Professor: Ross Alander

Student Name: Katy Y. Oliva-Anariba

Class: MAN3025.521F14

Date: 10/16/2014

CASE APPLICATION 2 Rewind and Replay: Netflix

1. Using Porter’s framework, describe Netflix’s competitive strategy. Explain your choice.

Netflix claims to be the world’s largest online move rental service.  Netflix has long held a position as
reigning monarch in the online video streaming industry. This is due to the incorporation fully
incorporating of factors including originality (it was the first large scale operation of its kind), sheer
amount of content and ability to meet increased demand. Success ultimately attracts competition.
Other businesses such as HBO, Redbox, Hulu, Apple, Amazon, and mainly Blockbuster want a piece of
the market resulting to an all-out competitive war.

I have been an active Netflix user for a couple of years, and I have seen how Netflix has implemented
several competitive strategies. Using the Porter's Five Forces framework, I will evaluate the Netflix’s
competitive strategy.

Suppliers:  as far as I can figure, suppliers don’t put a whole lot of pressure on Netflix.  The company
must keep enough DVDs in stock to handle customer demand (there are drops in the number of
subscribers who will still be renting DVDs) but that hasn’t changed much.

Substitution:  again, I don’t think this has much to do with the changes.  Customers could choose to go
see a movie in the theater, but that isn’t a very comparable substitute as movie theaters offer new
movies (for about $8 a pop) while Netflix offers old movies (for a flat $8/$16 a month depending on the
service (DVD, streaming, or both).

Threat of new entry:  There aren’t too many threats of new entry here either, as the main players in this
competition have already been well established (Netflix, Redbox, Hulu, and Blockbuster).

Rivalry:  I believe this is the driving force behind Netflix’s decisions in this case.  In order to stay
competitive with services like Hulu Plus (which offers streaming content for a $8 a month) Netflix has
separated the streaming service from the DVD service (this change was made months ago).  Now Netflix
is trying to separate those who really only use the streaming service and those who use the DVD service
(which is more in line with Redbox and Blockbuster).  I think the idea is that rather than charging $10 a
month for someone to use streaming and DVDs, the company and customers could benefit by a pricing
change that allows those customers who really only rent DVDs to pay less ($8 a month) and the same for
customers who really just use the streaming service.  The company hopes to generate more revenue

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and compete more fiercely with Redbox, while staving off any market share that Blockbuster is looking
to gain.

Customers:  This is the most interesting force at work here.  The article indicates that Netflix
underestimated this force when thinking about the decision and as it turns out, more customers than
expected are just canceling the service rather than paying the higher fees.  I’m not sure if in the end,
there will be enough customer cancellations to influence Netflix back to a lower price for both services,
but at least in the short-term, the effects have been dramatic.

At one point Netflix may have fell under what Miles and Snow refer to as the Prospector Strategy. Netflix
saw the decline in the video retail market, and knew that they needed to do something new and
innovative. The market was flooded with brick and mortar stores, so the founder of Netflix pioneered
the first Internet video store. More recently, Netflix has used a defender strategy. They have moved
their design strategy from innovation to quality of service. This is to help customers retain easy to use
methods of home delivery. This includes mail, and viewing through devices that promote online
delivery. This limits supplier power and it allows the company to retain lower overhead costs through
their distribution channels. There are companies that compete by entering the market, Blockbuster
being one late entrant, but not in successful fashion. Other competitors are companies like Redbox, but
the ease of use for Redbox still requires the customer to leave their residence; Netflix does not require
the customer to do this, because they sell both online and via mail order.

2. What competitive advantage(s) do you think Netflix has? Have its resources, capabilities, or core
competencies contributed to its competitive advantage(s)? Explain.

The biggest advantage enjoyed by Netflix is ease of delivery. The consumer need only go online to order
the video they want to see. Delivery then can be by mail, usually a couple of days, or online, which is
immediate. Netflix has partnered with electronics companies that allow these online deliveries to be
played through the consumer's television set. These resources and capabilities give Netflix a key
advantage over other delivery methods and competitors.

3. How will Netflix’s functional strategies have to support its competitive strategy? Explain.

Netflix’s primary competitors are Blockbuster and Comcast. These two companies have online and cable
“video-on-demand” capabilities, making them threatening entities in terms of video rentals that can be
viewed immediately. DVDs come standard, so the way that DVD rental companies have to differentiate
themselves is through unique services. However, Netflix's functional strategies most certainly support
its competitive strategies implicitly. The competitive strategy employed by the company is to deliver
movies to the consumer in the easiest, most cost effective and convenient way possible. This is done
through the functionality of their implementation over the internet and through postal delivery. Netflix
has moved to create value by fostering relationships with companies like Microsoft, the makers of Play
station, Sony, and a host of others who provide vehicles for Netflix to market their movies. Netflix is
currently working on making all of their movies available through these methods so that they can save
money on the postage that they pay, further reducing their overhead, and implementing a more
competitive strategy through functionality.

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4. What do you think Netflix is going to have to do to maintain its competitive position, especially as its
industry changes?

The future of Netflix can only remain stable as long as they continue to use a defender strategy to work
against the competition. Cable television companies have expanded their interests to making movies
available to consumers at a price. The main advantage, at this point, enjoyed by Netflix is their low
subscription fees. Cable and satellite companies charge up ends of $6.99 for a single movie; while Netflix
subscription based services allow the customer to rent unlimited movies for one low monthly fee. They
must continue to maintain competitive pricing, ease of service, and great service in order to maintain
their viability in a changing industry.