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Financial Analysis Essay

The competitive mechanism of the business world, lead companies to constantly evaluate their competitive advantages and compare them to their competitors. One of the strongest determinants of competitive advantages is operational efficiency. In simple words, companies that are not operating efficiently will soon be out of business. This paper discusses the performance of Blockbuster inc and particularly its operational efficiency.

The paper will perform a trace-back from the firm’s profitability (as the result of operational efficiency performance) and formulate the strengths and weaknesses of company. Using a broader view however, this paper will not attempt to exclude the presence of external factors and how they affect Blockbuster’s operational efficiency, and thus profitability. II. Aims and Objectives The core purpose of this research is to produce a set of suggestions that will improve efficiency and profitability of the company as a whole.

This objective can be achieved through ensuring the achievement of a series of preliminary objectives like: assessing the financial viability of the company, evaluating environmental conditions that relate to the firm’s businesses and by determining existing strengths, weaknesses, opportunities and threats of the firm in its current condition. Through performing all of these assessments, building the set of recommendation will be a more reasonable task. III. Research Methodology This paper employs observation method.

The use of observation method becomes an important technique for collecting data concerning what occurs in a real-life situation and it helps us to reach an understanding about the perceptions of those who are being studied, in that situation. To be specific, we employ non-participant observation method especially by analyzing qualitative information from journals, books, magazines and many more. The most important of conducting observation is it provides researchers with an understanding about the perceptions about things or people we observe.

However, since observation deals with someone’s perception, we plan to avoid preconceptions since it would provide this research with some bias. IV. Findings IV. 1. Corporate Background The company’s official name is Blockbuster, Inc, but since it was established back in 1985, it was better known simply as blockbuster. Back within those years, the owner (David Cook was simply trying to fill a market niche that was built from people wanting to rent a variety of VHS titles. The mission statement said that the company want to transform ordinary nights into ‘Blockbuster Nights’ by providing complete inventory of movies and video games.

The company operated with a core value of introducing innovative program, more focus on retail and expanding the selection of movies and gaming equipment. The company became very popular and today it has become a $900 million company with more than 8,000 stores in United States providing customers with video games, movies and other entertainment media (Blockbuster Inc, 2006). IV. 2. Financial Analysis From the income statement, we can conclude that Blockbuster’s recent financial performance is not as profitable as people might believe. In 2004 and 2005, the company even reported millions of dollars of net losses.

Table 1 Blockbuster five-year performance Vertical analysis on the other hand, described a tendency of financial development. Blockbuster records more than $5 billion in 2006. In terms of sales, 2006 actually revealed a declining performance, but it is still much better compare to 2002 sales (Blockbuster Inc, 2006). The undulating Blockbuster performance has caused the undulating performance as well. As to the rental business operational performance, 2006 revealed a notable decrease in efficiency because the cost of rental revenue was recorded to increase while sales were decreasing.

This means that the rental department is operating in a less efficient manner to the previous financial year. I would also like to highlight the high cost of general and administrative activities. It is this particular cost that ate away corporate profit over the years (Blockbuster Inc, 2006). Figure 1 Blockbuster Stock Price Performance Source: http://seekingalpha. com/wp-content/seekingalpha/images/Blockbuster02052007Chart_01. png IV. 3. Environmental Analysis • Rivalry Competition in the US video rental industry is fierce.

There are actually several different segments of players within the industry, like rentals who establish physical store locations and rentals who serve mail-orders, but these different segments are competing to gain the same market share. Blockbuster reveled that the business actually has a small profit margin, due to the high cost of building and equipment maintenance. Furthermore, the movie rental industry has a stagnant market condition, or in simple words, the market does not reveal any meaningful growth within the years. This means the only way to grow is by taking away a piece of competitors’ market share.

Thus, competition is s serious issue for Blockbuster because in one hand, the company cannot afford to loose more market share due to its minimum profit margin, and in the other hand, Blockbuster would also need to experience some kind of revenue growth. Ironically, competitors of Blockbuster also possess the same obsession. As a result, price war is the only way to determine which player would lead the market. Unfortunately, most of the players in the industry has already sustain heavy operational and maintenance that they cannot afford to reduce rental prices.

In addition, most of these players have also minimum promotion budget because of the small profit margin. Today, competition industry enters a stage where all the players are stagnant in most of its departments (Brem, 2002). Not all movie rental industry can survive in a long term, especially if the industry is online. With the recent tightening in the market, some executive and investor are challenging Blockbuster. com to show some results: higher revenues, more customers, perhaps even a profit.

This is should become tough news for Blockbuster. com who have spent most of their money on expensive advertisements, PR campaigns, or websites that look attractive. The full integration of Blockbuster. com online and in-store programs planned for next year will enable them to provide their customers, young and old, with unmatched convenience, service, selection and value. If a customer is in their store and wants to return a movie they rented online, Blockbuster. com will be able to accommodate them. If a member rents primarily in-store, but wants a hard-to-find title Blockbuster.

com does not typically carry in store, they will be able to go online and get it. It is a matter of maximizing convenience and choice (“About Blockbuster. com”, 2006). Blockbuster has not been watching these developments lazily. It has launched its own online rental service in response to the competition, despite the set-up costs and the fact that it could take revenue away from its retail operation. It has also introduced a number of initiatives, such as a part-exchange deal on VHS tapes, and is currently exploring offering an in-store download service.

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