Netflix in 2012: Can It Recover from Its Strategy Missteps?

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Strategic Analysis

Netflix’s multi-dimensional strategy aimed to elevate the company as the main provider for the majority of consumers and consisted of the following ideas:

- Providing consumers with an extensive DVD collection

- Building relationships with video entertainment companies in order to obtain new movies and TV series

- Facilitate the process by which consumers can identify video content they may enjoy

- Giving consumers the option between physical DVDs and instant streaming

- Aggressive marketing to expand consumer awareness of the brand

- Promote the shift of consumers use of DVD to streaming

- Obtain an international market share in the movie rental industry

Overall, Netflix’s strategy aims to grow its consumer base while also obtaining a competitive advantage within the industry in the way it conducts business. Netflix developed proprietary software to allow their consumers to identify movies that they may prefer or enjoy watching. Netflix’ unique algorithm “organized the company’s entire library of titles into clusters of similar movies and then sorted the movies in each cluster from most liked to least liked based on over 3 billion ratings provided by subscribers” (C-142). This software enables Netflix to introduce a slight advantage, as consumers are more likely to prefer their service as a result of this convenience. Netflix, however, did experience some setbacks when employing its strategy to separate the two services it provided. In the process of doing so, they implemented a new pricing structure in which consumers who wanted to keep the streaming as well as the DVD options would be forced to pay almost double the price. Netflix also attempted to use an entirely new website for the DVD portion of its business, Qwikster.com. These actions created consumer backlash as they were now expected to pay higher prices for the two services they had previously enjoyed for a low price. The attempt to disconnect the two services also resulted in additional backlash as consumers, in addition to the raised cost, were expected to visit two separate websites – one for each service. This proposed change was quickly abandoned as it became clear that the consumers were not receptive to it.

Strategic group mapping

A strategic group map gives bird's eye view of the competitive landscape of an industry. It shows the market share of each company and the placement of the company relative to two axes that range from Pricing to geographic coverage. Each group mapping is unique and it must be taken into account the wide range of competitive companies in the group map and their diverse offerings. The group map consists of a y-axis of vertical integration and diversification into other industries. The x-axis consists of product line depth from wide to narrow. The placement or space that a company occupied in the map correlates to the company’s profit margin. A space that is heavily saturated with rivals close to it means that many share in the competitive advantages and the profit margin is low. Whereas companies that have more attractive positions with wider space between its rivals and in terms of the wider product depth or integrations into other industries have a higher profit margin. Map positioning also will vary what strategy is best.

PESTEL Analysis

The PESTEL analysis is an important tool to understand the macro-environment of an industry. These forces consist of political, environmental, social, technological, economic, and legal / regulatory forces that impact the company and its competitors. Starting off with the economic conditions, as mentioned in the case customers were saving more and spending less. Preference shifted towards going out to the theaters to staying in and watching a movie. Streaming movies and shows made this shift easier and faster. Following the economical is the social forces. Social attitudes changed and values also shifted as a result of steaming entertainment. A research in 2013 for Netflix found that 73% majority felt that binge watching was “welcome refuge from their busy live” and associated no guilt in it. Binge watching is described as watching 2 – 6 episodes of the same TV show (citation). This is a dramatic change from the previous linear watching of television shows. Finally the technological force of the macro-environment for the home entertainment industry is influenced by the fast changing innovation in devices and availability of high speed Internet. Devices and other factors have influence the choices of consumers to watch streamed content rather than watching traditional television. As described in a study in 2013 mentioned that “Most Over-the-top (OTT) bypass takes the form of streaming or downloading (in both cases, video content is received over the Internet)” (Banerjee, 2013). As well as going on to say, “Growing availability of high-speed broadband is frequently credited with increasing OTT access to video content” (Banerjee, 2013).

VRIN Analysis

The VRIN analysis looks at the sustainable competitive advantage and first asks if the resources or capabilities are valuable, and rare to determine whether the competitive advantage is inimitable, and non substitutable.

The Netflix algorithm to better suggest content that the viewer will like by categorizing in an efficient manager is a valuable resource but is not rare. Other competitors have the same suggestions for their content. Also, it is not inimitable competitors use the same recommendations. Netflix is highly substitutable; customers can watch YouTube, Amazon prime, or iTunes to watch streamed movies or shows. This does not take into account the wide range of home entertainment, such as gaming, web surfing that are substitutes to watching movies at home.

5 Forces Analysis

Rivalry amongst Sellers

Rivalry amongst sellers within the movie rental industry is very strong. Various sellers possess the financial backing needed to fight for market share. Among the sellers, there are multiple large corporations, which include Amazon, Redbox, and Hulu to name a few. Furthermore, the product itself has lacks differentiation, which adds to the deep rivalry in the industry. The final service for every seller is the experience of watching a movie at one’s own convenience. Rivalry is heightened by various