Identifying operational problems and solutions for Blockbuster's decline

Operational Improvement Plan for Blockbuster

Blockbuster has been, ever since the foundation of the company in the mid-1980s, the prototype of video rentals, with a great success through generations. The diversification of its portfolio and offer to include additional services such as game rentals, as well as the consolidation on the market with the acquisition of rival company Ritz Video and the opening of numerous new stores, have assured a privileged position and a profitable business. However, the reality is that during the last couple of years, the company has been losing serious money, as much as $1.2 billion in 2004. The reasons for this can range from competition on the market to bad decisions in terms of future acquisitions and to technical and technological problems. The aim of this paper is to identify the causes of Blockbuster's problems and to provide a reasonable action plan for the future, which can include reasonable solutions for a better operational performance of the company.

The Blockbuster Process

The Blockbuster business process is based on a good business relationship with the producing studio by which Blockbuster keeps 60% of the rental free, with 40% going to the studio. At the same time, Blockbuster offers movies (DVDs) for sale and, through its portfolio of acquisitions, games and other services. At the same time, the company has launched its online service to counter the threat of competitors like Netflix on this segment and has been consolidating its position in this area by adding facilities like the possibility for the client to drop the rented movies either at the nearest Blockbuster store or through the usual postal delivery.

Despite the optimal process, the company has been reported losses throughout most of the 2000s and the online service has not helped much to regain some of the clients that have been lost or retain the existing ones. Some of the reasons are presented below.

Identified problems

On one hand, Blockbuster seems to provide a lot of opportunities for the individual consumer that are aimed at reducing the time he spends picking up or delivering movies and improving his overall experience as a Blockbuster client. In this sense, for example, the company has introduced, in November 2006, the Blockbuster Total Access program which allows the customers who are using the online Blockbuster service to drop the rented DVDs in a Blockbuster store, as well as their usual option of doing so in the mail. This decreases the time between DVD deliveries, because the DVD dropped off in the store will be counted as already delivered, thus saving a day (Netflix, the Blockbuster online competitor, has no such option, which leads to a lag time between deliveries, especially if there is a national holiday during which the postal services are on vacation).

However, one of the main operational problems identified at Blockbuster Inc. is exactly related to the online services the company provides. In this area, we have been able to identify the following segment problems:

Technological. Many of the customers have reported problems with the website. Some of these are either website errors or potential issues reflecting the possible improvements in terms of website design and the capacity of the website to be more user-friendly. Other technological problems/issues include a bad coordination with the actual physical deliveries. According to some testimonies of different clients, the DVDs are not respecting the promised process by which a DVD is released immediately as one is received. The technological problems behind this are to blame: the computers do not record sufficiently fast the fact that the DVD has been returned and these technological glitches delay the entire process.

Customer-service related. Service is sometimes slow in getting the DVDs out and the requests and comments made by the clients are slow in getting a response. In comparison to Netflix, where there is a list of frequently asked questions that obtain an immediate, automatic response and generate the required action. For example, at Netflix, replacing a broken DVD simply means a series of clicks on the website and the way this is done facilitates the interaction (the client can choose among several options in the list of potential problems).

Price. The options at Blockbuster online are simply higher priced, with no additional service or quality. As a simple example, the 3-DVD option is $16.99 at Netflix and $19.99 at Blockbuster. The extra $3 that are paid at Blockbuster are not justified, in the client's perspective, by any additional service or extra quality. It is not too much to pay extra, but why do it if it does not bring anything different. Over price, Blockbuster customers will simply switch to Netflix.

The second operational problem that Netflix encounters is cost-related. The costs of operating all the stores are much too high, because this includes not only rent-related costs, but also other administrative costs of operating a physical location. This will tend to make Blockbuster less competitive: additional costs than its competitors means that it will need to provide services at a higher price, which will turn people towards other offers on the market.

Finally, a third problem at Blockbuster is its capacity to keep up with its competitors and threats coming from the market. Netflix is the obvious example in this sense. To any analyzer, Netflix seems more slender and more capable to adapt its services in order to be able to offer them at the highest quality and lowest price. The costs that Netflix incurs are mostly technological costs, related to things such as the purchase and maintenance of the company servers, the capacity to deliver the DVDs, etc. We have already described some of the costs the Blockbuster incurs. Further more, Netflix seems better adapted at this point to a world where rapid change is probably the essential characteristic. People want to move fast and for them it is very practical to simply drop the DVD off and wait to receive a new one. Blockbuster provides a similar service, but, as previously shown, it is a service that does not run as smoothly, one that creates more problems for the client than it actually is able to solve.

Proposed solutions

The problems that have to do with the operational viability of the company all revolve around the problem with online Blockbuster, but also with competitiveness on the market (in fact, one induces the other). In this sense, the following recommendations are aimed at maximizing the company's capacity to increase its interaction with its clients and perform better.

Decrease profit margins

The issue here is relatively simple: Blockbuster should decrease its proposed profit margins in order to become more competitive on the online market and be able to increase its future revenues. In this way, with a balanced reduction of costs as well, the company can go from current losses to a potentially profitable business in the near future. The costs can be easily cut by a series of measures that can include reducing the size of the stores (already steps towards cutting overhead costs have been made with the reduction of retail space), but also more investments towards areas that can keep costs down in the future as well (the online environment is obviously a good example in this sense). This will increase the competitiveness of the company and its capacity to face threats on the market.

Some of the acquisitions that Blockbuster will be making in the future also need to be clearly analyzed and determine whether the added value justifies the price paid, as well as whether the company that is being acquired is likely to have costs that will impact the acquiring company's balance sheet.

Conclusions

The paper has identifies some of the operational problems that Blockbuster has. Many of these are related to its capacity to remain competitive on a market that requires flexible players, able to reduce their costs while keeping the same levels of activity. The online presence seems the best way by which Blockbuster can benefit from this as well, however, it needs to bring an added value on the market. We have proposed an integrated website that will present more of the services that Blockbuster can offer to its customers.

At the same time, costs remain a problem and a principal cause of the losses. The company will need to adapt more, while retaining its main focus, and either reduce retail space or simply close some of its stores. The shift needs to be made more towards a competitive online environment that can maximize revenues, while significantly reducing costs.