BLOCKBUSTER ENTERTAINMENT

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

national market for its product.

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

-sale computer system.

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. Will Blockbuster Entertainment

Corporation able to stand on own? BEC has certainly the resources and competitive

edge necessary to keep diversifying and go into alliance, if necessary, to stay on top of

the video rental industry.

Word Count: 1039