Blockbuster had a huge customer base and a conspicuous presence in many locations, which gave it a lead in market share. The company had a strong brand name and a highly visible store presence that kept customers always coming back.
The fees that Blockbuster charged on delays was considered by many as punitive and unnecessary. In addition, the company charged higher prices as compared to its competitors. This ensured that it lose out on low-income customers to its rivals.
There is an opportunity for diversification where Blockbuster can venture into movie production, run television stations, and establish video games. This will broaden its revenue stream and ensure that it does not only rely on one area, which can be rendered obsolete by technology. The existence of a highly automated distribution center measuring 850,000 square feet provides a good opportunity for the growth and expansion of the business. The company can use the big space for other business prospective such as opening a video games store.
There was a threat that Blockbuster would be rendered obsolete by technology. There were endless fears that the business and its operations would be rendered obsolete and depress its stock. The prevailing trends then made this threat real as videocassettes were quickly replaced by DVD players. This implied that all the investments that the company had made on videocassettes went to waste. In addition, competition from rivals and new entrants who were willing to leverage on the latest technological innovations to carve an edge also posed significant threats to Blockbuster’s operations. Indeed, the entry of Netflix dramatically titled the scales against Blockbuster. There was also another threat posed by the growing popularity of satellite services that had numerous movie channels. Plummeting cash flow, lack of merchandise focus, and high CEO turnover turned out to be serious threats that plagued the company as well.
Sources of Blockbuster’s Competitive Advantage
Blockbuster has a powerful buyer bargaining power that it can use to its advantage. Its huge size as a video store means that studios must rely on it to sell their movies to end-users at home. If Blockbuster does not buy from a studio, the studio sales will drastically reduce. In addition, Blockbuster relied on a revenue sharing formula that it had developed to negotiate contracts with studios. As a result, it managed to acquire the right number of videocassettes at a favorable price of $4 per piece and remit 40% of its revenue on the sale of the cassettes for the first six months. This was in contrast to the revenue-sharing formula used by most of its competitors who paid $8 per piece.
Blockbuster had a solid base of customers who exceeded one billion annually. Indeed, this put it way ahead of its competitors, some of whom were struggling to attract customers. Moreover, Blockbuster had a presence in 26 countries other than the United States and a workforce of more than 89,000. This ensured that it robustly executed its operations and managed to meet customer expectations. In addition, the company managed to build a strong brand for itself up to a point where 20% of all movie renters in the U.S knew no other moving tenting store besides Blockbuster. Its huge presence also ensured that its branches were in proximity to movie renters, and tactfully locked out competitors.
How Blockbuster Has Dealt with Suppliers to Create or Maintain A Competitive Advantage
Blockbuster entered into mutual revenue-sharing agreements with its suppliers. Part of the agreement was for suppliers to offer the best terms to movie renting outlets that could agree to stock huge volumes of movies that were considered less popular. Fortunately, Blockbuster was in the best position to leverage on this, thanks to its limitless shelf space that could hold huge volumes. Subsequently, Blockbuster received movie supplies at cheaper rates as compared to its competitors. Again, this initiative also ensured that it dealt with its suppliers directly without involving third parties.
How Blockbuster Has Dealt with Customers to Create or Maintain A Competitive Advantage
Blockbuster had a model of operation that accommodates all customer categories. Stores were customized and stocked with movies that marched the customers’ financial strengths. The company’s “Guaranteed in Stock” policy ensured that they retained a customer if they did not have the title of the movie that the client was looking for. A customer was advised to pick a different movie title but was issued a voucher for the movie that was not in stock. This way, Blockbuster ensured that it was guaranteed the customer’s return to the store. Effectively, this was also a strategy to lock out its competition from having the customer.
Although Blockbuster’s movie rental prices were higher than its competitors, its policy of imposing extra charges against late returns played in its favor. The late fees charges were not only a source of additional revenue, but they also ensured that its stores had substantial movie inventories at any given time. Therefore, every customer who comes looking for any movie title will be almost assured of it, and subsequently prevented from moving to a competitor’s store in search of the same. Furthermore, Blockbuster also provided other products such as T-shirts, drinks, DVD players, VCRs, posters, microwave popcorn, and candy. These items were appropriately blended with movie lovers and sent them back to the stores.
Blockbuster’s Competitive Advantage
Blockbuster’s competitive advantage primarily relied on its business model. The company had ensured that it bypasses the middlemen and deals directly with the supplier (movie producers) and the customers. Moreover, Blockbuster had created a dependency more for its suppliers. It had enough shelf spaces to hold huge volumes of movies. This implied that it can store piles of movies on behalf of the suppliers. As a result, it held a crucial stake in its interactions with its suppliers. This was in addition to its unique pricing strategy that is tailored to meet the needs of different customer categories.
In each one of the stores operated and franchised by the company, Blockbuster leveraged the computerized point of sale management information system. It managed to collect daily information about the customer demographics of its customers. This information was then analyzed and categorized in accordance to store, region, state, and country. This information helped it gain relevant information about its customers’ movie tastes and behavior and subsequently tailored its operations to meet these demands. Unlike its competitors that operated using generic formulas, Blockbuster knew which movie titles were required at which store. Indeed, this gave it a competitive advantage over its rivals.
The existence of its highly automated distribution center that was as big as 85,000 square feet also gave it a significant edge over its competitors. Thanks to this state-of-the-art distribution center managed to mechanically repackage newly released movies by itself and effectively avoid the use of third parties, which charged higher fees. On the other hand, its competitors that did not have the advantage of such a facility relied on middlemen to distribute their products. This not only increases operational expenses but also puts the business at the mercy of distribution companies. Incidentally, all these competitive advantages that initially gave Blockbuster an edge over its rivals were not sustainable in the next three years. In an industry that is technology-controlled a strategy can only run for a short period before a disruption occurs.
The Option of the Sales of New Movies
The option of aggressively pursuing the sale of new movies and removing much emphasis on the rental of new movies has both advantages and disadvantages. The primary advantage lies in the fact that selling new movies will be diversification. Relying upon a single revenue stream is not always good for a business. An upset or disruption in the market that touches on movie renting can adversely affect the business. Selling directly will also reduce the need to have big libraries and movie storage centers that stock returned movies from clients. This will save on space and reduce operational expenses incurred by the business.
On the other hand, it must be remembered that the main reason why the company thrived as a movie renting business was because of its target clients. As has been discussed above, it was expensive to buy movies or watch them in cinema halls as compared to renting them. Not many could afford to buy and attend theaters every weekend, hence the option to rent. Thus, if Blockbuster decided to put much focus on the sales component, it will be dealing with a small fraction of its clientele base. This cannot assure it of the huge revenue streams that it has been used to from the rental business.
The selling option will require Blockbuster to have and maintain sufficient movie stock for its millions of customers. This will promote it to use VCR to reproduce more movies to sustain its supplies. However, there are some legal issues including the First Sale Doctrine and Copyright laws that control this option. Chances are that the company will enter into endless legal battles with movie producers and studios for copyright infringement. In addition, by selling new movies, Blockbuster will be acting as the link between the movie studios and customers. There are many stores that sell directly to customers. Since Blockbuster will have to buy from them, they will be forced to sell at slightly higher prices to make a profit. In the end, customers will prefer to get their movies directly from the studios from where they will benefit from reduced prices as opposed to a distribution outlet such as Blockbuster. Based on the above considerations, it would not be a good decision for Blockbuster to consider venturing into the sale of new movies.
Porter’s 5 Forces
Bargaining power of suppliers- Blockbuster had a strong bargaining power over its studio suppliers. This meant that they could obtain products at reduced charges. There was no serious rivalry among Blockbuster’s competitors as it was the industry leader then with a huge market share. The threat of new entrants indeed challenged the organization. Netflix, for instance, banked on Blockbuster’s shortcomings to throw it out of business. Although buyers have strong bargaining power, Blockbuster did not allow them to be a limiting factor in its pursuit for profits as it came up with unique models to keep customers glued to it. However, the greatest threat to the business was that paused by substitute products. While the company was still mainstreaming video cassettes, products such as CD, live streaming and digital satellite were gaining tract.