David P. Cook created the first Blockbuster Video store in October 1985 in Dallas, Texas. Mr. Cook intended to establish ” video superstores” that would respond to the on going trends in the video industry during the 1980’s because the number or households buying VCRs was increasing very much and so was the number of film titles. He wanted to create a store that would respond to the customer’s needs such as: nice facilities, wide selections of videos, fast service, and convenience.
A computer system was developed so that the company was able to track specific demographic data, customer’s renting patterns, and the number of times a cassette has been rented, and the information was collected through the scanning of the customer’s membership card.
The primary target market of the superstore was eighteen to forty-nine- year-old adults and six-to-twelve-year-old children. In 1986, it is reported that the company was composed of eight stores and eleven franchises in cities with a minimum population of 100,000; for example: Houston, Chicago, Detroit… In May of 1986, the company officially became Blockbuster Entertainment Corporation (BEC). In 1987, David Cook, founder and chief executive officer (CEO), left BEC after selling 35% of Blockbuster common shares to John Melk, Donald Flynn, and H. Wayne Huizenga.
The latter became the new CEO of BEC. Under the new management team BEC has expanded into the West Coast, Midwest, Southwest, and Eastern regions of the country; by the end of 1992 the company had a total of 3,127 video stores. BEC wanted to open many more stores in 1993 because it wanted to acquire 25% to 30% of the market shares within the following two years; at that time BEC had revenues of $868 million. BEC was growing fast and so were technology and competition. It faced competition from other video rental stores like West Coast video, Kroger, and Winn in different regions.
In addition, new technology brought in cable TV with the pay- per-view or video-on-demand concept; consequently, customers are able to order their favorite movies from the comfort of their homes. However, BEC continued to expand and went international as far as Japan, United Kingdom, Chile, Venezuela, and Spain. The company entered into film entertainment programming, music retailing, and other new ventures. Finally, in 1995, Blockbuster Entertainment Corporation merged with Viacom, ” major provider of entertainment programming”, to “reduce the threat to Blockbuster from changes in technology.”
In 1996, BEC became a wholly owned subsidiary of Viacom with new leadership and unclear prospects. Chapter seven of the Strategic Management textbook is about competitive strategy and the industry environment with focus on strategies in fragmented industries, strategies in the different lifecycles of an industry, strategies to deter entry in the industry, and supply-and-distribution strategy. This relates to the Blockbuster video case because “the video- rental is still very fragmented” which means that the industry is composed of many small companies and barriers to entry are very low.
However, the book pointed out that “the returns form consolidating a fragmented industry is often huge…[so that] many companies have developed competitive strategies to consolidate fragmented industries.” For example, Wall-Mart pursue a chaining strategy to obtain the advantages of cost leadership, and Blockbuster opted for franchise and horizontal merger to secure a In order to become the world number one video rental chain, with more than 4,600 company-owned stores and franchised national stores and about 2,300 stores in about 25 countries, Blockbuster had to arrange the merger of its regional stores and develop franchises to form a corporation.
Management created the Blockbuster Distribution to look over licensing and franchising of new stores, to monitor their start-up and to make sure that “they keep up Blockbuster’s high standards of operations as its chain of superstores grows.” The corporate headquarter has all information about each store; for example, corporate tracks sales and inventory of each store through its point-of Secondly, according to the book, a company can develop competitive strategies throughout its different lifecycles. For example, in embryonic industries, the high profit of the innovators may attract potential movers which become known later.
The innovators can protect themselves by exploiting their innovation and develop low cost leadership or differentiation. In our case, Blockbuster was not the first to start the video rental business, but it moves into the market and differentiates itself with its new concept of superstore and acquires the largest share of the market. Blockbuster singles itself out as being the family oriented video store. The chief marketing officer, Tom Gruber, used his knowledge of family oriented advertisement from Mc Donald to “strengthen the company’s position as a family store.” This strategy helps establish brand reputation for the company.
Furthermore, with its position in the market, BEC is able to buy out small competitors which can only compete at the lower price level. BEC also establishes high barriers to entry with its purchasing, marketing, promotion and advertising power. For instance, BEC teams up with other companies like Mc Donald, PepsiCo, Domino’s Pizza, and Taco Bell to promote each other’s products.
A company can strengthen its competitive advantage through Supply-and- Distribution strategy. “To improve quality and protect market share, BEC decides to expand its entertainment concept by entering the music(which did not work out well for the company), and the film entertainment programming. By doing so, the company is able to acquire exclusive distribution right on several independent films per year
. It started out with Spelling Entertainment, Republics, Sundance Channel, American Film Institute, and Channel One Network. BEC went into alliance with some other company like America Online, Inc.; The Blockbuster/AOL Program will have special offers on rentals and special services for each other’s subscribers. As a result, the smaller competitors can decide to sell out or become a franchise of Blockbuster. Almost everybody in the business world is pondering about the future of BEC after Viacom announced that it intended to auction the rest of Blockbuster’s share after selling about 20%of its shares last Summer.