Case Study Analysis of Blockbuster
BLOCKBUSTER’S STUMBLING BLOCKS IN THE NINETIES: A CASE STUDY
Blockbuster Incorporated (Inc.) is one of the leading providers of videos, DVDs and video games worldwide. Blockbuster’s revenue topped $5.5 billion in 2002, and during the same year, nearly 80 percent of Blockbuster’s revenues were generated in the U.S., where the company has 48 million member accounts. Blockbuster has grown from a single video rental store to more than 8,500 company-operated and franchised stores throughout the United States, its territories and 28 other countries, in less than 20 years. Blockbuster was acquired by Viacom in 1994, and since then Viacom still controls 81% of Blockbuster's equity and virtually all the voting power.
With all of Blockbuster’s glory, the company is just as the same as any other company that experiences failures and disappointments. In May of 1991, one of the largest Blockbuster franchises, Cox enterprise, would sell 82 Blockbuster stores. Blockbuster had a disappointing first and was faced with a significant drop in a stock price, fallen $10, which was 30% below its price of $14 two months earlier. The chairman and CEO of the company at that time, Wayne Huizenga, was concerned and alarmed with the defection of one of Blockbuster’s franchise partners and future of the stores in the market. James Kennedy, chief executive of Cox Enterprises states in Forbes, in an interview by Machan (2002) that he considers the Blockbuster investment as one of the two failures that the company has experienced. The other one was the stumble into the movie business through Rysher Entertainment.
This unpleasant incident was one of the biggest fallbacks in Blockbuster’s history. Certainly, there was a mistake. It could be in the company’s management or its marketing strategy. This paper aims to evaluate what went wrong in the 1991 incident between Blockbuster Inc. and Cox Enterprises. The evaluation will be based on information about Blockbuster’s marketing strategies and management practices, along with the environmental analysis on the company, which includes its economic, competitive, technological and demographic factor. Review of franchise problems will also be a necessary tool to conduct the evaluation. The evaluation would hopefully provide solutions and recommendations on how Blockbuster could have prevented the Cox incident.
As was stated previously, the incident has been a big loss for the company, but Blockbuster’s fact sheets currently shows that it has already established itself as one of the world’s leading provider of video, DVDs and video game. Blockbuster has done a lot of overhauls in the company to acquire the strength needed for the survival in the business war. Last May 12, 2003, Blockbuster has taken the step in improving their customer service through the help of Acxiom Corporation, a customer service solutions company. Jonathan Portis (2003) of Acxiom, wrote in the company article that Acxiom has implemented a new Customer Relationship Management (CRM) solution for Blockbuster Inc. in order to allow Blockbuster to achieve richer interactions with its customers through improved use of customer information. The solution will provide improved interactions with customers, which will enable Blockbuster to gain the advantage of superior analytics and data mining support, as well as an environment for the marketing team to conduct a seamless, speedy and closed-loop marketing communications process. This move would be of great help for a company who already has 2,600 stores outside the United States.
According to Debbie S. Wang (2002), a stock analyst, Blockbuster has nimbleness, and its management's puts a lot vigilant efforts to counter competitive threats. Wang continued that though the video rental business is always vulnerable to changes in the underlying audiovisual technology, CEO John Antioco's deft maneuvering has allowed Blockbuster to thrive despite earlier predictions of the firm's demise at the hands of long-awaited video-on-demand services. Compliments like these mirror the stability of Blockbuster, but Wang continued that with all these positive traits, several risks might significantly influence Blockbuster's performance. Opening 200-300 new stores a year primarily drove the company’s strong sales growth in the late 1990s. With more than 5,400 stores domestically, Blockbuster may soon reach saturation in the United States, which accounts for 80% of its revenue. Finally, Wang states that Blockbuster must improve profit margins. Its 2.9% profit margin is anemic compared with those of closest peers Hollywood Entertainment (12.2%) and Movie Gallery (6.8%). Wang believes that the firm has pursued market share at the expense of profitability. In Blockbuster's case, small changes in gross and operating margins can make a big difference in financial performance. Thus far, she and other analysts have not seen any improvement in operating margins, and would require a 40% discount to their fair value estimate before they'd be interested in the stock.
Wang (2002) has provided a brief description of the company’s strategy. She points out that Blockbuster strives for dominant store presence by aggressively opening new units while minimizing cannibalization of existing stores. Blockbuster aims to capitalize on the growing demand for DVDs and introductions of new gaming platforms. This new strategy has been the idea of Blockbuster’s new CEO, John Antioco. Following a period of management turmoil, Blockbuster hired Antioco as chairman, president, and CEO in 1997. Antioco has turned the tide at Blockbuster. However, Wang stressed that Blockbuster’s management seems more focused on expanding business at the expense of positive cash flow, rather than on running its existing business more effectively and efficiently. In addition, Viacom still controls 81% of Blockbuster's equity and virtually all the voting power. Thus, Blockbuster management is wholly accountable to Viacom.
Blockbuster’s profitability, as Wang put it, “has lagged that of its key competitors.” She suggested that new emphasis on higher-margin DVDs should help considerably, but we expect the high costs of operating stores will continue to eat into profit margins. On the other hand, in terms of growth, Blockbuster's 4% revenue growth in 2001 was relatively weak, especially compared with double-digit increases a few years ago. After reconfiguring stores to highlight DVDs and video games, Blockbuster is poised for high-single-digit growth.
Analysts in the Morningstar.com (2003) reveal that stock in the rental/repair services industry, has been a poor industry to be in the past 10 years, though it has done somewhat better the past five. The stock itself doesn't have much of a record, but over the past three years it has turned in fairly standard returns compared to other stocks in its industry. They remind that when looking at a stock or industry's record that historic returns are not necessarily a predictor of future performance. Persistent strength or weakness, however, may very well say something about the structure of an industry or quality of a company's management.
Blockbuster basically solved most of its problems in the last decade. The new millennium has been a time of great opportunity in the rental/repair services industry. Morningstar (2002) reported that most stocks in the industry have seen steadily growing revenue and earnings over the past three years. This stock has also seen steady revenue growth over the past three years. It is a huge breakthrough for Blockbuster considering that it is one of the key players in the industry. In contrast to these facts, players in the industry still face serious risks because it is an industry with a healthy number of competitors. Blockbuster’s biggest challenge is to keep its edge in the industry consistent. It should maintain its total revenue of the company of $5,879, or increase it to higher numbers. Blockbuster’s current revenue does not even meet half of its total revenue last 2002, which means that the company starts to stumble again. Based on the analysis of Wang, and Morningstar.com, we can conclude that the problem of Blockbuster lies on its management, as it seems to focus more on expanding business at the expense of positive cash flow, rather than on running its existing business more effectively and efficiently. The Acxiom solution is a big step in improving this. Blockbuster must also remember that their stock, according to Morningstar’s statistics, has a low dividend yield, which is typical of stocks in its industry. Low dividend yields are typically associated with young companies or companies with considerable growth opportunities. Sometimes even mature companies opt to buy back stock rather than pay dividends, though, because that is more tax efficient for shareholders. It can be suggested that the company should maintain this yield, not only through its aggressiveness in opening new units and investing in new technological advances, but also through improvement in the process in which the management runs the business as competition from new comers arises. For this company to generate decent returns for investors, it will probably only have to realize moderate growth in earnings or a higher valuation by the market. Blockbuster has already pulled itself up from the quicksand of the 90s. It should maintain its status in the rental services industry. Otherwise, it would be the 90s all over again for them, and new Cox’s would emerge.
One of the marketing strategies that blockbuster could have done in the 90’s is by focusing on the person’s stage, in life when it comes to segmenting the mature market. Moschis (1994) states that “in segmenting the mature market, the focus should be more on the person's stage in life rather than on one's age. Life stages can be defined in terms of social, psychological, and health-related circumstances that people face. Much of the research in social sciences shows that people age not just biologically or physically, but also socially and even spiritually; they age differently and at different rates. It is often the composite of changes in these aging processes that affect behavior.” Also, Moschis (1994) stressed that “market heterogeneity suggests that using one strategy for the entire market is not likely to be effective. Companies marketing to the mature population have the choice of going after select segments of this market or trying to appeal to all subsegments. This decision can often be made by considering factors such as company resources and objectives.” The guidelines to be followed in Moschis (1994) study are: First, companies should address the issue of profitability in developing different arrays of products and services to appeal to different subsegments; Second, one should examine the impact of marketing strategies on other segments the organization attempts to reach; Finally, try to understand older customers. In the first guideline, Blockbuster could have ventured into other products and services besides rental and sales. They could have made a few variations in their store, like including a snack bar inside the shop or sets of magazines about movies, for sale. Moschis (1994) stressed that “the smaller the differences, the fewer the potential sales lost due to undifferentiated marketing; the greater the differences, the larger the losses. Conversely, the greater the differences, the higher the costs of developing marketing programs to meet different needs and, therefore, the incremental revenues needed to cover these costs.” This move is obviously beneficial in the rental/repair services industry where competition is stiff. The second guideline basically means that in developing marketing strategy, companies should try to use sound bases for decision-making. There are diverse opinions on how to market to older consumers. This is due in part to the fact that marketing is not a science. Strategies must constantly change to fit changing conditions in the business environment. Finally, in the last guideline, Moschis (1994) explains that “the reasons older consumers behave the way they do are several, and no single theory or approach is likely to provide adequate explanations. Behavior is influenced by a host of factors, and recent efforts in several disciplines of social sciences aimed at understanding human behavior have been focusing on incorporating several factors stemming from different research traditions.”
Another strategy that Blockbuster could have used is an undifferentiated marketing strategy. Moschis (1994) explains that:
“Segmentation is still a viable strategic tool. However, the purpose here is to find out the needs and attitudes that are both common and different among younger and older people or among subsegments of the mature market. In doing so, the strategy can be developed on the basis of similarities, avoiding products and communications that are likely to get different responses from the marketplace. For example, both younger and older consumers would like to see easier-to-open package, according to results of many surveys, and company efforts along this line would constitute an effective marketing tactic. The focus should be on emphasizing commonalities and deemphasizing differences in attitudes and preferences of the market.” (Moschis, 1994, p. 164)
Moschis (1994) points out “product positioning is also important, as well as risk reductions in their services. Functionality of the product, convenience should have also been looked upon. Along with these necessary marketing strategies, simplicity and familiarity should have also been observed. Of course, most movies are already familiar to the public, but they could have made these movies more familiar by highlighting the achievements of a certain movie, or the hype that it has created.” Moschis (1994) stressed that a successful strategy is not the one that merely increases sales or enrollments into membership programs, but the one with maximum impact on overall company goals over a specific period of time. Thus, one must address issues of cost-effectiveness and the impact of these strategies on other parts of the business operations and the company as a whole.” These must have been the points that Blockbuster have missed out in the 90’s.
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