Netflix Case Study

Netflix Case Study

Kathleen Kane

Central Michigan University BU690

Table of Contents

1. Netflix Business Model Development

        Top-Down -intended

        Bottom-Up -emergent

1. Netflix VRIO Framework

        Competitive Advantage

        Sustainability

1. Netflix Business Model

        Product or Process Innovation

1. Netflix VOD Strategic Options

Netflix Business Model Development

        In 1997, the home video market was a fragmented industry populated with mom and pop stores.^[1]  When Reed Hasting discovered a copy of Apollo 13 in his closet, and it had a $40-dollar late fee tagged to it, he decided that there had to be a better way to service the consumer groups much like him.  At that time, Blockbuster Video was the market leader, and they based their success under the assumption that movie rentals were predominantly an impulse decision. ^[2]

        Reed Hasting’s initial business model of offering DVD’s was an intended development (top-down). He did not desire to focus on the cassette market. He wanted to focus on a niche group of people who were purchasing new technology, like the DVD industry. Netflix was founded at a time when the video industry was largely populated by small retail outlets which were characterized by long product delivery time. This was an emergent time in Internet retailing. ^[3] Blockbuster had no discernable marketing strategy and customer loyalty was based on emotional impulse buying for a weekend movie night.

        Upon its entry into the market in 1997, Netflix realized that the market that was dominated by the brick-and-mortar marketing methods. Online selling was gaining popularity compared to the traditional way of shopping. This compelled Netflix's to have its own website in 1998 that specialized in the use of cross platform technologies in service delivery. This intentional top-down strategy resulted in different pricing models that were tested to increase sales volume. Netflix was also adept at countering new entrants and developments in the market. One of this was the development of a video provision services on line.

        As Netflix was an online operation, they targeted individuals who were already online customers. The research that led to these customers was intended, but it led to the emergence of intended business strategies. Reed Hasting’s realization that these emergent strategies were not healthy for the company put Netflix at risk. Hasting’s eliminated the emergent strategies and focused on Netflix’s core competency.

        Hasting’s initial idea provided tremendous growth potential, but it was the ideas of key individuals that made Netflix the go-to online DVD mail company. Neil Hunt proposed an emergent customer-centric strategy for pricing, consumer preferences, and expeditious delivery times. Instead of charging per DVD, the company devised a monthly subscription service. In addition, the engineering team developed a proprietary recommendation system to effectively balance customer demand. This was an emergent strategy that benefited the company and strengthened the consumers desire to subscribe to the service. They ensured that DVD’s ordered by the customer would be delivered within 2 days, so they could experience the convenience of going to a video store.^[4]

        Neil Hunt was intended to be Chief Product Officer, but his relationships with studios and other distributors was an emergence.  Netflix also hired Ted Sarandos as chief content officer to manage revenue sharing agreements with major distribution studios. ^[5]“We spent more money not less, with the studios but got bigger customer satisfaction. It was like paying 20% more and getting two times the number of copies.” (Bahaee, 2017) This provided lower costs when purchasing the rights of DVD’s and allowed them to gain access to the larger volumes of new releases they needed for customers. They intentionally devised the plan to have key partnerships with critical players to be successful in distribution and inventory management, but who was driving this part of the strategy emerged from competitive synergies. Finally, as they recognized the threats to the quantity of videos a household may have at one time, they emerged into an unlimited number of rentals in a monthly subscription.

Netflix VRIO Framework

        In the VRIO Framework figure below, we can evaluate the differing competitive views of the resources that the Netflix business model brought to the video entertainment industry.

        Netflix’s DVD-mail provided an initial competitive advantage. The business was valuable and rare in its beginning. It was challenging to imitate because of the customer preferences and recommendation system that helped users to identify movies that they would like compared to their current choices. This allowed the customer centric organization to capture value from its customers. The algorithms used for these selections are proprietary and kept secret to the Netflix team.

        The introduction of VOD created a shift in their resource rarity, and their service declined. Not only were they providing a service, but other companies were providing an optimized service through online streaming. Netflix went from a sustained competitive advantage to competitive parity. Netflix’s market share began to wane as the customer base was attracted to the convenience and selection of the new technology. With the threat of the VOD technology and loss of market, Netflix still retained a slight competitive advantage. The customer recommendation software of Netflix was still superior to that of any of the current entries in the VOD system.^[6]

        Despite the VOD threat, Netflix’s business model was still sustainable as Netflix’s purpose was not to provide DVD rentals through the internet but rather to allow the best home video viewing for its customers. It’s mail order service ensures that unlimited videos can be delivered in less than two days. They ensure this with multiple distribution centers across the United States.

        The content variety is also a key factor in the VRIO framework as Netflix can use their purchasing power to acquire many copies of the latest releases for its customer base.

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