The Closing of

Blockbuster Video’s
Stores

Hanna, Peter
SOUTHERN NEW HAMPSHIRE
UNIVERSITY OL-500
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Final Project Draft, The Closing of Blockbuster Video Stores

Abstract:

With increasing competition and the growth of technology, it is important that

organizations maintain focus on an innovative and clear strategic direction as well as always

striving for customer satisfaction. There are four major issues, inefficient and arrogant strategic

direction, customer dissatisfaction, fiscal irresponsibility and a lack of innovation that ultimately

led to the demise of the video rental “Kingpin” also known as Blockbuster Video.

Introduction:

Organizational strength relies on its infrastructure and strategic management. The study

of organizational behavior within any organization is intriguing. Success relies on many factors

that involve leadership, strategic vision and a motivated team poised for the challenges of the day

to day operations of the organization. Blockbuster Video skyrocketed to the top of the movie

entertainment empire. A Leader in the entertainment industry, Blockbuster Video was plagued

by challenges and failures that eventually led to their ultimate demise after a short lived 25 years.

This research paper will attempt to answer how the King of the video entertainment empire

withered away, even after years of company acquisitions and finally merging with Dish

Network. Blockbuster Video faced fierce competition in the latter part of its lifetime, namely,

Netflix and Redbox, although some would say that Blockbuster was its own competition with a

poorly executed strategic plan. The organization was plagued with customer dissatisfaction, a

poorly directed leadership, and a lack of innovation. Towards the end of the era, desperation led

Blockbuster to join forces with Enron; which eventually withered away as its counterpart.
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History:

David Cook, a successful entrepreneur in the oil and gas industry founded Blockbuster

Video in 1985 after realizing that the video rental industry was highly fragmented. The initial

Dallas Texas store opened with 8,000 tapes with 6,500 titles, Blockbuster had one of the largest

inventories of the neighboring video rental retail stores. His concept was to have video cassettes

available for display on shelves to allow customers to review and see what they were renting and

pick up their products and bring them to the front desk for checkout. He developed a unique

inventory control system that had a bar codes that would be scanned with a laser. In addition, for

security, he had a magnetic strip installed on each video which would set off an alarm if taken

beyond the alarm through the doors. This created a user friendly system, but most importantly,

increased customer satisfaction. The first Blockbuster store was an immediate hit. The

Blockbuster boom did not occur overnight. The company underwent major reform changes over

the 25 year years through a foretelling set of financial challenges. Cook’s reign over Blockbuster

was a short one, over the next 25 years, the organization went through many highs and lows.

Some can blame the economy, while others may blame poor strategic infrastructure and

leadership.

Strategic Direction and Vision:

In 1987, Blockbuster Video had expanded to three additional locations. After losing $3.2

million, David needed to fund the organization and sold 1/3 of the shares and eventually retired.

One of the key players in the organization’s history was Wayne Huizenga, who took over as the

company’s CEO quickly expanding the organization to over 3,400 stores by the 1990’s.

(Blockbuster, Inc. 2011) In the process, Wayne acquired Major Video and expanded the
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Final Project Draft, The Closing of Blockbuster Video Stores

offerings of the company’s products through a series of mergers and company acquisitions.

Throughout the time Huizenga was CEO, the focus was surrounded by growth and company

mergers. Huizenga’s leadership was based on unilateral decisions. His motivation was to acquire

as many organizations as possible, and took that into overdrive as he bought out many

companies. In September 1993, Huizenga proposed a $4.7 billion merger with media giant

Viacom Inc. The merger did not prove to be fruitful. By April 1994, Blockbuster's and

Viacom's stock had tumbled dramatically. The failure of the merger caused disdain in the

organization, beleaguered for financial losses and lack of clearly defined leadership, Huizenga

eventually stepped down as CEO in 1994. Over the next few years Steven Berrard, took over as

President and took the company on a terrible trajectory focusing on major expansion. He only

lasted for 2 years in the organization and Bill Fields in March 1996. Fields wanted to transform

the image of the organization, but also failed. 1996, Blockbuster’s worth was estimated at $4.6

billion which is half the value it had thirteen years prior. Blockbuster could not develop a clearly

defined path for excellence and the infrastructure was lacking; this was foretelling of the future.

Bhidé discusses that “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) without stability, the company was poised for long term

failure.

It appeared that in Blockbuster’s hankering for growth, a strong and strategic

organizational infrastructure was lacking. Blockbuster did not have a stable in structure of

leadership and management to sustain itself. This is most likely the reason that there were many

years of losses and mergers that were not considered sound practice. Without a stable strategic

direction, John Antioco gained control as the new CEO. He made a strategic decision to cut back

on expansion and develop an infrastructure that can sustain itself. Antioco continued as CEO into
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Final Project Draft, The Closing of Blockbuster Video Stores

the 2000’s. Initially, the thought to scale back was a great decision and it appeared that he would

set the organization a positive trajectory. However, over the next few years, his reign proved to

be misguided and they continued to fall behind the eight ball. Blockbuster’s infrastructure and

strategic management from an organizational perspective proved to have major flaws. Decisions

of the leadership team were not clearly thought out. Antioco’s decision to scale back and

reinvent Blockbuster was not innovative. The focus appeared to simply look at internal structure

to recreate what they were doing. There was a lack of ingenuity within the organization.

Mintzberg discusses that real strategic change requires not merely rearranging the established

categories, but inventing new ones” (Mintzberg, 1994, p. 109).  Bhidé also discusses that “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)  

In 2003, Bain discussed that effective organizations deliver results, and strength across five

elements which are: Leadership, Decision making structure, People, Work processes/systems and

culture.
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Final Project Draft, The Closing of Blockbuster Video Stores

The Bridgespan group surveyed more than 500 companies about their organizational

effectiveness and also measured the market performance of those companies Eighty percent of

the respondents from the "strongest financial performers" rated their companies "highly

effective," while only 14 percent of the total pool of respondents did so. The study further

discusses that key priorities should be the cornerstone of which an organization can align its

people, structure, and processes, and build its culture. When an organization's leader has

established clear priorities, he or she has essentially defined what "success" will look like.

However, in Blockbuster’s case, we see that unilateral decision making was a key factor to the

failure of the organization. A boardroom dispute resulted in a changes in the CEO, this explains

the volatile financial losses that the organization experienced. Antioco was not willing to adopt

the internet/online systems. His arrogance started changing the game plan, including pulling out

of their Internet efforts. Within 18 months, he had lost 85% of the capital value of the company.

Within two years, he lost it all. When a once successful company loses touch with the purpose

that made it great, disaster follows. (Dain, 2011)

Customer Service:

Customer satisfaction continued to dwindle. Blockbuster had the lion share of the

industry and monopolized it to their advantage. Video rental rates began to increase, and late fees

became entirely unreasonable. Leadership never took the opportunity to look at the public

demands and the fact that the economy was suffering. It was poised on profitability at any

expense and their decisions were made at the expense of the consumer. A decision to drive up

profits by introducing astronomically high late fees which in some cases could cost $100 was

one of the biggest mistakes that Blockbuster did. In 1997, Reed Hastings, future CEO of Netflix,
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Final Project Draft, The Closing of Blockbuster Video Stores

in what could be perceived as in my opinion as the turning point of their demise, returned his

rental of Apollo 13 six weeks late. Consequently, he ended up paying a $40 late fee. Hastings

was disturbed by the late fee, and one year later created Netflix.

The communication of the late fees was not clear and Blockbuster was faced with a class

action lawsuit. Blockbuster settled to avoid unnecessary media hype which cost Blockbuster less

than $1 million in reimbursements for false advertising. Blockbuster continued with the fees, but

provided more signage for their customers. (“Blockbuster settles ‘no late fees’ claims”, 2005)

Transformation of an Industry:

As mentioned above, Netflix was created in 1997, Hastings wanted to provide customers

with a convenient and technologically sound alternative to Blockbuster ridiculous pricing. In

1999, he offered customers an online movie rental alternative with a low monthly subscription.

At first, they used an online platform used a virtual video store, DVD’s were mailed to customers

and return via a self-mailer. (PR.Netflix.com, 2015) Netflix recognized that a partnership with

Blockbuster would be of great benefit. At first, they used an online platform used a virtual video

store, DVD’s were mailed to can be a fruitful and noteworthy accomplishment. Therefore,

Netflix offered a partnership that would allow both organizations to join forces and take over the

video rental empire. Blockbuster video showed no interest in partnering with Netflix and

“laughed” at the notion. (Satell, 2014) Satell further discusses that Blockbuster began losing its

competitive advantage and started to lose its market share with the enormous amounts of late

fees that they charged to their customers. 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
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Final Project Draft, The Closing of Blockbuster Video Stores

over two billion dollars in annual revenue (“Netflix 2010 annual report”, 2010). Netflix

continued to grow and eventually Blockbuster’s customer base began dwindled away.

The Beginning of the End:

Blockbuster realized that a partnership with Netflix could have made a huge impact on

taking on the entertainment industry. In an attempt to push Netflix out of the entertainment

industry, they enter into the online video rental market. Netflix CEO, once said Blockbuster was

throwing everything at them except the kitchen sink". The following day, Reed Hastings

received a kitchen sink from the CEO of Blockbuster, John Antioco. This displays the arrogant

and senseless attempts at Blockbuster attempting to belittle Netflix. However, profits continued

to dwindle and Blockbuster continued to dismantle at the seams.

Shortly after Blockbuster fell behind the curve with its competition2007, Jim Keyes, took

over as the organizations CEO. He had a strong background in business, as he was the former

CEO of 7-Elevan. Shortly after, Keyes showed that his authoritarian decision making style

burned a lot of bridges. His nonchalant arrogance about Netflix was evident when he questioned

why everyone was on the Netflix bandwagon. He admired what they had done, but was not sure

what all of the hype was about. (Carr, 2010) He denied that the company was going bankrupt.

Until the end, he thought there was hope. He may have been pessimistically optimistic in my

opinion. He partnered with Dish Network. However, with its aging infrastructure and a late start

in the online market, Blockbuster was not able to sustain profits. Redbox also was a new-up-

incoming organization that set up video rental kiosks across the nation at local markets and retail

locations. Blockbuster attempted to enter into this market as well and the results were futile.
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Solutions: Could Things have Been Different?

In my opinion, Blockbuster Video should have partnered with Netflix when they originally

were approached by the growing and successful organization. Netflix’s innovation has proven to

be a successful concept. It was through this innovation, that Blockbuster was not able to keep up.

Multiple failed attempts at regrouping were futile. At first, a strategic partnership could have

been developed with Netflix in which, Netflix would control the online delivery of movies and

technology. Blockbuster already had the advantage of owning the distribution rights for hundreds

of thousands of movie titles. This, combination of powers would have most definitely kept

Blockbuster in the entertainment industry. Initially, as the CEO of Blockbuster, I would have

contact Hastings and apologized for the disrespect, at that point negotiations for a company

merger could have occurred. Blockbuster had a strong hold on the title of films in production

along with many partnerships with the studios that Netflix had not established. Netflix had a

strong CEO who had a vision for technology. Netflix would handle the video online distribution

while blockbuster could have led the partnerships with the studios. This in my opinion is an ideal

situation. There are the best of both worlds and the wheel did not have to be recreated. A recent

article published by the Harvard Business Review mentions that many businesses have difficulty

reinventing their business model. The theory is, that most businesses do not understand their

current business model well enough and are unable to reinvent their model when needed. (HBR,

2008)

One of the failures as mentioned was its lack of customer service. Blockbuster Video needed

to focus on innovative and strategic decision making with the consumer first concept. The

exorbitant prices and late fees that were instituted proved that Blockbuster did not listen to the

consumer. In addition, there was a lackluster respect for the consumer when Blockbuster’s
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Final Project Draft, The Closing of Blockbuster Video Stores

executives stated that the consumer was not intelligent enough to adopt an online concept. I

believe that the organization could have created a strong marketing campaign to address their

lack of respect and change to a strong mission to include something that branded a passion for

serving customers through affordable pricing and excellent customer service. The idea of getting

rid of the no late fee’s idea was a noble one, but it was too late. It is important for an

organization to identify with its customer base and constantly keep up with changing times.

According to an article in Time Magazine, two of the six reasons Apple is so successful is that

first, for any product that Apple creates, the people who create it have to want it themselves. This

is extremely important and could be adapted to Blockbuster. Blockbuster could have put the

leadership team on the front lines to see if the products and systems that was developed is truly

liked by the customer base. Secondly, Apple offers great customer service and in-store

experiences with simple SKU’s and extensive training. I agree with this concept. Instead of

having tons of products and spreading themselves thin, they could have created a simple system

and focused on simplicity and staff training. A series of courses could be offered to staff and

extensive training to develop a strong team.

Faith in the Blockbuster organization diminished. According to Beaujin, Davidson and

Madge, many mature companies devoted a great deal of money and effort to retaining their

customers. Blockbuster on the other hand as mentioned earlier had a disrespectful attitude

towards their customers. (McKinsey Quarterly, 2006) The missing link was the interactive spark

between customers and frontline personnel. Staff development programs that explain emotional

intelligence and high charged customer interactions is a program that I would implement. If the

staff have a vibrant and exciting attitude about their jobs, it will translate to the customers.
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Blockbuster Video needed to focus on innovative and strategic decision making with the

consumer first concept. Unilateral decisions were made without identification of how the end

user would be affected. It was archaic thinking and a jump now think later idea that caused a

major downturn in the organization. While the organization had successful leaders of that time,

there appeared to be a herd like mentality and aggressive expansion that could not be reined in.

in my opinion, it also appeared that many of the decisions of the multi-layered organization

structure was made by the leadership at top without much interaction within the organization. I

would have collected a large group of vibrant enthusiastic and young professionals in the

industry who had an alternative way of thinking and combined their efforts with seasoned

professionals to create the ultimate think tank. Diversity within groups is extremely important.

As Bain stated, for an organization to be effective, the leadership team requires cohesion. I

would have developed a leadership team that could work well together to achieve the goals of the

organization. The team would be responsible for executing a vision that would be developed

through a series of organization retreats to turn the focus on direction and customer service.

Additionally, it is important that with changes in the environment, the organization would have a

capacity to change. This was one of the major flaws in Blockbuster. I would hire a team of

individuals who would constantly study the evolving market to analyze the demands.

Conclusion:

The story of the rise and fall of an organization is quite remarkable. It is interesting to see

how different decisions made contributed to the significant demise of the organization.

Blockbuster made many different strategic decisions to try to “keep up” with the competition. It

appeared that from its infancy, while Blockbuster’s goal of acquisition and growth were a

strength, it was also a weakness. Perhaps, the arrogance and lack of input from its customer base
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Final Project Draft, The Closing of Blockbuster Video Stores

along with its lack of infrastructure could not withstand the evolving market. With video stores

fading into extinction, Blockbuster struggled to transform a big box retail location into a diverse

distribution system to a multi-channel content delivery model. The company's customers can

either download movies to their home or mobile devices, order them by mail, or visit one of a

dwindling number of Blockbuster stores. Amid rapid technological change and competition from

Netflix and Redbox, Blockbuster filed for Chapter 11 bankruptcy protection in 2010 and was

sold to satellite TV service provider DISH Network in 2011.The key is to learn from others

mistakes and apply that to your own business development or personal experiences. Technology

is taking the place of human interaction, this may have been a large factor eliminating the fun of

driving to the local blockbuster and interacting with the team; however, as the organization came

closer to its end, it became more evident that strategic direction and lack of care for the consumer

may have led to its ultimate end.

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Final Project Draft, The Closing of Blockbuster Video Stores

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