The case covers Blockbuster’s emergence in

BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYI. DISCUSSION QUESTIONS, CASE INTRODUCTION AND KEY POINTSIntroductionThe case covers Blockbuster’s emergence in the video rentals market. After detailing theintricacies of the video rental market, the case takes a deeper dive into Blockbuster’s businessmodel, based on brick-and-mortar locations throughout the US. This costly infrastructure hasslowed the entertainment giant’s growth in an industry that has rapidly transitioned from thetraditional store-based model, to mail rental and video-on-demand alternatives. The rapidtransition of customer demand and the emergence of Netflix (Blockbuster’s main competitor) hasincited Blockbuster’s rapid entrance into the video-on-demand market through the acquisition ofMovielink.The key challenges that Blockbuster faces in 2009 include: rising consumer expectations,increases in media piracy, the impact of rising fuel costs on systems based on the distribution ofphysical media, and the intricacies of competing in a rapidly changing technology industry wherenew entry is enabled by low infrastructure costs.Summary of key learning points and strategic issues1. Understanding the challenges associated with a rapidly changing technology based industry2. Flexibility in the face of a evolving market with high competition and new technology3. The role of acquisitions in company growth4. The importance of brand image and marketing in an increasingly tech-savvy market5. Adjusting business-level strategy in light of disruptive business modelsDiscussion Questions1. Perform a STEEP analysis to understand the general environment facing Blockbuster. Howwill Blockbuster be affected by external factors?2. Use Porter’s Five Forces Model to analyze the mail rental and video-on-demand industries inthe US. Given this analysis, are these industries attractive or unattractive?3. Entering the video-on-demand business requires Blockbuster to shift its corporate businessstrategy and compete in a new space. Discuss this shift and the key challenges associatedwith it?4. Who are Blockbuster’s main competitors and how does Blockbuster measure up against thesecompetitors? (It may be helpful to chart competitors and product offerings) What advantagesdoes Blockbuster have and what advantages do competitors hold?5. What are the main capabilities of Blockbuster? Does Blockbuster have a core competence?6. Create a SWOT analysis to understand Blockbuster’s strengths and weaknesses. DoesBlockbuster have a sustainable competitive advantage in the mail rental and video-ondemand industries? If so, what is the source? What about Blockbuster’s evolution andcurrent business strategy may pose problems going forward?7. What is Blockbuster’s business-level strategy? Is the strategy appropriate to offset the forcesin the industries? How has Blockbuster attempted to overcome obstacles posed by being alate player in a rapidly changing marketplace? Do you recommend any changes and/orforesee any challenges?BLOCKBUSTER |1BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYII. EXTERNAL ENVIRONMENT ANALYSISSummarize the external environment, including conditions in the general, industry, andcompetitor environments.a. The General EnvironmentDefinition: The general environment is focused on the future and can be analyzed byconsidering the STEEP framework: Social/demographic, Technological, Economic,Environmental/geographic and Political/legal/governmental factors at play.1.2.3.4.5.Social/DemographicTechnologicalEconomicEnvironmental/GeographicPolitical/Legal/GovernmentalDiscussion Question 1: Perform a STEEP analysis to understand the general environmentfacing Blockbuster. How will Blockbuster be affected by external factors?Social/Demographic:•••Rising customer expectations and IT literacy prompt a need for Blockbuster to digitize itsentertainment offerings for customer convenience.Increases in consumer access to pirated media through online resources and bootlegs hasput substantial strains on the media sales and rental industries.Increased environmental awareness among customers will likely be a way to promote the‘green’ benefits of digitized offerings.Technological:•Increases in the amount of entertainment content offered on the web make market entry amust for Blockbuster to survive in a rapidly changing market environment.Economic:••Rising fuel costs will put a substantial strain on Blockbuster’s distribution network andcostsThe beginning of the subprime mortgage crisis is starting to decrease consumerdiscretionary spending, forcing Blockbuster to offer more economical alternatives tomaintain sales volume.Environmental/Geographic:•Globalization allows for access to increased customer base by using online media andmultinational brand presence.BLOCKBUSTER |2BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYPolitical/Legal/Governmental:•Increased concerns about piracy and digital rights management issues make the offeringof entertainment content through new media legally complicated and costly.Overall Assessment: The changing customer needs highlighted in the social/demographic sectionwill offer Blockbuster the most opportunity but also the most threats. Blockbuster needs torespond to changing customer needs and technology improvements in order to remaincompetitive. This will be challenging given Blockbuster’s history as a brick-and-mortar store asit will be both a strategic shift for the established Blockbuster and also economically challenging.b. The Industry EnvironmentDefinition: An industry is a group of firms producing products that are close substitutes. In thecourse of competition, these firms influence one another. Typically, industries include a richmixture of competitive strategies that companies use to pursue above-average returns. In part,these strategies are chosen because of the influence of an industry’s characteristics. Comparedwith the general environment, the industry environment often has a more direct effect on thefirm’s strategic competitiveness and above-average returns.The industry environment is the set of factors that directly influences a firm and its competitiveactions and competitive responses. Porter’s 5 Forces Model is a powerful tool for understandingthe dynamics amongst the five key factors that determine an industry’s level of rivalry and profitpotential. [Outlined below, High=H; Medium=M; Low=L]1.2.3.4.5.Threat of New Entrants (or barriers to entry)Supplier PowerThreat of Product SubstitutesBuyer PowerIntensity of RivalryDiscussion Question 2: Use Porter’s Five Forces Model to analyze the mail rental and videoon-demand industries in the US. Given this analysis, are these industries attractive orunattractive?The below Porter’s 5 forces analysis shows that the rental industry is not an particularlyattractive industry because competition, substitutes, and supplier power are high.Threat of New Entrants (or barriers to entry): Medium•••Mail rental infrastructure costs are much lower than those of brick-and-mortaralternativesVoD service providers can build infrastructure at a relatively low cost and often springout of new web-based delivery technologiesRelationships with media producer are difficult to establish when trying to attain rights totheir productionsBLOCKBUSTER |3BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYSupplier Power: High••High supplier power due to concentrated movie studio and game industriesSpecialized products such as movies and games which cannot be substituted with lowergrade productionsThreat of Product Substitutes: High•Large number of substitutes compete for customer attention within the media deliveryspace. (VoD based enterprises may have a competitive advantage due to increasedconvenience over other substitutes)Buyer Power: High•High price sensitivity among consumers constrained by subprime crisis, low switchingcosts between alternativesIntensity of Rivalry: High•••Low customer loyaltyLarge number of competitors within the media delivery industryCompetition within the industry is based on price, ease of use/convenience, selection, andserviceDiscussion Question 3: Entering the video-on-demand business requires Blockbuster to shiftits corporate business strategy and compete in a new space. Discuss this shift and the keychallenges associated with it?Blockbuster has traditionally been a brick-and-mortar business and it has dominated the videorental retail space, however moving into the video-on-demand business will require Blockbusterto switch gears and also swallow a bit of pride. Customers will no longer travel to Blockbusterto rent movies, rather Blockbuster must transition from physical to virtual media, bringing theproduct directly into its customers’ homes.Begun in 1985, Blockbuster has proven agile in the face of changing technology, but has neverbeen required to change its business model in the past. Blockbuster has upgraded from VHStapes to DVDs and has responded to new markets by renting video games. However the newthreats from VoD providers require Blockbuster to invest more heavily in an IT infrastructureand move its business from brick-and-mortar locations to online sites.Blockbuster faces challenges in shifting its business model. It is an established leader in its field,making it vulnerable to agile disruptors redefining the marketplace through new productofferings. Blockbuster’s current model requires heavy investment in real estate and inventory.However, these core competencies do not translate into the online space. Blockbuster’s highoverhead costs put it at a disadvantage as it seeks to move online where competitors have muchBLOCKBUSTER |4BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYlower cost structures. In addition Blockbuster’s traditional retail expertise is insufficient inmoving into the new industry which requires technology knowledge, innovative marketing, andpartnerships with cable operators.c.The Competitor EnvironmentDefinition: The competitor environment is the final subject of analysis required to gain a fullunderstanding of the company’s external environment. A competitor analysis focuses on eachcompany against which a firm directly competes and involves gathering and interpretinginformation about Blockbuster’s competitors. The intense rivalry of the movie rental and VoDindustry creates a strong need to understand competitors.Competitive rivalry is the ongoing set of competitive actions and responses that occur amongfirms as they maneuver for an advantageous market position. Especially in highly competitiveindustries, companies constantly jockey for advantage as they launch strategic actions andrespond or react to rivals’ moves. It is important to understand competitive rivalry because itinfluences a firm’s ability to gain and sustain competitive advantages.3 I’s FrameworkLeveraging the 3 I’s framework provides a thorough overview by grouping competitors intothree buckets: immediate competition, impending competition, invisible competition.1. Immediate Competition:Immediate competitors to Blockbuster are other brick-and-mortar entertainment rentalstores such as Movie Gallery and the increasingly popular Redbox. Blockbuster iscurrently outperforming competitors due to its much broader range of services andentertainment delivery methods. Within the mail rental industry, Blockbuster’s maincompetitor is Netflix which was the first company to enter the mail rental space. Netflixcapitalized on its first-mover-advantage to gain significant market share.2. Impending Competition:Impending competitors to Blockbuster are smaller VoD providers such as Vudu whooperate on a much leaner cost base by delivering content only over the internet and do notrely on costly brick-and-mortar operations. These businesses are also much more focusedon the technology as their core competency.3. Invisible Competition:Blockbuster’s invisible competitors consist of actual entertainment producers and studioswhich can rapidly form third party joint ventures to enter distribution markets. Anexample of this is the creation of Movielink by a number of movie studios.BLOCKBUSTER |5BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYDiscussion Question 4: Who are Blockbuster’s main competitors and how does Blockbustermeasure up against these competitors? (It may be helpful to chart competitors and productofferings) What advantages does Blockbuster have and what advantages do competitors hold?See Below for a chart of Blockbuster’s key competitors and their product offerings.In-store rental: Blockbuster has a clear advantage in the in-store rental category, as it is anestablished brand with premium locations.Mail rental: Blockbuster has established itself in the concentrated mail rental space, but Netflixremains the market leader due to its first mover advantage. The Netflix brand is synonymouswith mail rental whereas Blockbuster is struggling to make a name for itself in this business(despite nearly identical offerings and pricing) Blockbuster does offer the convenience of in storeexchange, but it is unclear of the customer appeal of this offering given Netflix quick deliverytime.Sales: The sales market is extremely fragmented as many players in different spaces (online,retail, video rental) are competing to sell media content in both physical and virtual form.Blockbuster probably has an advantage in selling previously viewed films, thereby reducinginventory, however it has no advantage in retail sales and customers are more familiar withApple and Amazon with regards to online sales.VoD: Blockbuster is entering the VoD space through its purchase of Movielink, however due tomovielink’s origins, customers will not be able to burn downloaded/streamed movies to DVDs.This puts Blockbuster at a disadvantage because customers want to watch movies on their TVsand not on their computers.Netflix, Vudu, and Apple sell VoD through boxes that customer can plug directly into their TVs.While customers do not want an additional box, they prefer this to watching movies on theircomputers.Sony/Universal/Warner Bros have partnerships with cable companies allowing customers towatch movies on their TVs without an additional box. Perhaps Blockbuster would be in a betterposition if it had formed partnerships with cable operators directly instead of purchasingMovielink.BLOCKBUSTER |6BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYBLOCKBUSTER |7BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYI II.INTERNAL COMPANY ANALYSISSummarize internal company factors including: capabilities and weaknesses, value chainactivities, strategy, and financial situation.a. Outline the company’s internal capabilities and weaknesses.Definition: Capabilities exist when resources have been integrated to achieve a specific set oftasks and are frequently developed within a specific functional area. In addition to identifyingthe company’s opportunities and threats from the external environment, another importantobjective of the situation analysis is to evaluate strengths and weaknesses as input for developingthe company’s strategies.Discussion Question 5: What are the main capabilities of Blockbuster? Does Blockbusterhave a core competence?Blockbuster’s main capabilities include its abilities to serve customers with physical movie andgame rentals through access to large selection, premium locations, and a well established,national brand. Its core competency is physical movie rental through an expertise in retailstrategy and know-how (location, selection, branding)Blockbuster was able to move into the online mail rental space because it developed distributioncapabilities and marketed the new service. However the move to Vod will likely be morechallenging given the necessary technology infrastructure, competition, and customer desire towatch movies on TV rather than computers.Discussion Question 6: Create a SWOT analysis to understand Blockbuster’s strengths andweaknesses. Does Blockbuster have a sustainable competitive advantage in the mail rentaland video-on-demand industries? If so, what is the source? What about Blockbuster’sevolution and current business strategy may pose problems going forward?Strengths1. Strong reputation and brand recognition2. Ability to leverage brick-and-mortar storesfor customer convenience3. Offerings across range of media deliveryservices (mail rental, VoD, sales, and instore rental)1.2.3.4.OpportunitiesOpportunity to renegotiate DRMrestrictions with movie studiosOpportunity to increase marketing of VoDofferings to new and existing customersOpportunity to create and rent set top boxsystemRoom to grow in international markets,through low infrastructure VoD offeringsBLOCKBUSTER |8BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYWeaknesses1. Brick-and-mortar stores come with highexpenses2. Large corporate structure limits agility3. Late player in online VoD and mail rentalmarket4. Small market share of above marketsThreats1. Decreased customer disposable incomeencourages cuts to non-essential spending2. Highly competitive and innovative marketspace in VoD technology3. Increased piracy4. DRM restrictionsWithin the brick-and-mortar space Blockbuster has a sustainable advantage through its locations,brand, and relationships with movie studios. However it does not seem to have a sustainableadvantage in the mail rental and VoD spaces.In the mail rental business Blockbuster’s locations, brand and supplier relationships along withits distribution network give it a competitive advantage over new entrants. HoweverBlockbuster’s primary competitor, Netflix has a stronger brand in this space and has equallyrobust supplier relationships and a distribution network. The only competitive advantage thatBlockbuster has is its locations, offering customers the ability to exchange mail rental DVDswhich Netflix cannot offer.Blockbuster continues to leverage its brand and supplier relationships in the mail rental space,but it must increase marketing in order to increase publicity around its new business expansion.Competition is stiff in the VoD space and Blockbuster appears to have no identifiablecompetitive advantage in this space. While Blockbuster can leverage the Movielink brand andsupplier relationships, competitors too have strong brands and supplier relationships. In additionBlockbuster is at a disadvantage due to Movielink’s restrictions regarding DVD burning,disallowing customers from viewing movies on their TVs.Blockbuster’s focus on its retail locations and failure to enter the mail rental and VoD spacessooner have put it at a disadvantage. As a result the Blockbuster brand is clearly associated withits retail spaces rather than its new business units. Blockbuster must increase marketing effortsin order to break free of its legacy business. Finally, Blockbuster’s decision to acquireMovielink which has DRM restrictions, is likely to further inhibit the company’s ability to makea place for itself in the highly competitive VoD market unless it is able to overcome thisobstacle.b. Conduct a Value Chain analysis to identify value-creating activities.Definition: By exploiting its core competencies, a competitive firm creates value for itscustomers. Value is measured by a product’s performance characteristics and by its attributes forwhich customers are willing to pay. Companies with a competitive advantage offer value toBLOCKBUSTER |9BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYcustomers that is superior to the value competitors can provide. Value is created by innovativelybundling and leveraging resources and capabilities.A value chain analysis provides information relative to primary (inbound/outbound logistics,operations, marketing & sales, and service) and secondary (firm infrastructure, human resourcesmgmt, technological developments and procurement) activities. A value chain representation ofBlockbuster’s primary and support activities is presented in the diagram below. This informationcan be used to establish a business strategy which targets select activities to create a sustainablecompetitive advantage.Primary Activities•Inbound/Outbound Logistics:o 23 distribution center across the US allow Blockbuster to offer 1 business daydelivery to its customers, enhancing their experience and effectively competingwith Netflix and other mail rental companieso 4,500 brick-and-mortar stores that Blockbuster owns provide an additionalplatform for its sophisticated distribution network as the company has allowedcustomers to return their mail rental DVD’s to any store across the US•Operations:o Blockbuster likely has an extensive inventory management and routing system toensure quick processing of movie rentals and returns.•Service:o Blockbuster offers customers the ability to exchange movies at its physicallocations.B L O C K B U S T E R | 10BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGY•Marketing and Sales:o Joint promotions with fast food outlets such as Domino’s Pizza and McDonaldsincrease exposure of the Blockbuster brando Printable e-Coupons for free movies, game rentals, etc. entice customers toremain loyalo Blockbuster now offers an online movie suggestion tool to increase customerloyalty and rentals. This system is akin to that developed by Amazon.com tosuggest purchases to customersSupport Activities•HR Management:N/A•Technology Development:o Blockbuster’s website offers a user friendly web interface, a movie queuingservice, and an extensive database, for mail order rentalso The company recently purchased Movielink, a provider of video-on-demand(VoD) services, to offer its customers increased convenience to watch theirfavorite entertainment content onlineo Due to the mail rental offerings, Blockbuster has built an extensive logistics andinventory management IT infrastructure that must be kept up-to-date and adapt tochanging customer demands and expectations•Firm Infrastructure:o Increased piracy concerns and digital rights management issues make the rental ofentertainment content, particularly through online media, increasingly difficultand costly to manage from a legal aspect•Procurement:o Along with the Movielink acquisition, Blockbuster acquired the rights to themovies of Movielink’s previous owners (Warner Bros., MGM, and Paramount),increasing the selection the company has to offer its customers and making itincreasingly complicated for new entrants to compete in the marketc. Product-Market GrowthUsing the product-market growth matrix developed by Ansoff, it is possible to outline thepossibilities that a company has to expand its product offerings and markets strategically toincrease sales.B L O C K B U S T E R | 11BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYConducting this analysis for Blockbuster reveals that the media delivery giant has room forgrowth in both its markets and product offerings at a relatively low cost.Products/MarketsPresentMarketsNew MarketsPresent ProductsNew ProductsIncrease marketing of VoDOffer integrated platform forand mail rental productsonline and mail order gamingthrough rebranding efforts to servicesappeal to younger, tech savvysegmentsMarket VoD services toExpand service offerings togrowing international markets provide online gaming services toincluding UK, Germany,international marketsFrance, and ScandinaviaB L O C K B U S T E R | 12BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGYd. Financial AnalysisDefinition: Financial analysis is used to assess the viability, stability and profitability of acompany or operating division. The analysis is done using quantitative historical performancefound in the financial reporting documents (Balance Sheet, Income Statement, Statement of CashFlows). The goal of the analysis is to understand a company’s financial health through itsprofitability, solvency, liquidity, and stability.Given the financial information provided in the case, it is clear that Blockbuster is facingoperational issues that span beyond the current financial downturn. Net income has sufferedsubstantially over the last four quarters as both operating revenues and costs have fallen. As canbe seen in the chart below, COGS + SGA expenses have fallen at a slower rate that operatingrevenue, placing substantial strain on the company.An analysis of Blockbuster’s COGS and NI as a percent of revenue reveals that even thoughefficiencies have been achieved (COGS as percent of revenue is steadily declining), net incomeis no improving.B L O C K B U S T E R | 13BLOCKBUSTER ACQUIRES MOVIELINK: A GROWTHSTRATEGY