A competitive landscape review done for a competitive intelligence course

1. Netflix: a Competitive Landscape
100%
50%
10%
Prepared by: Denton Bayles
For: Sean Campbell
CI Spring 2012

2. Executive Summary
• Netflix, a leader in the video streaming and rental industry, in the third quarter of 2011 lost 800k subscribers and
their stock price dropped nearly 500%. How was the company going to respond to this radical stock drop, lost of
customers, and the poor PR?
• The following competitive landscape uses the McKinsey 7S framework to identify Netflix’s strengths and
weaknesses in the following areas: structure, strategy, skills, staff, style, systems, and shared values.
• The results of the McKinsey 7S framework are that Netflix has set up an ideal corporate structure for flexibility.
Their long term strategy has always been to dominate the video rental market (changing over time from DVD’s to
streaming). However, they have struggled to fit their short term strategy seamlessly into their long term strategy
with mistakes such as Qwikster. They have competencies in their library size, recommendation algorithm, original
content, partnerships, and IT infrastructure. Their weaknesses lie in marketing/PR, short term strategy, customer
service, original content, and partnerships. Original content and partnerships are included in both strengths and
weaknesses due to the fact that the original content will be liked and hated on both sides and partnership with
one firm means that you did not partner with another. The staff is strong in computer science, computer
engineering, and economics; but, lacking in marketing and PR. They are talented and come from schools such as
Stanford and Wharton and the staff in general are well compensated. The Netflix style is to find the very best
employees and weed out those employees who are merely adequate. They give their employees freedom to be
creative and work as they need. Netflix relies on operations, product development, human resources, and
recommendation algorithm systems for their day-to-day success. Finally, Netflix has a shared set of values that
form their company culture. They divide them into seven sets: values are what we value, high performance,
freedom and responsibility, context – not control, highly aligned – loosely coupled, pay top of market, promotions
and development. Their most important values are judgment, communication, impact, curiosity, innovation,
courage, passion, honesty, selflessness. These are the values that on the corporate level keep the organization on
path.
• In the future I expect to see Netflix hire a permanent CMO, eradicate their DVD delivery service, form new
partnerships, bring in a new CEO with Hastings reverting to Chairman only, a new CCO or additional
communications/PR talent, another Qwikster-like experiment or the wholesale fire sale of their DVD equipment.
• Additional research would involve their competitors. They need to understand what Blockbuster, Redbox, and
Verizon are going to do in the future.

3. Overview
• Netflix
– Delivers streaming video content and DVD delivery
services.
– Instantly watch as many TV episodes & movies as you
want for only $7.99 a month.
– Established in Los Gatos, CA in 1997
– IPO May 2002
– 2011, 26 million worldwide subscribers and $3.2B in
revenue
• A $1B increase over 2010 despite the 3rd quarter loss of 800k
subscribers and which still resulted in 6.2 million new
subscriptions

4. Financial Overview
• The plummet of their stock price
in July 2011 with the
announcement of changes to
subscription fees, the
cancellation of Starz, and the
announcement of Qwikster
resulted in a stock price drop of
nearly 500% over the course of 4
months.
• Hasting’s announces he will not
resign, “this is the first time there
have been material missteps. If
you look at the cumulative track
record, it's extremely positive."

5. Social Media Review

6. KIQ
• What actions will Netflix take to address the
issues surrounding reputation, pricing, and
service offerings?

7. Sources
• Netflix.com
• Wikipedia.org
• Business and Competitive Analysis: Effective Application of New and Classic Methods
• Sean Campbell’s course on Competitive Intelligence and associated materials
• Netflix annual reports
• Paidcontent.org
• Techcrunch.com
• Slideshare.com
• Linkedin.com
• Facebook.com
• Netflix blog
• Twitter.com
• Glassdoor.com
• Compete.com
• Quora.com
• My Google Reader
• My Google Alerts

8. Methodology
1. Choose competitor
a. Chose Netflix because I was intrigued by how they were
going to try to fix their business.
2. Choose KIQ(s)
3. Choose framework
a) McKinsey 7S chosen because it allows for hard and soft
data.
4. Collect data
5. Synthesize the data
6. Make predictions
7. Future monitoring

9. McKinsey 7S
• “It is a management tool designed to facilitate the
process of strategy implementation within the context
of organizational change.” -Fleisher

10. Structure

11. Structure Cont.
• Netflix is divided into six major functions and
legal with the CEO retaining centralized
decision making authority over the six major
function areas.
• The structure is a flat structure that is
designed to help Netflix meet its desire for
flexibility

12. Strategy
• Current main strategic goal is to become a streaming
only service
– The Qwikster experiment was a failure; It showed Netflix
that the switch to online only would be difficult to do
without sacrificing their customer base
– The online only strategy of the company has been “on
again, off again.” After their move to originally bring the
services together they are proving difficult to separate.
– Develop original content in the mold of a “Mad Men” like
show to market as an exclusive and draw more people to
the service
– PAC – Netflix is showing their need for a free internet by
forming their own PAC in response to SOPA/PIPA

13. Skills
Strengths Gaps
Significant library (100,000+ movies & TV) Marketing / Public Relations
Recommendation Algorithm (75% of Making their short term strategy consistent
viewing done based on recommendations) with their long term strategy
Original Content Customer Service
Partnerships (most major studios) Original content*
IT infrastructure Partnerships*
Is it true that Netflix divides subscribers into 10 groups and assigns each group to an internal team that competes to
boost loyalty metrics of that group?
“There aren't 10 groups, however every subscriber might be allocated to a differential experience in a particular area - for
example, a variant of a recommendation algorithm, a different search results presentation, a different web UI, a
streaming experience that starts a second faster with lower bitrate prior to upshifting to the highest quality their
connection will support, etc. The terminology is that each customer is assigned to one test cell in each test, usually the
default or "control" test cell. There are typically a few hundred tests running concurrently, and a customer picked at
random would likely have a differential experience in more than 1 but less than 10 of the different tests, all assigned
randomly.” – Neil Hunt, CPO via Quora

14. Staff
• Reed Hastings – CEO
– MSCS from Stanford
– Has a trend as a long term CEO. 14 years with
Netflix and 7 years with his only previous CEO
post at Pure Atria Software.
• Jesse Becker – Interim CMO
– BS in Economics from Wharton
– MBA from Stanford
– Previously worked for Amazon and Oracle
– Expertise primarily in acquisition channels
– With Netflix since 2000

15. Staff Cont.
• Jonathan Friedland - CCO
– MS Economics from London School of Economics
– Worked previously for Walt Disney Company and
the Wall Street Journal
– Experience as a SVP with WDC and a foreign
correspondent/editor
• Neil Hunt – CPO
– PhDCS from University of Aberdeen, UK
– Worked previously as Director of Engineering for
Rational Software and at Netflix as VP of
Engineering
– In his current post at Netflix since 2002.

16. Staff Cont.
• David Wells – CFO
– MBA/MPP University of Chicago
– BS Accounting University of Virginia
– Previously worked for Deloitte Consulting
– Has been with Netflix since 2004 as
Director of Operations Planning & Analysis
and VP of Financial Planning & Analysis

17. Compensation

18. Staff Review
• Many of the Chief Executives share history
– Reed Hastings was CEO of Pure Atria Software which was acquired by
Rational Software.
– Most of the Chief Executives worked at one of these two companies
• Most of the Chief Executives have been with Netflix over 10 years
• Compensation – strong focus on paying high enough salaries to
keep top performers at the company, focused primarily on salary as
opposed to stock options or bonuses
• Talent – the resumes of Netflix’s employees boast of Stanford,
Wharton, Harvard, etc.
• Strengths in computer science, computer engineering, and
economics
• Weak in Marketing and PR
– Recently released their CMO who had been at the company for 12
years
– CCO is a journalist with experience in a different industry

19. Style

20. Style Review
• Despite the performance driven,
competitive culture; Netflix insists that
“cutthroat” or “sink or swim” behaviors
are not tolerated
• There is a stress on the importance of
creative performance, but how do you
define creative performance?
• Walk the talk – Most of the Chief
Executives have been with the company
for over ten years, but they did recently “I have worked for Reed for twelve
years at Netflix, and I believe the
remove their CMO and CFO culture deck is as accurate a
document as we can create in
describing our culture” – John
Ciancutti, VP of Engineering via Quora

21. Systems
• Operations – For their DVD service the warehouse holds over 26
million DVD’s. 100,000 DVD’s are returned every day and most of
those never reach the shelves, but are immediately returned to
circulation.
• Product Development – Although Netflix has a significant movie
and television library they focus on quality over quantity as a
method to differentiate themselves from Amazon
• Human Resources – between hiring and firing the HR system keeps
itself busy through a series of performance reviews that are integral
in their efforts to meet the corporate goals for finding the best
human capital
• Recommendation Algorithm – Like Google or Amazon, Netflix relies
on their recommendation algorithm and are constantly working to
improve the system

22. Shared Values
• Corporate Culture
– Values are what we value
– High performance
– Freedom & responsibility
– Context, not control
– Highly aligned, loosely coupled
– Pay top of market
– Promotions & development
• Values
– Judgment, Communication, Impact, Curiosity,
Innovation, Courage, Passion, Honesty, Selflessness

23. Predictions
• New CMO
• Eradication of DVD delivery
• New partnerships (because of the loss of Starz)
• New CEO, Hastings will become chairman only
• New CCO or additional communications/PR talent
• They will attempt “Qwikster-esque” business
again or have a wholesale sell off of their DVD
operations

24. Moving Forward
• Competition is catching up, as streaming video
becomes the norm, more and more people
will look outside of Netflix, How will they
react?
– Blockbuster focuses primarily on DVD’s, but could
expand
– Redbox
– Redbox/Verizon partnership

25. KIQ Answers
• What actions will Netflix take to address the
issues surrounding reputation, pricing, and
service offerings?
– New CMO
– Additional communications/PR talent
– Online only service with the consistent $7.99 price
– The addition of Original content and new
partnerships

26. Sources
• www.netflix.com
• http://en.wikipedia.org/wiki/Reed_Hastings
• http://en.wikipedia.org/wiki/Netflix
• Fleisher, Craig S.; Bensoussan, Babette E. (2007-02-27). Business and Competitive Analysis: Effective Application of New and
Classic Methods (Kindle Locations 5367-5369). Pearson Education (USA). Kindle Edition.
• Sean Campbell’s course on Competitive Intelligence at Willamette University and associated materials
• Netflix annual reports. http://ir.netflix.com/secfiling.cfm?filingID=1193125-12-53009&CIK=1065280
• Netflix Investor Relations. http://ir.netflix.com/stockquote.cfm
• http://paidcontent.org/2011/09/24/how-blockbuster-netflix-hulu-and-amazon-stack-up/
• http://techcrunch.com/2009/08/05/other-companies-should-have-to-read-this-internal-netflix-presentation/
• http://static.slidesharecdn.com/swf/ssplayer2.swf?doc=culture9-090801103430-phpapp02&rel=0&stripped_title=culture-
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• www.linkedin.com/company/netflix
• www.facebook.com/netflix
• http://blog.netflix.com/
• http://blog.netflix.com/
• www.twitter.com/netflix
• http://www.youtube.com/watch?v=K3GzO2_NFfQ
• Glassdoor.com
• http://siteanalytics.compete.com/netflix.com/
• http://www.quora.com/Netflix
• My Google Reader
• My Google Alerts