Blockbuster Declares Bankruptcy

Blockbuster Declares Bankruptcy Yvonne Dedmore MGT 435 – Organizational Change Robert Hamamoto September 19, 2011 Shortly before their 25th anniversary, Blockbuster files for bankruptcy protection with a Chapter 11 petition. The failing company couldn’t compete in today’s market against Netflix, Redbox, Apple, and other internet-based businesses that provided mail-order rentals or digital streaming. Their business model needed to be revamped to stay competitive. This paper will take a look at where the problem was, the measures taken to correct the problem, and how Blockbuster can come back and be competitive. Blockbuster, Inc. started business in 1985 in Dallas, Texas by David Cook. The company rented video cassettes, and later DVDs and video games, to customers for viewing at home. Mr. Cook was a computer programmer and used this to his advantage. While other video stores had no idea what they had still in stock, Mr. Cook had reports that showed him which movies were being rented most so he could optimize the video selection. He also wanted a family environment and had a no-porn policy. (Gandel, 2010). In 1987, Wayne Huizenga bought the business from Mr. Cook, and the company went into an expansion mode, opening stores nationwide and eventually overseas by the mid 1990s. (History. com, n. d. ). Mr. Huizenga knew that one day technology was going to put them out of business. He hired consultants to help work on a creative plan on different ways to deliver movies. The consultants even went as far as recommending Mr. Huizenga buy a cable company. Instead of doing that, Mr. Huizenga sold the company to Viacom in 1994 and got out of the business while the company was still worth something. (Gandel, 2010). Under Viacom, the company was losing money. They brought in different CEOs and tried once again to focus on movie rentals. (Gandel, 2010). That helped and currently, Blockbuster has over 3,500 stores and over 25,000 employees. These stores are considered â€Å"brick and mortar†. They are physical buildings that franchise owners must buy or rent, stock with supplies, and hire people to work and run the stores. There are overhead costs that internet-based businesses don’t have. This is one reason why Blockbuster has been losing money these past few years. Blockbuster was the leader in video rentals for over 15 years. That was the thing to do; go to the movie store, rent a movie, pop popcorn, and enjoy a good movie from home. Unfortunately, Blockbuster didn’t keep up with technology and didn’t take the competition seriously enough and soon enough to change. When change happens in an organization, managers need to develop strategies that benefit the entire organization. The effects of organizational development are to improve the organization’s ability to handle its internal and external relationships. Organizational development is intended to change the beliefs, attitudes, values, and structure of an organization. Blockbuster needed to concentrate not only on its customers, but also on their competition. Instead they ignored both and kept everything status quo. Instead of changing their strategy before the competition got their foot in the door, Blockbuster sat on the sidelines. Management said the business models were different and that Blockbuster could co-exist with the other companies. (Carr, 2010). Blockbuster was just too slow to embrace change and flow with today’s environment that consisted of convenience and digital delivery. People try to cram too much into their days. The convenience of having movies, television shows that got missed because of soccer practice or a late meeting, and even video games at your fingertips is too appealing. People today just don’t want to drive to the video store after working all day, driving the kids to activities, doing homework, making dinner, and cleaning up. They want the movie or television show to be just a click away. With the busy schedules, they don’t want to forget to drop the movie back off at the store and have to deal with late fees. If Blockbuster had stayed up on trends and realized what was happening with technology, they may have been able to keep the customers that were lost and also gain new ones. Instead someone else took advantage of this and stole business right out of the video giant’s hands. Netflix became the biggest competitor to Blockbuster, even though Blockbuster didn’t seem to notice. Netflix created a video rental mail-order service through their website. This was a monthly subscription service that allowed customers to receive a movie in the mail, watch it at their leisure, and return it when they were finished; all with no late fees. When the movie was received back to the Netflix warehouse, a new movie was sent from the customer’s favorites list. The customer only had to go as far as the mailbox to receive and return a movie. Netflix also initiated the streaming video and television shows through the internet to your television, computer, or gaming system. The selection wasn’t as big as the actual DVD mail-order system, but it was faster and more convenient for some customers who â€Å"wanted it now†. This was all offered to the customer in a low monthly fee. Some subscription services even allowed for unlimited rentals per month. Another competitor, in the form of kiosks, offered movies for $1. 00 a night, and these kiosks were conveniently located in grocery and drug stores. Pick a movie and drop it off the next time you were shopping. No late fees or membership necessary. Why not rent a movie after you checked out from the grocery store with dinner already in the cart? What a great way to save time, money, and spend quality time at home with the family. Redbox, backed by Coinstar, is the main competitor of movie rental kiosks. They have over 24,000 conveniently located kiosks. Redbox not only is in grocery stores and drug stores, but expanded into fast-food restaurants. (Newman, 2010). Due to these new technology inventions, Blockbuster stores were seeing less foot traffic at the brick and mortar stores. People were looking for convenience while trying to save money in today’s economy. This should have been a clear sign for Blockbuster’s management to make a change. Blockbuster did downsize by closing some of the existing brick and mortar stores, but continued to do business as usual. They needed to conduct an organizational diagnosis to find out not only what needed to be changed, but also why. The diagnosis is a chance for management to strategize where the company is now, what the skills set is, and where do they see the company going in the future. It consists of data collection which may include questionnaires, interviews and observations. (Spector, 2010). These shifts in external realities usually need a new pattern of behavior which Blockbuster didn’t seem to possess. It appeared as if the CEOs didn’t want to change their strategy or they really didn’t notice what was happening in the world of technology. It’s hard to say at this point. Blockbuster’s management needed to focus on a strategic renewal which would alter the current strategy with the intent of gaining an advantage over the competition. (Spector, 2010). It took Blockbuster over six years to enter the mail-order movie rental business. With the financial support and connections Blockbuster had, it shouldn’t have taken them that long. By the time Blockbuster entered into the â€Å"streaming† environment, Netflix already had over three million customers. (Gandel, 2010). Could Blockbuster’s big name compete with that? It depends on how they structure their business model. Blockbusters business model appeared too narrow – video rental. They left the door wide open for competitors to come in and create a new market. Blockbuster held on too long to their retail strategy even though trends were showing that consumers were not following. Netflix had a slow start, but no one was competing with them. It took Netflix a little time to work out some of the kinks, but Blockbuster wasn’t there to challenge them. (Newman, 2010). In the author’s viewpoint, Blockbuster almost set themselves up for failure by not taking advantage of changing their business model to keep up with technology. In this company analysis, it wasn’t a matter of employees resisting a change because management wasn’t proposing a change. Sometimes companies struggle to implement a cultural change only to meet resistance from employees. Usually the resistance happens for a few reasons; forcing the change from the top down, not communicating with employees, and not offering essential training for the change, to name a few. This wasn’t the case with Blockbuster. They needed an organizational redesign to respond to the changing environment of technology. Behind the scenes this may have been happening, but it never materialized into a functioning strategic plan. Blockbuster had bombarded their customers with late fees, tried to go in the direction of mail-order rental service (Blockbuster Total Access), and even put up kiosks. Unfortunately, they got into the game a little too late. The competition already had a handle on the market and customers were easing into the convenience of online streaming, kiosks at the grocery store, and mail-order delivery. There wasn’t the need to drive down to the corner video store to look through the new releases or older movies. Also, they could view online reviews instead of relying on the opinions of one Blockbuster employee. Blockbuster was sinking and the company wasn’t able to tread water fast enough to keep them afloat. The losses were huge every year and the amount of money they had invested into failed operations was getting them nowhere. The inevitable was happening. In September 2010, Blockbuster filed for Chapter 11 Bankruptcy protection. The goal was to reorganize the company instead of liquidating assets. That is a good strategy if you can implement a good business model to be and stay competitive. It has been speculated that after bankruptcy, the company will look much different. Hopefully, because their debt will be reduced and a new business model will be put into place, Blockbuster will be able to start over. In April 2011, Dish Network won the auction that bought most of Blockbuster assets out of bankruptcy. It paid an estimated $320 million and the goal is to compete directly with Netflix’s streaming features. With Blockbusters name in Hollywood, Dish feels that they will be able to offer better, quality service to its customers over Netflix. Dish is negotiating with Starz movie channels to provide a great line-up of movies to its customers. (Sherman, 2011). Another option that is coming out of this reorganization is continuing with the Blockbuster Total Access mail-order program. One perk that makes them different from Netflix is the option to take the disc back to a physical store for an exchange rather than wait on the postal service. (Falcone, 2011). This may appeal to some customers who want a membership or subscription-based fee structure, but also want the gratification of watching movies on their own schedule and not having to wait for a new one to come in the mail. The plan is to downsize the number of physical stores still open which would result in a number of layoffs. At this time, some 3,000 stores will continue to stay open until a plan can be implemented. Blockbuster has already closed approximately 1,000 stores over the last couple of years. (Anderson, 2011). The closing of additional stores will be more in line with the changing environment. To save some of the existing brick and mortar stores, Blockbuster should consider a different environment that would appeal to a wider range of customers. Some ideas of this could include the following: 1. Create a relaxed environment similar to Starbucks. Customers can come in and look for videos online while having a cup of coffee, tea, or a snack. There could be a living room type environment that is cozy and comfortable with couches, coffee tables, and table lamps. They should also have access to movie, game, and music reviews to help with their selection. 2. Provide Blockbuster kiosks in a wider range of locations. Compete with Redbox and Netflix on a wider level. Blockbuster’s name allows them to obtain new releases faster than Netflix and Redbox. Blockbuster can use this to their advantage at these strategically placed kiosks. 3. Know the demographics in the area. Some areas of towns are more able to afford internet and subscription fees. Maybe it’s time to shut down the brick and mortar stores and cut its losses in those areas. Concentrate on areas that may not have access to internet or can’t afford monthly fees. These areas of town may rely on physical stores and closing those locations would be a bad business move. 4. If the physical store is going to stay open, cut down on the size. If the owner owns the building, think of creative ways to fill the other area that would complement the Blockbuster store. Make it more appealing for customers to actually visit the video store rather than sit at home streaming the same movie. Make it an experience for the customer. If the owner leases, consider modifying the lease or look into subleasing the extra area. 5. Look into changing CEO or upper management. Dish Network needs to ask why management let technology get so far away from them, and how did they miss out on the opportunity to keep their existing customers and provide more for them. Was management so afraid of technology that they didn’t pursue it even though they were watching the losses year after year? Unless Dish Network creates a niche that Netflix, Redbox, and the other internet-based businesses can’t compete with, the purchase of Blockbuster may have been for nothing. The Blockbuster name and their Hollywood connections will help, but Dish Network needs to get moving fast on a strategic plan. The more time that goes by without having streaming capabilities and quality service under the Blockbuster name, more customers will stay with or revert to one of the other services. For Blockbuster to make a comeback they will need to invest in marketing campaigns, technologies to keep pace with competition, and a plan to stay competitive. This time Blockbuster can’t afford to enter a market and not keep up with the environment. Management needs to constantly watch trends and stay up on technology. They should be flexible and creative in this ever-changing world. Just because a business model was successful doesn’t mean it will always be successful. Blockbuster learned this the hard way. REFERENCES Anderson, M. (2010, September 23). Blockbuster files for bankruptcy. Debt, changing media habits topple Blockbuster. Yahoo! Finance. Retrieved from http://finance. yahoo. com/news/ Debt-changing-media-habits-apf-1049608580. html? x=0. Carr, A. (2010, August 27). Blockbusted: A Netflix Knock-Out, Bad Metaphors on the Path to the Movie Monster's Bankruptcy. Fast Company. Retrieved from http://www. fastcompany. com/1685375/blockbuster-plans-for-bankruptcy-a-look-at-ceo-jim-keyes-best-denials. Falcone, J. P. (2011, September 2). Netflix vs. Blockbuster: What’s the Best Service for Streaming and DVDs? Cnet News. Retrieved from http://news. cnet. com/8301-17938_105-20093587-1/netflix-vs-blockbuster-whats-the-best-service-for-streaming-and-dvds. Gandel, S. (2010, October 17). How Blockbuster Failed at Failing. Time Magazine Business. Retrieved from http://www. time. com/time/magazine/article/0,9171,2022624-1,00. html. History. com. Oct 19, 1985: First Blockbuster store opens. (n. d. ). This Day in History. Retrieved September 16, 2011, from A;E Television Networks website: http://www. history. com/ this-day-in-history/first-blockbuster-store-opens. Newman, R. (2010, September 23). How Netflix (and Blockbuster) killed Blockbuster. U. S. News ; World Report, Money. Retrieved from http://money. usnews. com/money/blogs/ flowchart/2010/09/23/how-netflix-and-blockbuster-killed-blockbuster. Sherman, A. (2011, September 2). Dish Said to Stream Blockbuster Films to Challenge Netflix. Bloomberg. Retrieved from http://www. bloomberg. com/news/2011-09-02/dish-said-to-plan-blockbuster-rival-to-netflix. html Spector, B. (2010). Implementing Organizational Change:   Theory Into Practice  (2nd ed. ). Upper Saddle River: NJ: Pearson Prentice Hall.