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  1. 1. Blockbuster Incorporated A Strategic Analysis for theTroubled Movie Rental House (Internal Analysis)Erin M. ClarkDecember 4, 2007 BUSA 499: Strategic Management Pacific Lutheran UniversityDr. Pham
  2. 2. Clark 2Table of Contents I. Introduction/Strategic Profile A. Executive SummaryB. Company OverviewII.Appendix B: Internal Analysis A. Financial AnalysisB. ResourcesC. Value Chain AnalysisD. CapabilitiesE. Distinct Core CompetenciesIII. Appendix C: Strategy Formulation A. Major IssuesB. Sustainable SolutionsC. Implementation PlanIV.Works Cited
  3. 3. Clark 3 I. Introduction/Strategic ProfileA. Executive Summary The purpose of this case analysis is to evaluate the internal and external environment ofBlockbuster Incorporated to determine the strategic position of the firm. This evaluationwill be further used to identify and recommend solutions to problems being faced byBlockbuster. Blockbuster is the largest retail movie rental store in the world. Responsible for over abillion rentals of DVDs and video games per year, the organization operates in overtwenty-two countries with over eight thousand stores. In addition to further expansioninto other countries, they have recently made the transition into a new market. Utilizing aweb based rental system, they are taking on serious competition such as Netflix andComcast by offering both DVD by mail and downloadable, or streaming, rentals.Blockbuster is currently undergoing an organization-wide overhaul and divesting fromforeign interest and refocusing on their core businesses in the United States. (1)B. Company Overview The company was founded in 1982 in Dallas, Texas. Since then Blockbuster has spreadout and made their brand a household name. They contribute their success to greatcustomer service and loyal customers. As cited in their website, Blockbuster pridesthemselves in their products and has launched a totally new way to rent movies, throughits Total Access Pass. With the new package, online renters are granted unprecedentedaccess to movies through mail or returning them to any store for an exchange at noadditional cost. At Blockbuster, diversity means valuing differences. It is a corporatevalue that must be continually developed, embraced and incorporated into the way we dobusiness. (2) Blockbuster is the leading global provider of movie and game entertainment with storesthroughout America, Europe, Asia and Austria. It is one of the strongest entertainmentcompanies in the world reported with revenue worth more than 5.5 billion in 2006.Although the entertainment business has made many changes, Blockbuster will adjustand move in the direction that is necessary to make the business successful. Blockbusterbelieves it has the assets that will enable the Company to bridge to the future. (3) Thisincludes the brand that stands for rented movies, relationships with tens of millions ofcustomers, good relationships with the Hollywood studios and other content providers,and entertainment marketing know-how. Blockbuster operates in a highly competitive market offering a variety of movies,television shows, and video games for various consoles. With their core business dealingin in-store rentals they have expanded into other markets, such as the online rentalmarket, as well as utilizing recent technology allowing for digital distribution overdigital cable and satellite mediums. Since 2004 they have made significant progress withtheir new product offerings. This being noted, Blockbuster is still facing significant
  4. 4. Clark 4challenges as they progress towards their ultimate goal of complete integration of their new online business units and their core business of in-store movie rentals. With the introduction of Blockbuster Total Access and the elimination of late-fees, they have successfully warded off competition from significant competitors, excluding Netflix. They have subscribed over two million online consumers to their Total Access program, allowing them to close stores in areas with lesser demand and show and post increases to their year-end financials. (4)The Blockbuster website proudly displays their mission statement, saying that Blockbuster is to perform for our customers the highest level of quality construction services at fair and market competitive prices, to ensure the longevity of our company through repeat and referral business achieved by customer satisfaction in all areas including timeliness, attention to detail and service-minded attitude, to maintain the highest levels of professionalism, integrity, honesty and fairness in our relationships with our suppliers, subcontractors, professional associates and customers. As cited on their website, Blockbuster feels that films are meant to be watched and enjoyed. They believe that the consumers want variety in their options of films. With over 60,000 titles for customers to rent, Blockbuster feels that their customers are getting the most for their time and money. This is one reason they started with the Total Access program, so that their customers would have complete access to all movies and other titles though internet access.The Blockbuster business model provides an advantage over other large video chains and significant advantages over single store competitors. The key elements of this business model are to: provide a large number of copies and broad selection of movie titles, operate conveniently located and highly visible stores, offer superior and consistent customer service, optimize their pricing to local market conditions, nationally advertise and market Blockbuster brand name and the differences between them and other competitors, use their extensive customer transaction database to effectively operate and market their business, and improve their efficiency and lower their costs through self distribution. (4)Blockbuster has several distinct business divisions that service uniquely different people. Each of them adapts as the market changes. This market is different, however, in that it is based not always on what the customers want, but they do not yet know about. Like other movie rental enterprises, Blockbuster aims at offering the most current movies and games as they become available. If they waited to see what the customers wanted to see, it would simply be too late. Much of this business is a gamble, and it does not always turn out in their favor. However there are many tools for them to utilize, such as reviews and sales data from the original release of the films. Blockbuster has the unique ability, setting them apart from other typical movie rental stores, to use its online division to find ratings, reviews, and rental data on each movie that it offers. With this, they can apply to their other business division, in sales and in-store rentals. There is a lag time using this approach, so there truly is a mix of looking at data from movie releases, data from online rentals, and persons with the movies in-queue, and ultimately guessing what the members will want to see.
  5. 5. Clark 5With such a large market share, Blockbuster can, to an extent, drive the market and release what they want, when they want to. All of this comes with a grain of salt; choosing to or not to offer the rental or sale of certain movies may be in their best interests with regards to their bottom line, but not their image. With such a large market share, they need to be aware of what people interpret their business moves to mean. If, for example, Blockbuster chooses not to release a movie featuring a newly found Jewish star because its ratings were less than that of another movie released at the same time, and focused its advertisements on the other movie instead, they may actually alienate their Jewish members. The same goes for any minority group who might misinterpret their strategically designed move. (5) (6)The organizational structure of Blockbuster is somewhat traditional, but relatively flat in comparison to most. This contributes to their success. There is Blockbuster Corporate, as most corporations traditionally have, and strategic business units, each running their own unit as if it were a standalone business. According to Fidelity, there are several distinctly different business units: corporate, franchises, sales, and online, with corporate backing each unit with a centralized marketing, research and development and IT department. Each business, although separate, shares information on their members, with regards to rental and purchase history. (6)II. Appendix B: Internal Analysis1.Internal AnalysisAn internal analysis is conducted in order to identify current and potential sources of competitive advantages. This process is accomplished by understanding Blockbusters resources and capabilities, and identifying what does and does not create value.A.Financial AnalysisBlockbuster has a very high amount of debt and cannot rely on their financial leverage or strength for growth; they state in their 2006 Annual Report that it may become necessary for us to divert our cash flow from operations to debt service payments. As of December 31, 2006, Blockbusters total outstanding debt was approximately $984.2 million.The following list describes the adverse impact on earnings and cash flow due to their debt service obligations:i. Make it more difficult for to pay debts as they become due during general adverseeconomic and market or industry conditions because any related decrease inrevenues could cause Blockbuster to not have sufficient cash flows from operationsto make their scheduled debt payments
  6. 6. Clark 6ii. Limit flexibility in planning for, or reacting to, changes in business and the industry in which Blockbuster operates, including limiting their ability to invest in strategic initiatives, and, consequently, place them at a competitive disadvantage to their competitors with less debtiii. Require a substantial portion of cash flows from operations to b