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Blockbuster Incorporated

VIEWS: 520 PAGES: 26

									Blockbuster Incorporated
    A Strategic Analysis for the
   Troubled Movie Rental House
        (Internal Analysis)




           Erin M. Clark




         December 4, 2007




  BUSA 499: Strategic Management
    Pacific Lutheran University
             Dr. Pham
                                                            Clark 2



                                        Table of Contents


I.     Introduction/Strategic Profile

       A.     Executive Summary
       B.     Company Overview

II.    Appendix B: Internal Analysis

       A.     Financial Analysis
       B.     Resources
       C.     Value Chain Analysis
       D.     Capabilities
       E.     Distinct Core Competencies

III.   Appendix C: Strategy Formulation

       A.     Major Issues
       B.     Sustainable Solutions
       C.     Implementation Plan

IV.    Works Cited
                                                                                        Clark 3


I.   Introduction/Strategic Profile

A.   Executive Summary

     The purpose of this case analysis is to evaluate the internal and external environment of
     Blockbuster Incorporated to determine the strategic position of the firm. This evaluation
     will be further used to identify and recommend solutions to problems being faced by
     Blockbuster.

     Blockbuster is the largest retail movie rental store in the world. Responsible for over a
     billion rentals of DVDs and video games per year, the organization operates in over
     twenty-two countries with over eight thousand stores. In addition to further expansion
     into other countries, they have recently made the transition into a new market. Utilizing a
     web based rental system, they are taking on serious competition such as Netflix and
     Comcast by offering both DVD by mail and downloadable, or streaming, rentals.
     Blockbuster is currently undergoing an organization-wide overhaul and divesting from
     foreign 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 spread
     out and made their brand a household name. They contribute their success to great
     customer service and loyal customers. As cited in their website, Blockbuster prides
     themselves in their products and has launched a totally new way to rent movies, through
     its Total Access Pass. With the new package, online renters are granted unprecedented
     access to movies through mail or returning them to any store for an exchange at no
     additional cost. “At Blockbuster, diversity means valuing differences. It is a corporate
     value that must be continually developed, embraced and incorporated into the way we do
     business.” (2)

     Blockbuster is the leading global provider of movie and game entertainment with stores
     throughout America, Europe, Asia and Austria. It is one of the strongest entertainment
     companies in the world reported with revenue worth more than 5.5 billion in 2006.
     Although the entertainment business has made many changes, Blockbuster will adjust
     and move in the direction that is necessary to make the business successful. “Blockbuster
     believes it has the assets that will enable the Company to bridge to the future.” (3) This
     includes the brand that stands for rented movies, relationships with tens of millions of
     customers, 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 dealing
     in “in-store rentals” they have expanded into other markets, such as the online rental
     market, as well as utilizing recent technology allowing for “digital distribution” over
     digital cable and satellite mediums. Since 2004 they have made significant progress with
     their new product offerings. This being noted, Blockbuster is still facing significant
                                                                                    Clark 4


challenges 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.
                                                                                           Clark 5



      With 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 Analysis

1.    Internal Analysis

      An internal analysis is conducted in order to identify current and potential sources of
      competitive advantages. This process is accomplished by understanding Blockbuster’s
      resources and capabilities, and identifying what does and does not create value.

A.    Financial Analysis

      Blockbuster 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, Blockbuster’s 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 adverse
             economic and market or industry conditions because any related decrease in
             revenues could cause Blockbuster to not have sufficient cash flows from operations
             to make their scheduled debt payments
                                                                                   Clark 6



ii.   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 debt

iii. Require a substantial portion of cash flows from operations to be used for debt
     service payments, thereby reducing the availability of cash flow to fund working
     capital, capital expenditures, acquisitions and other general corporate purposes

iv.   Cause trade creditors to change their terms for payment on goods and services
      provided to Blockbuster, thereby negatively impacting their ability to receive
      products and services on acceptable terms

v.    Result in higher interest expense in the event of increases in interest rates since
      some of Blockbuster’s borrowings are, and will continue to be, at variable rates of
      interest
                                                                                          Clark 7



                           Blockbuster Financial Comparison Data
                                         (Source: Hoovers (14))
Profitability                                              Company    Industry   Market
  Gross Profit Margin                                       52.70%    49.10%     52.10%
  Pre−Tax Profit Margin                                     -1.00%    -15.00%    6.10%
  Net Profit Margin                                         -1.70%    -12.90%    4.80%
  Return on Equity                                          -13.70%   10.10%     9.20%
  Return on Assets                                          -3.40%    -14.00%    1.50%
  Return on Invested Capital                                -5.50%     5.60%     3.90%
Valuation                                                  Company    Industry   Market
  Price/Sales Ratio                                          0.08       1.93      1.84
  Price/Earnings Ratio                                        −−       21.99     16.87
  Price/Book Ratio                                            0.7       2.39      1.78
  Price/Cash Flow Ratio                                      3.58      11.29     11.02
Operations                                                 Company    Industry   Market
  Days of Sales Outstanding                                  8.09      33.04     58.08
  Inventory Turnover                                              5     23.3      5.6
  Days Cost of Goods Sold in Inventory                        72        12         65
  Asset Turnover                                                  2     0.5       0.6
  Net Receivables Turnover Flow                              46.8       8.6       6.5
  Effective Tax Rate                                        -46.80%    3.50%     28.90%
Financial                                                  Company    Industry   Market
  Current Ratio                                              1.14       0.97      1.71
  Quick Ratio                                                 0.8       0.9       1.2
  Leverage Ratio                                             0.32       0.32      0.24
  Total Debt/Equity                                          1.25       0.61      0.64
  Interest Coverage                                          0.41       3.77      5.33
Per Share Data ($)                                         Company    Industry   Market
  Revenue Per Share                                          45.54      0.79      5.7
  Fully Diluted Earnings Per Share from Total Ops             −−        −−        −−
  Dividends Per Share                                         −−        0.25      0.62
  Cash Flow Per Share                                        1.05        0        0.5
  Working Capital Per Share                                  1.23        0        0.58
  Long−Term Debt Per Share                                   6.51       0.08      2.6
  Book Value Per Share                                       5.38       0.08      5.2
  Total Assets Per Share                                     21.1       0.26     10.66
Growth                                                     Company    Industry   Market
  12−Month Revenue Growth                                   -2.40%    -1.10%     11.40%
  12−Month Net Income Growth                                0.00%      3.20%     12.90%
  12−Month EPS Growth                                       0.00%     19.0%)     7.80%
  12−Month Dividend Growth                                  0.00%      0.00%     0.00%
  36−Month Revenue Growth                                   -6.90%    11.10%     36.30%
  36−Month Net Income Growth                                0.00%     117.50%    39.00%
  36−Month EPS Growth                                       0.00%     150.00%    34.30%
  36−Month Dividend Growth                                  0.00%      0.00%     0.00%
                                                                                     Clark 8

Key Numbers                          Blockbuster   Hastings    Netflix       −−        −−
  Annual Sales ($ mil.)                5,523.50      548.3      996.7        −−        −−
  Employees                             67,300       5,962      1,300        −−        −−
  Market Cap ($ mil.)                    445.6       90.3     1,579.90       −−        −−
Profitability                        Blockbuster   Hastings    Netflix   Industry   Market
  Gross Profit Margin                  52.70%      35.00%      36.00%     49.10%    52.10%
  Pre−Tax Profit Margin                 -1.00%      1.90%       9.30%    -15.00%     6.10%
  Net Profit Margin                     -1.70%      1.30%       5.60%    -12.90%     4.80%
  Return on Equity                     -13.70%      7.50%      16.10%     10.10%     9.20%
  Return on Assets                      -3.40%      2.90%      11.20%    -14.00%     1.50%
  Return on Invested Capital            -5.50%      5.00%      16.00%     5.60%      3.90%
Valuation                            Blockbuster   Hastings    Netflix   Industry   Market
  Price/Sales Ratio                       0.08       0.14        1.34       1.93      1.84
  Price/Earnings Ratio                     −−        10.6       24.55      21.99     16.87
  Price/Book Ratio                         0.7       0.77        3.64       2.39      1.78
  Price/Cash Flow Ratio                   3.58        3.7         5.4      11.29     11.02
Operations                           Blockbuster   Hastings    Netflix   Industry   Market
  Days of Sales Outstanding               8.09      104.13       0.87      33.04     58.08
  Inventory Turnover                        5         −−          −−        23.3       5.6
  Days CGS in Inventory                    72         −−          −−         12        65
  Asset Turnover                            2         2.2          2        0.5        0.6
  Net Receivables Turnover Flow           46.8        6.8       316.3        8.6       6.5
  Effective Tax Rate                   -46.80%     30.40%      40.10%     3.50%     28.90%
Financial                            Blockbuster   Hastings    Netflix   Industry   Market
  Current Ratio                           1.14       1.81        2.23       0.97      1.71
  Quick Ratio                              0.8        −−          −−         0.9       1.2
  Leverage Ratio                          0.32        −−          −−        0.32      0.24
  Total Debt/Equity                       1.25        −−          −−        0.61      0.64
Interest Coverage                         0.41       4.08         −−        3.77      5.33
Per Share Data ($)                   Blockbuster   Hastings    Netflix   Industry   Market
  Revenue Per Share                      45.54       50.55      17.94       0.79       5.7
  Fully Diluted EPS from Total Ops         −−         −−          −−         −−        −−
  Dividends Per Share                      −−         −−          −−        0.25      0.62
  Cash Flow Per Share                     1.05       1.92        4.45         0        0.5
  Working Capital Per Share               1.23       7.16         3.5         0       0.58
  Long−Term Debt Per Share                6.51       3.97         −−        0.08       2.6
  Book Value Per Share                    5.38        9.2         6.6       0.08       5.2
  Total Assets Per Share                  21.1       22.42       9.49       0.26     10.66
Growth                               Blockbuster   Hastings    Netflix   Industry   Market
  12−Month Revenue Growth               -2.40%      1.30%      29.90%     -1.10%    11.40%
  12−Month Net Income Growth             0.00%     14.00%      -8.80%     3.20%     12.90%
  12−Month EPS Growth                   0.00%      19.60%      23.4%)     19.0%)     7.80%
  12−Month Dividend Growth               0.00%      0.00%       0.00%     0.00%      0.00%
  36−Month Revenue Growth               -6.90%      4.20%     166.10%     11.10%    36.30%
  36−Month Net Income Growth             0.00%      33.6%)    260.90%    117.50%    39.00%
  36−Month EPS Growth                   0.00%       30.2%)    172.20%    150.00%    34.30%
  36−Month Dividend Growth               0.00%      0.00%       0.00%     0.00%      0.00%
                                                                                 Clark 9


The Economic Value Added (EVA) measurement is used to determine the true economic
value of a company. It is also a measure that reflects the absolute amount of shareholder
value created or destroyed during each year. Blockbuster had an EVA measurement of
-139.2 in 2006. This negative value indicates Blockbuster lost value and did not earn a
sufficient return to its stockholders for their investment risk.

                          Economic Value Added (2006)
                                            NOPAT

             Net Sales (Revenue)                                   $5,462.3
             Less
              Cost of Goods Sold                                   $2,475.7
              Sales/General/Admin Expense                          $2,755.0
              Depreciation                                           $208.6
             Operating Income                                         $23.0
             Tax                                                       $6.6
             NOPAT                                                    $16.4

                                     Company's Capital

             Total Liabilites                                      $2,394.8
             Accounts Payable                                       ($517.7)
             Accured Expenses                                       ($670.9)
             Capital                                               $1,206.2

                                  Capital Cost Rate (CCR)

                            (Avg Equity Proportion)(Equity Cost)
                             + (Avg Debt Proportion)(Debt Cost)
                                  Economic Value Added

                                       (631.6)(0.0952)
                                      + (1158.0)(0.0595)
                                            12.9%

                                   Economic Value Added

                                  EVA = NOPAT - C * CCR

                                16.4 - 1206.2 * 0.129 = -139.20

                                     EVA = -139.20
                                                                                       Clark 10


B.   Resources: Tangible

     Financial

     Due to Blockbuster’s high amount of debt, their borrowing capacity is severely limited.
     Currently they utilize variable rate loans, and likely they will continue to do so, thereby
     increasing the amount of interest payments. Funds for operations may be diverted to
     honor debt service payments, and ultimately it may be possible that Blockbuster will not
     have sufficient cash flows to meet both operational and debt service payment demands.
     (15)

     Organizational

     In 2006 Blockbuster enhanced their enterprise resource planning system and upgraded
     their corporate productivity tools. High level management and other corporate positions
     have experienced a large amount of turnover (see the Human Resource Section), making
     it difficult to consider their planning, controlling, and coordinating systems a valuable
     resource. (15)

     Physical

     Blockbuster has 5,194 stores within the United States, of which 939 are franchised; and
     3,166 stores in 22 markets outside of the United States, of which 870 are franchised.
     Their primary distribution center is located in McKinney, Texas, with an additional 35
     online distribution centers spread throughout the United States to support their domestic
     online rental service. (15)

     International offices are maintained in Buenos Aires, Argentina; Toronto, Canada;
     Santiago, Chile; Uxbridge, England; Dublin, Ireland; Milan, Italy; and Mexico City,
     Mexico. The international method of distribution is similar to the methods used in the
     United States. (15)

     Technological

     Blockbuster invested significantly in their online subscription service in 2006, including
     the launch of their Total Access plan in November. This plan grants customers the option
     to exchange their DVDs through mail or returning them to a local Blockbuster store in
     exchange for free in-store movie rentals. The online rental program and the new Total
     Access plan have allowed Blockbuster to exceed their goal of 2 million online
     subscribers by the end of 2006, with a total of 2.2 million as of December 31, 2006.
     Also, Blockbuster began providing laptops and cellular internet access at US retail
     locations to allow for in-store sign-ups for online subscribers. (15)

     The online services system uses internally developed software that focus on optimizing
     the online supply chain in order to ensure timely delivery of products, as well as offering
     a user-friendly website to customers. These online systems transmit data from operations
                                                                                 Clark 11


to a data center and other systems which support content delivery, customer web
analytics, and offer management tools. In 2006, Blockbuster re-launched their website to
provide customers with a better online experience. The website was changed to offer a
more modern look and feel, improved navigation, advanced user functions, and more
flexibility and scalability of the information obtained. (15)

In August of 2007, Blockbuster bought Movielink, an internet company offering movie
downloads. Their websites have not been completely merged yet, but Blockbuster
intends on providing customers with the option to download a movie directly from their
website with Movielink. This technology will compliment their already successful online
movie rental program. (16)

Blockbuster uses Management Information Systems to accurately and efficiently manage
their purchasing, inventory, and sales records. They maintain information, updated on a
daily basis, regarding revenues, current and historical sales and rental activity,
demographics of store customers and rental patterns. All Blockbuster retail stores use a
point-of-sale system. In the United States, the point-of-sale system is linked with a data
center located in their distribution center. Using scanned bar code information, all
products distributed from the distribution center to each US store are tracked and
recorded. At the close of business each day, the point-of-sale system transmits the
domestic rental and sales transactions data to the data center and the membership
transaction database. (15)

On November 8, 2006, the Chief Executive Officer, Jim Keyes mapped out his plans and
vision for Blockbuster to Wall Street. He described the following technological
strategies: (17)

   i.   Adding more electronic hardware to the merchandise mix, including iPods and a
        Disney portable DVD player for children.

 ii.    Selling the PlayStation 3, bundled with Blu-ray movies, out of a Sony-built
        display area in 2,000 stores.

 iii.   Offering movies preloaded on flash drives for convenient viewing on PCs or
        laptops on a jetliner.

 iv.    Offering online DVD downloads from a new Blockbuster.com site merged with
        that of Movielink, which Blockbuster recently acquired.

  v.    Testing kiosks in stores that burn DVDs and download movies onto flash drives
        while you wait.

 vi.    Testing DVD vending machines such as Redbox.
                                                                                   Clark 12


Resources: Intangible

Human Resources

Blockbuster hired James Keyes, former president and chief executive officer of 7-Eleven
Inc. Keyes has 21 years of experience working in the world’s largest chain of
convenience stores, during which he helped the company achieve 36 consecutive quarters
of same-store-sales growth and as well as record sales and profits. He guided the
company into implementing new retail systems technology that improved product
assortment decisions in every store. He also introduced a variety of new electronic
services and collaborated with manufacturers across all merchandise categories to
develop new products, enabling 7-Eleven to introduce as many as 50 new items each
week in advance of competitors.

Keyes served in several positions with 7−Eleven, including chief financial officer,
executive vice president and chief operating officer, and in 2000 was named president
and CEO of 7−Eleven Inc. Blockbuster has tied James Keyes personal value into the
company’s stock by giving him $3 million worth of stock that will vest on the third
anniversary of his hire date. In addition, Keyes has agreed to purchase $3 million worth
of common stock within his first 30 days of employment. James Keyes has both personal
and professional interests in helping Blockbuster to succeed. His retail background and
success, as well as his financial knowledge, are certainly assets for Blockbuster. (14 &
15)

Innovation Resources

The most innovative step Blockbuster has taken was to launch their online rental
program, then tie it together with their physical store locations with the Total Access
program. No other movie rental chain offers both in-store and online rental options.

Blockbuster decided to back Blu-ray DVD format, thus picking a side between the battle
between Blu-ray and HD DVD. This decision has helped relations with Sony because
Sony invested heavily in Blu-ray technology by putting one of the drives into every
PlayStation 3, relying on the value of Blu-ray to justify the premium price to consumers.
Blockbuster announced its decision to pick Blu-ray over HD DVD, and reported Blu-ray
rentals are "significantly outpacing" HD DVD rentals at its stores. However, Blockbuster
will continue to offer both HD DVD format as well as Blu-ray DVDs as rental options to
consumers. (18)

Reputational Resources

Blockbuster’s reputation has taken several hits as their debt has increased, stock value has
plummeted, and revenues continue to fall short of operational needs. Heavy competition
between Blockbuster and Netflix has caused the company to reshape much of the way
they run business, including eliminating late fees and competing in a price war.
Customers enjoy the lack of late fees, online or in-store options, and price reductions, but
                                                                                       Clark 13


     are not as pleased with customer support. Many consumers feel Blockbuster is on the
     path to “extinction,” while others are invigorated due to the new CEO, Keyes.
     Blockbuster is a recognized name brand throughout the country, but it is unclear as to
     whether this should be considered an asset or not.

C.   Value Chain Analysis

     A value chain analysis is used to determine the value in particular segments of
     Blockbuster’s operations. The value chain is broken down into primary and support
     activities.

     Primary Activities

     Inbound Logistics

     Inbound logistics are activities such as materials, handling, and inventory control used to
     receive, store, and distribute inputs to a product. Because Blockbuster does not “create”
     a product, but merely packages and distributes it, there are no raw materials or a
     production process. Items are purchased and shipped directly to distribution centers.

     Blockbuster purchases their movie rental inventory for US company-operated stores
     directly from the studios by two methods, the first being a title-by-title basis through
     purchase orders, and second through various “revenue-sharing” arrangements.
     International locations utilize the same two methods as the US purchase system, with the
     addition of one other method. Some studios appoint sub-wholesalers to distribute the
     studios’ product in certain countries.

     Blockbuster also acquires retail movie and game inventory through various trading
     programs. In these programs, Blockbuster purchases general merchandise that is
     complementary to rental and retail movie and video game inventory, such as confection
     (candy and other sweet things), game and other accessories and consumer electronics,
     from a variety of suppliers on a product-by-product basis through purchase orders.

     One particular advantageous agreement Blockbuster has right now is between them and
     The Weinstein Company. The deal offers an exclusive four-year deal, starting in 2006,
     which provides Blockbuster exclusive US rental rights to all of Weinstein's movie
     releases. The Weinstein Company was created by the founders of Miramax, Harvey and
     Bob Weinstein. A few of their released films include Derailed, Lassie, Hannibal Rising
     and Sicko. Some of their future releases include Rambo, Sin City 2, and Diary of the
     Dead.

     Blockbuster’s inbound logistics are roughly equal in value to their competitors, with
     exception of the exclusive deal with The Weinstein Company that is superior to their
     competitors. (15)
                                                                                  Clark 14


Operations

Operational actives are used to convert inputs provided by inbound logistics into the final
product form. Because Blockbuster does not convert inputs into a product, but merely
distributes products, their operations focus more on retailing and tracking demand for
their products.

Blockbuster uses Management Information Systems to accurately and efficiently manage
their purchasing, inventory, and sales records. They maintain information, updated on a
daily basis, regarding revenues, current and historical sales and rental activity,
demographics of store customers, and rental patterns. All Blockbuster retail stores use a
point-of-sale system. In the United States, the point-of-sale system is linked with a data
center located in their distribution center. Using scanned bar code information, all
products distributed from the distribution center to each US store are tracked and
recorded. At the close of business each day, the point-of-sale system transmits the
domestic rental and sales transactions data to the data center and the membership
transaction database. (15)

Blockbuster’s operational activities are neither inferior nor superior, but basically equal
in value, to those used by their competitors.

Outbound Logistics

Outbound logistics are activities that focus on collecting, storing, and physically
distributing final products to customers.

Blockbuster has 5,194 stores within the United States, and 3,166 stores in 22 markets
outside of the United States. Their primary distribution center is located in McKinney,
Texas, with an additional 35 online distribution centers spread throughout the United
States to support their domestic online rental service. International distribution occurs
similar to the methods in the US. The distribution center in McKinney, Texas, is a highly
automated, centralized facility that is used to mechanically repackage newly-released
movies and games to make them suitable for rental at retail stores. This center is also
used to restock products and process returns, as well as to provide some office space.
The McKinney distribution center supports virtually all of Blockbuster’s company-
operated stores in the United States and operates 24 hours a day, six days a week

The other 35 distribution centers are spread throughout the United States, in strategic
locations. Blockbuster uses the United States Postal Service to deliver their online
product DVD orders to customers. The closer a customer is to a distribution center, the
faster a customer will receive an online rental product. Approximately 90% of
Blockbuster’s online customers are reachable within one business day from distribution
centers due to the utilization of roughly 90 different mail entry points. Also, store
locations are used to fulfill a portion of online orders in order to keep up with demand.
                                                                                   Clark 15


Blockbuster uses a network of third-party delivery agents for delivery of products to US
stores. Products are shipped to delivery agents, located strategically throughout the
United States, and they in turn deliver them to Blockbuster stores. The use of third-party
distributors allows Blockbuster to process and distribute a greater quantity of products
while reducing costs and improving services to stores. (15)

Netflix currently has roughly 40 distribution centers; however, the delivery time of their
product when compared to Blockbuster is not significantly better or worse. Customers of
each service report higher or lower delivery times, depending on their location. Because
of this, it seems that the outbound logistics activities utilized by Blockbuster are roughly
equal in value compared to their competitors.

Marketing and Sales

Marketing and sales activities are carried out for the purpose of providing means through
which customers can purchase products, and to induce them to do so.

Blockbuster designs their marketing and advertising campaigns to best maximize
opportunities in the marketplace, and thereby increase the return on their marketing and
advertising expenditures. Information for marketing is obtained from their membership
transaction database, their real estate database, and outside research agencies. This
information is then used to formulate and adjust marketing and advertising campaigns
based on the following factors:

   1.   Membership behavior and transaction trends
   2.   Consumer needs and attitudes
   3.   Market share in the relevant
   4.   Financial position;
   5.   Evaluation of industry trends
   6.   Local demographics
   7.   Other competitive issues

Blockbuster uses a customer relations management (CRM) business strategy to build
relationships with specific customer segments. The CRM program is used to maintain
relevant value across all customer groups and to introduce customers to new customer
proposition initiatives. The process of segmenting the customer base and targeting their
direct marketing channel communications, Blockbuster tries to improve the effectiveness
and efficiency of their direct marketing efforts. They use a variety of communication
channels, to include direct mail and e-mail, as well as non-traditional channels such as
voice marketing and point of sale.

During 2006, Blockbuster focused their advertising on growing their online rental
subscriber base in support of their Total Access program. As a result, they surpassed
their goal of 2 million subscribers with a total number of 2.2 million as of December,
2006. (15)
                                                                                    Clark 16


Blockbuster’s marketing and sales methods are not distinguishable from methods used by
Netflix, their biggest competitor. The only exception would be their in-store sales option,
which makes them superior on that particular front.

Service

Service activities are designed to enhance or maintain a product’s value. The following
is a list of services offered by Blockbuster:

   i.     Online Subscription Service: launched in mid-2004. This program allows
          customers to rent DVDs by mail and offers a much larger selection that
          traditionally maintained in physical store locations. The only competitor to this
          program is Netflix and is about equivalent in quality.

 ii.      Blockbuster Total Access: Under the Blockbuster Total Access program, online
          subscribers have the exchanging their DVDs through the mail or returning them to
          a nearby participating Blockbuster store in free in-store movie rentals. Again,
          Netflix is the only competitor for this type of service; however, Netflix does not
          offer the in-store option making this service superior to competitors.

 iii.     No Late Fees: The “no late fees” program eliminates extended viewing fees on
          movies and games at substantially company-operated Blockbuster stores in the
          United States and Canada and at certain participating franchise in the United
          States. The “no late fees” program was launched to eliminate our most prevalent
          customer complaint movie rental experience and to combat our competitors’ use
          of “late fees” as a means of differentiating their service offerings. Of
          Blockbuster’s three top competitors, Netflix, Hastings Entertainment, and the
          Movie Gallery, both Hastings and the Movie Gallery still have late fees associated
          with rentals, making this service offered by Blockbuster superior to competitors.

 iv.      Guaranteed in Stock: The Guaranteed in Stock program offers customers the
          assurance that certain popular newly video titles will be in stock or the customer
          will receive a coupon that can be redeemed for a free rental of that the following
          30 days. Of Blockbuster’s three top competitors, Netflix, Hastings Entertainment,
          and the Movie Gallery, all three have similar services, making this service offered
          by Blockbuster equivalent to competitors.

  v.      Blockbuster Movie Pass and Blockbuster Game Pass: These in-store programs
          allow customers to watch an unlimited amount of movies or games (the number
          of movies or games allowed out at a time is dependent customer selects) for one
          monthly price and keep them for whatever period of time that they desire during
          the pass, subject to certain limitations. Of Blockbuster’s three top competitors,
          Netflix, Hastings Entertainment, and the Movie Gallery, all three have similar
          services, making this service offered by Blockbuster equivalent to competitors.
                                                                                  Clark 17


 vi.   Blockbuster Rewards: This premium in-store membership program is designed to
       offer benefits to our customers enhance customer loyalty by encouraging our
       customers to rent movies and games only from our stores. This program is not
       really applicable in comparison with its competitors because Netflix does not
       have in-store rentals, and Hastings and the Movie Gallery do not offer online
       rentals and therefore do not need an extra incentive to customers for renting only
       in their stores. (19)

Support Activities

Procurement

Procurement activities are those used to complete the purchase of inputs needed to
produce the end product. Purchased inputs are consumed completely during the
manufacture of products. Because Blockbuster does not manufacture any sort of product,
this level of the Value Chain Analysis is not applicable.

Technological Development

Technological development activities are used to improve a firm’s product and the
processes used to produce it.

Blockbuster’s biggest use of technology to improve their product would be their online
DVD rental program, especially when combined with their in-store rental option.
Recently Blockbuster redesigned their website for a more user-friendly and resourceful
site. The company also uses an Information Management System, and recently bought
Movielink that will make their product (relatively) instantly accessible via online
downloading.

Blockbuster’s technological development activities are superior to all of their competitors
except for Netflix.

Human Resource Management

Human Resource Management activities are those involved with recruiting, hiring,
training, developing, and compensating all personnel.

Blockbuster has experienced a high rate of turnover in high-level corporate positions,
including hiring a new Chief Executive Officer, Chief Financial Officer, Managing
Director, Chief Information Officer, Vice President of Merchandising, Distribution, and
Logistics, as well as laying off their Chief Operating Officer (to cut costs). This is very
indicative of serious internal issues and a weakness in the value chain for Blockbuster as
far as Human Resource Management activities goes, making Blockbuster clearly inferior
to their competitors in this activity. (14)
                                                                                         Clark 18


     Firm Infrastructure

     Firm infrastructure activities include:      general management, planning, finance,
     accounting, legal support, and government relations in support of the value chain. The
     firm infrastructure is responsible for effectively and consistently identifying external
     opportunities and threats, identifying resources and capabilities, and support core
     competencies.

     The general management aspect of Blockbuster is very weak, but ideally going through
     drastic improvements, especially with the addition of their new CEO, James Keyes. The
     firm infrastructure was successful in indentifying the possibility of accessing the online
     renter market, previously held by Netflix. However, Blockbuster has been facing
     increasingly dire financial strain with the very real possibility of the situation getting
     worse, not better, in the future. Previous firm infrastructure activities have been inferior
     to their competitors at being effective or consistent in identifying threats and
     opportunities as their current financial status would indicate.

D.   Capabilities

     As a result of the in-depth look at the resources available and the value chain analysis, the
     following capabilities are identified for Blockbuster:

        1) Market saturation and ability to reach US customers: Blockbuster currently has
           5,194 stores within the United States and 36 distribution centers. The placement
           of the distribution centers and the 90 different US Postal Mail entry points make it
           possible to deliver an online rental product within one business day to customers.

                a) Value: YES - the ability to deliver an online rental product within one
                   business day makes this very valuable to Blockbuster.
                b) Rare: YES - Blockbuster is the largest movie rental firm in the United
                   States; no other company has as many stores/distribution locations.
                c) Costly to Imitate: YES - to build an equivalent resource network would
                   take substantial funds.
                d) Nonsubstitutable: NO - the strategy of having multiple distribution
                   centers and mail-delivery rentals is used by other competitors.

        2) Variety of product rental options (online, in-store, download). Blockbuster offers
           customers the ability to rent DVDs either online or in-store, also with the option
           to exchange online-rentals with in-store movies. Blockbuster will also be offering
           the option to download movies.

                a) Value: YES - Blockbuster enjoys the status of being sole provider of both
                   services (online and in-store) and the resulting value.
                b) Rare: YES - No other company currently offers both online and in-store
                   rental options, especially with the ability to interchange them.
                                                                              Clark 19


       c) Costly to Imitate: YES - to set up a comparable system of stores and
          online-rental distribution chain would be very capital intensive.
       d) Nonsubstitutable: YES - because Blockbuster is currently the only
          company offering both online and in-store rental options.

3) Complete entertainment package offered for entire family. Blockbuster offers
   rental options for movies, games, as well as food and other related products.

       a) Value: YES - offering rental options for movies and games, as well as
          selling food/snacks/etc. provides value in that it attracts both children and
          adults as customers.
       b) Rare: NO - Hastings and other movie rental companies offer the exact
          same products.
       c) Costly to Imitate: NO - it cannot be overly costly to imitate considering
          most of Blockbuster’s competitors already offer a similar product package.
       d) Nonsubstitutable: NO - customers could substitute Blockbuster for
          Hollywood video, Hastings, The Movie Gallery, or any local movie rental
          store and receive practically the same product.

4) New upper management. The new management team at Blockbuster has the
   potential to help the company crawl out of the debt and unfavorable situation they
   are currently in, and to eventually become a successful company again.

       a) Value: YES - Potentially the new CEO will help provide value to
          Blockbuster, but it is undetermined yet.
       b) Rare: N/A
       c) Costly to Imitate: YES - It would be expensive to lure management away
          from Blockbuster.
       d) Nonsubstitutable: NO - other competitors have their own management
          teams that help produce value.

5) Extensive use of Information Management Systems. Blockbuster utilizes a point-
   of-sale system which is linked with a data center located in their distribution
   center. Using scanned bar code information, all products distributed from the
   distribution center to each US store are tracked and recorded. At the close of
   business each day, the point-of-sale system transmits the domestic rental and sales
   transactions data to the data center and the membership transaction database.

       a) Value: Yes - the information systems allow Blockbuster to track
          inventory and customer demands.
       b) Rare: NO - other firms use similar systems.
       c) Costly to Imitate: NO - point-of-sale systems are common and affordable.
       d) Nonsubstitutable: NO - other point-of-sale systems, or similar strategic
          systems, can be utilized.
                                                                                       Clark 20


        6) Exclusive relationship with certain suppliers. Blockbuster has a 4-year deal with
           The Weinstein Company that grants Blockbuster exclusive US rental rights to all
           of Weinstein's movie releases.

               a) Value: YES - Because Blockbuster is the only company that will carry
                  Weinstein titles, the deal is very valuable to the company.
               b) Rare: YES - Blockbuster is the only company that will carry Weinstein
                  movies in the next 4 years.
               c) Costly to Imitate: YES - Unless the deal is broken, competing firms
                  cannot pay to carry Weinstein films purchased directly from Weinstein.
               d) Nonsubstitutable: NO - Consumers can substitute renting Weinstein films
                  by purchasing them from other retailers or simply decide not to rent them
                  from Blockbuster.

        7) Ability to compete with Netflix. Currently Blockbuster is the only other major
           contender in the online DVD rentals business.

               a) Value: YES - Since no other firm has the ability to compete with Netflix,
                  Blockbuster offers an alternative to Netflix for consumers. The online
                  market customer base adds clear value to Blockbuster.
               b) Rare: YES - Blockbuster is the only other firm to compete with Netflix.
               c) Costly to Imitate: YES - The financial investment necessary to create a
                  similar online-rental and distribution system to compete with Netflix or
                  Blockbuster is considerable.
               d) Nonsubstitutable: YES - Blockbuster is the only firm competing
                  effectively with Netflix.

E.   Distinct Core competencies

     A review of Blockbuster’s capabilities results in two distinct core competencies that
     possibly offer a sustainable competitive advantage:

        1) Variety of product rental options

            Blockbuster is currently the only firm offering the combination of online and in-
            store DVD rentals. This attracts customers that prefer the experience of browsing
            in a physical store and selecting a movie. The customer can pick a selection on
            the spot, then walk out of the store with the movie of their choice and have instant
            entertainment. Blockbuster also attracts online customers that want the ability to
            browse a wider selection of DVDS, create an online queue that automatically
            sends out the next DVD on the list when the prior selection is returned, and do so
            from the ease of their personal computer. The distinct advantage occurs where
            Blockbuster combines the two options into one convenient package. Consumers
            can have their online selection and queue, but also take movies into the store for
            instant movie rental ability.
                                                                                     Clark 21


          2) Ability to compete with Netflix

             Against all other competitors, being the only company that can truly compete with
             Netflix is a sustainable competitive advantage in the online renter market.
             Currently, Netflix and Blockbuster are the only two companies genuinely
             competing for online customers.

III.   Appendix C: Strategy Formulation

A.     Major Issues

       Blockbuster has many problems to confront in the coming years. Four of the biggest
       issues are identified as follows:

          1) Constant Price war with Netflix Reduces Margins Further

             Blockbuster has been experiencing a decrease in rental gross profit primarily due
             to a decrease in rental gross margins. In 2004 it was 71.7% and 66.4% in 2005.
             Also in 2005, Blockbuster experienced a $215.8 million decrease in rental
             revenues. These decreases were due to several reasons, including: The launch of
             Blockbuster Movie Pass and Blockbuster Online in 2004, then the “no late fees”
             program at the beginning of 2005. To support their new online operations, in
             2005 Blockbuster increased their product purchases in order to grow and answer
             the increased product demand. As Blockbuster lowers prices in the constant
             struggle with Netflix for market share, their margins are tightened further.

          2) Instability of Upper Management

             The high rate of turnover in upper management is indicative of internal problems
             that may demotivate other employees and discourage investors. The change of
             CEO and CFO can create accounting inconsistencies which make interpreting the
             true financial status of the firm difficult as there are modifications and
             amendments from accounting methods used in prior years.

          3) Financial Weakness

             Blockbuster cannot guarantee that their future cash flows will be sufficient
             enough to meet their obligations and commitments. Funds may be diverted from
             operations to cover interest payment expenses, and growth will be negatively
             impacted if debt payments increase.

          4) Decline in Demand for Movie Rentals

             Movie rental demand occurs on a seasonal basis, with slower business occurring
             in April and May, (due partially to Spring and Daylight Saving Time), and in
             September and October (due partially to school starting and fall TV programs
                                                                                      Clark 22


           starting). For Blockbuster, typically November and December are the highest
           revenue months. Overall revenues for the in-store home video industry are
           expected to continue to decline as a result of mass retailers, such as Wal-Mart,
           offering low-priced DVDs.

B.   Sustainable Solutions

        1) Increase Profit Margins: Change In-store Packaging

           To increase their profit margin, Blockbuster would need to either lower their costs
           or increase prices. Since Blockbuster is in a tight price war with Netflix,
           increasing prices, or reintroducing late fees, would not be a sensible route as they
           would likely anger current customers and lose their loyalty, or potential new
           clients may substitute Blockbuster products with Netflix or another in-store movie
           rental chain, such as Hollywood Video. Since increasing prices does not seem
           feasible, lowering their costs is the direction Blockbuster would need to take.

           Currently Blockbuster uses hard plastic cases at their store locations when a
           customer rents a DVD. Their online service uses paper cases to deliver the DVD
           product in. Blockbuster could convert the packaging at their store locations from
           the more expensive plastic cases to the cheaper paper envelopes used for online
           DVD rentals. The paper envelopes would take up much less storage space, and
           allow Blockbuster to take advantage of economies of scale for using all paper
           cases instead of a mixture of paper and plastic. This packaging cost reduction
           may help Blockbuster to increase their profit margin.

        2) Increase Online-Renter Market Share

           Blockbuster and Netflix are fighting for market share of the online renter market.
           Blockbuster is planning to market specifically to internet consumers by marketing
           on the popular social network website, Facebook. This strategy may attract some
           of the online users of Facebook, especially if Blockbuster offers a discount
           specifically geared towards Facebook users.

           Blockbuster could also offer an online option to rent movies without paying a
           monthly fee for the subscription to their Blockbuster Online program. Consumers
           currently are not offered the option to rent a movie purely on a movie-by-movie
           basis from any online rental provider. Blockbuster may have a small niche
           market for individuals who prefer not to have a monthly plan, but like to rent from
           the convenience of their home computer.

        3) Debt Relief: Chapter 11 Bankruptcy

           Because Blockbuster is struggling to honor its debt payments, revenues have been
           decreasing and are expected to decrease further, and Blockbuster admits they may
                                                                                        Clark 23


            not have the cash flows to meet all their financial obligations, filing for
            bankruptcy is a real and viable option.

            A Chapter 11 Bankruptcy is considered a reorganization and focuses on
            restructuring the firm. In this type of bankruptcy the creditors and the debtor (the
            firm filing for bankruptcy) formulate a plan under which the debtor pays a portion
            of its debts and the rest are discharged. The debtor is permitted to continue doing
            business, and managers of the firm may continue operating the business. A firm
            need not be insolvent to quality for a Chapter 11 Bankruptcy.

C.   Implementation Plan: Chapter 11 Bankruptcy

     Because Blockbuster’s most urgent problem is their high level of debt and interest
     payments, Chapter 11 Bankruptcy may be the best option for Blockbuster. The threat of
     decreasing product demand and the resulting decrease in revenues, tied with their
     constant price war with Netflix and the inability to widen their profit margin, Blockbuster
     may face serious cash flow insufficiencies. Their option of borrowing further funds to
     cover financial obligations would be a short-term solution that would likely be
     accomplished with high interest, or more variable rate, loans. This would pose a long-
     term financial strain if Blockbuster’s future cash flows were not adequate enough to meet
     their debt obligations. If the bankruptcy were approved, then Blockbuster would have the
     financial freedom to focus more on operations and growth, rather than on interest and
     debt payments.

     The implementation plan for Chapter 11 Bankruptcy could take form in the following
     format:

        1. File a petition with the bankruptcy court. The petition must include:

                    (1) Schedules of assets and liabilities
                    (2) A schedule of current income and expenditures
                    (3) A schedule of executory contracts and unexpired leases
                    (4) A statement of financial affairs

        2. File a written disclosure statement and a plan of reorganization with the court.

            The disclosure statement must contain information concerning the assets,
            liabilities, and business affairs of the debtor that is sufficient enough to enable a
            creditor to make an informed judgment about the debtor's plan of reorganization.

            The plan of reorganization must include a classification of claims and must
            specify how each class of claims will be treated under the plan. Creditors whose
            claims are impaired (those whose contractual rights are to be modified or who
            will be paid less than the full value of their claims under the plan) vote on the plan
            by ballot.
                                                                            Clark 24


3. The disclosure statement must be approved by the court and must conduct a
   confirmation hearing to determine whether to confirm the plan. The plan must be
   accepted by at least one class of impaired claims and the bankruptcy court must
   determine that the plan is feasible in order to confirm it.

4. Confirmation of a plan under Chapter 11 acts as a discharge of all debts, filed or
   not, excluding those specified as not dischargeable elsewhere in the Bankruptcy
   Code. Both the debtor and the creditors are bound by the terms of the confirmed
   plan. (20)
                                                                                          Clark 25


V.     Works Cited

0.   http://www.dictionary.com (referenced throughout paper)

1.   Zemke, R. et al 2000, Generations at work, AMACOM books, New York.

2.   Blockbuster Homepage. (2007, April 1). Retrieved April 21, 2007 from
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3.   Cimmiluca, D. (2007, May 9). Thinking the Unthinkable. The Wall Street Journal, B-2.

4.   Kingsbury, K., Cumberpatch, C. (2007, May 3). Blockbuster Loss Widens, Subscriber
     Growth Jumps. The Wall Street Journal, B-7.

5.   Pruitt, A. (2007, April 19). Netflix Outlook Halts Rally in its Stock. The Wall Street
     Journal, D-7.

6.   Store visit and Interviews by Pauline and Jason. (2007, May). Tacoma and Port Orchard

7.   Yahoo Financials: Blockbuster. (2007, February). Retrieved April 14, 2007 from
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8.   McCrindle Research 2006, New Generations at work,
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9.   US Census Bureau 2007, Facts for features: Mother's Day, http://www.census.gov/Press-
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10. "More women have a late pregnancy", BBC News, December 17, 2004,
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11. Wheeler, M. et al 2006, Work and life balance: Policy implications of delayed reproduction
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12. Statistics New Zealand 2007, Fertility, http://www.stats.govt.nz/analytical-reports/dem-
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13. McCrindle Research 2007, Seriously cool, http://www.mccrindle.com.au/resources.htm,
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14. Hoover's Custom Report Builder, Blockbuster Inc. Hoovers, a D&B Company.

15. Form 10-K, Blockbuster Incorporated, 2006. Retrieved 8 November, 2007 from
    http://www.blockbuster.com/corporate/aboutBlockbuster,
                                                                                 Clark 26



16. Martin Peers and Merissa Marr. "Blockbuster Adds Film Downloading With Movielink
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17. “Blockbuster CEO Maps out Strategy for Wall Street.” The Dallas Morning News,
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    0.html.

18. Blockbuster to expand its Blu-ray DVD offerings:[HOME EDITION] Dawn C.
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19. Blockbuster Homepage. Retrieved 5 November 2007 from
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20. Chapter 11 Bankruptcy, US Courts. Retrieved 20 November 2007 from
    http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter11.html.

								
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