A strategy life-cycle: Blockbuster

Overview

In our outline "what is strategy" we classified the basic elements of strategy as:

• Choosing objectives for the organization
• Positioning the organization relative to others in its market or environment
• Steering the organization over time through the policies and decisions that affect its performance

Standard strategy methods answer the first two of these needs, but there’s little to help with the last challenge. And this matters because answers to the first two questions, whilst important, do not change often, whereas steering strategy has to be done constantly. To see why this is so, consider the history of the Blockbuster video-rental business. This company took off when video-cassette recorders [VCRs] made it possible to view movies at home - before DVDs, before widespread internet, and before down-loading videos was more than a distant dream. The figures on the right show how the company’s store numbers, revenues and operating profits changed from 1985 to 2007.

Blockbuster’s story goes through the following typical broad phases: Start-up, growth, maturity and then decline.

Generalised strategy life-cycle

Blockbuster’s strategic history illustrates a general model for the life-cycle of organizations’ strategy. The following figure shows the four broad phases, together with the impact made by [a] initiatives to add to the original strategic positioning, both by acquisition and extension, and [b] a revision of that position when it becomes unsustainable and threatens collapse.

What is most striking about this life-cycle is that, given the extreme rareness of changes to strategic position: The majority of management’s strategy work consists of delivering the strategy and performance from period to period, and sustaining that performance into the future. This is also referred to as strategy implementation.

Start-up

• Blockbuster's early objectives might have been to open, say, 20 stores each year, grow revenues to perhaps $50 million after 3 years and generate $10 million in profits.
• The positioning was to offer larger neighborhood stores with a wider range of family oriented movies than the many smaller mom-and-pop stores, using smart IT systems based on customer membership cards for control and to ensure popular movies were available.
• Steering the strategy needed continued decisions on the range of movies to offer, price levels, staff hiring and training, marketing spend and message and the rate, location, size and design of new store openings. Rapid growth gave strong buying power with the movie distributors, and hence low costs and access to new titles.

Growth

• The business objectives changed in response to early success and the big perceived opportunity. Growth targets increased to hundreds of stores per year, aiming for revenue of over $1 billion, and profits of hundreds of millions of dollars.
• The business’s positioning did not change during this period. VCR-owners were still the target, renting movies to view at home from local stores was still the core offer, and the successful operating system continued.
• Although no changes to business model or positioning were needed, this did not mean that ‘strategic management’ stopped. Steering the strategy still required on-going decisions on product range, pricing, staffing, marketing, and store design, branding and opening rate.

Significant initiatives were taken to extend the strategy:

• Business growth was accelerated by adding a franchising scheme.
• The aggressive growth was supplemented with acquisitions of other store chains.
• The same successful formula was copied internationally, with acquisitions and growth in the United Kingdom, Australia, Japan and other countries.

By 1995, store numbers hit 4500, including 1000 franchised outlets. Nearly a third of the business was outside the USA. Revenues hit $2.4bn and operating profits $785m – over 30% return on sales!

Maturity

With everything going so well in 1995, how come profits stalled and then fell back so sharply between 1997 and 2001? Commentary from the time suggests that nothing significant threatened the basic business model. Instead, it suffered a serious loss of operational effectiveness, after being acquired by Viacom.

• Objectives still focused on growing the store network and revenues, rather successfully it seems. Of course, the business kept trying to deliver profit growth as well as sheer scale, though conditions made that increasingly hard. When its profits dropped to just $310m in 1997, no-one realistically expected them to jump back over $700m the following year.
• The business’s positioning still did not change significantly – DVDs replacement of video cassettes did not alter the basic value proposition, target market or operating model.
• Again, then, the main strategic management activity through this period consisted of steering the strategy from quarter to quarter.

Decline

2007 saw the first signs of the final phase of strategy’s life-cycle – the threat of decline and ultimate closure. Netflix started up an internet-based rental service with postal delivery, but Blockbuster quickly offered the same. Netflix.com revenue for 2007 hit $1.2bn, and similar services from Amazon.com and others hurt the company’s store-based revenues. The vicious price competition that followed hit profitability.

• Objectives now switched to sustaining revenue and managing the decline of the store-based business.
• The positioning of the stores business remained essentially the same, though with the postal service added on top.
• So for the stores business, the main strategic management activity was still about steering the strategy from quarter to quarter.