Netflix and Disruptive Innovation

Introduction

The name Netflix didn’t come out of wishful thinking, it came from an uncomfortable and unsatisfied customer. The CEO of Netflix, Reed Hastings was charged $40 for returning the movie Appolo13 six weeks late (Zarafshar, 2013). This motivated him to start Netflix – a DVD rental-by-mail business with no subscriptions in 2007 with a partner Randolph. In 2009, the company launched the subscription-based DVDs rental by mail with multiple plans depending on the number of titles at a time. Subscribers were provided with extensive DVD library with over 120,000 titles for unlimited monthly DVD rental with free shipping as well as zero late and per title rental fees to choose from (Netflix Case Study, 2016). Customers were allowed to make subscriptions on the spot and subscribers of other competition found Netflix’s offers more appealing and it was easy for them to make the switch (Netflix Case Study, 2016). Netflix also enabled its subscribers to watch movies, TV-episodes, documentaries, series and much more on internet-enabled devices such as PCs, smart TVs, DVRs, etc. instantly (Madrigal, 2014). According to Netflix PR (2014), Netflix is currently the largest provider of online streaming service with almost 44 million subscribers in more than 40 countries with an ever-growing library of titles. Blockbuster, Amazon, Redbox, HBO, etc., are some of the competitors in the DVD-rental business that use different competitive models to compete with Netflix. Having this in mind, what has kept Netflix ahead of its competitors and to sustain its competitive advantage?

Netflix was able to gain a competitive advantage over its chief rival Blockbuster.

Netflix managers were eager to set-up great strategies using a profit-driven business model that gave them consistent competitive advantages over Blockbuster. They always monitor the industry and make the needed changes quickly and swiftly to harness new opportunities and as well as address suspected threats (Mohammed, 2018). Growing its library content, service differentiation, DVD-by-Mail service, unique marketing plan and ambitious international expansion all made Netflix a leader in the market (Madrigal, 2014). More so, they took advantage of the bargaining power of customers, bargaining power of suppliers, observed threat to new entrants, intensity on competitive rivalry, the threat of substitutes, etc.

Discuss the Netflix Value Proposition and How It Successfully Gained an Advantage over Blockbuster.

Netflix’s core values are mapped to deliver quality entertainment and make people happy. To derive their value propositions from these values, Netflix had to understand the customer’s needs and how to achieve it. The following value proposition or resources made it possible to have a competitive advantage.

1. The variety and big selection of titles (comprehensive library of movies and TV-episodes)

The value proposition must have enough competitive potential for the organization to outcompete its rivals. By providing its subscribers a wide selection of titles has been always Netflix’s basic strategy. In 2012, its library reached over 120,000 DVD-titles and more than 30,000 titles ready for streaming (Netflix Case Study, 2016). This extensive library is definitely valuable for Netflix to attract more subscribers to watch from a wide variety of titles. Moreover, this resource is rare as Blockbuster and other competitors are not able to offer its customers a huge number of titles for both DVD-rental and streaming services.

2. The exceptional software of streaming and recommendation

Netflix has shown to be meticulous and systematic to capture the value of its library by making it available for its subscribers when using both services. This resource is a plus to Netflix because subscribers can conveniently and quickly view movies they like or place them on queue instantly to watch them later (Netflix PR, 2014). Since the software consists of complicated algorithms and customized only for Netflix, it’s considerably inimitable

3. Nationwide distribution network

The combo of wide-spread distribution centers and fantastic logistics makes it almost impossible for competitors, such as Blockbusters, to deliver any of its DVDs within 1 business day using a large number of shipping points. Obviously, Netflix is doing a great job in regards to quick delivery to anywhere within 24 hours. The network has enabled Netflix reach over 98% of its subscribers (Mohammed, 2018).

4. Multiple marketing strategy

Netflix’s attracted more subscribers using multiple marketing channels including online advertising, direct mail, radio and television stations, and printed ads. Purchase decisions from customers were focused on convenient access, price, variety of DVD offerings, free shipping/return shipping and ease of return/return fees.

In summary, Netflix’s strategy is in several directions in order to build upon and capitalize on a growing subscriber base. These areas include;

•           Variety of the most comprehensive selection of DVD titles in the industry,

•           Service differentiation- Netflix offers by-mail rentals and online subscriptions. Focusing not only how customers receive content and consume it, but also how customers choose what to watch. Netflix’s number one competitive advantage over Amazon and Blockbuster is their inimitable software that takes what a customer has seen or rated and based upon that information builds a list of suggested titles similar to ones they have just watched (Mohammed, 2018). No other company had customer profiling software quite like Netflix.

•           Use of multiple marketing – they participate in several cooperative advertising programs with studios and receive cash for featuring a studio’s movies in its advertising.

•           Endless streaming services – Netflix long-term strategy was to make streaming service available outside the US, in countries like Canada, Latin America, the UK, and Ireland. (Mohammed, 2018) and they achieved it.

With all this in mind, companies like Blockbuster had to either restructure or face bankruptcy. Blockbuster’s strategy was to keep growing geographically by opening new stores in different locations, rather than switching to online streaming. But due to the rise in competition from Netflix, the company filed for bankruptcy in 2010 and in 2014 they permanently closed all their stores and operated only through “Blockbuster on Demand” on a pay per rental bases in the US (Netflix Alternative, 2013). The competitive advantage Netflix had over Blockbuster is the number of titles they offered since they did not operate from a physical store.

Identify and describe some of the technology innovations that Netflix was able to exploit and how these innovations contributed to competitive advantage.

The film rental industry witnessed a major shift in 2009, with a decline in the in-store rental market, while retailing machine rentals, by-mail rentals increased, and video on demand services through cable, digital, and subscription saw major increases. Netflix thrived because of its mail-order DVD rental and its introduction of streaming technology. Hence, it is obvious that technological innovation gave Netflix a competitive advantage by employing software technology, Netflix made TV programs and online streaming possible before its competitors (Alvarez, 2018). With six cell towers inside its mobile-testing labs, Netflix could also see how thousands of devices respond to different versions of its app (Alvarez, 2018) and justify its suitability to subscribers. Everything Netflix makes and streams needs to be just as perfect whether you are watching on a TV, PC, android, iPhone X, a Galaxy S9 or a basic smartphone. Netflix uses Cinematch to make movie recommendations to customers. Cinematch is a software technology known as collaborative filtering. Collaborative filtering monitors trends among customers and uses this data to personalize each customer’s experience. Collaborative filtering allows Netflix to discover and recommend less popular films owned by studios, thereby earning revenues for the studios that they would have not received otherwise (Mohammed, 2018). Netflix also uses a big supporter of high dynamic range (HDR), which delivers richer colors and deeper blacks, having more than 300 hours of HDR programming, made possible by an AI technology it developed called Dynamic Optimizer, so that content can look even better on high-end devices (Alvarez, 2018). For Netflix, technology and innovation are just as important as storytelling. Regardless of how many movies or shows Netflix makes, it needs to ensure that its subscribers can watch them without difficulty, no matter their location, the smartphone used or how fast their internet is.

Netflix is often used as an example of disruptive innovation. Using the LIRC and the internet, research the concept of “disruptive innovation” and then discuss how Netflix fits the model of disruptive innovation. Consider what role technology played in achieving the disruptive innovation that provided Netflix with a competitive advantage.

Disruption describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses (McAlone, 2015). Company with disruptive innovation begins by successfully targeting areas where the market leader overlooks. Usually, when incumbents focus on improving their products and services for their most demanding customers because of profit, they are likely to ignore the needs of some segments/customers. The Blockbuster and Netflix is a typical example. Back in its early stage of existence, Netflix had no chance to compete usually with the giant Blockbuster, so it chose an offensive strategy called “The Blue-Ocean Strategy”. Just like the disruptive innovation, it dictates that a company can “gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and instead of inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand” (Thompson, Peteraf, Gamble, & Strickland, 2014) This is exactly what Netflix did as it didn’t go into the block and mortar business (it didn't go after the core customers of competitors like Blockbuster because those customers rented new releases on-demand), but focused on introducing and growing its online video streaming as well as the variety selection of content using software with an all-you-can-watch, on-demand, low-price, high-quality, highly convenient approach (McAlone, 2015). All of a sudden, there is no reason to have Blockbuster anymore.

Conclusion

As a first mover, Netflix was able to move down the learning curve ahead of rivals, so it knows exactly what customers are expecting, and was able to set the technical standard for the industry by adopting the advanced streaming player and recommendation program that customers now can’t imagine accessing huge movie libraries without it (Netflix Case Study, 2016). Netflix’s competitors copied its superior website, subscription plans but could not replicate the recommendation engine and the customer experience. The brand’s earlier competitors like Blockbuster were slow at investing in any technology. They failed to understand the algorithms behind every logistics facility and struggled to automate them and these took them out of business.

References

Alvarez, E. (2018, October 3). Netflix’s real advantage is that it’s a tech company first. Retrieved on May 1, 2019, from https://www.engadget.com/2018/03/10/netflix-streaming-tech-hollywood/

Madrigal, A. C. (2014, January 2). How Netflix Reverse Engineered Hollywood. Retrieved May 22, 2016, from http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineered-hollywood/282679/

McAlone, N. (2015, November 18). The father of 'disruption' theory explains why Netflix is the perfect example — and Uber isn't. Retrieved on May 1, 2019, from https://www.businessinsider.com/the-father-of-disruption-theory-explains-why-netflix-is-the-perfect-example-and-uber-isnt-2015-11?IR=T

Mohammed, S. (2018, December 18). How Did Netflix Build Its Sustainable Competitive Advantage? The Key Success Factors. Retrieved on May 1, 2019, from https://medium.com/@shahmm/how-did-netflix-build-its-sustainable-competitive-advantage-3b3c7943c897

Netflix Case Study. (2016, Mar 11). Retrieved on May 1, 2019, from https://studymoose.com/netflix-case-study-essay

Netflix Alternative (2013, July) Blockbuster on Demand. Retrieved on May 1, 2019, from http://www.netflixalternative.com/blockbuster-on-demand/

Netflix PR. (2014, April 19). Netflix Media Center – Company Overview. Retrieved on April 29, 2019, from https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?contentGroupId=10476&contentGroup=Company+Facts

Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland III, A. J. (2014). Crafting and Executing Strategy – The Quest for Competitive Advantage: Concepts and Cases (19th Ed.). New York, NY: McGraw-Hill/Irwin. Chapter 6. 151-152.

Zarafshar (2013, November). Remembering Blockbuster. Retrieved on May 1, 2019, from http://deweydigest.com/tech/2547