Instructor: Kenneth Meland
Blockbuster Inc. is the largest video-rental chain in the world, positioning itself as
the leader in the fragmented video rental industry. The Viacom subsidiary owns the
majority of its stock, and together has stores in more than 25 countries. Through the
many stores Blockbuster distributes a large number of movie titles primarily focused on
family home entertainment in the video rental industry. Blockbuster sells and rents
videos, DVD’s, and videogames. It also rents VCR’s, DVD and videogame consoles.
Blockbusters total revenue for the third quarter of 2005 totaled $1.39 billion.
The rapid advance in technology has put the video rental industry into a mature
stage. The video rental industry started with the VHS during the 1980’s. Furthermore the
industry had to make adjustments and introduce the DVD format. As the number of
DVD’S started to become the majority of what people wanted, Blockbuster had to start
changing their inventory to keep up with consumer demand. Now the industry is
saturated and blockbuster has to make movements for the future to continue being the
leader in the video rental industry.
The Blockbuster case states some issues that threaten Blockbusters future. One of
the issues is that the video-DVD rental now is encountering the realization of new digital
technology like Video on demand or other channels of distribution to reach the end
consumer, which lowers demand for video rental. This issue can be linked with the next
one; the bargaining power of suppliers which threatens with movie studios eliminating
the middle man (Blockbuster) in order to maximize profits driving video rental stores out
of business. The power of competitors is another issue; on this case competitors are those
who take business away from Blockbuster or create war prices like Wal-Mart did
lowering demand and revenue for Blockbuster’s CD business.
The main issues of the Blockbuster case are the integration of the products offered
with new technology like pay-per-view and video on demand as channels of distribution
and competition against the video rental industry.
Strategy choice and defense
Blockbuster used corporate strategy mainly by diversification with joint ventures.
Blockbuster tried to diversify in order to enter into the video on demand and pay-per
view industry. Blockbuster saw an opportunity by making alliance with DIRECTTV. By
selling their dish system Blockbuster received a kick back from each dish sold and from
DIRECTTV when a video was rented on pay-per view, which was more money than a
normal movie rental in Blockbuster. Blockbuster also made an alliance with MGM to
gain more control by downloading the MGM library to Blockbuster’s web site for pay-
per-view consumption. The last deal in 2000 was with TiVo. In this agreement,
Blockbuster would offer a video on-demand through broadband using TiVo recorders.
There are macro environmental factors that have influenced Blockbuster’s
business in positive and negative ways. Some of the STEP forces have influenced
Blockbuster more than others, but they all can be related with the type of strategies in the
The new technology with per-pre-view caused a social trend by shifting consumer
demand from traditional video rental to a digital format. This social force has created
lower sales and revenue for Blockbuster. Thus brings concerns about how to handle the
future of this social trend.
On the technological side, Blockbuster has experienced tremendous opportunities
and challenges in corporate level strategy. The article states that during the 1980’s, the
number of families owning a VCR was increasing rapidly; this was the most available
technology in home video. This technology was seen as an opportunity to create a very
lucrative business using information systems technology to improve on what “mom-and-
pop” stores could offer. During the early 1990’s, blockbuster experienced competition
from cable TV with pay per view or video on-demand systems along with digital
compression and direct broadcast satellites. During this decade the company
implemented DVD on the shelves, entered in the CD-Music industry and video games.
The economic side is one of the forces that has not affected the industry in a
negative way, but still related with the corporate level strategy. The four most important
economic factors are economic growth, interest rates, currency exchange rates and
inflation or deflation rates. Due to the elasticity of the product offered by Blockbuster, the
company has experienced a positive growth. For example, there has been a rapid
expansion of stores created with the revenue of the business.
The political or legal forces have not played a big role in the case. Although
government regulations and new laws always affect big companies like Blockbuster. The
case does not discuss an issue related to this force, but it still can positively or negatively
affect Blockbuster in the future.
Porter’s five forces model also applies to the Blockbuster case. Porter’s model is
used to identify opportunities and threats in the industry environment.
The risk of entry by potential competitors is the first force. A potential competitor
is a company that has the capability to compete if it chooses to, but is not currently
competing. The initial investment is not very costly to enter the video rental industry.
Many entrepreneurial and major chains like Hollywood Video have entered the industry,
creating heavy competition in a saturated market. Blockbuster has managed to make it
somewhat hard for competitors due to economies of scale with low prices and a large
number of titles as part of its absolute cost advantages. But, not only on the video
industry, also cable and Pay-Per-View services have been a threat. The major movie
studios have expressed interest in entering the industry to distribute the movies through
Pay-Per-View, eliminating intermediaries. This would significantly affect the
Blockbuster market share in the cable industry.
The second force is the rivalry among established companies which relates to the
three strategies mentioned above. Price and non-price competitive weapons have been
used by Blockbuster to gain leadership in the industry. Differentiating the environment in
its stores and implementing marketing campaigns is part of the business level strategy.
Wal-Mart is one company mentioned in the case that created low price competition in the
music CD industry, narrowing profit margins for Blockbuster. New entrants also watched
Blockbuster and soon entered the competition for market share. Chains like Hollywood
Video also began to expand in the video rental industry.
The third of Porter’s five forces is the bargaining power of buyers or suppliers.
Blockbuster used the corporate level strategy with power of buyers from MGM and
Disney when implementing the price sharing deal. Blockbuster was able to use its
bargaining power due to the size of the company and its large market share in the
industry. On the other hand, the bargaining power of suppliers was used against
Blockbuster in 2002. The major movie studios announced a plan to eliminate powerful
middlemen like blockbuster and HBO in the pay-per-view cable industry. This threat
could be very harmful to Blockbuster. Instead of studios using intermediaries as part of
the distribution channel, studios could offer movies through Cable TV systems, with
products like video on demand or Pay-Per-View service. This could drive the video
rental industry out of business.
The final force in Porter’s model is the threat of substitute products. This force is
one of the most challenging issues for blockbuster, due to technological changes in the
industry. When the DVD came, it was taken as an opportunity instead of a threat. During
the late 1990’s demand for video tapes became saturated, but it created a shift in demand
with the new technology of digital compression. Blockbuster experienced a positive
outcome from DVD technology, but the article also mentions that Blockbuster has always
experienced competition from other sources of movies and entertainment, like pay per
view or video on demand. These kinds of substitute products constitute a threat for the
industry, but at the same time Blockbuster has seen this change as an opportunity to
become the warehouse of information from where the selection of videos is made. For the
future, Blockbuster has concerns about how to handle the threats that come from Cable
TV and its different products.
As the largest video rental company Blockbuster has several strengths. Brand
recognition is one of Blockbuster’s major strengths. Blockbuster is a symbol of quality in
the video rental industry. Brand name recognition has helped Blockbuster become the
global leader. Another factor that has given Blockbuster an advantage is the focus the
company has when targeting families. When bringing kids into the store, parents
automatically make kids part of the target market. Blockbuster also has computer
technology that helps integrate data about consumers’ wants, as well as technology for
movie tracking. Blockbuster also has the support of Viacom as the major stock holder in
the company. Diversification and willingness to adapt to technological changes are some
of Blockbuster’s strength.
Blockbuster also has some weaknesses, especially during this mature stage. One
of their main disadvantages is that by being experts in video rental they have much to
learn about digital technology. The many stores they have could be a big expense when
consumer demand for video rentals goes down. Diversification can also be a weakness
because when trying to expand into some other areas of the product they offer they may
not be able to handle it, like on the case of the CD stores.
With the rapid changing in technology Blockbuster can see opportunities to come.
One opportunity is to penetrate more aggressively into the video on demand business,
finding an alliance with a company expert on video on demand technology; unifying the
expertise and brand name recognition. The international market is another opportunity to
focus on more aggressively. Stores can focus on offering a larger variety of media
products. Finally, there is an opportunity to partner with major chains of grocery stores
and even gas stations to create a massive way to distribute movie rentals with help of
The threats are powerful in this stage due to major changes in technology. One of
the biggest worries would be the fact that the DVD will become obsolete just like film in
the photo industry; this is the main threat because the DVD is the physical product
offered in the Blockbuster stores. Another threat is the idea of the film studios of
eliminating the middle man in the channel distribution of the movies. Also the large
competition from video on demand companies that already know what they are doing and
do it good.
After analyzing the company, it is easier to identify the main issues and establish
goals. The most important issue at this time is to be able to identify a competitive
advantage. Blockbuster needs to come up with an idea that will position the company
with an edge in the video game and video rental industry. Since the main core of
Blockbuster’s business is movie/game rental, they should focus on revitalizing this part
of the business before entering the cable industry more aggressively. The main goal is to
develop a vending machine system that can distribute rental movies and games direct to
By using the Functional leave strategy Blockbuster will be able to achieve
superior efficiency. Using an alliance strategy Blockbuster will be looking to do business
at Wall-mart grocery stores and Chevron gas stations with a vending machine system that
will eliminate some of the cost in its overhead at the current time in the Blockbuster
The name will be the Blockbuster Station and will be placed at every Wal-Mart
and Chevron gas station across the United States with the ability of returning the rentals
to any location. Wal-Mart has heavy traffic flow and a target group in common with
The Blockbuster station at Chevron will serve the purpose of major convince to
the locals as well as the traveler. Targeting the industry of newer cars having DVD
systems for long trips or just to keep the kids entertained when moms are out running
around and doing errands will also increase the number of groups targeted.
The marketing side of this idea will be dealing with price promotion design and
distribution. For Example while promoting the new Blockbuster Station in the Wal-Mart
stores the deal will be for every 100 dollars spent on groceries get a free rental of your
choice. The market for Chevron will include for every two fill ups on gas receive a free
rental of your choice to help you get to the next stop.
The Blockbuster Station will have the entire Blockbuster most rented movies of
all time as well as new releases and video games. The IRM department in conjunction
with the marketing team will analyze data collected from the transactions data of base to
determine demand of specific games and videos according to the geographic areas.
The price will be $1.00 for 24 hours. The method of payment will be credit or
major debit cards to secure return of movies or games. If the disc is not returned on time,
one day charge will be debited from the customer’s credit card. I f the game or movie is
not returned after one week the fair market price will be charged automatically to the
customer. If the item is returned later than a week the current market price of the DVD
will be credited to the customers account.
The operations team will deal with Materials management and just in time and
efficiency. In order to distribute the movies to the different locations a Hub and spoke
system will be implemented with a team of delivery trucks divided into sectors.
As part of our costumer responsiveness a TQM team will make sure consumers
enjoy all of our favorite movies/games from a source they can trust with a guarantee of
no skipping. The Station will have the entire Blockbuster most rented movies of all times
as well as new releases and video games that can be rented for 24 hours. Inside the
Blockbuster Station there will be a scanner to find DVDS and games that are scratched
and take them out of rotation when returned.
With the business level strategy Blockbuster will focus on the same markets
segments they have used in the past. The project will be divided into different
departments for efficiency. A management department which will oversee the
development of the project, this department also will be in charged of public relations to
deal with the permits and contracts from the partners involved. There will be a finance
team, an IRM and customer service integrated to offer superior customer response. An
operations team will be managing the distribution system and will be in charged of
dealing with the vendor machines, including the design manufacturing and process of it
will also create a maintenance team to up keep the machines.
The cost leader ship will be the main non price strategy to compete with. The
cost of the machines and operation will is estimated to help reach the goal. The
differentiation and low price strategy will be focused more aggressively in the same
market Blockbuster has always targeted. With this strategy Blockbuster will adopted a
hold and maintain position to continue in being the leader in the video rental industry.