiesforlargercompetitors suchasBlockbuster.

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CompetitiveForces
The video rental segment of the movie industry is extremely competitive. At the global and national levels, Blockbuster is the undisputed leader. Several other regional players have thrived, in part, by focusingon geographical markets thatarenotservedorareunderservedbyBlockbuster.Evenso,at theregionallevel,andevenmoresoatthelocallevel,thereareusuallynumerouscompaniesranging from local convenience stores to chains such as Blockbuster competing for each and every video rental. Thedegreeofcompetitionhereislargelyattributabletothelowcostofentry.Withthepurchaseofa single tape or DVD, a store has the potential to generate rental income and thereby compete with Blockbusterandeveryoneelse.EventheestablishmentofaBlockbusterstylesuperstorewith5,000or morevideoscanbeachievedwithlessthan$500,000,whichisntalotconsideringthepotentialrevenue streamof$70,000to$90,000permonth. With so many companies renting videos, and with nothing to differentiate the videos of one rental companyfromanother,therentalcompanieshavehadtobeaggressivewiththeirpricingandwiththe service they provide. Price wars are becoming increasingly frequent. Pricing innovations such as subscription models are also being implemented. Service innovations such as home delivery and guaranteed availability are being utilized. And for most companies, the result of these efforts is not increasing profits; instead, it is the opposite due to everincreasing overhead charges and reduced margins.AlsoworthnotinghereisthearrivalofNetflix,amailbasedproviderofvideorentalsusinga subscriptionbasedbusinessmodelthat,intheory,allowsforunlimitedrentalsforafixedprice. The challenges resulting from the foregoing are exacerbated by the fact that the supply of the vast majority of movies is controlled by a small group of companies. In 1997, Blockbuster was able to negotiateaVHSrevenuesharingdealwiththemajorstudiosthatallowedittocarrysignificantlymore inventory, particularly the higher grossing new releases. However, this arrangement did not apply to DVDsandisnolongerapplicable.Inaddition,thestudioshaverecognizedthatcharginglessforDVDs increases their revenues as viewers opt to purchases the DVDs instead of renting them. And more recently, the studios have been effectively trying to rent movies themselves through the pursuit of variousvideoondemandsolutions. Itisalsoworthnotingthatcustomershaveverylittleattachmenttoanyparticularvideostore.Factors such as price, location, and selection are the major determinants of where customers rent and competitors can easily match any advances made in these areas. To this can be added the growing popularityofvideogamesthatleavecustomerswithlessandlessfreetimeforwatchingvideos. Theforegoingsuggeststhatthevideorentalsegmentofthemovieindustryisnotparticularlyattractive at this time. Barriers to entry are low. A small number of movie studios control most of the content. Rivalry among existing competitors is becoming increasingly intense. And customers are poised to switchstoresatthedropofahat,iftheyvenotalreadyabandonedmoviesforvideogames.Intheshort to mediumterm, consolidation seems inevitable. And while this could result in a period of greater profitability,itcouldbeahighriskstrategyforthosethatchoosetoremain.

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MacroEnvironment
The future of video rental stores depends to a large degree on macro environmental forces and, in particular,technologicaldevelopments.Alsopertinentisthegrowingpopularityofvideogames.Alarge amount of disposable income that had previously been spent on movies and music is now being diverted to game consoles, cartridges, and rentals. For the time being, video rental stores are able to compensate for lost video rentals with rentals of game cartridges. However, some of the same technologicaldevelopmentsthatthreatenthevideorentalbusinessarealsoathreattorentalsofgame cartridges. Thevarioustechnologiesthatthreatentounderminethebusinessmodelofvideorentalstoresallhave one thing in common. Simply put, they allow the content providers (e.g., movie studios, game developers) to put their content into the hands of consumers without the involvement of any intermediaries. By distributing the content electronically, they can forego the use of physical media (e.g.,disks,cartridges)andeliminatetheneedforintermediarieswhodistributeandrentthesemedia. Atthepresenttime(2002),thereareseveraldifferenttechnologiescompetingforthevideoondemand crown.Forexample,satellite,cable,andtelephoneprovidersareallexploringwaysofprovidingvideo ondemand(VOD)or,attheveryleastpayperview(PPV)video,throughtheirexistingplatforms. The even bigger threat to the video rental stores could be the fastrising Internet. Once bandwidth concernsareaddressedandmorehomesgainaccesstotheInternet,thelatterwouldseemtohaveall the capabilities required to provide true videoondemand without the need for any physical media. Gamescouldalsobedistributedinthisway.Andshouldthishappen,theneedforvideorentalstores wouldbecalledintoquestioninallbutthemostremoteoflocations. Whattheforegoingwouldsuggestisthatthequestionisnotwhetherbutwhenpeoplewillstoprenting DVDs and game cartridges. In part, this will depend on the technological solution that prevails. A satellitebased solution would be almost instantly accessible around the world, whereas a broadband Internetsolutionwouldmostresultinaphasedrolloutwithhighdensityareasbeingservedfirst.The former could eliminate video stores overnight, whereas the latter would result in a slower but still inevitableunderminingoftheirbusinessmodel.

InternalAnalysis
Blockbusters success to date is attributable to two distinctive competencies. The first of these, and perhaps the most important, is the companys ability to make the rental process convenient for customers.Thisincludesstoreaccess,therentalprocessandparameters,thevarietyoftitles,andother factors. And the second distinctive competency is the companys ability to meet or beat whatever pricing or rental arrangement its competitors might offer. So in essence, the companys competitive advantagecanbedescribedassignificantlybetterserviceatnoadditionalcost. Blockbusters competitive advantage can be traced to a set of interrelated resources and capabilities. Andamongitsmanyresources,therearefourthatareparticularlynoteworthy.Thefirstoftheseisthe

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video superstore concept described above. Moreover, because the basic Blockbuster concept has remainedthesamesincethebeginning,thecompanyhasavoidedanyconfusionaboutitsidentityinthe mindsofitscustomers.Thisbringsustoitssecondkeyresource,whichistheBlockbusterbrand.This brandisnotjustsynonymouswithmovies,butwiththevideosuperstoreconceptandtheclean,welllit, familyfriendlyenvironmentassociatedwithit.Thesuccessoftheconceptandthebrandhaveledtothe thirdresourceworthnotingwhichisthevastnetworkofstoresthatBlockbusternowhas.Toputthis anotherway,Blockbusterssizeisanimportantresource.Andfinally,thefourthofthekeyresourcesis itstechnology.Thecompanysfullyintegratedpointofsaleandinventorymanagementsystemsprovide itwithinimitablecapabilities,particularlyinthecontextofthecompanysnumerousstores. The resources noted above have both facilitated and benefitted from the companys four key capabilities.Thefirstoftheseisactuallyacollectionofcapabilitiesinvolvingthelocating,building,and managingofitsbuildings.Withoutthiscapability,thecompanywouldbesaddledwithunderperforming stores that, among other things, would drain away financial resources and limit its growth. Another important capability of Blockbuster is its buying power. This was most clearly revealed by the VHS revenuesharing agreement it negotiated in 1997. But it also applies to almost every purchase made. Simplyput,itsthousandsofstoresandthelearningtheyfacilitategiveittheabilitytonegotiatelower pricesthanitscompetitors. Blockbuster has also proven itself highly capable with respect to the management of its inventory. Largelyasaresultofthetechnologynotedabove,Blockbusterisabletotrackinrealtimeitsinventory levels at every store. And since it is also able to track which titles are and are not in demand at each store,itcanquicklymoveitsstocktothelocationswhereitismostlikelytoberented. Finally, it must be noted that Blockbuster is extremely competent in its marketing. In part, this stems fromthemarketingefficienciesmadepossiblebypoolingtheindividualmarketingbudgetsofitsmany stores. However, the company has also managed to clearly convey its identity to the public which, as notedabove,hasbeenfacilitatedbythestrengthofitsinitialconcept.Aswell,thecompanythoroughly analyzesthedataitcollectsthroughitsinformationsystemsand,inthisway,hascontinuedtoimprove uponitsdistinctivecompetenciesovertime. Inlightofrecentdevelopments,whatismissingfromtheaboveisanythingrelatedtovideoondemand. At this time, Blockbuster is not directly involved in the development of any of the technologies that mightonedayfacilitatewidespreadadoptionofVOD.

StrategicOptions
ThereareatleastthreedistinctstrategiesBlockbustercanpursueatthistime.First,itcancontinuewith itsexistingbusinessmodelandseekgrowththroughfurtherindustryconsolidation.Second,itcantryto becometheworldwideleaderinvideoondemand.Andthird,itcantransformitselffromamediarental companytoanentertainmentretailer.Furtherdetailsofthesestrategiesareprovidedbelow.

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IndustryConsolidation
What is referred to here as an Industry Consolidation strategy is, in effect, a leadership strategy in the context of a declining industry. It assumes that the development and adoption of videoondemand technologies will proceed at a modest pace thereby allowing for at least another decade of reasonably strong demand for media rentals. During this time, Blockbuster can continue to strengthen its balance sheetwhilefurtherexploringhowbesttopositionitself inresponsetotheinevitableadvancesofVOD. INDUSTRYCONSOLIDATION ARENAS/MARKETS Multinational/Family DIFFERENTIATORS Convenience/Selection/Price VEHICLES AggressivePricing/Signaling/Acquisitions STAGING Attackandacquirerivalsstarting withtheweakest ECONOMICMODEL Purchasemediaatthelowestpossiblecost andseektomaximizerentalrevenuessoas tocoveroverheadandgenerateprofits. PROS Leveragesexistingresourcesandcapabilities CONS Shorttomediumtermsolutionatbest

In keeping with leadership strategies more generally, the objective here would be to strengthen Blockbusters leadership position by encouraging competitors to exit the industry. Toward this end, it wouldtrytoweakenitscompetitorsthroughaggressive pricingtactics.Thelattermightincludeamovetoward unlimited, subscriptionbased rentals, a tactic that wouldbeparticularlydamagingtocompetitorswithsmallerinventories.Inregionswherecompetitors areknowntobefinanciallyweak,thecompanywouldopttochargeless,particularlyfornewreleases. Inadditiontopricingtactics,Blockbusterwouldalsosignalitsunwaveringcommitmenttothisindustry. Given the uncertainty about the industrys future, it might be wise to refrain from significant investments.Nevertheless,itwouldbeeffectivetoatleastannounceplanstoinvestinthefuture.The companywouldalsowanttorespondrapidlytoanyaggressivemovesbycompetitorstomakeitclear thatitintendstoprotectitsmarketshareifnotgrowit. The strategy would commence with the sending of some strong signals that Blockbuster intends to continueinvestinginitsexistingbusinessmodel.Then,thepricingtacticswouldcommenceinregions where competition is weakest so as to allow Blockbuster to strengthen its overall position prior to confrontingitsstrongestcompetitors.

Videoondemand(VOD)
TheVODstrategywouldultimatelyresultinBlockbustersexitfrommediarentalsand,morespecifically, would result in it no longer owning and operation bricksandmortar stores. The objective with this strategywouldbetoleverageBlockbustersstrongbrandanditsknowledgeofcustomerpreferencesto becometheworldwideleaderinthedeliveryofdigitalcontent.Andwhilethiscouldincludethegaming industry,thisstrategyisprimarilytargetedatthemovieindustry. ThiswouldbeanextremelyhighriskstrategyinthatitisheavilydependentonBlockbustersuccessfully developingoracquiringaviabletechnologyand,overtime,ensuringthatitemergesastheindustry

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standard. In addition, to maximize its effectiveness, Blockbuster would need to secure exclusive distributionrightsformuchifnotallofthecontentit delivers. GiventhatBlockbustercurrentlyhaslittleexpertisein VODtechnology,buildingtheR&Dcapacitytopursue a solution would probably not be advisable. Instead, thecompanywouldbebetteroffsecuringtherightsto several promising technologies, thereby reducing the risk. Even then, there will be considerable risk as the company has no proven ability to identify technologicalwinnersandlosers. While pursuing the foregoing, the company would wind down its store front operations in as orderly a fashion as possible. This would involve the slow migration of its inventory from markets where VOD penetrationishighesttothosewhereitmaybemany yearsbeforeVIDisavailable.Inaddition,thecompany would seek to sell of its real estate holdings when motivatedbuyersemerge. VIDEOONDEMAND ARENAS/MARKETS Worldwide/Internet DIFFERENTIATORS Content(ExclusiveAccess) Convenience(UserInterface) VEHICLES R&D/Acquisitions Collaborations/Divestiture STAGING Develop/acquiretechnologicalsolution Securethesupportofthemajormoviestudios Opportunisticsalesofexistingassets ECONOMICMODEL Collectacommissioneachtimeamovieis streamedtoacustomer PROS Longtermpotential Unassailableposition CONS Highrisk Basedonanonexistentcompetency

EntertainmentRetailer
ThisstrategyenvisionsBlockbustertransitioningfrom therentaltothesaleofvideosandgames.Thiswould also include the sale of related equipment. The company is already doing this to some degree with the sale of both new and used DVDs and game cartridges and through its partnership with DirecTV. However, the company is still best known for its rentals.Thus,thisstrategywouldinvolveaconcerted effort to redefine the company as the premier destination for the purchase of movies, games, and relatedequipment. Thiswouldbeanextremelylowriskstrategy,atleast intheshorttomediumterm.Thecompanysnetwork of superstores would provide it with the perfect platformforpursuingthisstrategy.Itwouldmakeuse of the systems already in place to manage and sell ENTERTAINMENTRETAILER ARENAS/MARKETS NationswithstrongIPlaws DIFFERENTIATORS Service/Selection VEHICLES Restructuring/Acquisitions STAGING Developnewstoreconcept Saturatedmarketsfirst ECONOMICMODEL Selldigitalmediaandrelatedequipment PROS Lowrisk Leveragesexistingcompetencies CONS Longtermpotentialisuncertain Backlashfromelectronicsretailers

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theseproducts.Itssizewouldenableittopurchasethemediaandequipmentonfavourableterms.And itsstrongbrandwouldleadcustomerstocommencetheirbuyingeffortswithBlockbuster. The risks inherent in this strategy relate to its longterm potential and the reactions of its new competitors. While it appears likely that digital media will be distributed via DVDs and cartridges for quite a few more years, it seems inevitable that this will come to an end in the foreseeable future. A shiftinemphasistowardtherelatedequipment(e.g.,VODtechnology,gameconsoles)couldoffsetthis development.However,itcouldalsoprovokesomestrongcompetitionfromtheelectronicsretailers. Therolloutofthisstrategywouldcommencewiththedevelopmentofanewsalesonlystoreconcept thatcustomerscouldeasilydifferentiatefromrentalstores.Thisconceptwouldthenberolledoutfirst in markets where Blockbuster had a strong presence. From that point forward, the rollout would be dictatedbylocaldemandandongoingdevelopmentswithVOD.

Recommendation&Implementation
WerecommendthatBlockbusterpursuetheEntertainmentRetailerstrategyforthereasonsdescribed above.Inbrief,thisstrategywouldleverageBlockbustersstrongbrand,itsdistributionnetwork,andits technologytopositionthecompanyastheleadingsellerofmovies,games,andrelatedequipment. Toimplementthis,afunctionalstructureshouldbeadoptedsoastoallowforacoordinatedapproach to maximizing customer responsiveness. This is important because, going forward, the hallmarks of Blockbustersserviceconvenientstorelocations,ampleparking,goodselection,fastprocessingwill continuetobeimportant.However,withthemovefromrentalstosales,thecompanysservicerecipe willexpand.Mostimportantly,itwilldependtoalargedegreeontheexpertiseandfriendlinessofits sales staff. Thus, a functional structure will allow the companys most senior accounting, finance, operations,sales,marketing,andhumanresourcesexecutivestojointlypursuethehigheststandardsof customerservice. Reporting to the functionallybased executives should be the managers of geographicallybased divisions.Inconsultationwiththeseniormanagementteam,thesemanagerswouldhavetheauthority to adapt the Blockbuster formula within their regions provided that this resulted in higher levels of service. But in general, they would be responsible for rolling out and supporting the initiatives of the seniormanagementteam. The new sales model will require Blockbuster to be even more astute in its inventory management. Whereas rental customers might have selected a different movie when their first choice was unavailable, customers looking to purchase a particular gaming console are likely to go elsewhere to maketheirpurchaseshouldthatconsolenotbeavailableatBlockbuster.Theobvioussolutiontothisis tocarrymoreinventory.However,thephysicalspacerequired,nottomentionthecarryingcosts,limit thedegreetowhichthisispossible.Asaresult,furtherrefinementsofthecompanysinventorysystems anddistributionmodelarelikelytoberequired.

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BlockbusterInc.
Another challenge is going to be attracting, selecting, and motivating the talented sales personnel. These individuals will themselves need to be passionate cinephiles and gamers who are able to effectivelysharetheirexpertiseandguidecustomerstowardapurchasethatcompletelysatisfiestheir expectations.Itisimportanttonotethat,becauseoftheemphasisonoverallservice,theseindividuals shouldnotbepaidcommissions.Instead,theshouldreceiveaflatwageandpossiblyabonusbasedon overallstoreperformance. Despitetheserviceorientationofthisstrategy,itwillbeessentialthatBlockbusterbeabletomeetor beatcompetitorsprices(unlessitisabletonegotiateexclusivedistributionrightsforitsproductlines). Toward this end, it will need to constantly monitor competitors prices and strategic initiatives. Moreover,itwillneedtotakeactionsthatensureitisthedominantretailerinitschosensegmentslest itscompetitorsgaingreaterpurchasingpower.

References
Jones, G. R. (2004). Blockbuster in 2002. In C.W.L. Hill & G.R. Jones, Strategic management: An integratedapproach,6thEdition.Boston:HoughtonMifflin.

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