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Section I: Strategic Profile and Case Analysis Purpose

David Cook opened the first Blockbuster

store in 1985. One year later Blockbuster had

expanded to 18 stores. The company was still in

financial trouble. The end of 1986 the company

suffered a $3.2 million loss. Wayne Huizenga brought the company with a couple of

other investors in 1987. David Cook left the company after the purchase. Under

Huizenga the company expanded to 415 stores, making it the largest video rental

company in the country. In 1992 the company decided to start diversifying. They opened

250 music stores and spread into 13 different countries. In 1994, they merged with

Viacom which turned out to hurt both companys stock value. Also in 1994, Wayne

Huizenga stepped down and was replaced by Steve Berrard. Steve was replaced by

William Fields in 1996. William Fields was replaced in 1997 by John Antioco. In 1996

the stock value had dropped to half of its 1993 peak. In 1998, Blockbuster moved

headquarters from Fort Lauderdale, FL to Dallas, TX. Their cash flow decreased 70%.

They also made an agreement with America Online to create Blockbuster.com. In 2005,

they tried a new marketing venture in which they stopped charging late fees. If a

customer kept the movie a week past the due date the rental changed to a purchase.

They had to pay $630,000 in legal fees to settle the lawsuits for false advertising. They

also lost $500 million in late fee revenue. They also started a mail-order video rental

system. Blockbuster had to settle with Netflix for patent infringement. In 2007, they

acquired Movielink to gain a downloadable movie library. They had to close 300 stores
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in 2006 and another 280 in 2007. James Keyes took over for John Antioco also in 2007.

The purpose of this case analysis is to generate ideas to get Blockbuster to

regain and maintain its spot at the top of the video rental market. I think Blockbuster has

made a couple of great moves however they seem to get in legal trouble every time

they do. After several legal issues has left Blockbuster hurting financially. We will take a

look at the situation analysis, SWOT analysis, strategy formulation, and strategic

alternative implementation. Blockbuster has some things they need to do to avoid being

known as lackluster.

Section II: Situation Analysis

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The situational analysis is designed to gain a better understanding of current the

current situation Blockbuster faces. The situation analysis has four parts. They are

environmental, industry, competitor, and internal. Having a better understanding of

these four parts is very important. They are important because they have the ability to

affect the company either in a positive or negative manner. Since they have this power

strategies need to be developed around these parts.

Part A: General Environmental Analysis

The environmental analysis consists of six trends. The trends are technological,

demographic, economic, political/legal, sociocultural, and global. It is important for a

company to understand these trends because they can have and already have had a

dramatic impact.

The first trend is technological. This is the trend that has had the biggest impact

on Blockbuster. In the beginning Blockbuster only had to worry about video cassettes.

The technology in this field has grown extremely fast. Just when people finally get on

board with DVDs they come out with Blu-Rays. Blu-Rays are much larger than DVDs do

they can hold a lot more information. The downside is

they cost more money. More and more companies are

releasing movies on Blu-Ray which means the DVD is on

its way out the door. Movies can also now be downloaded

directly to your computer. This means the customer does

not have to go through the hassle of driving to the store

and there is no way to lose or return the video late. Downloadable movies also greater
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lower a companys risk because their product cannot be damaged. There is also a direct

mail system of renting movies. A customer gets online and selects a couple of movies

they want to watch and a business mails them directly to you. As soon as the customer

puts the first movie in the mailbox and it is scanned in by the postal service they send

out the next one. These are just some of the advances in technology over the past 24

years just imagine what the future will bring.

The second trend is demographic. This trend has not had much affect on

Blockbuster. Their target market is people of all ages. They have classics and new

releases in several different types of mediums, which appeal to a wide range of people

with different ages.

The third trend is economic. The current economy is in the gutter. A lot of people

are losing their jobs. With less money moving around people are deciding to save it as

opposed to spending it on renting some movies. Interest rates are at all time lows. This

gives Blockbuster the opportunity to borrow money to expand. The American dollar is in

poor condition compared to foreign currency. This hurts the exchange rates. Blockbuster

is in thirteen different countries. Since the dollar is hurting they are having a harder time

maintaining those stores. Their marketing and maintenance costs are up which may

force them out of those markets.

The fourth trend is political/ legal. There have not been many political issues that

have affected Blockbuster. Movie rental is not on Washingtons agenda. They have had

a couple of legal issues. They were sued by forty seven states for false advertising.

They advertised no more late fees. However, if a customer kept a movie too long past
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the due date the rental was converted to sale which caused a fee for the total cost of the

movie. They settled the lawsuit for $630,000. They were also sued by their competitor

Netflix. Netflix claimed that Blockbuster infringed on their patent when they started their

mail order video delivery system. They settled the lawsuit for an undisclosed amount in

2005.

The fifth trend is sociocultural. There are not many sociocultural issues affecting

Blockbuster. The biggest sociocultural issue affecting them is the new health movement.

More and more families are trying to become more health conscious. Sitting around

watching movies is not as healthy as other activities that involve physical exercise.

Since Blockbuster is in thirteen different countries they need to be aware of several

different cultures. If they are not aware of the different cultures of the countries they are

in they could inadvertently insult potential customers in their marketing and advertising.

The sixth and final trend is global. There are not any global issues that have

been mentioned previously affect Blockbuster. Blockbuster may become more globally

concerned if they continued to expand and enter more countries.

Part B: Industry Analysis

Michael Porter created the framework for analyzing an Industry. He called his

framework the five forces model. The five forces are potential entrants, substitute

products, suppliers, buyers, and rivalry among existing firms. It is important for a

company to be aware of the industry in which they operate. Failure to know your own

industry can have horrible consequences.

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The first force is potential entrants. It is pretty easy for a new firm to open up a

rental store. Video rental companies can pop up at any time. There are not economies

of scale problems for rental stores. A company does not to be big to enter the market.

Anybody with a decent video collection can start renting out movies and open there own

business. Smaller companies may also be able to provide a more personal movie rental

experience. They can get to know their customers better and know what kind of movies

they may be interested in. The capital requirements are pretty low comparatively. A

company would just need a good size movie collection. They do not even need a

building with the advent of direct mail rentals and internet downloads. There are no

switching costs. They could get their movies from several different suppliers without a

great change in cost. There is not a whole lot of room for differentiation. There are

several different genres of movies but they are still movies. A company could try to

focus on classic movies but I do not think they would be able to get a very large portion

of the market. There is a very easy access to distribution channels. A person can go to

Wal-Mart and purchase all of the movies they need to start their own store. There are no

government policies in place to block potential entrants.

The second force is substitute products. There is a very high risk for substitute

products. There have already been a couple of substitute products that have entered

their market. Some of the substitute products that have recently entered their market

are DVDs, Blu-Ray, downloadable movies, movies on demand, and direct mail movies. I

believe innovations in the movie industry will continue to happen. The popularity of

movies is continuing to rise.

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The third force is the bargaining power of suppliers. In the movie rental market

there is not much bargaining power of suppliers. The movie producers could raise

movie prices however it would have to be across the board. That means all movie rental

companies would have to raise their prices as well as companies that sell movies such

as Wal-Mart and Best Buy. It is unlikely that a single movie producer would raise their

prices. If one producer raised their prices they other companies would capitalize on that

opportunity by keeping their prices the same. Imagine if one gas station was thirty cents

higher a gallon than every other gas station. It would take all of the producers to raise

their prices together. It is not very often that competitors would come together in a joint

effort to raise prices.

The fourth force is bargaining power of buyers. The buyers do have a lot of

power. Customers buy a large portion of the firms total output. Blockbuster does not sell

to other companies they mainly deal with customers directly. This makes Blockbuster

totally dependent on customers for their sales revenue. It is very easy for a customer to

switch movie rental companies and buy their products instead. The movies are the

same regardless of which company there are purchased from. The format and delivery

method may be slightly different but the movies are the same. They can also stop

making purchases with a company with no regret or damage done to the customers.

The fifth force is rivalry among existing firms. There is competitive rivalry among

the different companies in the movie rental industry. If you store lowers their rates you

can bet the other companies will follow suit. If one company starts a program that

seems to draw in customers the other competitors will follow suit. There is very little

differentiation in the products and services that the different movie rental companies
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provide. There are no switching costs for changing movie rental companies. It is very

easy for a customer to get a membership to any movie rental company. There are

several equally balanced competitors. This means that no one firm dominates the

industry. The growth of the industry has slowed in recent months. This increases the

pressure on the companies to perform to the best of their ability. The strategic stakes

are pretty high as well. If one company has a couple of poor strategies implemented

that may lead to their failure because the companies are so close in size. The fixed

costs and storage costs are not very high. This does not increase rivalry. The exit

barriers are not high either. It would not be a problem for a video rental company to

close up shop and leave. This also does not increase rivalry. The last two items do not

increase rivalry among the existing movie rental companies however; the other items

more than make up for it.

Part C: Competitor Analysis

Blockbuster needs to stay on top of their competitors if they want to increase

their market share. The video rental

market is extremely competitive. Their

competitors have been gaining market

share due to some poor decisions bad by

Blockbuster and with the use of new

technology. The competitor we will look at

during this analysis is Netflix.

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The first factor we will look at is Netflixs strategic intent. Netflix wants to be the

top dog in the movie rental company. They are willing and able to move around their

resources to maintain and grow their current market position.

Netflixs current strategy is to provide the products that customers want as fast

and as effective as possible. As soon as the mail carrier scans the DVD into their

system to return to Netflix they send the next one out. Another part of their strategy is

delivery movies instead of having traditional brick and mortar stores. This cuts down on

their expenses by eliminating the costs that comes along with operating out of several

buildings.

Netflix has a couple of key strengths. The first one is their marketing. Every time

you watch TV you see one of their commercials. Another strength they have is their

partnership with Microsoft. On the X-box 360s online system they have a place where

you can download movies directly from their website for a free. This is just another

example of Netflixs ability to provide their customers with the products they want as

quickly as possible.

Netflix does also have a couple of weaknesses. Since they do not have any brick

and mortar stores people cannot drive by and spontaneously stop in and make a

purchase. The other weakness they have is their product mix. Netflix does not have any

other products of than videos for rent. They do not have any snacks or drinks a

customer can purchase. They do not rent or sale video games.

Part D: Internal Analysis

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The internal analysis is the process of discovering a companys internal strengths

and weaknesses. We will also look at strengths and weaknesses in the SWOT analysis.

Their operations have been declining over the past three years. Their revenues have

decreased 179.4 million. Their profits have decreased 296.2 million. Their cost of sales

has increased 116.8 million. Their base movie rentals have decreased 11.8%.
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As the previous charts illustrate there have been some significant changes in

how Blockbuster is earning revenues. Their base movie rental decreased 11.8%. Their

base game rental decreased 10.5%. Their subscription rental increased 112%. Their

previously rented product sales increased 6.6%. Their movie sales fell 5.8%. Their

game sales sank 38.8%. There general merchandise sales rose 10.1%. The royalties

sank 42.9%. The product that performed the best was their subscription rentals. The

product that performed the worst was their royalties.

Section III: Identification of Environmental Opportunities and Threats and

Firm Strengths and Weaknesses (SWOT Analysis)

Internal Strengths Internal Weaknesses

1) Product Mix 1) Prices

2) Marketing 2) Employees

3) Supply Chain 3) Stock

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4) Morals 4) Legal Issues

External They could increase They need to have

Opportunities their product mix by lower prices than their
1) Low Interest utilizing the low week competitors to
Rates interest rates force them out of the
Their competitors market
2) Struggling cannot match their They need to lower
Competitors product mix because their prices on new
they are struggling products
3) Emphasis on They can capitalize on Their employees need
Family the new emphasis on to outperform their
family by providing competitors
4) New more family friendly Their employees need
Technology products to be family friendly
With all of the new They need to stock
technology coming out more family products
they can continue to to capitalize on the
advance their product emphasis on family
mix Before they release
The low interest rates any more new products
can provide them with they need to make
the capital needed to sure no one has a
increase their patent
marketing
Since their competitors
are struggling they can
out market them
They can create a
marketing campaign
illustrating the
importance of gather
together as a family
and watching a movie
They can also market
all of the new
technology they are
using
They just opened a
new distribution center
which their struggling
competitors can not
They can apply some
of the new technology
to their supply chain
They have a higher set
of morals than other
movie rental
companies and they

can use to capitalize
on the new emphasis
on family
External Threats They need to continue
1) Competitors to improve their
product mix to stay
2) Poor Economy above their
competitors
3) Weak Industry They need to keep the
prices of their new
4) Rapid products low because
Technology people are hurting
Advances They need some
exciting new products
to strengthen the
industry
They need to advertise
that they are keeping
up with technology
advances
They need to make
sure their supply chain
runs more efficient
than their competitors
They need to make
sure their supply chain
can handle new
products
They need to maintain
their high moral
standing regardless of
what their competitors
are doing
Regardless of what
new products come
into the market the
need to keep their
morals high
Section IV: Strategy Formulation
Formulating a strategy is critical for a firm reaching their goals. Successful
companies are successful because they use the vest strategy. Companies that fail
usually do not have good strategies in place
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They need to lower the
prices of their new
products to compete
They need to lower
their prices to help out
customers who are
hurting financially
They need to lower
their prices to help out
the industry
With new products
they need to keep the
prices low
Their employees need
to perform better than
their competitors
Their employees need
to be knowledgeable
about new products
They need to have
more products than
their competitors
To help the industry
the need to keep
various products on
their shelves.
They need to have
more stock of newer
technologies
Next time they try to
duplicate a strategy
their competitor is
using they need to
make sure there are no
legal issues
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Part A: Strategic Alternatives

I created several different strategies in the SWOT analysis. We will take a look at

three of them in more detail. They are capitalizing on the increase of a family mentality

with their own sense of morals, lower the new product prices to better compete, and

creating new products to help the overall industry.

Part B: Alternative Evaluation

The first strategy we will look at is capitalizing on the new importance of family

with their own moral standards. Blockbuster has a high set of morals compared to other

video rental companies. They do not rent or sell pornographic movies. This decision has

given Blockbuster the wholesome image. Recently there has been a push from several

sources about increasing family time. ESPN is running commercials encouraging men

to be a dad today. President Barrack Obama has expressed several times that dads

need to step up and care for their families. I think Blockbuster can capitalize on this with

a clever advertising campaign. The campaign should say something like spend time

with your family by gathering around the TV and watching a family movie. They should

show kids leaving the house daily with the parents sitting around with dumbfounded

faces. Then one of them gets the idea to get to grab a movie from Blockbuster and the

next night after dinner when all the kids get up to leave the house they pull out the

movie and the kids decide to stay in and watch. Then the commercial should end with

an announcer saying spend an evening together as a family with Blockbuster. The

problem with this strategy is it may single out people without families and people who

enjoy pornography.
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The second strategy is lower their new product prices. When new movies come

to Wal-Mart, Meijer or Best Buy they are released at a discounted price. Blockbuster

does not do this! They have some of the most expensive movies for sale. Their new

movie sales are only 6.10% of their total revenues. I know their main focus is on renting

movies but their sales should be more than what they are. They should be pushing

more new movies. They need to become know as a place to buy movies as well as

renting them. Their previously viewed movies sales are good. They are one of the few

categories that actually increased in 2007. I think if they lower their prices to regular

market prices that revenue stream would increase too. The problem with this strategy is

they would lose some of their profit margin on the sale of new movies.

The third strategy is creating new products to help the overall industry. It is hard

to predict the future of technology but here are a couple of things I think they can do.

Netflix has a partnership with Microsoft I think Blockbuster to try to form a partnership

with Sony and Apple. With the Sony partnership they can sell downloadable movies on

the Playstation 3s network. The partnership with Apple can allow them to sell

downloadable movies on the super popular I-pod. The problem with this strategy is the

cost to get it off the ground. Apple and Sony are huge companies and I am positive they

will want compensation for their support.

Part C: Alternative Choice

I think the strategy Blockbuster should go with is capitalizing on the increase

focus on family values with their own morals. This strategy gives them the most wiggle

room. It is also the cheapest to get off the ground. The gains outweigh the risks which is
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the best idea for a company who has been bitten by some of their most recent moves in

the market.

Section V: Strategic Alternative Implementation

Figuring out which strategy to use is only the first step. The next step is put that

strategy into action. To put a plan into action the company must figure out the two main

steps. They are what items they need to begin the strategy and a plan to get the

strategy going.

Part A: Action Items

The first step is to figure out what items they need to implement their strategy.

They do not need many items. They need some actors to participate in the

commercials. They should get several actors with different appearances and from

different ethnic groups to illustrate that watching movies as a family applies to all

families. The other thing they need is TV time. They should advertise during prime time

television to gain access to the most potential customers. They should also advertise

during sporting events to appeal to fathers. They will also need to increase their family

oriented movies. They need to load up on G and PG rated movies. The recent Disney

Pixar movies have had great success as well as great reviews. Blockbuster needs to

stock up on these movies when they implement this strategy.

Part B: Action Plan

The plan for implementing this strategy is simple. That is just do it. They need to

get the items discussed earlier and just do it. They need to stay focused on family and
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on their own morals. They need to advertise that they are a family friendly company.

They need to load up on family friendly movies. Their staff needs to focus on family

attitudes and appearance. I think if they implement this strategy their market share will

increase.