Video Concepts, Inc Executive Summary Whether to remain in the business with increase in Rental to $ 2.49 whereby increasing the profitability of the business due to stiff competition from the Blockbuster or to sell it off or hire a manager for the shop and start doing job at some other place, has to be evaluated on the basic objectives of economics of the firm. The main objective of the firm is to maximize the profit and thereby maximize the return on investment. In order to attain this at the same market share it is suggested to sell the business to the competitors, if they are interested. Word Counts: 102 Table of Content SITUATION ANALYSIS | 2 | THE PROBLEM STATEMENT | 5 | OPTIONS | 5 | CRITERIA FOR EVALUATION | 6 | EVALUATION OF OPTIONS | 7 | RECOMMENDATIONS | 9 | ACTION PLAN | 9 | Situation Analysis Outlook of Video Rental business in Lexington In Research conducted by the Chad Rowan for the business of Video Rentals when it was relatively a new business, it was found that it is profitable enoug h to earn more than the average rate of return on investments. So it was possible p ossible to start with the store of 200 square feet with the 500 video tape library in Lexington, North Carolina, a town of 28,000 people. Due to innovative ideas and marketing strategies, it was possible to generate the sales volume of $64,000 in the first year itself which was further invested in the business to buy the video tapes. Just because the expansion and to cope with the demand of the Video it was decided the own a new shop of 1000 square feet with the capacity to store 3000 videotapes. For the $80,000 was borrowed from the bank with the condition to pay interest on yearly basis and principal amount to be repaid on seventh seven th year only. Video tapes were purchased from the seller of the bankrupt shopper so as to reduce cost c ost of inventory.
Expansion of the business Due to the possibility of high growth in the business, it was decided to start with the third shop in 1990 having 3000 square feet space with the capacity of 12,000 video tapes. Growth at the three video Concepts stores continued year after year with the majority of the growth coming from the new store. Store reduced the price per rental to $1.99 per night, and introduced advertising, which was centered primarily on local high school promotional events. The original two stores saw little growth in sales but remained profitable. By the summer of 1991, only six of the original seventeen competitors were still in operation. So the conclusion was that the use of aggressive pricing strategy, high quality service, and good selection of new releases were factors in demise of some of smaller competitions. It was estimated that store requires $ 600,000 a year as revenue to be profitable. Entry of Chain Store: Blockbuster In August 1991, Blockbuster Entertainment announced that it would open a store in Lexington. It was the largest video chain store in United Status. Size of the Store was about 4000 to 10000 square feet with the capacity of 8000 to 14000 Video tapes in it. It had a pricing strategy of $ 3.50 per tape for two nights. The Competitor was having a capital intensive policy with the more on fixed cost. Video Concepts was a locally owned shop that supported local school events. It was decided not to do the same marketing strategy as Blockbuster has. Impact of Competition Due to Competition from Blockbuster, Video concepts’ revenues dropped about 25% for two months and then hit plateau of just under $40,000 per month and stayed there. Profitability was decreased due to increase in the cost of advertisement, promotion and competition. It was noted that there was fairly good market for used tapes for a short period of time, but if the tapes were not sold during this period, it would end up with a tape that had very little rental demand and little resale value. After two years, Blockbuster had captured the market more than 50% with the share of $ 700,000 a year out of $ 1,300,000 in totality whereas Video Concepts had the revenue share of $ 500,000 a year only. Problem Statement Whether Video Concept should be closed down or to remain in business with the option to hire a manager for the business and to do job by the Chad Rowan?
Option 1. Increase the rental per tape to $ 2.49. 2. Hire a manager to manage the business and receive the offer of corporate jobs. 3. Sell the business. Criteria for Evaluation 1. Profit maximization of Video Concepts This is the primary criterion as the profit margin was greatly impacted due to stiff competition in the market. 2. Ability to Repay the Debt After evaluating the primary criterion of profit maximization, it will also be the criterion to pay off the debt on time and ability to generate such cash flow from the business. Evaluation of Options 1. Increase the rental tape to $ 2.49 I. Profit Maximization of Video Concepts As it is not possible to forecast the revenue for the future and estimate demand, it is not feasible to identify the profit in numerical mode properly. As the company has the second major stake of the market, it is quite possible to earn greater profit at the same level of market size with the steady adopting the new promotion strategy. Thus the profit motive is achieved. II. Ability to Repay the Debt If the pricing decision is to be taken then it will be more profitable to the company and also psychologically the rate is less then the competitor, there are more chances to generate more cash from the business with the given stake. Such, increased cash flow will enable the Video Concepts to make some arrangement to repay the debt on time. 2. Hire a manager to manage the business and receive the offer of corporate jobs. III. Profit Maximization of Video Concepts
Here, there might be the case that the company could find good manager but it is not recommended as payment of salary will make the decrease in profit of the company. IV. Ability to Repay the Debt Cash generation from the business will not be in good from as it was pointed in the option number 1. Chad Rowan, the owner shall also be required to move out from business and search for corporate job. So it is not the good option one can suggest for the future viability. 3. Sell the business. V. Profit Maximization of Video Concepts Here, this is not the criteria to evaluate. As the company is selling the business to outsiders or even to competitors, there can be the option to think upon in the given situation. VI. Ability to Repay the Debt Try to evaluate the value of the firm and a proper buyer for the same. As now due to stiff competition, it is not profitable enough to meet the desired ROI. If possible, do your efforts to deal with the Blockbusters Entertainment itself to purchase the company as it would create the win-win situation for the both companies like encashment for the Video Concepts Inc. and about 92% market share with monopoly in the business of Rental Tapes. Recommendation Evaluating the options suggestion should be of the third one as to dispose the business with the Goodwill. Action Plan * Communicate to the Blockbusters Entertainment abou t your decision * Try to know it’s interest in purchase of your business or some others’ interest in the same * Make the valuation of the business and all the assets of the company * Prepare the Draft report for the decision of disposal of all the assets and repayment of the debt from the bank and other financial institutions. Word Count: 1173
Whether to accept the alternative of hiring someone to manage the business and find a corporate job for yourself, thereby continuing the revenue generation at price $1.99, has to be evaluated on the main objective of the firm, which is to maximize the profit. The suggestion for selecting this alternative is that, in future, growth prospects do not look bright as certainly in many years away, new technology which is presently in development stages could render video-store rentals obsolete. Moreover, looking to the future, the net income from the Video Concepts operation would not provide you high return on your time and capital. Hence, accepting the proposal is recommended.
Video Concepts l. What is your assessment of Chad Rowan as an entrepreneur, chief strategy-maker, and chief strategy-implementer? How well has he performed the five tasks of strategic management? What mistakes has he made? What grade would you give Chad in his role as owner-entrepreneur of Video Concepts?
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What is the video rental industry like? What forces are driving change? What are the key success factors in this industry? What are Blockbuster Video's strengths? its weaknesses? Compare them to Video Concepts strengths and weaknesses. How does Video Concepts fare? What is Video Concept's strategy? How well did it work prior to Blockbuster's entry? Does what Blockbuster did in Lexington surprise you? Why is Blockbuster outperforming Video Concepts? What competitive options does Video Concepts have? What can Chad do to improve Video Concepts' performance and market position? What strategic issues does Chad need to address? What alternatives does Chad have? Which of these appears most profitable? What recommendations would you make to Chad Rowan? What could Chad get for the business if he tried to sell it? Is he better off keeping the business and pursuing efforts to make it more profitable?
There are many issues, challenges and problems that confront Chad Rowan, the owner of Video Concepts, Inc. The first problem is raising monthly revenues from their current plateau of $40,000. The second problem is figuring out a way to compete with Blockbuster Video, Inc. for market share in order to secure market stability. The third problem is figuring out how to purchase new release videos for less money than the current $70 average they cost Video Concepts, Inc. The fourth
problem challenging Video Concepts, Inc. is finding a way to maximize the resale value of its previously viewed new release videos. A fifth challenge is figuring out how to pay down the debt the company owes in the face of stalled cash flow. A six challenge facing Video Concepts, Inc. is a maturing industry and the enormous buying and advertising power of its chief rival, Blockbuster Video, Inc. The following alternatives are designed to help Video Concepts, Inc. meet some of the challenges outlined above. These alternatives are: Raise video rental prices from the current $1.99 by .50 cents to $2.49 each. Increase advertising and promotion strategies which focus on Video Concepts Inc.'s lower rental price, free home delivery, and option to reserve videos in advance. Design and create a Web site whose address is featured in all in-store and local advertising and promotion. These strategies are designed to resolve some of th
