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My thoughts on the demise of Blockbuster…

Introduction

photo credit: Thomas Hawk

photo credit: Thomas Hawk

On Wednesday, November 6, 2013 Dish Network (parent company of BlockBuster) announced the remaining 300 Blockbuster stores will be closing.   This should not be much of a surprise to consumers who have had a hot and cold relationship Blockbuster throughout it’s history and started running from the stores in the late 1990’s when Netflix arrived on the scene.  In this blog post I will examine aspects of organizational behavior (OB) and human behavior (HB) through Blockbuster’s start-up phase, its 20 year skyrocketing growth period and finally through bankruptcy and acquisition by Dish Network in 2011.  Blockbuster’s story is of interest to me in a couple ways.  Firstly, I was a customer of Blockbuster starting back in the 1990’s.  Almost every weekend involved a trip to Blockbuster to select a video tape of a recent movie.  As Blockbuster expanded their services our future trips involved rentals of video games and DVDs – sometimes even the purchase of candy and popcorn.  Secondly, many attribute the demise of Blockbuster to Netflix, the online movie delivery giant who I have been a customer of for many years.  Netflix revolutionized the movie rental market by delivering movies right into your home via the internet.  In our home we have the ability to watch Netflix on five different devices.

The review will describe the history of Blockbuster to illustrate areas in which the organization was positioned to flourish.  It will also discuss possible changes that occurred in the structure of the organization that may have ultimately led to the bankruptcy of the company in 2010.  Lastly I’ll focus on the impact to Blockbuster’s individuals, groups, and the overall organization when the company began to falter as well as how human behavior of those individuals, groups and organization contributed to their failure.  The most obvious organizational behavior topic to explore will be in the area of Strategic Management which “uses strategy for an organization’s survival by eliminating competitive threats and maximizing opportunities for increased organizational security and wealth.  Strategic management is concerned primarily with decision-making processes and actions that determine an organization’s long-run performance” (Pindur, Rogers & Kim, 1995).  Blockbuster failed significantly in implementing approaches associated with successful strategic management.

The early days

Blockbuster’s beginnings trace back to the mid-1980s when computer service company owner David Cook saw his sales to oil and gas customers in Texas dwindling when that industry started to dry up.  At the urging of David’s wife Sandy, who was an avid movie fan, David sold off his interests in his software company and opened the first Blockbuster Video store in Dallas, Texas in 1985.  Cook believed that with his experience in computers he could gain significant competitive advantages over the much smaller, non-technical mom and pop video stores that sprinkled the landscape (“Blockbuster inc.”, 2011).

Cook introduced a computerized video inventory system, a magnetic strip on movies to prevent theft, and a laser scanning system tied to the members’ card to speed the checkout process.  Sales of interests in his software company provided Cook with significant cash flow to support an inventory of over 8,000 tapes which dwarfed inventories of other local stories.  As a result, Blockbuster Video became a huge success in Dallas.  Cook took this opportunity to quickly expand, opening three more stores over the next year (“Blockbuster inc.”, 2011).

Waste Management founder takes over the Blockbuster helm in 1987.

Waste Management founder takes over the Blockbuster helm in 1987.

High start-up costs, particularly attributed to large inventories, forced Cook to explore options to raise funds to continue the expansion of Blockbuster.  In late 1986, Blockbuster prepared for an initial public offering (IPO) of Blockbuster shares.  However, the IPO was canceled just days before after an industry column questioned Cook, who was experienced in the gas and oil industry, about his ability to lead a publicly traded video entertainment company.  After the failed IPO and continued losses, Cook was forced to sell interests in Blockbuster to a group of investors led by Waste Management’s founder, Wayne Huizenga.  Huizenga and Cook had very different visions for Blockbuster’s future.  Huizenga planned growth through corporate owned stores whereas Cook saw opportunities in franchising.  After a mere two months, Cook backed down and left the company.  With Cook out of the way, Huizenga went on a buying spree and within two years had grown the company to over 700 stores – primarily through acquisition.  By 1990, Blockbuster was opening one new store a day and had expanded outside the States to a total of 1,200 global stores.  In the mid-1990’s, the growth frenzy started to stall as Blockbuster reached 3,400 stories with as many as 1/3 being outside the US (“Blockbuster inc.”, 2011).

Interestingly, their start was predicated on visibility into a changing and ultimately failing industry (i.e. software services for Texas oil and gas companies) and the application of innovation into an existing business (i.e. video rental) which revolutionized an industry.  One could argue that the same vision and innovation that led to the rise of the once multi-billion dollar Blockbuster business is what led to its demise.  This demise started when modern day leadership failed to provide that same vision and innovation (see Failed Strategic Planning section below) their original founder had when Blockbuster launched.

Blockbuster’s organizational structure

The strength of an organization is critical to its long-term success and sustainability.  As noted by Bhidé, “an organization’s capacity to execute its strategy depends on its ‘hard’ infrastructure – its organizational structure and systems – and on its ‘soft’ infrastructure – its culture and norms.” (Bhidé, 1999)  As such, it is important to evaluate Blockbuster’s hard and soft infrastructures during their early days of growth through their darker days preceding their collapse.  As expected, Blockbuster utilized a very tall hierarchical structure “with several layers of management between frontline employees” (Bauer & Erdogan, 2010, p.346).  However, was it structure that fail them or was the strategy being poorly executed?

Blockbuster loses connection with their customer

In their early days, Blockbuster controlled the video rental industry with their large inventories and a monopoly on access to newly released movies.   In the driver’s seat, they were able to set aggressive daily rental pricing models and apply steep penalties when movies were returned late.  Over the years, Blockbuster management has always appeared to use what I call a “heads down” management approach.  With this style of management, the business focuses on the delivery of their current services, makes decisions within a vacuum and fails to integrate innovation into their daily management responsibilities.  Possibly the most public example of their heads down decision-making approach was then they changed their rental policy, as a convenience for their members, to automatically convert rentals to purchases when a movie was more than a week late.  Customers were surprised to see thirty dollar charges on their statements for the purchase of late rentals and rushed to stores to beat rental return deadlines.  This was quickly seen as an underhanded approach to generate revenues.  Soon a class action lawsuit representing members from 47 states was brought against Blockbuster.  Blockbuster’s settled the lawsuit but their cavalier attitude towards their customer was made abundantly clear when chief executive John Antioco said “even with refunds and the cost of new signs and brochures to explain the policy, the settlement will cost Blockbuster less than $1 million” which was not even 1% of their six billion dollar revenue from the previous year (“Blockbuster settles ‘no late fees’ claims”, 2005).  Blockbuster also refused to eliminate this policy but did agree to provide more signage in the store so members were aware.

A more recent example of decision-making devoid of customer input or awareness was illustrated in a 2010 Fast Company interview when then president Jim Keyes stated “Look, when I say it’s [gaming consoles] confusing, I’m talking about how confusing it can be for parents, our consumers. That is our core–for example, that family-oriented mom who is not as willing to figure out how to go to a console or a computer and load a movie into the queue. The mainstream consumer wants simplicity. But we could be on consoles tomorrow morning for subscriptions if we wanted to.” (Carr, 2010b)  In this case it was clear that Blockbuster management had stereotyped their customers and consumers, as being technology deficient and unable to understand and effectively utilize streaming content – a market which at the time was providing Netflix with over two billion dollars in annual revenue (“Netflix 2010 annual report”, 2010).

Failed strategic planning

Blockbuster struggled with direction during the late 1990's. photo credit: FutUndBeidl

Blockbuster struggled with direction during the late 1990’s. photo credit: FutUndBeidl

Aside from the aforementioned issues with their organizational hierarchy and customer relations, many have attributed Blockbuster’s ultimate demise to failure in strategic planning.  However, before we can fully evaluate Blockbuster’s strategic planning efforts, we must understand what strategic planning is and why is it critical for an organization.  Harvard Business Review author, Henry Mintzberg describes strategic planning “as the one best way to devise and implement strategies that would enhance the competitiveness of each business unit” (Mintzberg, 1994, p. 107).  In the simplest of terms, strategic planning is a framework that dictates a direction in which the company plans to move over a given period of time and how they will get there.

Approaches used to create an organization’s strategic plan can vary.  One option is more formal, which includes the evaluation of detailed organizational financial data and brainstorming meetings with the organization’s top officers at retreat locations.  Planning can also be inspired in more subtle, personal ways, where ideas and opportunities rise from lower levels within the company through the grapevine.  Some companies prefer a hybrid, where both formal and informal approaches feed into each other to ensure all options are considered.

One can only assume with the purported draconian management styles of former president Antioco and onetime owner Huizenga that the more formal approach was taken by Blockbuster in developing their strategic plan.  As mentioned previously, Huizenga’s plan was to ensure future success with an aggressive expansion – opening new stores every day and across the globe.  However, “real strategic change requires not merely rearranging the established categories, but inventing new ones” (Mintzberg, 1994, p. 109).  What Huizenga and all senior management and presidents since that time have failed to do was recognize and adopt the changes in technology that resulted in a new, cost-effective way to deliver movies into the home.  As noted by Donna Fenn, “big business is grid-locked with a deep and nested organizational structure which makes horizontal collaboration and operational change difficult to achieve” (Fenn, 2010) which may explain how in 1997 Netflix was able to create a new market that would forever change Blockbuster’s history.  Blockbuster was burdened with a deep, nested organizational structure, and even further challenged with the sheer number of local stores, however, with all the resources that Blockbuster could bring to bear in this war with Netflix, it’s hard to understand why they were not able to build off of what Netflix started and through innovation recapture the on-demand video delivery market.

Before being overly judgmental of Blockbuster management, one has to remember that “strategy making is an immensely complex process, which involves the most sophisticated, subtle, and, at times, subconscious elements of human thinking” (Mintzberg, 1994, p. 111).  Netflix arrived on the scene in 1997 and in all those years Blockbuster has failed to create a strategic plan that would allow them to conquer or even merely compete in the video on-demand home delivery market.  Was there a failure in their planning? Or was their debt too deep to execute their strategic plan?  Or do they believe the “world is supposed to hold still while a plan is being developed and then stay on the predicted course while that plan is being implemented” (Mintzberg, 1994, p. 110)?  Regardless of how these questions are answered, strategic planning and its execution was seriously flawed, allowing the rise of competitors like Netflix and RedBox which led to the end of the Blockbuster era.

The end of an era

In 2007, Jim Keyes, formerly of 7-Eleven, was appointed new Blockbuster CEO.  Blockbuster had hoped to bring in a new leader who would reestablish relationships with their lost customers and return the organization to financial health.  Unfortunately, it did not take long for Keyes to demonstrate his authoritarian decision making style in which “leaders make the decision alone without necessarily involving employees [or customers] in the decision-making process” (Bauer & Erdogan, 2010, p. 291).  Keyes quickly moved to roll back their successful Total Access plan and positioned Blockbuster to acquire the failing Circuit City chain.  After many questioned the acquisition plan, Keyes reluctantly withdrew the offer blaming “market conditions and the completion of our initial due diligence process” (Musil, 2008).

Keyes demonstrated additional human behavior challenges as his reign continued at Blockbuster.  One such challenge was his overconfidence bias, which “occurs when individuals overestimate their ability to predict future events” (Bauer & Erdogan, 2010, p. 267).  This overconfidence bias was particularly evident when Keyes spoke of Netflix.  He stated “I’ve been frankly confused by this fascination that everybody has with Netflix”.  In 2010 when asked if Netflix had any part in Blockbuster’s financial troubles he said “No, I don’t know where that comes from” and denied his company was going bankrupt (Carr, 2010a).  This downward spiral continued for Keyes and Blockbuster until 2011 when the company, who was once purchased by ViaCom for $8.4 billion, has its assets bought out of bankruptcy for $240 million by Dish Network thus sealing the end of the Blockbuster era.

Summary and Conclusion

Blockbuster got its start when a simple situation presented a unique opportunity.  Founder David Cook’s wife wanted to watch a movie in her own home.  Today, that is easily accomplished without even leaving your home through services such as Comcast On-Demand and Netflix.  However, back in the mid-1980’s in rural Texas your only option was a trip off to the semi-local video store.  If you happened to find a store, you would be limited to just a few movies.  Cook had a strong computer background and quickly formulated a plan to computerize the video movie industry and in doing so opened the first Blockbuster store in 1985.

With expansion, Blockbuster faced increasing costs to outfit stores with computer systems and large inventories of movies.  In an effort to generate funds to continue moving the company forward, Cook setup an initial public offering of stock.  Unfortunately, many questioned the former computer executive’s ability to run a public video company and the IPO was cancelled.  This left Cook with only one other option – bring in investors – namely Waste Management founder Wayne Huizenga.  Huizenga and Cook had very different plans of how the company should operate and those differences greatly impacted the culture Cook had worked so hard to cultivate.  After a mere two months with Huizenga on board, Cook resigned.

Huizenga was the first in a long line of poor managers for Blockbuster who all shared strikingly similar beliefs around organization structure, culture and customers.  These leaders created centralized organizational structures where decisions were made at the top – the very top.  In the case of Huizenga, he went on an aggressive store-opening spree with very little feedback from lower levels of management.  Other presidents since Huizenga have made similar singlehanded decisions such as to convert late movies into purchase and the elimination of the Total Access program.

The decision to convert late movies into purchases may have been the single biggest event in Blockbuster history.   This led to customer outcry and even a lawsuit that represented Blockbuster members from almost every state in the nation.  However, it was the impact to one particular customer that many say started the end of Blockbuster.  Reed Hastings, a Blockbuster member had returned Apollo 13 six weeks overdue, and was dismayed by a $40 charge.  Hastings channeled his anger and eventually launched the streaming video giant Netflix in 1997.

Blockbuster did not have effective strategic planning that would have either beat Netflix to market or identified them as a threat and made decisions to counter that threat during any of the 15 years in which Blockbuster and Netflix competed.  In the end it’s a sad story of how vision and innovation created an industry in the mid-1980’s but then the lack of such vision and innovation led to the demise of Blockbuster.

References

Blockbuster settles ‘no late fees’ claims. (2005).  Retrieved January 26, 2013 from: http://www.msnbc.msn.com/id/7327309/ns/business-us_business/t/blockbuster-settles-no-late-fees-claims/#.UQWNyHcZ-Ps

Bhide, A., (1999). The entrepreneurial venture. Boston, MA: Harvard Business Press
Blockbuster inc. – company profile, information, business description, history, background information on blockbuster inc. (2011). Retrieved January 25, 2013 from: http://www.referenceforbusiness.com/history2/93/Blockbuster-Inc.html

Carr, A. (2010a). Blockbuster bankruptcy: a decade of decline.  Fast company. Retrieved from http://www.fastcompany.com/1690654/blockbuster-bankruptcy-decade-decline

Carr, A., (2010b). Blockbuster ceo jim keyes on competition from apple, netflix, nintendo, and redbox. Fast Company. Retrieved January 27, 2013 from: http://www.fastcompany.com/1656502/blockbuster-ceo-jim-keyes-competition-apple-netflix-nintendo-and-redbox

Fenn, D., (2010). What can small businesses learn from blockbuster’s failure? plenty. CBS MoneyWatch.  Retrieved February 12, 2013 from: http://www.cbsnews.com/8301-505143_162-41841288/what-can-small-businesses-learn-from-blockbusters-failure-plenty/

Mintzberg, H. (1994). The fall and rise of strategic planning. Retrieved February 14, 2013 from: http://staff.neu.edu.tr/~msagsan/files/fall-rise-of-strategic-planning_72538.pdf

Musil, S. (2008). Blockbuster abandons circuit city bid.  C|Net. Retrieved March 3, 2013 from http://news.cnet.com/8301-10784_3-9982618-7.html

Netflix 2010 annual report. (2011).  Retrieved January 26, 2013 from: http://files.shareholder.com/downloads/NFLX/2292687632x0x460274/17454c5b-3088-48c7-957a-b5a83a14cf1b/132054ACL.PDF
Pindur, W., Rogers, S., & Kim, P. (1995). The history of management: a global perspective.

Siegler, M. (2011). Snoozing and losing: A blockbuster failure. Retrieved March 3, 2013 from http://techcrunch.com/2011/04/06/make-it-a-blockbuster-night/

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