Controlling Risks- Blockbuster case study Blockbuster: “Blockbuster was an Ameri

Question

Controlling Risks- Blockbuster case study

Blockbuster:

“Blockbuster was an American-based provider of home movie and video game rental services. Founded in 1985, it expanded rapidly. By 2005, it had 9,000 stores with 60,000 employees. If management had had three questions, it might have saved itelf from considerable grief that, for the company at least, represented a black swan.

What are we doing? Our business is renting DVDs to consumers who stop in our stores.

What will we be doing? We may be doing less business. Competition is coming from Netflix, a provider of DVDs by mail. We are not in that market.

What should we be doing? It would be a good idea to hedge our bets and offer DVDs by mail.

Apparently, Blockbuster did not ask these three questions. In 2005, revenues were $6 billion and profits were $600 million. By getting a late start on DVDs by mail, it suffered a massive decline in business. In 2009, revenues of $4 billion were accompanied by a loss of $550 million.

Sometimes an organization helps to create a black swan. The decline of Blockbuster was accelerated by its policies on late fees. If you rented a $4.99 movie and failed to return it on time, you paid $1 a day in late fees. Then the policy was changed. If you were five days late, you bought the DVD at the full retail price. Even though you could reserve the transaction in person at the store, people were annoyed. Did Blockbuster foresee the risk? Apparently not. Although the truth behind the statement is controversial, it is pretty clear that Blockbuster was making bad strategic and situational decisions about risk.

Epliogue: Due to its failure to spot the risk, Blockbuster filed for bankruptcy in 2010. Dish Network, a satellite television provider, purchased the company and its remaining 1,700 stores. Dish closed 200 stores in 2011, 500 more in 2012, 300 in 2013, and the remaining stores in 2014 when Dish also closed the DVD-by-mail return.” (Hampton, 2015, pp. 51-52)

References

Hampton, J. J. (2015). Fundamentals of enterprise risk management: How top companies assess risk, manage exposure, and seize opportunity. . New York, NY: American Management Association.

Question

List any assumptions you made and any information you know that was not described in the above case study

Describe how you believe risks were probably managed within the Blockbuster organization.

Describe how you would have improved the process they used to manage risk.

Describe how your change in risk strategy may have resulted in different outcomes for Blockbuster.

Describe why you believe your strategy could have solved Blockbuster's problems when the company was not able to do so.

Explanation / Answer

The Blockbuster failed to foresee the advent of a disruptive innovation in form of movie on mail through netflix. The new method offered its customers subscription of the services rather than charging them per rental. It made the penalty (late fee) charged from the customers by Blockbuster ( which was a significant part of the revenue of the company) unnecessary to the customers. By the time company realized it, it had lost many customers to the Netflix, causing considerable fall in its revenue.

The risk management lacked foresight and the customer pain points who though loved to have movie on demand instantly, but deeply annoyed by very high fee for late return. It should have reduced the late fee or altered its business model just when the disruption came, to retain its old customers through high quality, high convenience service at a competitive cost.

Firstly any business model that depends significantly on the default of its customers can only be sustainable till an alternative comes to them. Certainly the company could not increase the happiness index of the customers through its services.

The company should have been proactive to reduce the part of penalty from its revenue stream,and have reduced risk by increasing customer loyalty and enhancing their experience through innovative practices its competitors were following. It should have retained the customers through lowering the rentals, reworking on the availability of latest titles by maintaining the exclusivity of top selling movies, reducing or doing away with the penalties altogether.

This changed risk management strategy might have prevented customer migration in large numbers to Netfilx, which due to its cumbersome model with mail service and few choices for movies could not have made inroads as easily as the Blcokbuster let it make into its business.

Through the strategy of analysis, gap identification, resolution of issues, measuring the outcomes and again analysing the process, the company could have arrested the mass migration of customers who were eager to find an alternative first. In the meantime, it could have got sufficient time to rethink on its business plan and remodelling its business to take on the competition without sacrificing on its market share too rapidly.

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