DVDs Profitable for Small Video Stores
Friedman, Mark. Arkansas Business; Little Rock20.45 (Nov 10, 2003): 1.
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YEARS AGO, WHEN VIDEO tapes regularly cost $65-$70, Little Rock video store owner
Gregg Davis only could afford to carry a few copies of box-office bombs.
But now, with the wide appeal and low prices of DVDs, Davis can buy more copies of
practically every movie including 20 copies of "The In-Laws," which fizzled in theaters.
"It definitely changed how we buy and how we do business," said Davis, who owns Premier
Video at 11600 N. Rodney Parham Road. "While [DVDs] are lower cost than the tapes, the
profit margins have increased. But we have also increased the number of copies we get of a
movie."
While Davis wouldn't discuss sales figures, the Video Software Dealers Association of Encino,
Calif., said DVD rentals contributed to a 5 percent increase in an average video rental store's net
profits in 2002, according to a study it released Sept. 30.
"What DVD does is it comes in and provides everybody with plenty of low-priced product to put
on their shelves and rent to their customers. Everybody's happy," said Sean Bersell, a spokesman
for VSDA.
In the past year, Wal-Mart Stores Inc. of Bentonville has dived into the DVD rental business
with an Internet-order, mail-delivery service similar to the one popularized by Netflix Inc. of Los
Gatos, Calif., that allows customers to rent as many DVDs as they want and keep them as long as
they want, with two to four movies out at a time, depending on the rental plan. The movies are
delivered through the mail.
Jon Hegranes, who covers the entertainment industry for Baldwin Anthony Securities in Dallas,
said he doesn't know how well the online service is going to work.
"An online model is kind of limited to the high-quantity type viewers who just rent movies after
movies," Hegranes said. "I don't think the subscription model is for everyone."
DVDs Flood Market
DVDs first started appearing on the scene in the late 1990s, at the time when independent video
stores were going the way of the nickelodeon.
Blockbuster Inc. of Dallas, the largest in the industry, was accused of driving the mom-and-pop
video stores out of business through their wall full of new releases.
In the early 1990s, there were about 30,000 video stores nationwide, and now there are between
16,000-18,000, said Davis, who has owned a video store for nearly 20 years.
Up until the late 1990s, he competed with Blockbuster by buying more "sleepers" - good movies
that most people have never heard of and foreign films.
He's also tried to keep his prices down.
What enraged some video store owners, though, was a deal Blockbuster made in late 1997 to buy
videotapes at a reduced price from the movie studios. In return, the studios got a piece of the
rental profits. The deal enabled Blockbuster to increase its new release copy depth, which
improved the chances of customers going home with movies they wanted.
In 1999, three small video store owners filed a federal lawsuit in Texas alleging a conspiracy by
Blockbuster and the studios to keep small operators from enjoying from the same deal. A federal
court judge ruled in favor of Blockbuster in July 2002, and the ruling was upheld on appeal.
But by the time the case was over, a dramatic shift had occurred in the video retail landscape:
DVDs.
In 1998, DVD rentals accounted for less than 1 percent of a typical video store's total rentals,
according to the report by the VSDA. In 2002, the number went to 20.1 percent.
And for the week ending June 15, DVD reached another milestone: for the first time more DVDs
were rented in a week than videotapes, 28.2 million to 27.3 million, Bersell said.
"It surprised some people that it's done well in the rental market," Bersell said.
At Premier Video, Davis saw the same transformation. In 2001, it rented about 70 percent
videotapes and 30 percent DVDs. Today, Premier is renting about 60 percent DVDs and 40
percent tapes. Davis sees the DVD percentage jumping to 70-75 percent after Christmas, when
people receive DVD players as gifts.
Davis said he pays between $18-$20 for DVDs. The low price of the DVDs has caused tapes to
drop in price as well: anywhere from just under $20 to $40.
Because of the reduced prices for tapes, "we are still having better profit margins, but we're
taking advantage of that and being able to satisfy customers [by buying more copies of movies],"
Davis said.
"With the DVD pricing, it definitely puts us back more on an even plane [with Blockbuster],"
Davis said. "And a lot of independents have been able to stay in business and get healthy again
because of it."
Although VSDA doesn't track the number of video stores opening and closing, Bersell said more
video stores have opened recently because of DVDs.
DVDs are becoming the standard medium over tapes because of the price, superior sound and
picture, and extra features such as trailers, deleted scenes and commentaries, Bersell said.
The DVDs also have helped boost revenue for the typical store.
The typical video store had revenue of $335,000 in 2002, compared with $261,000 'in 1999, the
VSDA report showed. The report also showed a profit margin of 4.2 percent after taxes for the
average video store in 2002.
Online Renting
In 1998, just before the widespread success of DVDs, Netflix entered the market. Its model
allows subscribers to request a list of DVDs online and receive them in the mail within a day or
two. Subscribers can keep three DVDs for as many - or as few - days as they want; when one is
returned by pre-paid mailer, the next DVD on the customer's list is automatically shipped.
The service quickly took off with the popularity of DVDs.
At of the end of its third quarter 2003, Netflix had 1.29 million customers, up 74 percent from its
2002 third quarter. It also reported $191 million in revenue for the nine months that ended Sept.
30 and net income of $4.24 million.
"Netflix has proven that the online model works quite well," said Hegranes, the analyst with
Baldwin Anthony Securities.
Wal-Mart.com began testing its similar DVD rental service in October 2002 and unveiled its
system nationwide in June.
Its monthly subscription rate for customers who want to have two DVDs at a time is $15.54 and
its $18.76 for those who want to have three. In typical Wal-Mart fashion, that a bit less than
Netflix's flat rate of $19.95 for three DVDs at a time.
Cynthia Lin, a spokeswoman for Wal-Mart.com, said Wal-Mart got into the rental business as
more of its customers moved to the DVD format.
Research shows more than 40 percent of U.S. households have a DVD player, but that number is
expected to grow to 84 percent by 2007, she said.
Lin would not release customer numbers or say what kind of revenue Wal-Mart expects from the
service.
To attract customers, Wal-Mart has done some advertising in its sales circulars, which reach
"millions of homes," Lin said. It also has placed inserts in the boxes of DVD players sold at its
stores.
There are a handful of smaller, similar services as well.
Blockbuster spokesman Randy Hargrove, said Blockbuster views online renting as a niche
market. But Blockbuster started an online service, Filmcaddy.com, 2002. And it is testing a
subscription service where a customer can rent as many movies he wants from the store.
Of the $8 billion in video rentals, only a tiny fraction comes from online services.
"Online renting is not really an impulse [buy]," Hargrove said. "Most people plan to rent the
same day. The vast majority of people won't want to wait by the mailbox for a movie."
But Hegranes, the stock analyst, said online rentals service can be very attractive to some
consumers because they eliminate late fees.
"I think the space is going to get kind of crowded, but I think it's got a lot of room to grow," he
said.
Hegranes said he doesn't believe the online rentals are going to hurt the small independent video
stores any more than they've already been hurt by the mega chains.
"It's [still] just as tough for a mom-and-pop to compete against the size of Blockbuster," he said,
because it's nearly impossible for them to be as well stocked.
Davis said he is going to keep fighting Blockbuster, by offering such things as a plan 'in which
customers can rent several movies a night for several days for one price.
RAO Video owner Bob Oliver, who has been in the video rental business since 1977, said he's
not worried about Blockbuster.
"I was here long before they were," said Oliver, who has more than 20,000 titles at his store at
609 Main St. in Little Rock.
Although he wouldn't release revenue figures, he said RAO is as healthy as it's ever been.
Cite:
Friedman, M. (2003). DVDs profitable for small video stores. Arkansas Business, 20(45), 1.
Retrieved from https://search.proquest.com/docview/220375525?accountid=458
Strategic Repositioning of the Service Supply Chain
Carr, Amelia; Muthsamy, Senthil; Owens, Charles. Organization Development Journal;
Chesterland30.1 (Spring 2012): 63-78.
This study uses archival data, observations, and focus groups to better understand strategic
repositioning in the service supply chain. The strategic management theory, resource based view
theory and social exchange theory are used to develop a conceptual framework. The study
attempts to answer three research questions concerning Blockbuster, Inc.: What is the role of
technology innovation? How does strategic repositioning apply? What is the role of strategic
alliances? A discussion and implications of the study are offered. [PUBLICATION
ABSTRACT]
Headnote
Abstract
This study uses archival data, observations, and focus groups to better understand strategic
repositioning in the service supply chain. The strategic management theory, resource based view
theory and social exchange theory are used to develop a conceptual framework. The study
attempts to answer three research questions concerning Blockbuster, Inc.: What is the role of
technology innovation? How does strategic repositioning apply? What is the role of strategic
alliances? A discussion and implications of the study are offered.
Introduction
One of the major challenges in business and industry observed today is firms' inability to sustain
their performance and competitive advantage when technologies or markets change (Bower &
Christensen, 1995). While firms are quite adept at making incremental performance
improvements to their extant technologies and giving their customers something more or better
in the product/service attributes they already value, but often they fail to meet the challenges of
the disruptive technologies that introduce a radically different package of attributes from the one
that mainstream customers typically value (Bower & Christensen, 1995). Managing disruptive
innovations involves reworking many things inside and outside the organization product/service package, pricing, cost structures, business models, segmentation, customer
networks, product applications and complements, and supplier networks and alliances.
Innovation in the service sector is necessary for companies to maintain their cornpetitive
advantage in their respective industries (Lyons et al., 2007).
This study examines the strategic repositioning of Blockbuster Inc.'s service supply chain.
Blockbuster suffered a number of set-backs due to disruptive technological innovations and
attempted to reposition its strategy to meet competitive challenges in the movie rental industry.
The study uses archival data, observations, and focus groups to better understand the strategic
repositioning of Blockbuster in the movie rental industry. The objective of this study is to
capture some of the mistakes made during the repositioning of Blockbuster's strategies and
understand the implications of reconfiguring its service supply chain. The strategic management
theory, resource based view theory and social exchange theory are used to develop a conceptual
framework of strategic repositioning in the service supply chain. We attempt to answer the
following research questions in this study: (1) What is the role of technology innovation as it
relates to Blockbuster and its position in the movie rental industry?; (2) How does strategic
repositioning apply to Blockbuster, Inc.?; and (3) What role might strategic alliances and
organizational change have for Blockbuster to achieve a competitive position in their industry?
The next section provides a conceptual framework for strategic repositioning in the service
supply chain. The elements in the framework are discussed, then we provide a discussion on
Blockbuster's efforts to strategically reposition itself in the movie rental industry followed by
some implications for management.
Conceptual Framework
The strategic management theory provides for an understanding of the need for aligning an
organization with its internal and external environments in order to achieve a better competitive
posture and firm performance (Elms et al., 2010). Forming alliances with other organizations is a
key strategic approach to manage the challenges of the environment by taking mutual advantage
of each other's expertise. The strategic management theory has been extended to include alliance
networks as a major repositioning tool (Dittrich et al., 2007). In this study, the focus is on the
challenges of relationship building among supply chain partners. The paper considers the
dynamics inherent in organizational change efforts involved in uniting organizations across a
supply chain for the sake of effective and efficient sourcing, operations, and marketing of
products and services.
An interdisciplinary conceptual framework of strategic repositioning grounded in strategic
management theory is presented in Figure 1. In the framework, technology innovation occurs as
organizations seek new methods of producing or delivering products and services effectively.
Once the new technology is successfully adopted by pioneers (first movers) in an industry, the
other organizations will be forced to react to the trend to sustain their business. In an effort to
remain competitive, organizations have to examine how the new technology has affected their
business model, and evaluate their strategic position in the industry. A decision to reposition
their organization will be necessary if the firms adopting new technologies have gained
considerable advantages. Repositioning is not possible without cooperation from other
organizations that are part of the supply chain, especially suppliers. Support exists for this
argument from various strategic perspectives. Resource based-view suggests that an
organization's ability to acquire or absorb the necessary resources from other organizations is a
critical capability to achieve and maintain a competitive advantage (Barney, 1991). Similarly,
social exchange theory recognizes that organizations have to work together to assist each other in
attaining the necessary resources to achieve a competitive advantage (Yang, 2009). As a result of
entering into strategic alliances, the organizations are better positioned to access the necessary
resources to achieve business goals such as improving customer relationships, reducing cost,
triggering innovations, and other organization improvements.
The framework presented includes the dynamics of organizational change because when a firm is
trying to implement new strategies or make adjustments to existing strategies, it has to alter
various aspects of the organization that is quite a daunting task. Organizational change as shown
in the framework suggests that a strategic decision to reposition the organization requires input
from internal constituents including management and employees.
Technology Innovations: "Technology related trends and conditions can be placed into three
categories: technology diffusion and disruptive technologies, the information age, and increasing
knowledge intensity" (Hitt et al., 2011, p. 11). In the movie rental industry, technology diffusion
and disruption have occurred due to firms such as Redbox and Netflix adopting digital and
internet based technologies. Blockbuster was late to respond simply because top management at
Blockbuster never believed that the new technologies would win the market and delayed the
efforts to implement the new technologies (Randall, 2010). It seemed that the management team
at Blockbuster did not understand the nature of the disruptive technologies. Clayton Christensen
suggests that often firms fail to respond to the disruptive technology because there was no
common language throughout the organization to describe the trends and in turn a lack of
common understanding necessary to articulate how to respond. In other words, there is no clear
understanding of the disruptive technology so the organization's leadership team could engage in
a dialogue and discuss how to arrive at a solution (Euchner, 2011).
According to Christensen (Euchner, 2011), understanding the simplicity of what the customers
are seeking and providing it to them at a price that is consistent with what they are willing to pay
is critical to capturing the market. Not only did customers respond quickly and in high demand to
Redbox and Netflix's use of new technologies used to deliver movies, also there was decline in
customers' use of the existing methods of in-store movie rental. Clearly, the adoption of new
techniques such as mail ordering and kiosk movie rentals disrupted the Blockbuster in-store
movie rental business model. Diffusion of an innovation occurs through a five-step process
including awareness, interest, evaluation, trial, and adoption (Rogers, 1962). The rate that
customers move from awareness to adoption of a new technology determines how quickly the
technology diffusion occurs. In the movie rental industry, new technologies are already
overtaking the mail order and kiosk movie rental delivery methods. In an effort to remain
competitive, Netflix began using on-demand video streaming as a new technology to deliver
their movies (Gandel, 2010).
Firms need to respond quickly to the new technologies and they should perceive it as an
opportunity rather than a threat when a new technology is emerging in their industry. The nature
of disruptive technology is that its rapid adoption by users indicates the emerging trends in the
industry. Blockbuster was focused on the established paradigm neglecting the future trends in the
market. For example, Blockbuster was slow to deploy the new technologies of kiosk movie
rentals and on-demand video streaming. When employed by a competitor, a disruptive
technology that is quickly diffused into the industry can severely reduce the market share of the
industry leader if they are not able to quickly deploy the new technology and remain competitive
in the process (Hitt et al., 2011). Thus, the diffusion of technology in the rental movie industry
had two main driving forces: 1) competitors who introduced new technologies and 2) consumers
who used the new technology and discontinued using the existing technology to rent movies.
Strategic Repositioning of the Organization: Strategic repositioning is a deliberate and
comprehensive attempt by an organization to adapt to the changing industry forces and market
environments. Strategic repositioning essentially calls for large scale changes in the entire stream
of business operations. Such strategic change often represents a radical shift in the underlying
value proposition the business offers to customers as it seeks to change the targeted market
segment(s) as well as its basis for differential advantage (Porter, 1996). Repositioning is largely
driven by a growing chasm between the needs of the market and the capabilities of the enterprise
(Corstejens & Doyle, 1989).
Accordingly, strategic positioning demands that the firm has to reconcile internal and external
environments by finding a match between market requirements and its ability to serve them
effectively (Hooley et al., 2005). Thus in repositioning, it is important not just to know how the
change in direction constrains the capability of the firm's assets but how and whether the firm
can build or acquire the distinctive resources and capabilities to sustain their advantages in the
new position (Collis & Montgomery, 1995). This is where Blockbuster initially failed. They
were trying to make corrections to their current business practices rather than trying to build the
new competencies and capabilities required to stay competitive in the movie rental industry.
Based on the strategic management theory, we examine the internal and external forces as well
as core competency as they relate to Blockbuster and the movie rental industry. Porter's (1980)
five forces model includes the threat of new entrants, bargaining power of suppliers, bargaining
power of buyers, threat of substitute products, and the intensity of rivalry among competitors.
We can apply the five forces model to Blockbuster. From the beginning in 1985, when
Blockbuster entered the movie rental business, it had to contend with the threat of new entrants
to the market. Initially, Blockbuster used its vast resources to remain competitive in the movie
and video game rental market through its in-stores operations (Spielvogel, 2006a). The
bargaining power of the suppliers of the movies was evident by the revenue-sharing contracts
that Blockbuster entered into with Warner Brothers. As the buyer, Blockbuster was able to obtain
discounts for the large quantities of computer diskettes (CDs) that it purchased from Sony. The
threat of substitute products and services became an issue in the movie rental industry as new
methods used to deliver products and services to customers were made available by competitors
such as Redbox, Netflix, and other competitors (McBride & Karnitschnig, 2007). As each
company tried to remain competitive, the rivalry among competitors began to force some
companies out of the market such as Movie Gallery. Competitors began to adapt to the new
methods for delivery of movies to customers such as kiosks and ondemand. With many
competitors in the movie rental industry, achieving above average returns became more difficult.
In order for an organization to be successful in the long-term, it must be able to identify and
sustain its core competencies. By definition, the core competence of a company is what sets it
apart from the competition and allows it to improve its business performance (Schmenner &
Vastag, 2006). However, prior research suggests "that core business-related outsourcing,
offshore outsourcing, and shorter-term outsourcing have positive effects on the outsourcing
firms' market value. In contrast, non-core business-related outsourcing, domestic outsourcing,
and longer-term outsourcing are not found to enhance a firm's value" (Jiang et al., 2007, p. 885).
One might question which is true for Blockbuster since it seems to have lost a great deal of firm
value since it was founded. Blockbuster was far ahead of their competition with its brick and
mortar store operations when they first entered the industry. The CEO, John Antioco, of
Blockbuster knew that it would be difficult to remain competitive without a strategy for
competing in the industry (Antioco, 2011; Spielvogel, 2007). Blockbuster attempted to modify
its business strategy by expanding its product and service offerings, implementing a variety of
pricing strategies, trying to acquiring some smaller competitors in certain markets, and finally
trying to play catch-up to compete with its competitors. Further, the new CEO, Jim Keyes,
planned to transform Blockbuster from a "video retailer into a company that provides completely
convenient access to media entertainment" (Wall Street Journal, 2007, p. B14). Unfortunately,
due to internal management conflicts, Blockbuster had difficulty in identifying a solid strategy
and had to file for Chapter 11 bankruptcy in September 2010. Blockbuster may have lost focus
of what its core competency was. It may have focused on the types of products more than on the
delivery of the product. While Blockbuster was trying to figure out the best pricing strategy such
as late fees, extended rental periods, rent to own, its competitors were developing new methods
of delivery of the product such as mail delivery, video kiosk, and ondemand rentals. Further, the
competition was delivering the product at a more competitive price while incurring lower
overhead costs compared to Blockbuster (Bond, 201Oa). Blockbuster also lost focus of which
market they were competing in when they began to sell movies and games in their brick and
mortar stores. One might say that the management team at Blockbuster was at fault and that is
why there was a change in the leadership of the company to try to turn it around (Millstein,
2007). On a positive note, Blockbuster made a very strategic move to shore up its supply chain
partners and try to gain a competitive advantage through strategic alliances with its suppliers
such as Sony for CDs, NCR for kiosks, Quick Trip convenience stores for the location of kiosks,
and Warner Brothers for movie titles piOrio, 2010). Further, Blockbuster was able to offer ondemand through their strategic alliances with TiVo and T-Mobile. Agreement with the suppliers
to give Blockbuster first priority on receiving new title releases before they are made available to
the competition is one of the competitive advantages that Blockbuster had (Bond, 201Ob). In
addition, the revenue sharing contracts that Blockbuster made with its suppliers helped it to
improve cash flow. Eventually, several of the strategic partners also invested money in
Blockbuster and assumed some ownership in the company. These and other strategies were some
steps taken to try to reposition Blockbuster and help it to focus on its core competency in the
movie rental industry.
Organizational Change: Effective innovation required not only external stimulants but also
internal receptivity to change. Some individuals lacked interest in and resisted innovation due to
self-interest, uncertainty, and lack of trust (Patti, 1974). A "significant shareholder at
Blockbuster, Carl Icahn, went after the CEO John Antioco publicly" (Nash, 2009, p. 30).
Blockbuster avoided the risk of implementing new technology and tried to stick to its old
business model until it had to make changes in order to remain in business. There was no trust
among the management team to allow the company to explore innovative delivery of it products
to customers. The leadership at the top of the company did not empower employees to make
decisions at the local unit level as everything was driven from corporate management from the
top down to employees. Thus, employees and store managers could do little to affect the
company's customer relationships and the organization's long-term survival. This is important
since the organization's management team relied on the employees for contribution to the
successful implementation of the organization's strategies. Employees needed to be integrated
into the problem-solving process so they will be successful in their efforts (Mohrman & Worley,
2009). Blockbuster's management team struggled in this area.
It is increasingly recognized that organizational culture plays an important role in determining
how well the individual members of the organizations fit into an organizational context
(Rousseau, 1990). Thus, organizations devote substantial time and resources to establish and
maintain congruence between strategic objectives and their members' values and interests.
Organizational culture is the pattern of shared values and beliefs that help individuals to
understand organizational functioning and thus provide them with norms for behavior in an
organization (Deshpande & Webster, 1989). Theorists argue that even the process of strategy
formulation is determined by the "guiding beliefs" of the organization's members and that the
effectiveness of strategy implementation is dependent upon the extent to which norms and
beliefs are shared and accepted (Davis, 1984). Organizational culture is an important element in
strategic decisions, and organizations emphasizing innovation strategies should foster a culture
that encourages experimentation and tolerates mistakes (Arogyaswamy & Byles, 1987).
Unfortunately, management at Blockbuster made too many mistakes. A series of bad decisions
kept the management team floundering to satisfy not only its shareholders but also its strategic
alliance partners. Perhaps, the level of innovation at Blockbuster was stifled to the extent that
new ideas were based on an old paradigm when, in fact, the new paradigm required a totally new
business model. One only needed to observe the competitors in the industry to see the new
paradigms being utilized while Blockbuster's management team had difficulty trying to match
them. "At Blockbuster, it was apparent in 2005, that directors with preconceived notions were
determined to serve as obstacles to the management team's plans, especially since they made it
hard for the management team to find a formula for success" (Antioco, 2011, p. 39). In this case,
it can be said that the organization's inertia was reflected by the top management's resistance to
change.
Research indicates that organizational climate that is conducive for employees' commitment is
more likely to exist in organizations with cultures emphasizing flexibility oriented values than in
those emphasizing control-oriented values (Zammuto & Krakower, 1991). It is evident that
appropriate organizational culture is essential for the successful implementation of strategies and
specifically innovation programs. The strategic decision to reposition Blockbuster likely required
some degree of adjustment to change within the entire organization. Addressing organizational
change is important in the strategic process as it can affect an organization's ability to build
supply chain relationships for long-term profitability. Firms entering into a relationship are never
certain about how much risk or benefits they will receive, therefore a sense of commitment to
ensure the overall success of the relationship is continually being reinforced as long as the
relationship continues (Liao et al., 2010). Organizational change can affect the level of
commitment between the firms and the extent to which it is credible. Moreover, Blockbuster's
strategic alliance with its key suppliers required reciprocal commitment so both organizations
benefited from the relationship. If the management team of either organization in the strategic
alliance was not committed, then the relationship could disintegrate. For this reason some of
Blockbuster's management team, was replaced to help the company fulfill its commitment to the
alliances established with its strategic suppliers. Further, the level of commitment by the
strategic suppliers was extensive given that some had assumed part ownership in Blockbuster to
try to ensure its survival in the movie rental industry. This level of commitment exemplified a
sense of duty on the part of both firms, and it formed the basis by which problems could be
addressed and resolved. Reciprocal commitment of resources by one firm also enhanced the need
for joint planning and actions, and a high degree of information exchange between the alliance
partners.
Further, workers' attitudes towards Blockbuster as a result of numerous store closings and
changes in store operations may have affected how the customers were treated (Wall Street
Journal, 2007). Blockbuster's decisions to change their movie rental policies may have caused
major issues if customers did not perceive value in the changes made by Blockbuster. Pricing
decisions were critical to the company's strategy as it attempted to deal with the changing
business environment due the technology innovations and increased competition in the industry.
In addition to charging premium prices for new titles, Blockbuster reintroduced late fees when
movies were not returned on time by their customers. Also, the rental period was shortened to
take advantage of renting the new titles to as many customers as possible before the perceived
rental value of the title decreased (Kok & Bekker, 2007). While these changes in Blockbuster's
pricing strategies may have been in the best interest of Blockbuster, they were not helpful in
building stronger relationships with Blockbuster's customers.
Strategic Alliances: The strategic management field offers much opportunity for exploring the
benefits of supply chain relationships to improve firms' competitiveness in their respective
industries (Huit et al., 2007). The resource based-view suggests that the use of strategic alliances
to assist a firm in establishing capabilities that it does not already possess is beneficial to firms
seeking to maintain their competitiveness in an industry (Huit et al., 2002). Firms need to
continuously update their capabilities whenever technological disruptions and change occur
(Eisenhardt & Martin, 2000). Firms are constrained internally in developing the capabilities to
manage technological change due to organizational inertia (Cohen & Levinthal, 1990; Cyert &
March, 1963). Thus, alliances and supplier networks are considered effective mechanisms to
absorb and learn new capabilities to manage the technological changes with ease (Anand et al.,
2010; Rothaermel & Deeds, 2004). Since alliances and supply chain relationships enable an
organization to create, extend, or modify its resources and assets to meet the challenges of the
emerging technologies and markets, a firm's ability to collaborate with suppliers can be
considered an important dynamic capability (Repenning & Sterman, 2002). Recent studies
suggest that alliance and supplier relations can act as catalysts of large scale strategic change
projects and help a firm in its strategic repositioning (DeMan & Duysters, 2005). Alliances and
supplier relationships facilitate strategic change by helping the focal firm explore and absorb
new capabilities as well as exploit and leverage their existing knowledge bases to find new
opportunities (March, 1991).
As previously mentioned, Blockbuster entered into strategic alliances in an effort to improve its
performance by sharing risks and cost reduction efforts. A number of firms have used strategic
alliances to gain a competitive advantage and increase their market reach in their industry
through the development of new products and services (Jiang & Li, 2008). In the movie rental
industry, uncertainty and risk was driven by the fierce competition and technology innovations.
Prior research (Kanter et al., 1992; March & Simon, 1958; Milliken, 1987) has consistently
defined organizations in the context of facing great turbulence embedded in ever-increasing pace
and uncertainty. The ability of Blockbuster to remain competitive was impaired by its inability to
quickly sense and respond to industry changes which caused it to lose market share. This played
a major role in Blockbuster's development of strategic supply chain relationships.
Since technology continued to change in the movie rental industry and the market tends to be
price sensitive, it became increasingly important for companies like Blockbuster to manage it
supply chain relationships. Blockbuster and its strategic supplier partners needed to ensure that
the final customers' expectations were met as well as ensuring that the business was profitable.
The literature on customer relationship management and strategic alliances suggests that
information sharing, credible commitment through relationship building can help to reduce
uncertainty and enable strategic alliances to better sense and respond to changes in the market
place. Further, survival of organizations during times of uncertainty requires top management
visionary leaders that can successfully guide their organizations through the inherent risks. One
of the concerns with establishing strategic alliances is that the organizations are committed to the
success of the relationship for mutual benefits and that neither organization behaves in an
opportunistic manner so as to compromise the effectiveness and efficiency of the other
organization. In other words, they must be a trustworthy alliance partner (Johnson, 2010). One of
the risks associated with developing strategic alliances is that the alliance partners could
ultimately become competitors of each other. Blockbuster risked having their alliance partners
begin to sell directly to their customers if the alliance relationship did not work out as planned
(Shambora, 2010).
Customer Relationship Management: A robust service system design will focus on the customer
and develop strategies, people and systems to ensure that the service system meets the customer's
expectations (Chase et al., 2009). As products reach the maturity phase of the product life cycle,
companies like Blockbuster have to maintain vigilance in product/service development as well as
maintain a leadership role in deploying cutting-edge new technological innovations (Nash,
2009). Matching the supply chain with the product/service design chain would be necessary for
Blockbuster to remain competitive and grow its market share. Understanding the changing
environment includes making the correct decisions about pricing strategies to complement the
product/service offerings as customers could easily switch to a competitor in a price sensitive
market (Netherby, 2007; Winer, 2001).
One area that Blockbuster continued to struggle with was its customer relationships. Although
some efforts were made to identify their customer's needs, management at Blockbuster did not
come up with a pricing strategy that effectively and efficiently competed with its competitors
(Wasserman, 2005). Management's pricing strategy was designed to increased revenue by
charging a premium for new releases and reducing the rental fee once the movies were made
available by their competitors. In addition, the use of late fees to increase revenues continued to
be an area of concern that did not help in establishing good customer relationships. Delivery is
another area that Blockbuster had to work on to meet customer expectations. Making movies
available in stores, at kiosks, and on-demand would allow for more flexibility in meeting
customer expectations (King, 2009a; King, 2009b).
As noted by Clayton Christensen, an organization must go beyond merely listening to the
customer. They must be able to think beyond what the customer's present needs are to what the
customer's future needs might be. Also, they must be able to understand how to meet the
customer's present and future needs using the most effective methods that will allow their
organization to stay ahead of the competition. The customer may not be giving a clear indication
of what they want so the management team has to be capable of understanding the market and
what trends are occurring or might occur in the future. This is how Christensen (Euchner, 2011)
suggests that management can respond successfully to a disruptive technology that may appear
to be simple yet meets an unexpressed need of customers. As in the case with Netflix's mail
order movie rentals service and Redbox's inexpensive and conveniently located movie rental
kiosk, these simple technologies severely disrupted Blockbuster's business model for in-store
movie rentals.
Technology disruption in the movie rental industry was aided by the fact that customer's
disposable income decreased during the economic downturn in 2008 through 2009. The
introduction of new service delivery methods and offering a more customer oriented pricing
strategy allowed Blockbuster's competitors, Netflix and Redbox, to quickly grow their market
share and profits.
Blockbuster's attempts to transform their operations (Millstein, 2007) and improve their
customer offerings continued to lag behind their competitors as they struggled to achieve a
profitable operation (Spielvogel, 2006b).
Discussion
Blockbuster's effort to strategically reposition itself is not uncommon for a once dominant player
which has become complacent in their response to competitors in the industry. According to
Stalk et al. (1992), companies that neglect to proactively maintain their competitive advantage
will ultimately be overtaken by rival entrants to the market. Certainly, allowing new entrants to
the market to take away the established firms' market share is not in the best interest of
shareholders so one would expect a change in leadership in any firm that takes this position. On
the other hand, some companies find themselves in a mature industry with declining sales. These
companies must continually find new and innovative ways to remain competitive as new entrants
attempt to take market share from them. Blockbuster did make some efforts to remain
competitive as noted by its marketing strategies and operations strategies; however, it was not
able to respond quick enough to retain its competitive position. Theory on technology innovation
suggests that Blockbuster would have been better off if they had been more focused on changes
in technology and deploying new methods for delivering their products and services to customers
rather than on the marketing and operations strategies alone. Unfortunately, Blockbuster did not
attempt to focus on information technology and supply chain management until it was rather late.
Even when senior management was hired to address the problem, no support was given to
implement appropriate strategies to compete with competitors like Netflix. Blockbuster's
management team took a 'wait and see' approach to change their business model and use
innovative technology to the deliver their products and services to customers. This is not the
norm for a dominant player in the market that is willing to take calculated risk to outperform the
competition. Obviously, Blockbuster was hindered by a management team that did not have the
foresight to make the right strategic decisions and follow through with them at a time when
Blockbuster was the dominant player in the movie rental industry.
The use of strategic alliances by Blockbuster was a good strategic decision similar to the
initiative taken by IBM and similar companies that realized their suppliers had key resources that
could help them to reposition their company for long-term growth and profitability.
Unfortunately, the timing of implementing the strategic alliances and other strategies that
Blockbuster pursued was a bit too late to allow them sufficient time to protect their core
business. For example, Blockbuster specialized in delivery of the movie to the customer. Yet,
they partnered with NCR and other companies to distribute the movies using the new technology
such as video kiosks and on-demand (Bond, 201Oc). While, it is not clear whether any of the
alliances that Blockbuster entered into caused them problems, it is clear that the alliance partners
were more focused on whether or not they would be paid than whether Blockbuster would come
out of bankruptcy as a going business concern. For Blockbuster, losing sight of their core
business was a mistake that resulted in erosion of the Blockbuster Brand and net worth of the
company. In fact, Blockbuster was purchased by Viacom in 1994 for over 8 billion dollars and
later Viacom sold Blockbuster while it was still profitable; however, in 2011, Blockbuster was
purchased by Dish Network through an auction for about 320.6 million dollars (Russolillo,
2011).
Finally, it is imperative in the service sector that a company focuses on their customers' needs.
Anecdotal evidence suggests that Blockbuster failed miserably in this area. Customers have
many choices when it comes to renting movies and a company like Blockbuster must understand
that building customer loyalty is first and foremost in their industry. In theory, the service system
design places the customer at the center of the business strategy. It appears that Blockbuster
missed this critical step in identifying what was important to its customers and delivering that
service to their customers. Given a loyal customer base, Blockbuster might have held onto
enough market-share to remain a competitive force in the market. In the end, many of the
customers willingly tried the new competitor's products and service offerings and began shifting
their purchases away from Blockbuster. Going forward as the Blockbuster brand, the enterprize
under the new ownership of Dish Network, is repositioned to survive and possibly flourish
among the complimentary products of Dish Network. One thing for certain, more capital
investment and a new strategic direction are required to maintain the Blockbuster brand image as
part of Dish Network.
Managerial Implications
When a firm faces a disruptive technological shift in the market - one that alters the industry's
proven business models, how the managers of the firm perceive the disruption could alter
whether the firm responds to the challenge successfully. The management must be able to
describe the technology disruption of the firm. Further, management must be able to structure a
response and decide whether they can allocate the appropriate level of resources to adapt the
firm's strategies to disruptions introduced by the technologies. Since how the technological
change is portrayed influences the organization's behavior (Gilbert & Bower, 2002), appropriate
framing of the challenge is a critical responsibility of the top management team. For instance, if
the disruptive changes are perceived as a threat, managers and employees may respond very
hastily and rigidly, try to defend the existing business model, commit resources in excessively
large portions rather than a measured, and the organization may resort to centralization of
authority instead of giving autonomy to the champions of change. On the other hand, if the
disruptive innovation is perceived and articulated as an opportunity, it will enhance creativity.
Flexibility and optimism will enable altering the existing paradigms, and can inspire the
organizational members to engage in dialogue in search of new concepts, ideas, or solutions
(Stacey, 1995). In the latter case, tolerance for ambiguity and openness to challenges enhances
the ability of individuals to detect variations in the environment and develop new knowledge
(Chapman & Chapman , 1967).
The implication for managers in the service supply chain is that technology innovation requires
constant attention. Successful organizations may stay ahead of changes in technology by being
the innovator and driving the implementation of new technologies in their industry. Unsuccessful
organizations may lag the changes in technology and take the attitude that they can play catch up
if a new technology becomes the new way of doing business in their industry. Using the
Blockbuster example, the role of organizational change has a major effect on whether or not the
organization will be the leader or the laggard with respect to technology innovation. Sticking
with the traditional technology methods and thinking that size of an organization and market
dominance will insure that the organization can quickly respond once a competitor has gained
access into the market is incorrect thinking on the part of the organization's management team,
dearly, this is an inappropriate method for achieving and maintaining success in business.
Organizational culture must be aligned with a strong sense of management direction to turn an
organization around even when a competitor has gained access into the industry. Once again, the
Blockbuster example demonstrates that a culture that suggests that the company can ignore its
core competency and develop alliance and partnership relationships on the supply side as well as
the distribution side without considering what capabilities it contributes to the success of the
organization is problematic. The literature indicates that developing alliances and partnerships
will only benefit the organization when it possesses a capability that will contribute to its own
success. It would be inappropriate use to use alliances and partnerships when the organization
has undefined capabilities. As in the Blockbuster case, we see an organization that ultimately
was at a loss to identify its true capabilities and depended totally on its alliance partners to take
ownership of the company and eventually sought to sell it. Many of the alliance partners became
more concerned about their benefits from the relationship with Blockbuster than the success of
the organization. This was especially true once they saw that the management team at
Blockbuster had no clear direction to make the organization profitable. Thus, it is critical to have
a clear understanding of the organization's capabilities and an organizational culture that will
shift it in a direction that strategically repositions it for success. A more positive example is
demonstrated by IBM when it strategically repositioned itself. IBM was in a similar position as
Blockbuster when it became complacent as the industry leader in a dominant position. However,
as competitors began to enter the industry rather than remain complacent, IBM identified what
its core competency was and developed capabilities to not only remain competitive but to look to
the future for what would be the next technology innovation in the industry. IBM developed
strategic alliances and partnerships while making preparations to be on the leading edge of the
next technology innovation for their industry. This is what a fierce competitor must do to
maintain a leadership position in its industry and remain profitable. Likewise, under the
ownership of Dish Network, Blockbuster is in a position to better compete with the rival
competitors such as Netflix provided all other hurdles are overcome.
Conclusion
This study raises a number of questions and provides a conceptual framework of strategic
repositioning in the service supply chain. Due to technology innovations, a number of companies
in the service sector are experiencing similar difficulties faced by Blockbuster. Given that the
service sector in the United States economy is so vital, this is a prime area for further
examination of the organizations in service supply chains as they face decisions on how to
reposition their organization and better utilize the new technologies that are disrupting their
business models. The role of supply chain management including service delivery, strategic
alliances and customer relationship management are primary areas for consideration as
researchers continue to study the role of technology innovation in organizations in the service
sector.
Cite: Carr, A., Muthsamy, S., & Owens, C. (2012). Strategic repositioning of the service supply
chain. Organization Development Journal, 30(1), 63-78. Retrieved from
https://search.proquest.com/docview/963777416?accountid=458
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