What is a good strategy
In September of 2010, Blockbuster LLC filed for bankruptcy. By then, the once dominant video rental giant had been on the downward slide for sometime. Saddled with over a billion dollars in debt, the board tried desperately to re-invent the company and develop a sustainable business model. Their main focus was on closing physical stores and replacing them with thousands of “Blockbuster Express” video rental kiosks. This plan turned out to be deeply flawed. It failed to stave off the inevitable. By January of 2013, Blockbuster had a handful of remaining stores and DISH Network, it’s parent company, announced plans to sell off the company.
What caused the decline and fall of the mighty video rental empire? In order to answer this question lets briefly look at the history from company.
In 1985, David Cook decided to act on the advice of his wife and open a video rental company. Originally the owner of a not very successful software services company, Cook utilized his expertise in managing large databases to streamline movie rental process. This helped the company get off the ground. By 1997, the Blockbuster expanded into video game rentals, following a successful legal battle versus Nintendo. A co-founder of Waste Management company, Wayne Huizenga, spotted the opportunity to invest in the business. With his help, the company was soon opening up stores every 24 hours. Things were looking up. With 2,900 stores, the future of video rentals was firmly in the hands of Blockbuster. In 1993, it was sold to Viacom in a deal worth $8.4 billion.
Over the next several years the company continued grow. It acquired its rivals and opened up more stores. A new revenue model, charging customers outrageous late fees, was developed to help reach the Blockbuster’s financial goals. Associated Press reported that in 2000 Blockbuster collected over $800 million in late fees, 16% of it’s total revenue for that year. In 2004, at the height of it’s market reach, it had over 9,000 stores worldwide. “Let’s make it a Blockbuster night” slogan became a synonym for renting a movie.
While in the early 90s the company was a leader in movie rental market, by 2007 it became a follower. The advent of online movie streaming caught the company by surprise. While it explored multiple ways of growing the company, it struggled to keep enticing its customers to come back to physical locations. It was a follower in the online streaming market. It tried acquiring a streaming video startup MovieLink, but this move was largely unsuccessful. Slowly losing market share to an upstart competitor, Blockbuster went on a spree of store closures in order to cut operating expenses and reduce debt.
In the end, none of the attempts by the company to stop its decline were successful. The board and the CEO failed to grasp the changing nature of the movie rental business. In September of 2010 Blockbuster LLC filed for bankruptcy.
What led to Blockbuster’s downfall? There are several possible reasons. First, Blockbuster’s focus on growing the company through competitor acquisitions and physical location expansions left little opportunity to explore how the Internet was revolutionizing the economy.
Second, the company’s revenue model was highly dependent on late fees collection. It didn’t occur to the executives that growing company’s revenue by penalizing its patrons would eventually lead to patrons ending their patronage. Third, and probably the most important reason, was Blockbuster’s failure to understand that the Internet changed movie delivery model not just the movie format.
According to Richard Rumelt, a professor of Business and Society at University of California, having a strategy requires identifying a specific challenge, outlining a guiding policy and following it up with coherent action. By looking at Blockbuster’s last decade in business, it is hard to discern anything that remotely resembles a coherent approach to running a successful business or having a good strategy. In fact, it looks like Blockbuster had no strategy. It had a set of financial goals. When online streaming began to change the movie rental landscape in earnest, the only strategy that Blockbuster had come up with was to copy what its main competitor was doing. But copying someone else rarely keeps you in business for long.
Consider its rival, Netflix. It began selling and renting DVDs on it’s website in 1998. The founders of the company came upon the idea after looking for a way to emulate Amazon’s business model. The challenge was to figure what could be sold online that would be easy and cheap to ship? The answer came in the form of the up and coming format for movies, the DVD. DVDs were becoming cheaper and they were strong enough to ship via regular mail. The founders tested the concept by mailing CDs to themselves. It worked. The CDs arrived in tact and Netflix was born.
As Reed Hastings, the founder of Netflix, tells it, a common pet peeve of movie renters was another reason for founding Netflix. Sometime in 1997, Reed rented the Apollo 13 movie and was late returning. Upon the visit to Blockbuster, he was horrified to find out that he had to pay a $40 late fee. It turned out, later, that this story was made up. Many people, however, could relate to Reed’s movie rental experience. The founder’s dislike of late fees spurred Netflix on to its next innovation. A year after its official debut, Netflix launched a subscription service. It allowed people to rent unlimited DVDs without incurring the dreaded late fines.
In early 2000s the popularity of DVDs was growing. DVD players were becoming more common and this allowed Blockbuster to enter the market with it’s own online rental offering. Even though business was growing at a steady pace, Netflix needed to differentiate itself even more. Blockbuster put more pressure on Netflix when it eliminated the late fee charges. If Netflix were to continue to thrive, it needed a new way to do business.
Blockbuster was expanding through acquisition of competition and focusing on growing the number of physical locations. What could Netflix do? By 2005, it had over 4.5 million subscribers, but not the reach and the brand of Blockbuster. How could one leverage such a vast customer base? You change the way customers experience the movie rental process. Netflix decided to embrace the new online video streaming technology.
Like Amazon before them, Netflix embraced the economic model of the Internet and changed they way movies were delivered to their customers. It introduced the online streaming service in 2007. The new service took advantage of company’s existing subscriber base. Each Netflix customer had the option, without paying anything extra, to just watch movies online. No more trips to the video store. No more waiting for DVDs to come in the mail. And no more restrictions on how many times to you can watch a movie.
Netflix changed how movies were delivered to consumers. Let me repeat that again. Netflix changed how movies were delivered to consumers. They did this twice. The first time, of course, was with its DVD rental service. Reed Hasting and Marc Randolph understood Amazon’s strategy early on. It was a simple. Deliver products purchased online to customer’s home. Netflix did the same with DVD rentals. They delivered DVDs to their customers’ homes. The second was with the online streaming service. In keeping with their original strategy, Netflix delivered movies to their customers’ TV screens.
How was this strategy developed? Whether the founders of Netflix knew of Richard Rumelt or not, their strategy embodied his concepts. They identified the challenge. How can we deliver DVDs to customers. They developed a guiding policy. DVDs will be mailed to customers and customers will mail them back. And they followed up with coherent action. Netflix eliminated late return policy, allowed customers to keep DVDs as long as they wanted, and developed features to constantly improve their customers’ movie watching experience. They followed the same course of action with their online streaming service.
A good strategy always looks as simple as that. Following Richard Rumelt’s definition, a good strategy requires leaders and strategists to ask the right question, to focus on the right challenge. Crafting the strategy then requires outlining overall guiding policy. A guiding policy acts as reference point in determining what to do next and how to act when faced with an unfamiliar situation. Coherent action is what brings the first two steps to a successful resolution. Once a strategy has been defined, there’s nothing left to do but to actually get it done.
