1. Assess the video-rental industry. How will this impact the strategy of businesses in this industry?
2. What role did technology play in Blockbuster's demise? How will technology impact the strategy of other like kind organizations?
3. What functional level and generic level business strategies were/are successful for the parties involved in this case?
The case details the rise of Blockbuster as the leading video rental company and the forces such as increasing competition and changing technology that led to its decline and fall. Founder, David Cook, built Blockbuster upon society's changing desire to own VCRs and rent videos. Antcipating, greater consumer demand, Cook realized the need for IT speed. To this end, Cook's new strategy and business model revolved around developing appealing stand-alone superstores, that offered wide variety, longer rental periods, and long operating hours all of which would incorporate an IT system. As company-owned stores and franchised stores began to expand, Wayne Huizinga purchased Blockbuster with the intent of making it the industry leader in the U.S. video-rental market. Huizinga's new business model included a "cluster strategy, " intense marketing campaigns to attract customers and build brand recognition, the formation of alliances, reducing cost structure, an IT upgrade, new store expansions in smaller market segments (free-standing and franchised), and acquisitions of smaller video chains.
By 1990, revenues from video rentals exceeded the revenues obtained in movie theaters which heighted competition among Netflix, Amazon, and Apple. Blockbuster, on the other hand, had no national competition in video rental. However, at the local and regional levels, Blockbuster faced fierce competition due to ease of entry. Despite Blockbuster's advantage in negotiating discounts with suppliers on new releases and having huge volumes, the industry was changing because of the growth in digital technology which provided numerous ways in which to view movies. Blockbuster remained unconcerned.
With solid cash flow, Blockbuster was sold to Viacom, an entertainment conglomerate. The next year, a tidal wave of problems hit Blockbuster including price wars with start ups, movie studios selling direct to customers, dysfunctional materials management and distribution, increased overhead costs, and revenue declines. With falling cash flow, Viacom resorted to multiple changes in leadership and cost cutting measures for Blockbuster. The use of revenue sharing agreements with studios provided a short term solution so that Blockbuster could increase responsiveness to customers and increase revenue. In the wake of better profits, Blockbuster phased into DVDs and games to better meet the customer needs. Again attacked by movie studio direct sales to customers, Blockbuster's DVD sales declined and forced them to drastic means to increase rentals. By the 2000s, Blockbuster moved toward digital downloads and broad banding without the expertise to play in an industry with strong technological competitors which resulted in great losses for the company.
On the horizon, was the founding of a company called Netflix who pioneered the concept of receiving movies by mail for a fixed monthly fee. This model did not require any physical presence, and Netflix could use the money saved to stock a wider selection of movies. A monthly subscription model also locked in customers, and provided a steady stream of revenues. Also, Blockbuster belatedly entered the rental-by-mail business, to counter the meteoric rise of Netflix in that business. A second major source of B&M competition arose in 2004 when Redbox, a division of Coinstar best known for its coin-money counting machines, began offering video rentals for $1 a night through vending machines at fast-food restaurants, grocery stores, and other retail outlets. Blockbuster responded by opening its own line of Blockbuster Express kiosks that were made by NCR. However, as its profitability collapsed Blockbuster could not afford to run the kiosks and licensed the ownership of the kiosks back to NCR that ran them in 2011.