by M. Dana Baldwin, Senior Consultant

Strategic Planning Expert

In the 80s, families, teens, many of us used to go to Blockbuster Video to select movies for our entertainment.  The business model was simple: go to the store, wander the aisles, select one or more videos to bring home, watch the videos and bring them back to the store within 3 days or so to avoid the late return fee. 

A significant source of revenue for Blockbuster was the fee for returning videos late.  If a customer returned a video late, the total cost for the rental could well double or triple. In 2000, Blockbuster reaped nearly $800 million in late fees alone.  This was nearly 16% of operating revenue.  By 2009, this number had dropped to $134 million, or about 3% of revenue. 

But in the market place, things were changing.  In 1999, a new startup appeared on Blockbuster’s horizon.  An upstart company, Netflix, started taking orders over the phone or on the internet for DVDs and mailing the DVDs to the customer.  They changed the terms of competition, too, by allowing the customer to keep the DVD as long as they wished.  The cost for this, instead of the late fee, was covered by charging a flat monthly fee for the service.  Blockbuster tried dropping the late fee a few years ago, but for Blockbuster this meant that some of the more popular videos stayed out longer, thus impacting their rental revenue. 

When other strategies didn’t work, Blockbuster entered the rental of videos by mail segment to try to compete directly with Netflix.  What this accomplished was to lower the average contribution per rental to under $2.80 per disc, about a dollar below their prior level.  

Even then, the management of Blockbuster considered Netflix to be only a sub-segment of the market.  By 2002 Netflix had gathered enough market share and volume, to go through an IPO and yet Blockbuster still dismissed it as a “niche service”. 

More recently, video rental services, including Netflix, have moved to downloading movies directly to DVRs in the home.  This makes delivery of a movie essentially instantaneous, saving a trip to the video store or waiting for the mail to arrive.   Not only did this service allow people to rent a movie on impulse, but it further cut the heart out of the Blockbuster model. 

Blockbuster’s innovative business model helped generate the growth of home video viewing and helped sell VCRs and, later, DVD players.  It also helped generate billions in revenue for Hollywood.  But, its success led to its own failure.  Blockbuster was hugely successful early on, with over 9100 stores.  Because it was so dominant for so long, it missed the changes in the market.  When the changes became so obvious, that they could not be ignored, Blockbuster still pooh-poohed the evolution and moved too late to accept the changes. 

The obvious lesson here is that Blockbuster could not or would not accept that their market was changing.  Their assumptions about the direction of their markets contained the fundamental error of assuming that the direction they were going would continue forever because they were good at it and dominated the market place for most of their 25 year history.  They refused to accept the facts that their market was evolving and changing, and kept their model intact – in effect, keeping their heads in the sand. 

There are 4 types of assumption errors: Missing, Wishful thinking, Excessive Conviction and Naïve Projection.  My “assumption” is that Blockbuster was primarily guilty of missing an assumption and wishful thinking, helped by their need to satisfy their parent at the time, Viacom, who likely acquired them as a Cash Cow. 

How does a company avoid making this type of assumption error in its strategic planning?  All assumptions are subject to errors because they are only educated guesses, not facts, and must be regularly reviewed for accuracy and how well they fit the current conditions in the market.  In addition, a reality check that asks, “What could go wrong with the results of your assumption,” should be performed.  If you need help in making and reviewing your assumptions, as a part of your strategic planning, please contact the Center for Simplified Strategic Planning, Inc. at www.cssp.com.

M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. and can be reached at baldwin@cssp.com.

© Copyright 2010 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.