Assignment 1: Blockbuster, Redbox and Netflix Case Study

Team 1 in Operations and Supply Chain Management

Nguyen Thanh Tri - 阮成智 - 0753024
Lilliana Brambillasca - 林艾娜 - 0753035
Carla Hernandez - 高凱蘭 - 0753037

National Chiao Tung University

1. In what ways did BlockBuster achieve a better strategic fit than local stores?
Context - Movie Rental Industry 1970 – 2000
With the appearance of the videocassette recorder (VCR) in the 1970s, TV watchers could record
a television program to play back at another suitable time. Moreover, it also was available for movie
watchers to enjoy their favorite movies without relying on TV cable. Besides, people could go to movie
theaters to enjoy interesting movies. However, many people, feel that the whole process of going to
cinemas as inconvenient. In addition, some don't like the lack of privacy or interruptions that come from
having to share a cinema with strangers. All of these things acted as a precursor for the movie rental
industry to boom. Till 1985, the revenues of this industry was $2.5 billion which implied a massive
demand in this industry. After that, the DVD appeared followed the Internet’s boom and its applications.
How Blockbuster achieved a better strategic fit than local stores.
Step 1: Understanding the customer and supply chain uncertainty.
● David Cook recognized the problem as a business opportunity that video rental market was
highly fragmented which means that the rental stores were mostly family business and did not
have a wide range of movies to satisfy the demand of customers.
● As mentioned in the movie rental industry, there had been a demand for renting a VCR to watch
at home. However, it was a challenge to figure out which genres of movies or movie titles were
profitable because different people had different favorites. Knowing that is sue, Blockbuster had a
much broader and deeper inventory with 8,000 VCRs covering 6,500 titles in its first store.
Step 2：Understanding Supply Chain Capabilities.
● David Cook, the founder of Blockbuster, was a computer programmer. With the background of
computer science, he had a strong potential to create the success of Blockbuster. He used
computers and programs to track the inventories as well as the customer preferences which
helped him to understand more about customers.
● Regarding the design of the store, as in a bookstore, tapes were displayed on shelves, so that it
was convenient for customers to pick up and check out at the front desk. Moreover, a laser
scanning system, magnetic strip on each video and other tools were adopted to reduce the
transaction time. The transaction time was from 10:00 AM to midnight every night for the whole
year; a three-day policy encouraged customers to borrow more than one tape at once. Moreover,
Blockbusters offered not only new movies but also old movies.
● Blockbuster’s retail channels kept expanding not only in the US but also in other countries which
increased the number of stores to more than 9000 in 2005. The expansion improved the
responsiveness and convenience for customers when renting a VCR.

NCTU GMBA Class 2020 2 2019 Spring Semester

 ● Moreover, Blockbuster provided products not only from the movie industry but also from the
video games industry and others.
● Key suppliers to Blockbuster includes all major film production companies such as: Fox
Enterprise Group, Paramount Motion Pictures Group, Sony Pictures Entertainment, NBC
Universal, Buena Vista Motion Pictures Group, Lion Gate Entertainment, The Weinstein
Company. Blockbuster used Revenue-sharing Contracts with suppliers to improve Supply Chain
performance. For example Movies Studio would offer the video rental stores at $6 each, even
though it cost $65 for one VCR, to receive around 40% share in rental revenues.
● With the advent of movies on DVD, Blockbuster used machines, technology in packaging the
DVD provided by the movie production companies. DVDs for sales had to undergo a
complicated procedure such as picking, packing, and shipping process to store shelves to meet
the schedule.
● Regarding regional management, Blockbuster divided the U.S and its surrounding territories into
50 different regions and kept checking on the delivery schedule to maintain the key player’s
position in a competitive industry.
● Blockbuster built many strategic partnerships, marketing alliance with companies to strategic fit
for its supply chain. For example, Blockbuster invested in Food.com, a company which acquired
a delivery service company Takeout Taxi. As a result, Takeout Taxi was in charge of delivering
food and movies.
Step 3: Achieving strategic fit.
● Blockbuster used a computerized system to keep track of VCRs in the stores which meant they
could have up-to-date information about their inventories and inform customers in the shortest
amount of time. It could help them to increase the degree of responsiveness of their supply chain.
● Moreover, Blockbuster could tailor their inventories based on the local demographic to target at
the right customer segmentation and improved the responsiveness in each region. Because there
was an implied demand uncertainty, doing so helped them reduce such uncertainty.

NCTU GMBA Class 2020 3 2019 Spring Semester

 ● Offering old movies, Blockbusters attracted more customers which generated 70% revenue at the
time. Besides, purchasing old movies also reduced the cost and increased the profit for
Blockbuster.
● Using Revenue-sharing Contracts with suppliers provided Blockbuster a wide variety of movie
offering to customers which means improve the responsiveness of Blockbuster.
● Having human labor replaced by machines in packing procedure, Blockbuster could save more
than half of the time and save several million dollars a year.
2. How did Netflix and Redbox achieve a better strategic fit than Blockbuster?
Step 1:
● Netflix and Redbox achieved a better strategic fit than Blockbuster through several fronts. While
Blockbuster had the burden or renting a store and hiring staff. Netflix kept its DVDs in
distribution centers that processed the orders and eventually shipped all over America. Therefore
the facility costs of Netflix were much lower compared to Blockbuster.
● Even when Netflix transitioned over to a streaming service, the major cost was the serves and
software.
● Redbox fixed installation costs was $15,000 which was the biggest compared to the mechanical
and electrical upkeep. Blockbuster had to deal not only with the cost of keeping up a store. The
reason that Redbox and Netflix could offer rentals at a lower price since they didn’t have
excessive fees in leasing retail stores like Blockbuster.
● Blockbuster had a limited number of stores compared to Redbox, which means that customers
had to have the goal of renting a movie in mind. However, Redbox was conveniently placed in
select McDonald’s restaurants, leading grocery stores, and Walmart, Walgreens (Pharmacy), and
7-Eleven stores. Meaning that it could cover customer from both ends, they could target
customers whose sole purpose was to rent a movie or those who were on another errand and
thought “maybe a movie sounds nice.”
● Also, it was also at many times available 24/7 rather than confined to the store hours of
Blockbuster. It was also a huge advantage that no membership was required, meaning that it was
convenient and cheap.
● Netflix advantage on this front was the convenience to the customer since the product was
delivered to the customers’ home.
Step 2：Market Segmentation
● Blockbuster usually had one full wall dedicated to new releases but also had to allocate space
for older movies that rented at a much lower cost. Blockbuster was seen as a store in which you

NCTU GMBA Class 2020 4 2019 Spring Semester

 could rent any movie, even despite the fact older movies rented at a much lower price then
rentals.
● Netflix initially targeted different segments of the movie rental achieving a better strategic fit.
Netflix was also effectively providing variety to its customers offering 100,000 titles and
Blockbuster only 5,000 (which is 5% of what Netflix was offering) and even at lower cost
through the shipment from their distribution centers.
● Netflix had an extensive range of titles, and during its peak time of mailing DVDs, they had
around 60 distribution centers. To the same accord, Redbox primarily targeted a much smaller
variety of new releases that catered to a more predictable demand. Also, a Redbox kiosk rented
its average DVD 15 times at an average of $2 per transaction. Following, the used DVDs were
sold to customers for the amount of $7.
● Whereas Blockbuster attempted to provide its customers with both new releases as well as older
movies, Netflix and Redbox divided the market among themselves. Netflix primarily targeted a
wide variety of older movies while. Netflix initially targeted different segments of the movie
rental achieving a better strategic fit. Netflix was also effectively providing variety to its
customers offering 100,000 titles and Blockbuster only 5,000 (which is 5% of what Netflix was
offering) and also at lower cost through the shipment from their distribution centers.
● Redbox primarily targeted a much smaller variety of new releases 200 of the newest movie titles.
● In regards to the newer releases, Netflix didn’t attempt to satisfy the whole initial rental demand.
Since the high initial cost of purchase, Netflix only purchased a limited number of the new
release DVDs and waited a few weeks for then buying the bulk of its supply at a lower cost.
Customers were able to put the new titles into queues and then receive it when the DVD became
available in stock. From 2005 to 2009, Netflix had great financial results in growing revenue by
150 % and the profits by 175 %.
● By the middle of 2010, Redbox was accounted for 25 % more DVD rental volume than
Blockbuster. The company was on course to generate more than $1 billion in annual sales, faster
than Netflix was able to achieve that milestone.

NCTU GMBA Class 2020 5 2019 Spring Semester

 References
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NCTU GMBA Class 2020 6 2019 Spring Semester