Outline the relative strategic positions of Netflix and Blockbuster. What are the key factors that explain the ultimate Blockbuster demise? (as of the time of the case) In the following assignment I will begin by giving the relative strategic positions of Netflix and Blockbuster as of January 2007.
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I will then outline what I believe to be the top three key factors that explain the ultimate Blockbuster demise.
Netflix – An outside-in company
At the time of the case, Netflix was a perfect example of an outside-in thinking company. Netflix‘s strategy was very straight forward – it was to allow the best home video viewing for its customers. This was a simple and clear strategy. This strategy meant Netflix could adapt and change its model of allowing the best home video viewing for its customers as its customers habits changed.
By January 2007 Netflix was fulfilling this strategy via its DVD home delivery service. By the end of 2006 we are told in the case study that Netflix had 6.6 million subscribers, a library of 70,000 different titles which were held on over 55 million DVD’s, revenues of nearly one billion and free cash flow of $64 million. The company could deliver to 90% of its subscribers within a single day.
Netflix demonstrated that it listened to customer feedback from very early on. When something didn’t work they changed it until the results showed that the replacement service was working. They changed their charging model from a per-movie price to a monthly subscription, they improved their delivery service through opening more distribution centres to allow for quicker delivery and therefore improving customer service, the range of movies on offer was not being limited to new releases but was instead being broadened to offer its customers more of what they liked, the tailoring of movies to the individual and finally carefully considered partnerships and alliances
to increase their customer portfolio.
At the time of the case Netflix had a sound business model however the CEO, Reed Hastings, could see large-scale change was imminent and he did not want to be left behind. He could see Video-On-Demand was the future and he wanted to be ready for it. The company had already been investing tens of millions in cash in VOD for several years. This demonstrated their desire to differentiate themselves from their competitors. Netflix was evolving to meet its customer’s desires.
Blockbuster – An inside-out company
At the time of the case Blockbuster were playing catch up. They had spent the recent past in a very dominant and comfortable position with almost 50% of the home rental market. During the period of dominance their model worked. They were in a position which was similar to that of Kodak at the time of the early introduction of digital cameras which ultimately saw the end of Kodak’s dominance in the photographic market. (Johnson, Whittington & Scholes, 2011, pp. 308).
They had been very much in the position of an inside-out company whose success had been built around “depth of copy”. (Ritson, 2010, pp. 62) The only evidence of a strategy was to copy and try to improve upon models which had already been developed by its competitors. Blockbuster did not identify any threats to its market position until it was too late, and when they did recognise the threat their response was to copy, not to innovate. Blockbuster first dismissed the concept of online rentals in 2002, but went on to launch a version of their own in 2004.
Key Factors in the ultimate demise of Blockbuster
1 – Blockbuster did not take its competitors seriously.
Ritson tells us that a key factor in the demise of Blockbuster was one of ignorance and arrogance. Blockbuster ignored a tiny upstart with a new
business model (Netflix) which began in 1999. In an interview with Fortune magazine in 2003, Blockbuster senior management were openly dismissive of the threat posed by Netflix. They stated that their customers were more “spur of the moment renters who did not necessarily plan their movie watching in advance”. Blockbuster viewed itself as a rental outlet and Netflix as a delivery service. It did not consider Netflix as a competitor. (Ritson, 2010, pp. 62)
2 – Blockbuster was always playing catch-up.
Blockbuster saw itself as competing in a different market. Ritson states that if Blockbuster had realised early enough that it was in the entertainment business instead of the home rental business it could have launched a competitor service to Netflix or perhaps even acquired Netflix. (Ritson, 2010, pp. 62) In the case study we are told that Hastings stated in 2005 that, “we’re just thankful Blockbuster didn’t enter four years ago”.
Again from the case study detail we can see that when Blockbuster did eventually start competing with Netflix in 2004 it launched similar products to its competitor and tried to differentiate itself through price. In the article, “Reinventing your Business Model” we are told that, “pursuing a new business model that’s not new or game changing to your industry or market is a waste of time and money”. (Johnson, Christensen & Kagermann, 2008, pp. 56) Blockbuster missed an opportunity to leap frog its opponents and instead of trying to break new ground they simply followed what was already working for its competitors. Meanwhile its competitors were already moving on.
3 – Blockbuster did not listen to its stakeholders or strategise.
Blockbuster did not listen to what its stakeholders were saying and doing. The article “Strategic Management of Stakeholders: Theory and Practice”, tells us that by “attending to important concepts emerging from the stakeholder literature”, it is possible that “top management teams can increase the robustness of their strategies”. (Ackermann & Eden, 2010, pp. 179). The article goes on to demonstrate that by mapping their stakeholders
in the following way companies can see very quickly who has the relevant interest and power to influence the company’s strategic direction.
Stakeholder mapping diagram
The lack of a strategy at the time of their dominance saw Blockbuster having to give up revenue when trying to imitate their competitors – $600 million forgoing late fees to match the Netflix model as well as spending heavily on advertising when taking their version of their competitor’s products to market. This money could have been diverted early on to innovate and to remain dominant in the home entertainment market. (Pugatch, 2007, pp. 43).
1. Ackermann, Fran & Colin Eden. (2011) ‘Strategic Management of Stakeholders: Theory and Practice’, Long Range Planning 44, pp.179–196. 2. Johnson, Gerry, Richard Whittington & Kevan Scholes. (2011) Exploring Strategy, Text & Cases, Ninth Edition. Harlow: Prentice Hall Financial Times. 3. Johnson, Mark W., Clayton M. Christensen & Henning Kagermann. (2008) ‘Reinventing your business model’, Harvard Business Review, December 2008, pp. 50–59. 4. Pugatch, CB. (2007) ‘Rent this’ (Online). Available at: http://www.response-digital.com/response/200707/?pg=42#pg42 (Accessed 19th June 2013). 5. Ritson, Mark. (2010) ‘This Blockbuster is one you mustn’t miss’ (Online). Available at: http://www.marketingweek.co.uk/this-blockbuster-is-one-you-mustnt-miss/3018752.article (Accessed 19th June 2013).