Strategic Management: Analyzing Netflix’s Blue Ocean Strategy And Competitive Advantage

December 21, 2023/

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Netflix’s Original Business Model: Blue Ocean Strategy or Generic Strategy?

A business model is an essential strategy for the success of any business. The model implicitly and explicitly describes the architecture or the design of the value creation, capture mechanism and delivery system employed by an organization (Kim and Mauborgne, 2005). Netflix is an American media company started in 1997 by Reed Hastings and Marc Randolph (Teece, 2010). The company was founded to offer rental by mail services for film and television programs. It was started at the advent of the DVD and therefore took advantage of the compactness of the disc and its portability to maximize on a market that never existed.

The founders wanted to maximize on a market that did not previously exist in the rental by mail services. It is evident that they employed the blue ocean strategies to create a new market. Before the company was founded video rental service were dominated by Blockbuster which preferred offering the service from a brick and mortar stores across the United States (Giesen, Berman, Bell and Blitz, 2007). Blockbuster preferred customers walking into its store and renting a VCR tape. The company was very successfully in the late 80’s and the 90’s. Its success rose from the high cost of buying a VCR tape which ranged around $50 leading to more people to prefer renting (Osterwalder and Pigneur, 2010). The numerous stores opened by Blockbuster were a clear sign of the rise in the popularity of the rental business. The company had been busy buying off other video renting companies.

The founders of Netflix had been inspired by Amazon.com. The company had achieved huge success in shipping books and other commodities through the postal service to its customer. Hastings is recorded saying they wanted to create an Amazon.com for movies and films. Exploring rental by mail was proved to be blue Ocean (Adhikari et al., 2012). No company was interested in the avenue as mode of products distribution. Blockbuster was preoccupied with opening brick and mortar stores to satisfy its growing customers. If the company was able to offer the video by mail without affecting the package it would be a lucrative marketing to explore since no other company was doing it (McCord, 2014). The advent of the DVD which was more compact and easily portable than the VCR was another avenue in which the company would explore.

The mail the company would be able to reach more people than through a physical store. The cost of renting the video via mail is relatively lower than when customer visit the store. It was possible for customer’s to rent movies and films from the comfort of their home using a phone or a computer (Bell and Koren, 2007). The business model was more convenient than Blockbuster’s. It was pegged on new technology which was bound to propel the company further (Jenner, 2016). The model offered creative value proposition which were bound to be attractive to the clients over time. The company offered its rental service in an affordable price that was below Blockbuster’s. It was able to offer its service at a lower price due to its ability to reduce the overhead costs.

The Criteria for a Competitive Advantage and Sustainable Competitive Advantage

Accessibility was another selling point for the business model. The company developed an attractive website through which its customers would view movies and films and make an order. This was pioneer idea that many other companies had ignore (Casadesus-Masanell and Ricart, 2010. Although that at the beginning there was less traffic since few people had access to the internet, the number were bound to grow with time. The website provided convenient access to a variety of movies and films to clients to choose from (Hallinan and Striphas, 2016). It was better appealing and easier to navigate than heading to a brick and mortar store. The website had the potential of reaching more customers since it was not limited by physical space (Ryan, 2013).

Understanding the consumers that a company is serving is essential for any firm to prosper in creating more markets. The blue ocean strategies advocate for company to explore ways on creating a new market rather than fighting for a crowded market (Kim and Mauborgne, 2005). In 1999 Netflix took a different turn different form other video rental companies. It introduced monthly subscriptions for its unlimited movies that customer would order within the month. This was a game change and anew market that other companies had ignore (Aguiar and Waldfogel, 2018). Unlimited movies offered customer variety of movies and films that unshackled them form the high cost of renting individual movies. Netflix on the other hand would have more client and more orders as client made more orders (Mithas and Lucas, 2010). The company would save on the cost of shipping as it was possible to post several movies for single customers. The company leveraged on the fact that not all monthly subscribers were able order many movies every month.

Monthly subscription was new concept in video rental and the company had chance of having a head start before other companies switching from brick and mortar stores (Matrix, 2014). Unlimited movies for monthly subscription was an offer many customer were willing to take up as it was more cost effective. The ability of a company to clearly study the needs of the customer is the avenue which companies are able to invent new markets. Netflix developed a rating platform named Cinematch where customer left their review of the movies they had watched (Gomez-Uribe and Hunt, 2016). The platform helped the company to know understand most watched movies as well as consumer behavior. Form the ratings the company would be able to develop database that would make it easier form the company to recommended new movies depending on the past history of a consumer (Weinman and Euchner, 2015). No other company had such an infrastructure to analyze the behavior of their consumers.

Analyzing Netflix’s Current Competitive Advantage through Barney and Porter’s Theories

Creation of new markets involves offering different approaches in which products and services are offered in an already existing market. Tweaking the distribution channels system or combining it with new technologies will lead to the creation of new markets (Aguiar and Waldfogel, 2018). Companies’ ought to investigate the variety of ways in which the current product and services can be distributed to the consumers. The consumer will always appreciate convenience and accessibility.

References:

Adhikari, V.K., Guo, Y., Hao, F., Varvello, M., Hilt, V., Steiner, M. and Zhang, Z.L., 2012, March. Unreeling netflix: Understanding and improving multi-cdn movie delivery. In INFOCOM, 2012 Proceedings IEEE (pp. 1620-1628). IEEE.

Aguiar, L. and Waldfogel, J., 2018. Netflix: global hegemon or facilitator of frictionless digital trade?. Journal of Cultural Economics, 42(3), pp.419-445.

Bell, R.M. and Koren, Y., 2007. Lessons from the Netflix prize challenge. Acm Sigkdd Explorations Newsletter, 9(2), pp.75-79.

Casadesus-Masanell, R. and Ricart, J.E., 2010. From strategy to business models and onto tactics. Long range planning, 43(2-3), pp.195-215.

Fernández-Manzano, E.P., Neira, E. and Clares-Gavilán, J., 2016. Data management in audiovisual business: Netflix as a case study. El profesional de la información (EPI), 25(4), pp.568-576.

Giesen, E., Berman, S.J., Bell, R. and Blitz, A., 2007. Three ways to successfully innovate your business model. Strategy & leadership, 35(6), pp.27-33.

Gomez-Uribe, C.A. and Hunt, N., 2016. The netflix recommender system: Algorithms, business value, and innovation. ACM Transactions on Management Information Systems (TMIS), 6(4), p.13.

Hallinan, B. and Striphas, T., 2016. Recommended for you: The Netflix Prize and the production of algorithmic culture. New Media & Society, 18(1), pp.117-137.

Jenner, M., 2016. Is this TVIV? On Netflix, TVIII and binge-watching. New media & society, 18(2), pp.257-273.

Kim, W.C. and Mauborgne, R., 2005. Blue ocean strategy. California management review, 47(3), pp.105-121.

Matrix, S., 2014. The Netflix effect: Teens, binge watching, and on-demand digital media trends. Jeunesse: Young People, Texts, Cultures, 6(1), pp

McCord, P., 2014. How netflix reinvented HR. Harvard Business Review, 92(1), pp.70-76.

Mithas, S. and Lucas, H.C., 2010. What is your digital business strategy?. IT professional, 12(6), pp.4-6.

Osterwalder, A. and Pigneur, Y., 2010. Business model generation: a handbook for visionaries, game changers, and challengers. John Wiley & Sons.

Ryan, L., 2013. Leading change through creative destruction: how Netflix’s self-destruction strategy created its own market. International Journal of Business Innovation and Research, 7(4), pp.429-445.

Teece, D.J., 2010. Business models, business strategy and innovation. Long range planning, 43(2-3), pp.172-194.

Weinman, J. and Euchner, J., 2015. Digital Technologies and Competitive Advantage. Research-Technology Management, 58(6), pp.12-17.

Netflix enjoys a competitive advantage over its peers in video on demand. Competitive advantage has been defined as the set of attribute that allow a business to maintain advantage over its competitors (Casadesus-Masanell and Ricart, 2010). The company has been a pioneer of creating new markets through its innovative ideas and processes. From its inception the company has been at the forefront in creating new markets through the way it has remodified its distribution channels (Fernández-Manzano, Neira, and Clares-Gavilán, 2016). The company was responsible for the decline of Blockbuster.com despite it having a dominant market share in the late 1990’s. The growth and dominance of Netflix can be attributed to several factors which has made the company dominant in the video on demand market (Gomez-Uribe and Hunt, 2016). The paper will seek to explore the several ways in which the company has been able to remain relevant in an ever changing market.

Resources and Capabilities for a Sustainable Competitive Advantage

The company perceives itself as a technology company more than a media distribution company this has enabled it to invent and develop new technologies geared towards consumer satisfaction (Barney, 1991). Combining cutting edge technology with quality content has been a step ahead of the rest of its competitors in the video on demand market. With over 100 million subscribers the company acknowledges the need for customer satisfaction as they interact with its services (Bell, Koren and Volinsky, 2008). The company therefore considers consumer satisfactions as a key element in ensuring that is products are easily accessible and navigable. The company has optimized its streaming service for a variety of devices that the consumers owns. All the platforms are optimized to be accessible regardless of the bandwidth the consumers are surfing on (Fernández-Manzano, Neira, and Clares-Gavilán, 2016).

The algorithm of their search engines takes note of the customers’ history and offers recommendation guided by their past behavior. The company has optimized all its platform to improve on the users’ experience (Osterwalder and Pigneur, 2010). Users continue to prefer Netflix over other companies due to its ease in navigability and great interaction. The company offers ad free services meaning that the consumers are not interrupted by any advertisement from the company. This portrays the company as strictly geared towards improving the experience of the viewers.

In 2013, Netflix changed its strategy towards content by developing its own content. The company began poaching high quality director actors and top-shelf writers from movie production companies. Its goal was to grow original content which it would not need to pay license for (Gomez-Uribe and Hunt, 2016). The project has paid off with the production of high quality original content that has been nominated for several global films awards. This approach has portrayed Netflix as high quality entertainment company able to offer exclusive content to keep consumer coming back (Matrix, 2014).

Michael Porter described competitive advantage as a result of two general factors mainly price advantage as a result economies of scale. He further noted that differentiation through provision of greatest value and user experience at the similar price of their competitors (Porter, 1989). The sheer size of Netflix and its market share is a great competitive advantage against its competitors (Adhikari et al., 2012). The company has been in existence for over 20 years making it a challenge for new entrants to break its dominance. The company has accumulated over 100 million customers who are happy with the diversity of films television services and movies offered by the company (Mithas and Lucas, 2010). The ability of the company to offer entertainment without advertisement is another edge that the company has over its competitors.

Challenges to Netflix’s Potential Competitive Advantages

Netflix has expanded its reach beyond the United States into foreign markets. The large distribution of its service and products is greater than most of its competitors (Jenner, 2016). This serves as a huge advantage to the company. The company can be able to products create and produce quality content for a diverse market due to the increasing large audience (Aguiar and Waldfogel, 2018). The large subscriber base is essential in enabling the company to develop new content. The company spent $6 billion on content creation a fete that has not been matched by any media company (Hallinan and Striphas, 2016). The large budget on content creation head start will ensure that the company continue acquiring new customers which validates spending more money on content creations.

Emerging technologies from outside an industry tend to have the potential to result in disruption. It is evident that from the advent of the company, it has approached the industry from a technological perspective (Mithas and Lucas, 2010). It has developed data driven strategies which have been beneficial in its dominance. The company heavily invests in data processing to understand its client better. It was through data processing that the company was able to develop a film rating system. Data was essential in determining the types of television series and movies to create when the company was starting its content creation project (McCord, 2014). The large number of consumers has ensured that the company has access to rich data essential for defining its business strategies. This is an advantage that its competitors do not have as they have a limited customer base (Weinman and Euchner, 2015).

Before any project the company engages in deep analysis of the consumer feedback before going ahead to create new content. They endeavor to develop what their clients are looking for. Netflix has been able to maintain consistency in its strategy and brand name. This had made the brand name synonymous with online entertainment etching it deep in the mind of consumers (Casadesus-Masanell and Ricart, 2010). This is a great competitive advantage for the company having a brand name synonymous with online entertainment.

In conclusion, Netflix possess a great competitive advantage over its rivals. The consistent brand which the company has built over the year is an essential asset for has offered it’s a competitive edge. The ability of the company to embrace and innovative new ways of content distribution has seen it lay a significant infrastructure that its competitors will struggle to match. Its large distribution reach venturing in emerging markets has amassed the company a large base of subscribers more than all of its competitors. These characteristics have ensured that the company has remained dominant in the video on demand industry earning it an edge over the rest of the competitor. The conceptualization of Barney when defining competitive advantage are correct in regard to the analysis above concerning Netflix.

References:

Aguiar, L. and Waldfogel, J., 2018. Netflix: global hegemon or facilitator of frictionless digital trade? Journal of Cultural Economics, 42(3), pp.419-445.

Barney, J., 1991. Firm resources and sustained competitive advantage. Journal of management, 17(1), pp.99-120.