BUS 845 : Strategic Management : Netflix Business Model

1. The original Netflix business model was one of the generic strategies because it out-competed its competitor (Blockbuster) on the basis of differentiation offering a wider selection of products(Teece, 2010). Netflix enters each new technology market immediately they are available through utilization of technological superiority(Leitner&Güldenberg, 2010). Differentiation; There are several firms in the movie industry that compete with Netflix offering a wide variety of methods for the consumer to obtain a movie. This together with the large firms in existence in the industry increases rivalry(Bordean et al. 2010).  Therefore, consumers have four methods to choose a movie from including; online selection and mail delivery, video on demand or kiosk rental(Bordean et al. 2010). Netflix key competitors have very large capital levels and achieved economies of scale. Low switching cost and low level of product differentiation alsolead to competitive rivalry(Teece, 2010).

Cost leadership; Netflix enjoys a low threat of new entrants because of the high levels of capital required by new entrants which result from stocking the needed products. Branding of Netflix and its image makes it difficult for new entrants into the market(Leitner&Güldenberg, 2010). The main competitors of Netflix are Red Box, Hulu+ and Amazon Instant Video(Butler, 2013). Therefore, new entrant would need to invest billions of money and carry out a lot of advertising and marketing to become competitive.

There is a big threat of the substitute products in the industry which require a reduction in prices to remain competitive. Substitutes to the movie rental industry are in various forms and like surfing the web, physical attending to movies, watching live TV, or even playing video games(Teece, 2010). Technology comes as a big threat to the substitute products as consumers are surfing the net to compare prices, read reviews and find sales. Suppliers have moderately high bargaining power as they have the power to increase prices of their products or instead lower the quality of the products(Nandakumar, Ghobadian&O'Regan, 2011). For instance, in 2013, Netflix was obliged to remove Nickelodeon and MTV television shows when their contract expired in their selection(Nandakumar, Ghobadian&O'Regan, 2011). In recent times, for example, Netflix has tried to lower the supplier power by backward integration through the creation of one popular series under the title ‘the house of cards.’Netflix has leverage in the movie industry due to the large volume they demand and how large they are in the industry.

In almost all times buyers have viewed Netflix dimensions as unique and they perceive online review more interesting more specifically because of series after series reviews. More buyers can subscribe to differentiated products from Netflix even at slightly higher prices than the competitor's normal rates due to its uniqueness in meeting customers’ needs. This slightly added price is a reward for the unique serves it offers which equals a premium price.

Focus; Buyers also save time by ordering their favorite movies from the comfort of their homes and can also watch the programs they want to see instantly(Nandakumar, Ghobadian&O'Regan, 2011). All this has been made possible by Netflix unique line of focus. The focus mostly would mean subscribers have more access to their favorite shows anywhere and anytime at a friendly cost. A large selection of movies to watch is made available and can be easily accessed. Convenience has been the driving force behind the popularity of streaming services where 74 percent of Americans have been to use streaming services to vie any time they feel like(Nandakumar, Ghobadian&O'Regan, 2011). Many prefer streaming in order to catch up with the episode they missed or avoid commercials on television and watch full seasons of their favorite shows(Osterwalder&Pigneur, 2010). Those who find the uniqueness of Netflix focus are have made streaming or downloading more popular with 40 % of 18-34 views subscribing to Netflix compare to the overall population of 27 percent. The cost of the movie in American households can be too expensive(Osterwalder&Pigneur, 2010). They spend an average of 5 hours per day watching TV and movie contents. Therefore the best way to save as much is through movie renting when compared to physically attending movie shopswhich may cost $16 per ticket(Osterwalder&Pigneur, 2010). Netflix business model they favor cost through mail delivery compared to in-store rental. When comparing in-store rental cost it is far much expensive. Netflix charges male delivery cost unlimited subscription at $7.99 per month while in-store rental cost $4 per rental.

The reason why Netflix is one of the largest online subscription services streaming around the globe is because Hastings developed the following strategies; wide selection of DVDs for customers to view, continuous acquiring of new content through relationship establishment, provision of easy to use technology for its customers in identifying and suggesting what they wanted to view, provision of options to view through mail or streaming, international expansion, spending aggressively to increase brand awareness, and enabled rapid transitions for US subscribers to streaming.   

By the year 2012, over 120,000titles were available for streaming and with more titles than all other streaming services in the public domain(Osterwalder&Pigneur, 2010). Hastings had focused on gaining new content to make available to his subscribers and many times he negotiated with a number of networks and studios and he also paid licensing fees profit sharing ordeals or so as to be able to stream these titles online service(Copeland, 2010). Having looked at these efforts made by the Netflix’s founders and prospering with very stiff competition, Netflix had ventured into a market flooded with other service-providing firms but looked for a more satisfying segment to address customers’ needs.

2. A competitive advantage is the ability of a firm to implement a value-creating strategy that is not currently being implemented by any competitor or potential competitors(Butler, 2013). Sustainable competitive advantage refers to the ability of the firm to implement a value-adding strategy which is not being implemented by any existing competitor or potential competitor and competitor of potential competitors are not able to duplicate its advantage(Butler, 2013).Netflix has been successful in remaining relevant in the market due to its strategy in mailing which has not been able to successfully be copied by its competitors e.g. Blockbuster which even ended closing up(McGrath, 2013).

The resources and capabilities at Netflix disposal enable it to have a competitive advantage and sustainable competitive advantageover the other firms. Resources, in this case, are defined as all the assets, knowledge, capabilities firm attributes, information, organizational process etc. and are controlled by the firm to enable it to conceive and implement the strategies to improve efficiency and effectiveness. Resources are traditionally the strength to conceive of and implement a strategy.

Netflix has a number of resources and capabilities which includes; physical capital resources, human capital resources, and organizational capital resources. These have given Netflix a competitive advantage and a sustainable competitive advantage(McGrath, 2013). For instance, itsrelationship with its Internet Service Providers (ISPs) has been good and well managed. They use the internet to rent their products and those of their partners in a big way using the internet(Giesen et al. 2010).  Netflix has a good access to raw materials which are distributed widely to its growing global audience. For instance, they are able to serve over 93 million subscribers from60 Countriesofwhich 49 million are from the US, a representation of 53%. They have managed to offer six DVDs at a time to a single customer by renting out through Netflix’s Home Rental Library.

Human capital resources like intelligent staff and well-experienced managers are a plus to Netflix(Giesen et al. 2010). For instance, Netflix founder, and former CEO stated that Netflix DVDs rental-by-mail business had been well thought of which was made possible by advances in home internet technologies Video-on-demand(Gravey, Guillemin &Moteau, 2013).

The three most valuable things Netflix used to survive that led its fast growth were to adopt a new strategy of DVDs Mail service which really competed out the Blockbuster. They bought DVDs in retail stores which were allowed by law to be rented(Lohr, 2009).  They started renting out DVDs straight to homes bringing physical movement to shops to an end. The second thing, Netflix transformed their services from home delivery to online streaming services(Gravey, Guillemin &Moteau, 2013). This allowed the subscribers to watch their favorite shows not only on TVs but also through their computers and more lately on their mobile phones.The third thing that Netflix adopted was an innovation. Content Streaming is a huge investment which required Netflix to help consumers to never be dictated on what program they watched through program schedules. They were able to stream contents from the partners as well as the content they created themselves. This one has brought a big success for Netflix. In the near future, Netflix plans to transition to HTML5 for content delivery by use of flash on a downward spiral and Microsoft Silverlight.

The ability to use more than one subscription plan has helped Netflix increase the number of subscribers. For instance, there are four devices that subscribers can stream Netflix content by enabling even those who are at home with the different favorite program to choose what they want to watch differently(Gravey, Guillemin &Moteau, 2013). These strategies have helped Netflix have a longer time competitive advantage which takes time before they are duplicated by the competitors.

Television and movie industry is well recognized and is likely to have more stiff completion in future for the interest it carries to thousands of people. For instance, it is expected that in the future more entrants could be expected to provide with the same services. Netflix is likely to face high completion from Rogers and Bell Media which in 2014, introduced Shomi and Crave TV in Canada market(Abraham, 2013). This two have already copied Netflix’s strategy of personalized recommendations offered by (NetflixRao et al. 2011, December; Shih& Kaufman, S. T. E. P. H. E. N. 2014). The competitive advantage of Netflix has been grabbed in some extent(Abraham, 2013). For instance, incoming competing firms such as Crave TV and Shomi have built a good reputation for sound television content as Netflix remains recognized as the top movie content provider. In future copying, it will be a sure bet(Butler, 2013). This means as time would move by, some firms in existence and the potential upcoming competitors would make Netflix’s competitive advantage obsolete. The good reputation that Netflix has built for decades may be futile and may start declining in movies content market share experience by competition brought about by other providers. For instance in the US, in 2014, HBO and CBS had announced a launch of digital streaming services for 2015(Lohr, 2009). But what brings it even more trouble is the lowering of charges per monthly subscription by other service providers. For instance, crave TV is available to its customers in as low as $4.00 per month compared to Netflix which charges $8.99 per month.

The growth of Netflix over the years and the persistence to a competitive market describes its competitive advantage(Lohr, 2009). This is because no firm can survive without the good Organizational Capital Resources. Netflix has good controlling and coordinating systems that allow it to make good and clear strategies towards achieving its goals(Copeland, 2010).

References:

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Butler, B. (2013). Amazon and Netflix: competitors who need each other. Retrieved, 5(01), 2017.

Copeland, M. V. (2010). Reed Hastings: leader of the pack. Fortune (December 6).

Cronin, M. J. (2014). Netflix Switches Channels. In Top Down Innovation (pp. 25-35). Springer, Cham.

Giesen, E., Riddleberger, E., Christner, R., & Bell, R. (2010).When and how to innovate your business model.Strategy & Leadership, 38(4), 17-26.

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Rao, A., Legout, A., Lim, Y. S., Towsley, D., Barakat, C., &Dabbous, W. (2011, December).Shih, W. I. L. L. Y., & Kaufman, S. T. E. P. H. E. N. (2014).Netflix in 2011.Harvard Business School, Boston (Harvard Business School Case 9-615-007) Google Scholar.