The Shareholders of Blockbuster - Essay Example

A Consultancy Report on the Leadership Analysis of Blockbuster and Suggested Leadership Plan to Move the Company Forward Consultancy Report: To the Shareholders of Blockbuster April 2014 List of Contents 1.0 Introduction 1.1 Introduction.......................................................................................................4 1.2 Strategic Contest................................................................................................4 2.0 List of contents...............................................................................................................2 3.0 Executive Summary.......................................................................................................8 4.0 Introduction..................................................................................................................14 4.1 Background of the Company...........................................................................12 5.0 The Main Body of the Report......................................................................................14 5.1 The Main Account of the Problem...................................................................14 5.2 Business and Financial Metrics.......................................................................14 5.3 The Temporal Trend of Variables....................................................................14 5.4 Trends and Forces............................................................................................16 5.5 Recommendations on Salvaging......................................................................16 6.0 Implementation Plan....................................................................................................18 6.1 Downsizing......................................................................................................18 6.2 Capitalizing on Impulse...................................................................................19 6.3 Supplement rentals with Electronic Sales........................................................20 6.4 Making Video Games More Important............................................................22 INTRODUCTION 1.1 Introduction The tenacity of this study is to make available the analysis of the leadership of Blockbuster Inc. and to explain why and how things went wrong, and suggest a leadership plan to move the company forward. It also attempts to review the management and regulatory policy context and establish prospect for rejuvenation (Attridge, 2009). Blockbuster Entertainment Inc. was a corporation based in the United States of America. Its key areas of specialization were the provision of home and video game rental services. They offered these services by means of owned and franchised video rental shops, streaming, supply on demand, and also through cinema theatre. Blockbuster Entertainment Inc. was once at its performance height back in 2004 where it hired more than 60000 employees and it had in excess of 9000 stores. 1.2 Strategic Contest Many previous analysts who conducted studies in the rental movie industry have come up with values and postulated approaches for managing, protecting, and enhancing the corporation standards. However, some of the present management strategic for Blockbuster failed to conduct robust market research. A robust management planning must have a standard set balanced scorecard founded on the four perspectives of the balanced scorecard. They include the Learning and Growth Perspective, the Business Process Perspective, the Customer Perspective, and the Financial Perspective. The learning and growth perspective captures employee training and the general human resource build-up for the betterment of both the corporation and the individual. It recognizes that, in a knowledge-worker corporation, individuals who are the only repository of knowledge and must continuously undergo a leaning mode to keep in track with the rapidly changing technology. This is the only way personnel human knowledge growth can be sustained (Ireland et al., 2008). The business process perspective refers to the internal business processes such as products and services design. Managers must rely on the metrics built from this perspective by those who intimately interact with these processes. That way the manager will ensure that the business is running well and the products and or services produced are conformant to the respective customer and or client requirements. This defines the mission of the organization (Norton, 2007). The Customer Perspective posits that, in the face of intensive product and service differentiation, customers’ propensity to shift between products and or services is very high. When customers are not satisfied, they will, with a lot of ease, locate other suppliers whom they consider to be responsive to their unique needs. This may possibly result into deterioration in the sales volume in the future for the firm. Organizations should incorporate customers in their analysis in their attempt to develop metrics for satisfaction (Norton, 2007). The financial perspective calls for incorporating the traditional financial data and their funding thereof in a timely and accurate manner. To forestall unprecedented predicaments that can befall the organization, provisions must be created for additional financial-related assessment. For instance, creating a provision for certain risks would eliminate shocks that may veer the organization off its vision and mission path (Norton, 2007). 2. Executive Summary This report in a consultancy report based on a study conducted to provide analysis of the leadership of Blockbuster Inc. and to explain why and how things went wrong, and suggest a leadership plan to move the company forward. It also attempts to review the management and regulatory policy context and establish prospect for rejuvenation. The outcomes are that there were many managerial lapses that caused Blockbuster its once shining image. Recommendations based on the same topic are presented at the end where an intensive market research is recommended. The Movie Gallery liquidation began May same year. This meant that Blockbuster as the only distribution outlet in the USA. Another agency conflict arose same year when a disentangled shareholder, Gregory Meyer wage a proxy fight with the board of directors on pointing an accusing finger to the board for being responsible for the mass loss in value of the shareholders’ wealth. He was elected to the board same year. All these turn of events saw Blockbuster delisted from the New York Stock Exchange since the shareholders could not pass the reverse stock split. The Blockbuster shared then traded at a creeping $1per share and this saw the Blockbuster’s shares only to be tradable over the counter. The corporation had a debt of $4204 million interest payment to bondholders in arrears. The corporation was granted a timeline of up to September 30, 2010 to settle its owing dues to the bondholders. Blockbuster’ attempt to acquire Circuit City was not as much of a dumb move. Given that most impulse buyers do take bundle purchases of electronics together with movies, a foray at venturing into the electronics is a very promising move. This would give it an edge above its competitors or at least veer it back towards redemption. It should engage in video game sales and DVD players alongside other complementary accessories. 3.0. Introduction This is a report on Blockbuster LLC, formerly Blockbuster Entertainment Inc. providing an analysis of the leadership and giving an explanation as to why and how thing went wrong, and a suggested leadership plan to move the company forward. 3.1. Background of the Company Blockbuster Entertainment Inc. was a corporation based in the United States of America. Its key areas of specialization were the provision of home and video game rental services. They offered these services by means of owned and franchised video rental shops, streaming, supply on demand, and also through cinema theatre. Blockbuster Entertainment Inc. was once at its performance height back in 2004 where it hired more than 60000 employees and it had in excess of 9000 stores. Throat competition in the entertainment industry saw Blockbuster Entertainment Inc. lose revenues significantly and thereafter filed for bankruptcy in the year 2010. Of the more than 9000 stores, only 1700 were left by April 2011 forcing it to salvage the remnants of a once vibrant entertainment supplies hub. Dish Network bought the movie corporation through a public auction at a creeping $233 million and assumed the $87 million liabilities and other obligations thereof. In the face of high operation costs, Dish Network was forced to close 200 branches both foreign and local by 2011. By 2013, more than 500 more had been closed down thus leaving only about company-owned 300 and about 50 franchise-owned in operation. Several other services such as video rental services would cease operations shortly after (Bovaird & Löffler, 2009). Blockbuster Entertainment Inc. acquired Movie trading Company (MTC), a movies and games buyer and seller based in Dallas, in 2002. It also acquired Gamestation the same year. Gamestation had 64 stores in the United Kingdom and dealt in computer and console games. In 2005 one financier Mr. Carl Icahn and the corporation engaged in an agency conflict where the former accused the later of remunerating the chairman and CEO Mr. John Antioco above par. He used his shareholding power to add himself plus two other members to the board. The controversy did not end yet when Icahn ran at odds with the CEO over his insistence of profits revival and scrapping of late fees (Bovaird & Löffler, 2009). This controversy forced the CEO to exit and was given a whopping $24.7 million severance send-off. James Keyes, a former president and CEO of 7-Eleven, was named the chairman and CEO replacing Antioco. Keyes re-emphasized the Total Access online service, a strategy he tagged unprofitable and introduced the in-store, retail-oriented strategy. He also introduced the ban lift on using check cards as a way of securing movies and game rentals exceeding the check-out limit. In 2007, Blockbuster acquired Choices UK Plc among other many acquisitions through 2008. In 2010, Blockbuster closed down all its operations in Portugal. Portugal market was a host to its 17 outlets and by the time they were all closed workers in excess of 100 were apparently unemployed. The company’s bankruptcy in the country was to be blamed on internet piracy and lackluster government response to concerns of the industry. In the same year, the corporation launched the Additional Daily Rate (ADRs). This was a strategy meant that a member would be charged for each day holding beyond the rental terms (Belknap & Group Publishing, 2006). On March 12, 2010, PricewaterhouseCoopers (PWC), a robust and independent accounting and audit firm, raise concerns based on their considered opinion were a pointer to non-going concern. They gave a warning that, in their audit opinion, the corporation’s going concern classification could only be a fuss. The revenue had dropped significantly, and the corporation indebtedness had nearly hit $1 billion. The then CEO, Icahn, resigned from the Board of directors selling nearly all his interest in stock. The Movie Gallery liquidation began May same year. This meant that Blockbuster as the only distribution outlet in the USA. Another agency conflict arose same year when a disentangled shareholder, Gregory Meyer wage a proxy fight with the board of directors on pointing an accusing finger to the board for being responsible for the mass loss in value of the shareholders’ wealth. He was elected to the board same year. All these turn of events saw Blockbuster delisted from the New York Stock Exchange since the shareholders could not pass the reverse stock split. The Blockbuster shared then traded at a creeping $1per share and this saw the Blockbuster’s shares only to be tradable over the counter. The corporation had a debt of $4204 million interest payment to bondholders in arrears. The corporation was granted a timeline of up to September 30, 2010 to settle its owing dues to the bondholders (Staiger, 2000). The challenging losses saw the corporation file for bankruptcy protection in the face of growing losses. Large debts, threats of being outcompeted by likes of Netflix, Redbox, among others were a major motivation for that protective move. When it filed for Chapter 11, the corporation clarified that it would carry on running its 3300 stores. To fend off the bankruptcy atmosphere, Blockbuster closed additional 182 stores as of the first quarter of 2011. By February 2011, Blockbuster and its bondholders crafted an exit plan and resolved that the company had to be sold for at least $300 million and debts and leases to be taken over. Blockbuster made it clear that, in the face of the circumstances before it, it could not be able to sustain or even service all its financial obligations. This implied that the bankruptcy filing was to be converted to Chapter 7 which meant liquidation. This was revealed in the March 1, 2011 United States Department of Justice filing that Blockbuster had no financial strength to continue in operations and should thus be liquidated (Belknap, 2001). Come second quarter of 2011 Blockbuster’s landlords opposed the assumption of leases citing the lack of assurance of the new owners (Dish Network) to honor the leases. On August same year, the liquidators closed all the remnant 253 stores in Canada. Dish Network acquired Blockbuster in March 2011 for $320 million and said it would only sustain 500 stores open. The liquidator negotiated through a court of law to be allowed some time to adjust in maintaining the 500 branches. In 2012 (first quarter) the CEO of the liquidating company announced that all the unprofitable stores were to face the shut. A couple of stores closed down their operations month later. By 2013 January 300 more Blockbuster stores had been shut seeing a termination to some of the prevailing leases. By mid January 2014, all the Blockbuster shops had been shut down. 4.0 Main Body of the Report Blockbuster Inc. failure is attributable to a strategy gone sour. The stewards lost the understanding of the industry trends and then when they get up to the right knowledge, they realize it is too late to save the situation. Blockbuster was the market leader in the video rental business in Hollywood and beyond in 2001 and 2002 with its shares going for $ 30 and a market capitalization of close to $ 5.75 billion. A trend towards online rental movies development was on the rise and the then movie giant could not recognize its importance. This miscalculation would haunt Blockbuster to naught. Blockbuster which was a force to reckon is now a fly to whisk away and is currently working its way back to the glory. Indeed to achieve this it has a whole mountain to climb (Hyvonen & Tuominen, 2007). Blockbuster virtually had incurred a significant revenue loss for three whopping quarters and is crafting strategies to grow its revenues. For five years to 2006, it had only realized a pitiful 2.6% estimated earning’s growth rate. This occurred at a time it is faced with large debts to the extent of $ 1.27 billion and a 2.73:1 debt equity ratio pointing a very much constrained budget. Poor capital, high financial risk, retarded revenue growth and rising losses put Blockbuster Inc. in a dilemma (Branine, 2005). Nothing much is expectable from it. Blockbuster needs to change its stores’ designs radically. This points at a questionable arrangement of movies by genre and adopts the alphabetized format. This will enable the impulse buyers to quickly locate movies. Many impulse buyers do not want to know about the genre but know rental movies by name. A customer can get into a Blockbuster shop and walk out without buying because he or he cannot locate the movie 5.1 Main Account of the Problem Structural reorganization has proved a nightmare for Blockbuster. In 2009 financial year it ended with a whopping debt of $963 million against a cash balance of $189 million. In the leading three quarters of the 2009 financial year, Blockbuster closed 635 retail stores. Its strategy to get control of the kiosk rental space has been thwarted by Oinstars Redbox which is currently boasting of 15000 kiosk outlets globally. 5.2 Business and Financial Metrics Blockbuster posted a colorless figure in the first quarter of 2010. It can, however, be seen that it has not failed up to rise up to any single obligation, chances are very dim that the company is going to meet its obligations in the near future. This is reaffirmed by the closure of addition 470 stores by mid-2010. For the leading quarter of 2010, aggregate proceeds were $939.4 million which indicated a decline of about 14% from the first quarter previous year. This translates to $1.09 billion revenue fall. Blockbuster’s major sources of revenue are rental services and merchandise sales. Rental services account for 77% of its sales revenues which translated to $720 million in the first quarter of 2010. Domestic revenue consists of 69% of the first quarter of 2010 revenues. 5.3 The Temporal Trend of Variables Annual Financial Data ($ millions) FY 2006 FY 2007 FY 2008 FY 2009 Revenue 5523.5 5542.4 5287.9 4062.4 Gross profit 3407.8 2864.6 2722.5 2172.2 Operating Income 79.1 39.1 (293.3) (355.2) Net Income 43.4 (85.1) 9385.4) (569.3) 5.4 Trends and forces Some of the challenging losses saw the corporation file for insolvency fortification in the face of growing losses. Large debts, threats of being outcompeted by likes of Netflix, Redbox, among others were a major motivation for that protective move. When it filed for Chapter 11, the corporation clarified that it would carry on running its 3300 stores. To fend off the bankruptcy atmosphere, Blockbuster closed additional 182 stores as of the first quarter of 2011. By February 2011, Blockbuster and its bondholders crafted an exit plan and resolved that the company had to be sold for at least $300 million and debts and leases to be taken over. Blockbuster made it clear that, in the face of the circumstances before it, it could not be able to sustain or even service all its financial obligations. This implied that the bankruptcy filing was to be converted to Chapter 7 which meant liquidation. This was revealed in the March 1, 2011 United States Department of Justice filing that Blockbuster had no financial strength to continue in operations and should thus be liquidated (Belknap, 2001). Cyclicality of Retail Sector Blockbuster faces a highly volatile retail market with swings and booms closely pegged on the business cycle. When the economy is undergoing a period of boom, the demand for many products such as rental videos rises (Armstrong, 2011). During depressions, however, the demand subsides. The economy of the U.S is operationally weak and this impacted on Blockbuster negatively thereby occasioning it a demand drop of 14% in the third quarter of 2009. 5.5 Recommendations on Salvaging Given that Blockbuster is now a shadow of its former self is this all? No. competitors, dubious management motives, and evolving industry dynamics have seen the company into rocks and dangling precariously. Unless it makes a quick move to improve business model and rejuvenate in the market, its chances of salvaging will get tinier and tinier. Time and again, the corporation had experienced great opportunities to improve its business model and start focusing on those areas with high consumer concentration such as rental-by-mail and video on-demand. As an alternative, Blockbuster chose to make the brick-and-mortar business the key thing of its strategy (Biskind, 2000). Blockbusters problems are not only macro in nature, the stores are not to spare in terms of problems. The stores arrangements are such that it is difficult to locate an item therein. A film for instance in the store costs $4 or $5 to rent. However, the customer would be required to return to the store in order to make sure that they are not charged the full price for it. Despite all these misfortunes, Blockbuster can still turn things round and come up with a model that is more appealing to the people. One way of turning things round is downsizing, better capitalizing on buyer impulse and giving a strong focus in areas it still considers to command strong followership (Stringer, 2003). One key to Blockbusters immediate success strategy is not to try to imitate its competitors. Instead, it should capitalize on its core competencies and expand it along those lines. Blockbusters success in the short-term does not require that they try and copy their competitors. Instead, they would be needed to only focus on their core competencies to help them in the expansion of their business. 6.0 Implementation Plan This section covers the modalities which Blockbuster Corporation can adopt to rejuvenate its operations after a major rock of business. It is observed that, despite all these misfortunes, Blockbuster can still turn things round and come up with a model that is more appealing to the people. One way of turning things round is downsizing, better capitalizing on buyer impulse and giving a strong focus in areas it still considers to command strong followership (Neale, 2006). 6.1 Downsizing When the corporation finds it necessary to downsize, it will have to close down every store that is incurring losses and even those that even though they are not incurring losses are having no-growing profits. Even though this has been a trend over the last many years, it still has close to 4000 stores in the United States. However, this might still be considered as a big number for an organization pursuing a salvage strategy from the verge of closing down (Peter, 2004). Before it made the decision to close many stores the corporation incurred large losses. It lost $1.2 billion in 2004 alone followed by more than $500million loss in a subsequent financial year. The implementation of the downsizing strategy in 2004 saw the company report dismal net earnings of $50 million in 2006 and a loss of just $74 million a year later. The losses of the corporation are attributable to high operation costs of the many stores which are in essence not even profitable. As the profit margins and other performance indicators point at souring financial future, the only way Blockbuster can stay afloat and competitive is by closing down more and more stores. With the presence of Blockbuster’s stores virtually everywhere in the United States, closing down does not mean that they will lose sales as the customers will still remain virtually close to the store. In the financial reports of 2010 Blockbuster admits to failing to recognize the accelerated downturn in brick-and-mortar rental and will need to craft a catch-up strategy if, it has to stay afloat in the industry. This was a risk management accident that the corporation committed (Ireland et al., 2008). As it learned from its competitors such as Movie Gallery and Hollywood Video stores, Blockbuster can only do a better job to eliminate all the unprofitable stores most of all in the face of the 840 million of debt as reported in the financial structure of 2010 (Peter, 2004). 6.2 Capitalizing Impulse Most of Blockbuster’s competitors such as Netflix and Video on-demand service have a strategy of making the renting of movies during the weekends to be more expedient than store rentals. However, given that Blockbuster still tends to reign in the impulse market and should make the impulse buyers have an easy time getting the movies. Blockbuster needs to change its stores’ designs radically. According to Keyes, the resultant changes in the market factors have led to more mothers being driven into Blockbuster for purposes of renting out a movie that can help calm their children during the afternoons or when they need to purchase films for use by the whole family during trips or weekends. Subsequently, Blockbuster has served as a place where people can go to in search of specific comedies to watch without having to wait for a DVD from Netflix to get into the mailbox (Reisinger, 2008). This points at a questionable movie arrangement of movies by genre and adopt the alphabetized format. This will enable the impulse buyers to quickly locate movies. Many impulse buyers do not want to know about the genre but know rental movies by name. A customer can get into a Blockbuster shop and walk out without buying because he or he cannot locate the movie. This strategy of changing the store outlook and restocking may be an expensive but a very revenue yielding move for Blockbuster. For a leasing chain store that depends on the impulse procurements, it would be unacceptable that a customer walks into a store willing to make a purchase but moves out empty-handed simply because the stock replenishment is wanting. 6.3 Supplement Rentals with Electronic Sales Blockbuster’ attempt to acquire Circuit City was not as much of a dumb move. Given that most impulse buyers do take bundle purchases of electronics together with movies, a foray at venturing into the electronics is a very promising move. This would give it an edge above its competitors or at least veer it back towards redemption. It should engage in video game sales and DVD players alongside other complementary accessories (Biskind, 2000). 6.4 Make video Games more important Blockbuster experiences competition from not only Netflix. Cable companies and satellite provider companies also give a throat competition to Blockbusters. There strategy is to allow internet users to download movies on-demand. Netflix, for example, has a hardware which is enabled to allow users to download movies on-demand. The HDTV device and the streaming movies offered from Amazon and Hulu services (Reisinger, 2008). Blockbuster may be on its way to developing a set-top box with LG that will enable consumers to stream movies to their HDTV with the use of Movielink to contain the competitors in the video game rental business. This means it needs to compete with GameFly, a service that rents video games via mail. The comparative disadvantage in the video game rental space is so much attributable to the inability to scream video games and to download them and make them work on a console. Blockbuster needs to change its stores’ designs radically. According to Keyes, the resultant changes in the market factors have led to more mothers being driven into Blockbuster for purposes of renting out a movie that can help calm their children during the afternoons or when they need to purchase films for use by the whole family during trips or weekends. Subsequently, Blockbuster has served as a place where people can go to in search of specific comedies to watch without having to wait for a DVD from Netflix to get into their mailboxes (Reisinger, 2008). This points at a questionable movie arrangement of movies by genre and adopt the alphabetized format. This will enable the impulse buyers to quickly locate movies. Many impulse buyers do not want to know about the genre but know rental movies by name. 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