Netflix SMP Report

Strategic Management Project

Prepared by:

Tyler Bushnell, Hayley Downing,

Caitlin Hayes, Chang Soo Kim, & Maximilian Uson

December 12, 2016

Prepared for:

BUS 690.01

Professor David Hover

Netflix: SMP Analysis

Table of ContentsTable of Contents …………………………………………………………………………………………...1

Executive Summary ……………………………………………………………………………………….. 3

Section I: Company History …………………………………………………………………………….... 5

Declining DVD Sales & Company Expansion ………………………………………………... 5

Netflix Today ……….……………………………………………….…………………………….. 6

Section II: External Analysis …………………………………………………………………………….. 8

Online Streaming Industry ………………………………………………………………………. 8

Blurred Boundaries ………………………………………………………………………………. 8

Industry Growth …………………………………………………………………………………... 8

Dynamic Streaming Industry ……………………………………………………………………. 9

Threat of New Entrants ………………………………………………………………………… 10

Bargaining Power of Suppliers ………………………………………………………………...11

Bargaining Power of Buyers …………………………………………………………………... 11

Threat of Substitutes ……………………………………………………………………………. 12

Rivalry Among Existing Competitors ……………………………………………………….... 12

Complementary Products ……………………………………………………………………….12

Implications …………………………………………………………………………………….... 13

Strategic Groups ………………………………………………………………………………....14

Conclusions …………………………………………………………………………………….... 14

Section III: Internal Analysis …………………………………………………………………………... 15

Mission Statement & Values …………………………………....……………………………... 15

Competitive Advantage & Distinctive Competencies Within the Industry ………………. 15

Efficiency (Organizational Structure) ………………………………………………………... 17

Evaluating Generic Building Blocks for Competitive Advantage ………………………… 18

Building On New Distinctive Competencies ……………………………………………….... 18

Pursuing Customer Responsiveness ………………………………………………………….. 19

Barriers to Imitating Distinctive Competencies …………………………………………….. 20

Section IV: Business-Level Strategy ...…………………………………………………………...……. 21

Providing & Perfecting the World’s Leading Streaming Service ..………………………...22

Strategy & Segmentation at Netflix …………...…………………………………………….... 23

Functional Forces & Growth Drivers ……………………………………………..…………. 24

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Advantages & Disadvantages of Netflix’s Differentiation Strategy ……………………….25

Securing A Sustainable Future ..………………………………………………………………. 26

Section V: Additional Strategic Issues ...……………………………………………………………….28

Netflix Technological Innovation ………………………………………………………………28

Dominant Product Technology and Sales …………………………………………………….28

Technical Standards ……………………………………………………………………………. 30

Technological S-curve, Disruptive Technology, and Risk …………………………………..31

References ………………………………...………………………………………………………………. 32

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Executive Summary

The company discussed in this report is Netflix, one of the leading streaming and video

on demand companies in the United States and internationally. When one of the founders, Reed

Hastings, had an overdue movie rental, he was inspired to come up with a better business plan

when it came to the movie rental industry. Today, Netflix has about 86 million subscribers

worldwide and plays a dominant role in what the majority of our population watches daily.

Netflix started out as a DVD rental company in 1997, and in 2007 they realized that they

needed to change their business plan to focus on streaming content due to consumer trends. By

switching to streaming, this gave Netflix a first mover advantage as well as brand loyalty, which

placed Netflix in a good position within the upcoming streaming industry. After successfully

creating a content streaming service, they developed Red Envelope Entertainment which gave

them the ability to create their own content such as original shows, specials, and movies. By

adding exclusive content only available on their service, it incentivizes customers to stay

subscribed because it is only accessible through them.

In an industry that is changing rapidly and filled with strong competition, it would be

very difficult for new entrants to be successful. The bargaining power of buyers is very strong

due to having essentially no switching costs throughout the streaming industry. This is one of the

threats to Netflix because their customers can cancel their subscription and switch to another

provider if they choose to. To stay successful, Netflix must keep providing high quality content

that interests their customers and more generally, keep innovating their services. Luckily, Netflix

has many long term contracts with their suppliers, giving them an advantage when it comes to

some of the content they provide by being exclusively for their service.

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With distinctive competencies such as customer responsiveness and barriers to imitate, it

is easy to see why Netflix is performing well financially. A big factor in Netflix’s success is their

recommendation algorithm that keeps their consumers engaged throughout the program by

suggesting unwatched content that is similar to what they have watched or are currently

watching. Netflix’s financial stability has lead them to a strong research and development ethic,

giving them an advantage over their competitors when it comes to barriers to imitate. To keep

these distinctive competencies, Netflix needs to continue to focus on research and development

so that they can keep innovating their services.

Netflix takes on a differentiation strategy as their business level strategy, which comes

along with some advantages and disadvantages. The main advantage that comes from their

differentiation strategy is from their exclusive content, recommendation algorithm, and their

innovative mindset. All of these qualities add value for the customer which leads to brand loyalty

and then having a competitive advantage over other providers. Although this advantage is

beneficial, there are also disadvantages Netflix faces when it comes to their differentiation

strategy. The main disadvantage with this strategy is finding ways to constantly keep their

services distinct and unique so that customers are satisfied and remain loyal. Although there are

pros and cons with having a differentiation strategy, Netflix continues to innovate and add value

to the services they provide.

Throughout this report, Netflix will be analyzed in these specific areas: the company

history, internal and external analyses, business-level strategy, and additional strategic issues.

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Section I : Company History

Netflix was founded in 1997 by Marc Randolph and Reed Hastings. The idea for what is

now Netflix came to Hastings when he was charged a $40 late fee for an overdue copy of Apollo

13 rental from Blockbuster. (Business Insider, 2015) Netflix was launched on April 14th, 1998

as a pay-per-rent model. It cost the customer 50¢ per-rental via mail. Late fees applied.

In September 1999, Netflix introduced monthly subscriptions. This meant a business

model of a flat-fee in return for unlimited rentals without due dates, late fees, per-title rental fees,

and shipping and handling fees. In 2000, Netflix offered to be acquired by the rental giant

Blockbuster for $50 million. Netflix want to aid in the development of Blockbusters online

sector. Blockbuster declined this offer. (Wall Street Journal, 2010) At this time Netflix was the

“rental underdog.” (Business Insider)

In May 2002, Netflix made its first initial public offering (IPO). Netflix sold 5.5 million

shares to the public priced at $15.00 per share. By June, the company had to sell an additional

825,000 shares at the same price to cover substantial losses during its initial first few years. In

2003, Netflix brought in revenue of $6.5 million and had overall profits of $272 million. (The

Economist, 2005)

Declining DVD Sales & Company Expansion

In October 2006, Netflix held a contest offering a 1 million dollar prize. The contest was

for developers to create a video-recommendation algorithm that could beat its existing algorithm

Cinematch, at predicting customer ratings by more than 10%. (Netflix Prize Website). By 2007,

Netflix had delivered its billionth DVD. At that time consumer trends were changing. The

general public was spending more time on the internet streaming videos and at the same time

DVD sales were declining. Netflix realized that they needed to change their business model and

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to focus more effort on their streaming sector. Soon after Netflix introduced video on demand.

Its customers were able to access thousands of movie titles and shows over the internet. (Time

Magazine, 2011) Another step Netflix took to distance itself from its competitors was to

establish Red Envelope Entertainment. This gave Netflix a platform to produce its own original

content for example, House of Cards.

By 2010, Netflix was the second largest source of streaming internet traffic in the United

States in the evenings. (New York Times, 2013) At the end of that year Netflix offered its first

stand alone streaming service.

At the same time, Netflix rebranded and restructured their DVD service as an

independent subsidiary still under the name “Netflix.” This separation of business lead 800,000

customers to unsubscribe. When the entities separated the monthly subscription prices rose. As

a result, the stock value of Netflix declined. (New York Times, 2011)

Netflix Today

Netflix is determined to offer movies and TV series commercial free unlike their

competitors. Also, they would like to keep the prices for their subscriptions affordable and non-

committal. The company wants customers to have the “freedom of on-demand and the fun of

binge viewing.” (Netflix.com) In the upcoming year they plan to spend $800 million on

technology and development. They are projected to grow by 60-90 million customers in the

United States by 2020, according to their website. The company expects to be barely profitable

this year but expects growth next year due to their growing markets overseas. Netflix is virtually

everywhere except China.

Key Partners: Movie and television studios, postal service, internet service providers, set top

box hardware makers.

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Key activities: Video player software, content licensing, mail handling operations, content

algorithm.

Value Propositions: Price, accessibility, convenience.

Customer Relationship: Self-service, automated services.

Customer Segments: Mass market, cable/satellite replacers, fans of blockbuster movies.

Key resources: Content (virtual), DVD inventory (physical), servers (physical)

Channels: Netflix.com, mobile app, set top boxes (cable, blu-ray, etc.)

Cost Structure: Fixed costs (discs), variable costs (per-user licensing, streaming capacity),

content licensing agreements.

Revenue Streams: Monthly subscription revenue, DVD envelope advertising.

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Section II: External Analysis

Online Streaming Industry

A video streaming service is an on demand online entertainment source for TV shows,

movies and other streaming media.

These services provide an alternative to cable and satellite on demand service, often at a

lower cost. Use of streaming services often requires fees, either per view or subscription. The

videos come from a network that is typically cloud-based. The availability, content and price of

services may vary from one region to another. (Whatis.com)

Blurred Boundaries

When online streaming got its start it was strictly found through an internet platform. In

the past decade the industry has grown tremendously in size. Other industries such as the cable

industry, game console industry, software industry, etc. saw the huge market potential of online

streaming and decided to partner with Netflix and other online streaming platforms. Netflix

currently has a long list of partners, among the most prominent are Comcast, Microsoft,

Nintendo, and Samsung. Comcast decided to partner with Netflix because their Xfinity X1 did

not perform as well as expected. They saw online streaming as an opportunity to expand their

online selection for their customers and to have an advantage over their competitors. These

companies have approached online streaming providers for that reason to have an advantage over

their competitors because they have access to such customer base.

Industry Growth

The online streaming industry got its start in the mid-1990s. Online streaming as we

know it today started to grow rapidly in the early 2000s. It began to gain its popularity through

Youtube, a website where you can watch and stream videos. Netflix started online streaming in

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2007. Hulu followed in 2008. Amazon Prime was the last major competitor to enter the market

in 2011. Currently, the industry in near the end of its growing stage and entering the maturity

stage. It was estimated in 2015 that Netflix had another 36.5 million U.S. subscriptions until it

reaches market saturation. (The Guardian) Since these companies are a disruptive technology it

does not mean immunity against other potential technologies that could shock the market. They

will have to watch carefully for new trends in the market. These competitors have also entered

foreign markets to gain a larger customer base and to reach untapped markets. Though they are

in a saturated and maturing market in the United States there are still areas that have huge growth

potential for these companies.

Dynamic Streaming Industry

The online streaming industry is extremely dynamic, meaning that it is constantly

changing by updating services with higher quality content, more variety in content, and by

providing better user algorithms. When Netflix was founded, they didn’t have streaming services

and only had DVD rentals. After destroying Blockbuster from their subscription based pricing,

they later began to stream their content, opening up a new industry which later brought

competition into this the online streaming industry. Innovation of these services has completely

reshaped competition by closing businesses like Blockbuster, as well as bringing other

companies to the market such as Hulu. By being such a dynamic industry, innovation has

completely reshaped competition in the past and recently.

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Threat of New Entrants

The streaming industry is a fairly young industry and still rapidly changing. Netflix has

paved the way for online streaming which creates opportunities for new entrants. Since the

market is evolving rapidly there is a threat of new trends such as, Youtube Red. Youtube Red

gives customers access to watch Youtube ad free for a small fee. Youtube has movies, a large

selection of music, and connects to social media. Youtube Red could be a direct competitor of

Netflix in the future because they could potentially decide to add movies and TV shows to their

selection.

Youtube Red, unlike new entrants has the backing of Google. (Investopedia.com, 2016)

Many new entrants to the streaming industry would have a hard time competing at the same scale

as Netflix. They already have established contracts and long standing relationships in the video

industry. In addition, do not have the same amount of financial resources that Netflix does.

Netflix has an established brand and reputation. One of the only way a new streaming service

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could enter the market is to partner with a well established network or studio to have the ability

to compete with Netflix directly.

Bargaining Power of Suppliers

Contract cost is essential to Netflix’s survival. The large number of customers offset the

contract costs. If Netflix were to lose a large amount of their clientele they would have to

renegotiate their contracts. By doing this they could possibly incur more costs. If they have to

break contracts because of this the company might not be able to break even financially. This

may cause people to unsubscribe to their service because Netflix would have raise their prices.

Another issue Netflix could face is their partners having exclusive rights to certain shows.

This could give their competitors an advantage. In addition, the suppliers in a sense have

become the competitors to Netflix. Traditional cable has started to enter the streaming market.

This could affect future contracts. Luckily, Netflix already has many long term contracts with

suppliers. To combat this Netflix can focus on building upon its own original content to avoid

contractual issues.

Bargaining Power of Buyers

A fault in Netflix’s strategy is that there are virtually no switching costs. Netflix does not

run on an annually contract. In fact, they say that one of their core beliefs to remain low cost and

contract free on their website. Buyers can easily end their service with Netflix and switch to

another online streaming service such as, Hulu. One of the biggest influences that buyers have is

what content Netflix uses. The content provided by Netflix is based off of viewer preferences.

If Netflix is unable to meet customer preferences customers can switch to another service.

Threat of Substitutes

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In the past couple years online streaming has grown significantly. The live streaming

sector has been growing significantly. Now, many cable providers grant access to live

streaming. This is predominately used by sports fans and to watch live news. Cable providers

have tapped into live streaming and the online streaming industry. These are free if you are a

cable subscriber. So instead of a consumer purchasing a monthly subscription with Netflix, they

may be satisfied with the content their cable provides, hurting sales for Netflix.

Another threat is illegal streaming websites. One of the reasons they are so popular is

their price, free. One can find endless free movies and shows to watch if they look hard enough.

This can be a threat because consumers can simply look on Google to watch content for free

instead of paying a monthly fee.

Rivalry Among Existing Competitors

The online streaming industry is fast growing with it comes fierce competition. Netflix’s

biggest direct competitors are Hulu and Amazon Prime. Both provide similar services at roughly

the same price ($99 per year for Amazon Prime and $7.99 a month for Hulu) They both offer

original content like Netflix. Netflix is priced higher than its competitors priced at $9.99 a

month. The content provided by the companies is the main difference when it comes to the entire

service offered. Hulu has exclusivity with Showtime. Amazon provides free shipping and has the

most content selection. (Investopedia.com) Netflix has the largest selection of original content.

Complementary Products

The most important complement product of Netflix is technology itself. Technology

including high bandwidth needed for the quality of their content as well as all of the devices used

to watch Netflix on. Without a high bandwidth, Netflix services would not be of high quality,

which would most likely decrease brand loyalty and more importantly, the number of

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subscribers. Another complementary product to Netflix would be the various devices that have

access to their services. A few of these devices would be the Nintendo Wii, PS3, Xbox, Apple

products, etc. For consumers who already own one of these devices, subscribing to Netflix is

easy and convenient. Without these devices, Netflix wouldn’t stand where they do today as the

leading streaming service.

Implications

From these 5 forces we can conclude that this industry is highly competitive due to lack

of differentiation. There is little difference between the services provided by the market leaders

(Netflix, Hulu, Amazon Prime). There is a growing threat of substitutes which include, live

streaming and the ever present illegal streaming websites. These will probably affect the future

business endeavors of Netflix. Bargaining power of suppliers could become stronger in the

future if Netflix’s competitors gain more of the market. Suppliers can threaten to leave Netflix

for another online streaming service if Netflix does not pay a higher price. There is a threat of

new entrants but, it will be hard to compete with Netflix’s financial powers and long-standing

contracts without entering into a joint venture or through acquisition by a larger company.

Lastly, we can conclude that the buyer's shape the content that Netflix’s provides. There is no

switching costs with Netflix since there is no annual contract. To keep its customer base, Netflix

will have to maintain a high quality of provided content to remain competitive or they can start

enforcing annual contracts.

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Strategic Groups

The streaming industry is organized into different strategic groups. Netflix, Hulu, and

HBO GO all have subscription based pricing, while Youtube provides free content with

advertisements as a downside. While the companies with subscription based pricing get

payments monthly, Youtube gets paid from the advertisements that are played before a video.

Although, now Youtube has brought Youtube Red to the market, which is also a subscription

based pricing model without any advertisements. From having heavy competition mainly in the

same strategic group, it would make it extremely difficult for any companies trying to enter the

industry. If new companies did enter the industry, they would have to find a huge way to

differentiate themselves compared to their competition.

Conclusions

To conclude Netflix’s external analysis, some of the most important issues to note are

that the streaming industry is a dynamic industry, there is fierce rivalry among competition, a

growing threat of substitutes, and that Netflix is almost completely in the maturity stage in its life

cycle. It is important to analyze these external factors because they can be detrimental to

Netflix’s financial performance.

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Section III: Internal Analysis

Mission Statement & Values

Netflix is considered one of the leading online movie streaming rental companies at the

moment. Currently, Netflix is providing services to “86 million members in over 190 countries

enjoying more than 125 million hours of TV shows and movies per day, including original

series, documentaries and feature films” (Overview). Over this small amount of time since

Netflix opened its doors, it has gained the brand recognition as one of the best streaming services

available. This was done by the values set in place imposed within the culture of Netflix; these

being: Judgment, Communication, Impact, Curiosity, Innovation, Courage, Passion, Honesty,

and selflessness (McCord).

Netflix has established its business model thriving off their original mission statement

which states “our appeal and success are built on providing the most expansive selection of

DVDs; an easy way to choose movies; and fast, free delivery” (Topix.com). Throughout its time

of growth, netflix has distinguished itself from its competitors in the ways it innovates and adapts

to changing technology.

Competitive Advantage & Distinctive Competencies Within the Industry

Innovation is the main factor that contributes to the overall success Netflix has been

experiencing. When the technology changed, so did the company allowing for more

cohesiveness in adapting to the industry changes. These shifts in the market demand were

quickly seized as opportunities in which Netflix would capitalize on. From the beginning, Netflix

has designed a set of principles in order to bring about innovation.

They illustrate their model for innovation in four parts:

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● Think Big

● Start Small

● Fail Quickly

● Scale Fast

(Mui, 2016)

Using this model has served beneficially towards Netflix’s expansion. Innovation being

the driver of the company operations is essential when incorporating this way of thinking. Being

in a rapidly growing industry, Netflix needs to utilize resources and expand intellectual capital

appropriately according to cost. The most important part about this model is the fail quickly area,

allowing companies not to invest in an area that looks unpromising in the long run. This model

and its qualities have helped Netflix keep up with consumer trends by being innovative and

fresh.

Netflix also has distinctive competencies in their management teams which has shown in

the creation of value in the eyes of the consumer. Effectively and efficiently are how teams at

Netflix are coordinated. This competency has developed the company to possess a highly

productive employee staff. This has attributed highly to the success of Netflix.

Utilization of information technology is another one of the main distinctive competencies

Netflix possesses. Netflix is considered a technology based and run company. Since the time

Netflix opened their doors for business, they had developed a great interactive platform that

other small companies cannot replicate. Their intellectual capital used from daily operations gave

birth to their subscription model which customers are very attracted towards. Their strength in

information technology gives Netflix a competitive advantage over other companies in the way

capabilities are implemented.

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Efficiency (Organizational Structure)

Netflix operates off a functional organizational structure focusing on prime aspects

within the company. It strives off its ability to successfully accomplish tasks by the

interconnectedness within the company alongside its guidance accompanied by the managerial

staff in charge of teams.

The management style uses a anti-control method in monitoring and evaluating

employees. (Ortner) Netflix invokes freedom and responsibility as the way operations are carried

out daily throughout the company. This cultural outlook is outlined as the “Netflix culture deck,”

which is used throughout Silicon Valley and is a true key to Netflix’s success (Stenovic);

Employees are placed with high levels of trust within the organization. Its values are centrally

placed on output rather than long hours. Netflix strives off of being innovative; in upholding this

competency, Netflix wants their employees to work at a super high-level or they would be shown

the door. In a company like Netflix, it is necessary they explore areas of innovation in order to

survive and stay a key player within in the industry.

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Slide from Netflix Culture Deck

Evaluating Generic Building Blocks for Competitive Advantage

Netflix has done a stellar job in innovation, efficiency and innovation. The only area that

needs more attention is quality. Netflix is a streaming provider that provides a vast amount of

selection in terms of content. Much of the videos are bypassed by viewers because they are

considered unpopular. The best way Netflix is striving to achieve even better competitive

advantage and improving this generic building block is through their own developments in

filming; this is known as a way Netflix is utilizing their competencies through backward

integration. In the completion these activities, Netflix is using its production to bring about more

capabilities by use of new available resources.

Building On New Distinctive Competencies

Creating easier access for availability of Netflix platform on other devices. This is a

continuous area of each streaming company to get better at. Netflix has spotted various

opportunities in innovation such as accessing content. Developers and teams have created the

necessary changes to accommodate consumers effortlessly. In exploring this core competency of

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“convenient content delivery to home, they have manage to outcompete other companies such as

Blockbuster and many other companies in their space” (Penn, 2016).

Efficiency and innovation have led Netflix to gain competencies in their own venture

with their own film studios. They have created TV series such as House of Cards, Narcos,

Orange is the New Black and many others. Netflix realized that many of its TV series and

Movies that were available to be viewed were based on licenses which meant that competitors

would only need to outbid them to acquire the rights to show these various media on other

outlets. The creation of their own film developments have gained more attraction for Netflix

making it the only outlet to watch these popular TV series. The cost of starting this new venture

was expensive but as result of doing this, Netflix has received revenue increases as much as 24%

which amounted to around $1.2 billion (Bushey, 2016).

Pursuing Customer Responsiveness

Netflix realized the different needs of their consumers. From their ability to brand

position themselves, they were able to distinguish their activities that allowed for adaptability in

the market. Netflix has strategically positioned itself by aligning their business model with the

interest of the customer. Since the time they were in the DVD rental market, they were aware of

the idea of creating a subscription based model. Netflix realized that customers really wanted an

unlimited subscription model. (Bariso, 2015). This is an example of how Netflix has coordinated

its efforts in innovation to the fulfill the desires of their customers.

Barriers to Imitating Distinctive Competencies

The distinctive competencies which Netflix has developed relate primarily to outputs in

innovation. Companies not at the top would struggle to imitate the competencies in place at

Netflix because they lack the information technology to drive innovation. Research and

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development are essential to keeping up with the demands of the consumers in this industry

because its rapidly changing. Companies like Amazon with Amazon Prime can emulate areas of

Netflix and their model which are similar in many respects already. The one area that bears

differences is content. Having resources such as those that relate heavily to content brings the

customer more value. In this way can they seek other partners such as Disney and Paramount in

acquiring more content.

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Section IV: Business-Level Strategy

The business model of Netflix can be divided into three segments consisting of domestic

online streaming, international online streaming, and domestic DVD-by-mail. Both the domestic

and international streaming segments of Netflix earn revenue through monthly membership fees

and provide unlimited content streaming services, typically starting around $7.99 per month.

Similarly, the domestic DVD-by-mail business unit earns revenue through monthly membership

fees starting around $7.99, however, members pay solely for DVD-by-mail services and are

unable to access unlimited streaming. (Netflix Annual Report, 2015)

Although reported as separate segments, both domestic online streaming and

international online streaming have grown to become the overwhelmingly dominant business

units of Netflix with each representing roughly 60% and 31% of Netflix’s total revenue for 2015,

respectively; DVD-by-mail, the original core business model, makes up less than 9%. (Netflix

Annual Report, 2015)

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Providing & Perfecting the World’s Leading Streaming Service

With the domestic launch of Netflix’s Internet streaming service in 2007, the company

began to move away from their core business model of DVD-by-mail and re-focused their efforts

on satisfying the growing need for video on demand via Internet streaming; indeed, they

recognized a traditional business model would not be sustainable long-term in such a new,

rapidly changing industry. DVD sales had been steadily declining, and in order to attract and

retain subscribers the company recognized the need to provide compelling content, build and

enhance engaging user experiences, and focus on providing an innovative ecosystem of

technology that makes the overall streaming service unlike any other. (Netflix Annual Report,

2012)

Self-proclaimed pioneers in Internet delivery of TV shows and movies, upon the launch

of their streaming services Netflix immediately had the advantage of becoming the first company

to release an online video on demand service which allowed users to fully control their streaming

experience with the freedom to watch however they please, initially providing around 1,000 titles

for streaming upon launch in 2007; since then, Netflix has built up a broad and deep streaming

content library through backwards integration with thousands of titles available today. Netflix

also has a team of expert programmers with access to more than a decade's worth of data on user

preferences and viewer habits, enabling the company to continue building their compelling mix

of content which is increasingly exclusive and original. (Netflix Annual Report, 2012)

In addition to valuable content, Netflix’s innovative and effective user interfaces have

enhanced user experiences and increased user engagement. Members of Netflix’s online

streaming service were for the first time given the freedom to watch whatever exclusive content

they want, whenever they want, and wherever they want for unlimited amounts of time on almost

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all Internet-connected devices available at the time without the distraction of commercials or ads;

this included PCs, laptops, video game consoles, and tablets which typically had built-in Netflix

apps for easy watching. (Netflix Annual Report, 2012)

Netflix has always been focused on high quality content and experiences for users, but

the concentration on the overall quality through providing users an ecosystem of interconnected

screens with streaming capabilities has truly given Netflix a competitive advantage. By

concentrating on providing a great, affordable subscription streaming service with constant

technical innovations and endless viewing options, Netflix believes they will innovate faster than

competitors and will better satisfy the needs of consumers by helping them more easily discover

and enjoy the service offerings. (Netflix Annual Report, 2012)

Strategy & Segmentation at Netflix

Netflix strives to offer it’s streaming services to people of all ages from all parts of the

world, reflected in their vast and diverse library of thousands of titles and current position as the

world’s leading Internet TV network; with over 80 million streaming members, the market

Netflix seeks to reach is incredibly broad and unfocused by typical strategic standards. However,

they still strategically segment their customers based on the types of content they are interested

in viewing via the filtering algorithm in order to ensure each customer has an enhanced

experience when they sign on and search for content to watch; essentially, Netflix offers 80

million personalized user interfaces and suggested titles for all 80 million users. (O’Reilly, 2016)

Since the development of the filtering algorithm in 2006, Netflix has continued to rely on

the tool as a method of market segmentation. In order to offer users a personalized experience

each time they log on, Netflix relies on their highly advanced filtering algorithm as a tool to

predict user ratings for films and content, effectively segmenting the market/customer base by

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providing users with titles tailored to their viewing patterns and history. Updated every 24 hours,

the algorithm is meant to provide each user with a personalized experience by helping assimilate

the titles available to users, in order to ensure users do not become overwhelmed. (O’Reilly,

2016)

Functional Forces & Growth Drivers

Netflix’s driving forces stem from the company’s core strategy to grow their streaming

subscription business both domestically and internationally and include streaming content

investments, service and quality improvements, and expansion in correlation with the growth of

devices capable for streaming content. (Netflix Annual Report, 2012)

Netflix’s investments in obtaining streaming content that is increasingly exclusive and

original has become a huge functional force for growth. Content is obtained through streaming

content license agreements from various content providers and mainly has been the product of

backwards integration; reports of increased subscriber viewing and positive consumer word-of-

mouth in correlation with increased availability of diverse types of content has lead to subscriber

acquisition and revenue growth, enabling Netflix to continue the growth cycle. (Netflix Annual

Report, 2012)

Continuous service and quality improvements of the streaming service itself have

enhanced member satisfaction and retention at Netflix, and have proven to become valuable

functional forces for growth. Incremental improvements made to refine the technology, user

interfaces, and overall infrastructure of the streaming service are constantly being made to better

improve the customer experience. For example, technology has been developed to optimize the

streaming rate of each user’s Internet speed, minimizing loading and buffering times.

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Capabilities for HD viewing with high quality sound features have also been added over the

years to create a more immersive streaming service. (Netflix Annual Report, 2012)

The overall adaption and growth of Internet streaming has also been a force for growth at

Netflix with the company growing in correlation to the growing demand for Internet streaming

services that allow consumers the control and freedom to watch whatever they want, whenever

they want, and wherever they want on their connected devices. With the full global launch of

Netflix’s streaming services in 2016, Netflix looks forward to continue growing in correlation

with technology and trends across the globe for years to come.

Advantages & Disadvantages of Netflix’s Differentiation Strategy

The main advantages of Netflix’s business-level differentiation strategy are typical of any

company pursuing a differentiation business-level strategy, and stem from the core goal of

creating a product that customers perceive as different in a way that adds value. In Netflix’s case,

brand loyalty is one of the most common advantages associated with exclusive content obtained

through backwards integration, enhanced and personalized streaming experiences, and an

innovative ecosystem that makes the overall streaming service simple have proven to provide

many advantages for Netflix.

Competition mimicking Netflix’s core business model began to emerge a few years after

the launch of Netflix’s streaming service, including Hulu in 2008 and Amazon Instant Video in

2011, both offering unlimited viewing and exclusive content with minor differences such as

commercials and higher fees. The differentiation and brand loyalty advantages, together,

combine to create intense barriers to entry for competitors within the industry, another advantage

for Netflix; substitute products are also no longer a threat because competitors are unable to meet

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customer needs in the same way a successfully differentiated product can. (Netflix Annual

Report, 2011)

However, disadvantages associated with differentiation strategies oftentimes are

companies having difficulty maintaining long-term levels of distinctness amongst their products

and services. For example, before 2011 Netflix streaming and DVD-by-mail operations were

combined and subscribers could receive both streaming content and DVDs under a single

“hybrid” plan. Later in the year, Netflix announced separated DVD and subscription only plans,

forcing members to have two separate subscription plans for each service; there was also a

resulting price increase. As a result, consumer reaction to the subscription plan and price change

was very negative, leading to significant customer cancellations and a loss in stock value;

although Netflix was able to recover from this incident, it is a reflection of typical disadvantages

faced by differentiation strategies. (Netflix Annual Report, 2011)

Securing A Sustainable Future

Overall, Netflix has remained a top global streaming service for almost a decade since

launching and has managed to maintain sustainable levels of competitive advantage amongst

competitors. Netflix has made public their intentions to broaden their array of Internet connected

devices capable of streaming content in order to enhance the value of their service and position

themselves for continued growth as pioneers of second-screen device streaming, such as tablets

and smartphones. The company is actively engaged with all device partners, constantly

evaluating how Netflix can enhance and improve user experiences with product innovations; by

continuing to follow an un-traditional differentiation model and preparing for whatever may

come their way in the rapidly changing online streaming market, Netflix will surely continue as a

successful industry leader. (Netflix Annual Report, 2012)

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In 2016, Netflix announced a new offline streaming feature allowing users to download

their favorite television shows and movies directly to their devices in order to be viewed at any

time in any location, regardless of Wi-Fi availability. Once again, Netflix is beginning to move

in directions not previously taken by companies in the online streaming industry with their plans

to offer offline viewing of their content. In addition, 2016 has seen full global availability of

Netflix’s streaming services in nearly every country other than China, which also represent the

company continuing to work towards their long-term growth goals through international

investment in content and marketing. (Victor, 2016)

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Section V: Additional Strategic Issues

Netflix Technological Innovation

Netflix has successful to capitalized on the online streaming service and increasing

internet speeds of consumer broadband to streaming service of movies, TV shows, dramas, and

cartoons. They provide service through internet rather than delivering DVD by mail. Also,

Netflix still working on perfecting the algorithms that suggest right service, program, and

entertainment to customers based on which TV shows, movies, and dramas subscriber watch and

how they rate them. Netflix also successful from competition to global research about their

algorithm around the world to figure out ways to improve the accuracy. Netflix also provides

their own content called “Netflix Original,” it is possible due to easier to access filming business

and meet with customer needs. However, Netflix's most successful innovation is move to mailing

DVD business to online streaming service because mailing DVDs goes to decline stage very fast

due to personal internet service provided in the market, also people want to have more faster

service, easier to access, and they want to watch most recent TV shows, and movies more faster.

So, online streaming service solved all these customers needs at once, no waiting time for DVD

release, no delivery times, and some of programs uploaded in over night. Also, online streaming

service provide customized system that each customers can create their own DVD shelve in their

account, so customers can access the service easier than before. In addition, Netflix decrease

down DVD loss problem, not extra cost for mailing, warehousing, and cost for managing DVDs.

Dominant Product Technology and Sales

Netflix services can not be separate from online streaming because that is one of their

competitive advantage. The company begins with mail DVD to customer and customer can hold

their favorite DVDs as long as subscribe monthly membership. But after early 2000s, major

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target customers owned PC and home internet services, also many local and national internet

providers had a format competition of internet service. Basically, most internet providers using

light sensor cable (cable TV line), telephone line (DSL), and satellite dish to provide their

services.

Therefore, Netflix had to move their service through online, and it is wise movement

because there was no competition, so Netflix earned a first mover advantage due to technological

innovation. By using an online streaming service, it gives Netflix a huge advantage by reducing

the cost of labor and operations, providing quick and immediate customer service, and now takes

on a cost leadership position from the service. Netflix online streaming service has most sales

from advertising, streaming contract with broadcast company and film studio.

Netflix’s recommendation algorithm is a very unique technology within the industry. The

company is constantly adding new services and apps to be accessible on new devices which

customers can stream content, also regularly new content adding in the Netflix system. Often

customers confusing to find right content, and there has a demand for find relevant content

easier. This algorithm technology based on customer’s behavior and collecting a data of each

customer's interest in the Netflix matrix to output the relevant result. This Netflix algorithm

leads to increase Netflix sales power to customers because most of time customers do not have to

search to find content, evaluate each content more easier to Netflix, and easier to catch customers

interest and trendy content. It means that Netflix could evaluate each content to make decision,

also same time this algorithm collecting a valuable information and research for future content as

well. Also, this algorithm data can be useful for future contract negotiation with content

providers, like a film and TV studios.

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Another technological innovation for Netflix is making their own content. Recently,

many content providers become a new competitors because many TV studios tries to streaming

their content from their own website. Also, industry competitors come up with new ideas and

provide better deals to these content providers. Therefore, Netflix making a decision to make

their own content for what Netflix customers wants. Netflix could possible to service their

original content because they have a enough research data and information from the algorithm,

and easier to access filming technology. The point is filming technologies become more concise

than before and easier to access. Also, Netflix create new server management system in the

industry, it calls “Overload system”. This system made for provide high quality, and fast speed

service to customer. But after when Netflix decide to go global, this new system bring huge

advantage to Netflix. This new system gives Netflix cost efficiency for managing online servers,

possible to make good relationship with local internet provider, and stable service outcome to

customer.

Technical Standards

Netflix does created technical standard by customers demand. Most of Netflix

technologies developed base on customer's opinion, and it is important in the industry because

without standard customers need to learn and need time to get used with different format. Netflix

service based on their website, so Netflix sets up the website design only for watching visual

entertainments based on their algorithm. Therefore, Netflix does winning format war from the

online streaming industry. Most of movie studios and broadcast studios desire to launch online

streaming service through the Netflix, and it makes Netflix can dominating the online streaming

format from competitors. Also, Netflix has leverage of online streaming from mobile streaming

service as well. Netflix finds out new technologies, like smart phone, tablet PC, and portable

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electronic devices, can streaming Netflix contents, so they launched mobile application to access

Netflix website to watch what customer want. Competitors like Amazon Prime, and hulu follow

the path of Netflix service and provide same format of service in general, each competitors have

different detail of service but general service are very similar. Netflix created new service

format, and use new technologies in their service and make their competitors need to follow or

copy the Netflix service format. Therefore, it makes Netflix takes the position of industry leader

and increase their reputation positively.

Technological S-curve, Disruptive Technology, and Risk

Netflix technology is on the nearing the maturity stage from a technology S-curve

because people more easier to access internet, or mobile internet, also global average of internet

access rate over 45% in 2015, and for 3G mobile access rate over 69% in 2015. In the U.S, over

88% of population can access PC internet, and over 89% of population can access 3G mobile.

From the domestic market it is nearing maturity stage industry due to market saturation, but

from a global standpoint, Netflix is still rapidly growing. In the technology S-curve, Netflix

almost reach the early maturity stage. So far, online streaming technologies still need to more

research and development. In the industry, if virtual reality(VR) technology could be combined

with online streaming, it could bring paradigm shift in the industry. Therefore, Netflix has

technological advantage from the innovation, and started new business with new industry area.

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