BEYOND THE DANGER ZONE: WHEN BLOCKBUSTER AND CRISOBA RAN OUT OF TIME

Through an analysis of the internal and external environment, it is possible to predict whether a company is in danger, but if we also add the Z-Score analysis, we can know up to three years in advance whether a company is going bankrupt.

The Blockbuster and Crisoba (Scott Paper Mexico) disaster was a slow decline that could have been predicted through the aforementioned analyses, which, along with trend analysis, forces us to ask the right questions for a company's survival.

Can a company's bankruptcy be predicted? Yes

Whether anything can be done depends on the company's life cycle.

The Financial Warning Sign That 95% of Bankrupt Companies Ignore

As a senior management consultant, one of the questions I'm asked most often is, "Can a company's failure be predicted?" My answer, based on decades of experience, is almost always the same: "Yes, the information was always there."

Imagine for a moment Blockbuster's board of directors in 2004. They were the undisputed kings of home entertainment. At that same time, a small company called Netflix was perfecting a business model that seemed like a mere nuisance. However, hidden in Blockbuster's financial statements, a single number, a score, had already begun its slow descent into the danger zone. That number exists. And today, it could be doing the same thing at your company , and it's called the Altman Z-Score.

Developed in the 1960s, the Altman Z-Score is a diagnostic formula that uses information from balance sheets and income statements to measure a company's financial health. Its accuracy is astonishing: historical studies showed that 95% of companies that went bankrupt had scores in the danger zone one year before the collapse.

In essence, the formula combines five key financial ratios that evaluate:

Short-term liquidity.
The cumulative profitability over time.
The efficiency with which your assets generate profits.
Market confidence in your company versus its debt level.
The ability of your assets to produce sales.

THE THREE ZONES OF FINANCIAL HEALTH

The result of the formula places you in one of three critical zones, functioning as a traffic light for senior management:

Safe Zone (Score > 3.0) Indicates a low probability of financial failure. The ship is sailing in calm waters.

Preventive Zone (Score between 1.81 and 2.99) This isn't a sign of imminent failure, but it is a yellow light. It's a warning to thoroughly investigate what's weakening the financial structure.

Danger Zone (Score < 1.81) This is the warning bell. It indicates a high probability of bankruptcy in the next two years.

WISDOM IS NOT IN THE PHOTO, IT'S IN THE MOVIE

The true power of the Z-Score isn't just a single year's number, but its trend. This is where business wisdom transcends simple calculations.

Blockbuster's Z-Score didn't go from "Safe" to "Danger" overnight. It was a gradual decline, year after year. A light on the dashboard that flickered ever more persistently as management focused on optimizing an outdated business model. They ignored the trajectory.

A Counselor doesn't just give you the number; he helps you interpret the whole movie and change the ending.

THE COLLAPSE OF THE MEXICAN PAPER INDUSTRY

Let me share with you a case I experienced firsthand, an example of how the death sentence is pronounced long before the blood reaches the balance sheet and income statement: the collapse of the Mexican paper industry.

The Inevitable Sentence: Scott Paper (Crisoba) Ran Out of Time (1992)

I remember that pivotal year, 1992 , with absolute clarity. I was the General Sales Manager of the Scott Paper (Crisoba Group) white paper division in Mexico , and my mind was already processing the impending catastrophe. It wasn't a hunch, but rather a cold-blooded analysis of the reality of the environment. While in Atlanta, attending a meeting of the U.S. White Paper Association, the major North American manufacturers were announcing that Mexico had already opened up to paper imports and that they would soon conquer the Mexican market.

The outlook was bleak: the threat from North American giants like International Paper , Georgia-Pacific , and James River was no longer a possibility, but an imminent threat . The key lay in economies of scale . Think about this: total white paper production in Mexico represented a tiny 1.9% of our competitors' capacity. It was an irrefutable truth that their production costs were radically lower than those of domestic mills, which at that time included Kimberly Clark de México, Grupo Industrial Atenquique, Celulosa y Papel Ponderosa, Grupo Industrial Durango (GIDUSA), Fábrica de Papel Tuxtepec, Compañía Papelera Maldonado, Papelera Chihuahua, Envases Especializados de La Laguna, and the historic Loreto and Peña Pobre Paper Mills.

In a senior management meeting, I remember the COO trying to calm the storm: "Don't panic, this is a capital-intensive company and it won't disappear so easily." As a strategist, I recognized a dangerous fallacy in that statement. Capital intensiveness is an advantage, yes, but it becomes an unsustainable burden if the business model collapses.

The real death sentence wasn't dictated by management, but by a change in the political and economic environment: the government eliminated restrictions on paper imports. This action eliminated our only competitive advantage—tariff protection.

THE COST OF INACTION, THERE WAS NO MORE TIME

Herein lies the most painful ingredient and the lesson for all: there was no more time.

The need for strategic change for Scott Paper (Crisoba Group) should have been identified and implemented several years earlier, when globalization was a possibility. Facing a structural cost threat requires years of restructuring, renegotiating, or pivoting toward high-value niches.

The impending decline in margins was reflected in the negative operating profit in the 1993 budget, the signal that prompted the CEO to resign, refusing to be the "gravedigger." Chronic inaction had taken its toll.

Altman's Z-Score for Scott Paper in previous years would have served as an early warning signal that screamed, "Capital flight! Unsustainable structure!" While the metric can predict bankruptcy, the ultimate lesson is that no metric can save a company that has ignored the imperatives of strategic thinking for too long.

The competitive advantage that guarantees profitability must be created years in advance. If you wait for the threat to materialize or for the Z-Score to fall into the danger zone, you've simply run out of time.

THE QUESTIONS YOUR STEERING COMMITTEE SHOULD BE ANSWERING

The stories of Blockbuster and Scott Paper teach us that having information isn't enough. Wisdom lies in asking the right questions at the right time.

I leave you with the same questions I would ask your steering committee:

1️⃣ Do you know your company's current Z-Score? And more importantly, do you know its performance over the past three years?

2️⃣ If the score has dropped, even slightly, have you accurately identified which radio station is responsible and what concrete actions you are taking to reverse it?

3️⃣ Who on your management team is responsible for not only reporting this number, but also translating it into strategic actions?

The Z-Score is a diagnostic tool, not a solution. It shows the symptom with brutal clarity, but it doesn't prescribe a cure.

If reading these questions makes you feel a pang of uncertainty and you don't have an immediate answer, let's talk. Sometimes, the light of a lighthouse not only serves to warn you of rocks, but also to illuminate the path to a safer haven.