Netflix SMP Report

Strategic Management Project
Prepared by:
Tyler Bushnell, Hayley Downing,
Caitlin Hayes, Chang Soo Kim, & Maximilian Uson
December 12, 2016
Prepared for:
BUS 690.01
Professor David Hover

Netflix: SMPAnalysis
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Table of Contents
Table of Contents …………………………………………………………………………………………...1
Executive Summary ……………………………………………………………………………………….. 3
Section I: Company History …………………………………………………………………………….... 5
Declining DVD Sales & Company Expansion ………………………………………………... 5
Netflix Today ……….……………………………………………….…………………………….. 6
Section II: External Analysis …………………………………………………………………………….. 8
Online Streaming Industry ………………………………………………………………………. 8
Blurred Boundaries ………………………………………………………………………………. 8
Industry Growth …………………………………………………………………………………... 8
Dynamic Streaming Industry ……………………………………………………………………. 9
Threat of New Entrants ………………………………………………………………………… 10
Bargaining Power of Suppliers ………………………………………………………………...11
Bargaining Power of Buyers …………………………………………………………………... 11
Threat of Substitutes ……………………………………………………………………………. 12
Rivalry Among Existing Competitors ……………………………………………………….... 12
Complementary Products ……………………………………………………………………….12
Implications …………………………………………………………………………………….... 13
Strategic Groups ………………………………………………………………………………....14
Conclusions …………………………………………………………………………………….... 14
Section III: Internal Analysis …………………………………………………………………………... 15
Mission Statement & Values …………………………………....……………………………... 15
Competitive Advantage & Distinctive Competencies Within the Industry ………………. 15
Efficiency (Organizational Structure) ………………………………………………………... 17
Evaluating Generic Building Blocks for Competitive Advantage ………………………… 18
Building On New Distinctive Competencies ……………………………………………….... 18
Pursuing Customer Responsiveness ………………………………………………………….. 19
Barriers to Imitating Distinctive Competencies …………………………………………….. 20
Section IV: Business-Level Strategy ...…………………………………………………………...……. 21
Providing & Perfecting the World’s Leading Streaming Service ..………………………...22
Strategy & Segmentation at Netflix …………...…………………………………………….... 23
Functional Forces & Growth Drivers ……………………………………………..…………. 24

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Advantages & Disadvantages of Netflix’s Differentiation Strategy ……………………….25
Securing A Sustainable Future ..………………………………………………………………. 26
Section V: Additional Strategic Issues ...……………………………………………………………….28
Netflix Technological Innovation ………………………………………………………………28
Dominant Product Technology and Sales …………………………………………………….28
Technical Standards ……………………………………………………………………………. 30
Technological S-curve, Disruptive Technology, and Risk …………………………………..31
References ………………………………...………………………………………………………………. 32

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Executive Summary
The company discussed in this report is Netflix, one of the leading streaming and video
on demand companies in the United States and internationally. When one of the founders, Reed
Hastings, had an overdue movie rental, he was inspired to come up with a better business plan
when it came to the movie rental industry. Today, Netflix has about 86 million subscribers
worldwide and plays a dominant role in what the majority of our population watches daily.
Netflix started out as a DVD rental company in 1997, and in 2007 they realized that they
needed to change their business plan to focus on streaming content due to consumer trends. By
switching to streaming, this gave Netflix a first mover advantage as well as brand loyalty, which
placed Netflix in a good position within the upcoming streaming industry. After successfully
creating a content streaming service, they developed Red Envelope Entertainment which gave
them the ability to create their own content such as original shows, specials, and movies. By
adding exclusive content only available on their service, it incentivizes customers to stay
subscribed because it is only accessible through them.
In an industry that is changing rapidly and filled with strong competition, it would be
very difficult for new entrants to be successful. The bargaining power of buyers is very strong
due to having essentially no switching costs throughout the streaming industry. This is one of the
threats to Netflix because their customers can cancel their subscription and switch to another
provider if they choose to. To stay successful, Netflix must keep providing high quality content
that interests their customers and more generally, keep innovating their services. Luckily, Netflix
has many long term contracts with their suppliers, giving them an advantage when it comes to
some of the content they provide by being exclusively for their service.

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With distinctive competencies such as customer responsiveness and barriers to imitate, it
is easy to see why Netflix is performing well financially. A big factor in Netflix’s success is their
recommendation algorithm that keeps their consumers engaged throughout the program by
suggesting unwatched content that is similar to what they have watched or are currently
watching. Netflix’s financial stability has lead them to a strong research and development ethic,
giving them an advantage over their competitors when it comes to barriers to imitate. To keep
these distinctive competencies, Netflix needs to continue to focus on research and development
so that they can keep innovating their services.
Netflix takes on a differentiation strategy as their business level strategy, which comes
along with some advantages and disadvantages. The main advantage that comes from their
differentiation strategy is from their exclusive content, recommendation algorithm, and their
innovative mindset. All of these qualities add value for the customer which leads to brand loyalty
and then having a competitive advantage over other providers. Although this advantage is
beneficial, there are also disadvantages Netflix faces when it comes to their differentiation
strategy. The main disadvantage with this strategy is finding ways to constantly keep their
services distinct and unique so that customers are satisfied and remain loyal. Although there are
pros and cons with having a differentiation strategy, Netflix continues to innovate and add value
to the services they provide.
Throughout this report, Netflix will be analyzed in these specific areas: the company
history, internal and external analyses, business-level strategy, and additional strategic issues.

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Section I : Company History
Netflix was founded in 1997 by Marc Randolph and Reed Hastings. The idea for what is
now Netflix came to Hastings when he was charged a $40 late fee for an overdue copy of Apollo
13 rental from Blockbuster. (Business Insider, 2015) Netflix was launched on April 14th, 1998
as a pay-per-rent model. It cost the customer 50¢ per-rental via mail. Late fees applied.
In September 1999, Netflix introduced monthly subscriptions. This meant a business
model of a flat-fee in return for unlimited rentals without due dates, late fees, per-title rental fees,
and shipping and handling fees. In 2000, Netflix offered to be acquired by the rental giant
Blockbuster for $50 million. Netflix want to aid in the development of Blockbusters online
sector. Blockbuster declined this offer. (Wall Street Journal, 2010) At this time Netflix was the
“rental underdog.” (Business Insider)
In May 2002, Netflix made its first initial public offering (IPO). Netflix sold 5.5 million
shares to the public priced at $15.00 per share. By June, the company had to sell an additional
825,000 shares at the same price to cover substantial losses during its initial first few years. In
2003, Netflix brought in revenue of $6.5 million and had overall profits of $272 million. (The
Economist, 2005)
Declining DVD Sales & Company Expansion
In October 2006, Netflix held a contest offering a 1 million dollar prize. The contest was
for developers to create a video-recommendation algorithm that could beat its existing algorithm
Cinematch, at predicting customer ratings by more than 10%. (Netflix Prize Website). By 2007,
Netflix had delivered its billionth DVD. At that time consumer trends were changing. The
general public was spending more time on the internet streaming videos and at the same time
DVD sales were declining. Netflix realized that they needed to change their business model and

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to focus more effort on their streaming sector. Soon after Netflix introduced video on demand.
Its customers were able to access thousands of movie titles and shows over the internet. (Time
Magazine, 2011) Another step Netflix took to distance itself from its competitors was to
establish Red Envelope Entertainment. This gave Netflix a platform to produce its own original
content for example, House of Cards.
By 2010, Netflix was the second largest source of streaming internet traffic in the United
States in the evenings. (New York Times, 2013) At the end of that year Netflix offered its first
stand alone streaming service.
At the same time, Netflix rebranded and restructured their DVD service as an
independent subsidiary still under the name “Netflix.” This separation of business lead 800,000
customers to unsubscribe. When the entities separated the monthly subscription prices rose. As
a result, the stock value of Netflix declined. (New York Times, 2011)
Netflix Today
Netflix is determined to offer movies and TV series commercial free unlike their
competitors. Also, they would like to keep the prices for their subscriptions affordable and non-
committal. The company wants customers to have the “freedom of on-demand and the fun of
binge viewing.” (Netflix.com) In the upcoming year they plan to spend $800 million on
technology and development. They are projected to grow by 60-90 million customers in the
United States by 2020, according to their website. The company expects to be barely profitable
this year but expects growth next year due to their growing markets overseas. Netflix is virtually
everywhere except China.
Key Partners: Movie and television studios, postal service, internet service providers, set top
box hardware makers.

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Key activities: Video player software, content licensing, mail handling operations, content
algorithm.
Value Propositions: Price, accessibility, convenience.
Customer Relationship: Self-service, automated services.
Customer Segments: Mass market, cable/satellite replacers, fans of blockbuster movies.
Key resources: Content (virtual), DVD inventory (physical), servers (physical)
Channels: Netflix.com, mobile app, set top boxes (cable, blu-ray, etc.)
Cost Structure: Fixed costs (discs), variable costs (per-user licensing, streaming capacity),
content licensing agreements.
Revenue Streams: Monthly subscription revenue, DVD envelope advertising.

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Section II: External Analysis
Online Streaming Industry
A video streaming service is an on demand online entertainment source for TV shows,
movies and other streaming media.
These services provide an alternative to cable and satellite on demand service, often at a
lower cost. Use of streaming services often requires fees, either per view or subscription. The
videos come from a network that is typically cloud-based. The availability, content and price of
services may vary from one region to another. (Whatis.com)
Blurred Boundaries
When online streaming got its start it was strictly found through an internet platform. In
the past decade the industry has grown tremendously in size. Other industries such as the cable
industry, game console industry, software industry, etc. saw the huge market potential of online
streaming and decided to partner with Netflix and other online streaming platforms. Netflix
currently has a long list of partners, among the most prominent are Comcast, Microsoft,
Nintendo, and Samsung. Comcast decided to partner with Netflix because their Xfinity X1 did
not perform as well as expected. They saw online streaming as an opportunity to expand their
online selection for their customers and to have an advantage over their competitors. These
companies have approached online streaming providers for that reason to have an advantage over
their competitors because they have access to such customer base.
Industry Growth
The online streaming industry got its start in the mid-1990s. Online streaming as we
know it today started to grow rapidly in the early 2000s. It began to gain its popularity through
Youtube, a website where you can watch and stream videos. Netflix started online streaming in

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2007. Hulu followed in 2008. Amazon Prime was the last major competitor to enter the market
in 2011. Currently, the industry in near the end of its growing stage and entering the maturity
stage. It was estimated in 2015 that Netflix had another 36.5 million U.S. subscriptions until it
reaches market saturation. (The Guardian) Since these companies are a disruptive technology it
does not mean immunity against other potential technologies that could shock the market. They
will have to watch carefully for new trends in the market. These competitors have also entered
foreign markets to gain a larger customer base and to reach untapped markets. Though they are
in a saturated and maturing market in the United States there are still areas that have huge growth
potential for these companies.
Dynamic Streaming Industry
The online streaming industry is extremely dynamic, meaning that it is constantly
changing by updating services with higher quality content, more variety in content, and by
providing better user algorithms. When Netflix was founded, they didn’t have streaming services
and only had DVD rentals. After destroying Blockbuster from their subscription based pricing,
they later began to stream their content, opening up a new industry which later brought
competition into this the online streaming industry. Innovation of these services has completely
reshaped competition by closing businesses like Blockbuster, as well as bringing other
companies to the market such as Hulu. By being such a dynamic industry, innovation has
completely reshaped competition in the past and recently.

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Threat of New Entrants
The streaming industry is a fairly young industry and still rapidly changing. Netflix has
paved the way for online streaming which creates opportunities for new entrants. Since the
market is evolving rapidly there is a threat of new trends such as, Youtube Red. Youtube Red
gives customers access to watch Youtube ad free for a small fee. Youtube has movies, a large
selection of music, and connects to social media. Youtube Red could be a direct competitor of
Netflix in the future because they could potentially decide to add movies and TV shows to their
selection.
Youtube Red, unlike new entrants has the backing of Google. (Investopedia.com, 2016)
Many new entrants to the streaming industry would have a hard time competing at the same scale
as Netflix. They already have established contracts and long standing relationships in the video
industry. In addition, do not have the same amount of financial resources that Netflix does.
Netflix has an established brand and reputation. One of the only way a new streaming service

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could enter the market is to partner with a well established network or studio to have the ability
to compete with Netflix directly.
Bargaining Power of Suppliers
Contract cost is essential to Netflix’s survival. The large number of customers offset the
contract costs. If Netflix were to lose a large amount of their clientele they would have to
renegotiate their contracts. By doing this they could possibly incur more costs. If they have to
break contracts because of this the company might not be able to break even financially. This
may cause people to unsubscribe to their service because Netflix would have raise their prices.
Another issue Netflix could face is their partners having exclusive rights to certain shows.
This could give their competitors an advantage. In addition, the suppliers in a sense have
become the competitors to Netflix. Traditional cable has started to enter the streaming market.
This could affect future contracts. Luckily, Netflix already has many long term contracts with
suppliers. To combat this Netflix can focus on building upon its own original content to avoid
contractual issues.
Bargaining Power of Buyers
A fault in Netflix’s strategy is that there are virtually no switching costs. Netflix does not
run on an annually contract. In fact, they say that one of their core beliefs to remain low cost and
contract free on their website. Buyers can easily end their service with Netflix and switch to
another online streaming service such as, Hulu. One of the biggest influences that buyers have is
what content Netflix uses. The content provided by Netflix is based off of viewer preferences.
If Netflix is unable to meet customer preferences customers can switch to another service.
Threat of Substitutes

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In the past couple years online streaming has grown significantly. The live streaming
sector has been growing significantly. Now, many cable providers grant access to live
streaming. This is predominately used by sports fans and to watch live news. Cable providers
have tapped into live streaming and the online streaming industry. These are free if you are a
cable subscriber. So instead of a consumer purchasing a monthly subscription with Netflix, they
may be satisfied with the content their cable provides, hurting sales for Netflix.
Another threat is illegal streaming websites. One of the reasons they are so popular is
their price, free. One can find endless free movies and shows to watch if they look hard enough.
This can be a threat because consumers can simply look on Google to watch content for free
instead of paying a monthly fee.
Rivalry Among Existing Competitors
The online streaming industry is fast growing with it comes fierce competition. Netflix’s
biggest direct competitors are Hulu and Amazon Prime. Both provide similar services at roughly
the same price ($99 per year for Amazon Prime and $7.99 a month for Hulu) They both offer
original content like Netflix. Netflix is priced higher than its competitors priced at $9.99 a
month. The content provided by the companies is the main difference when it comes to the entire
service offered. Hulu has exclusivity with Showtime. Amazon provides free shipping and has the
most content selection. (Investopedia.com) Netflix has the largest selection of original content.
Complementary Products
The most important complement product of Netflix is technology itself. Technology
including high bandwidth needed for the quality of their content as well as all of the devices used
to watch Netflix on. Without a high bandwidth, Netflix services would not be of high quality,
which would most likely decrease brand loyalty and more importantly, the number of

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subscribers. Another complementary product to Netflix would be the various devices that have
access to their services. A few of these devices would be the Nintendo Wii, PS3, Xbox, Apple
products, etc. For consumers who already own one of these devices, subscribing to Netflix is
easy and convenient. Without these devices, Netflix wouldn’t stand where they do today as the
leading streaming service.
Implications
From these 5 forces we can conclude that this industry is highly competitive due to lack
of differentiation. There is little difference between the services provided by the market leaders
(Netflix, Hulu, Amazon Prime). There is a growing threat of substitutes which include, live
streaming and the ever present illegal streaming websites. These will probably affect the future
business endeavors of Netflix. Bargaining power of suppliers could become stronger in the
future if Netflix’s competitors gain more of the market. Suppliers can threaten to leave Netflix
for another online streaming service if Netflix does not pay a higher price. There is a threat of
new entrants but, it will be hard to compete with Netflix’s financial powers and long-standing
contracts without entering into a joint venture or through acquisition by a larger company.
Lastly, we can conclude that the buyer's shape the content that Netflix’s provides. There is no
switching costs with Netflix since there is no annual contract. To keep its customer base, Netflix
will have to maintain a high quality of provided content to remain competitive or they can start
enforcing annual contracts.

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Strategic Groups
The streaming industry is organized into different strategic groups. Netflix, Hulu, and
HBO GO all have subscription based pricing, while Youtube provides free content with
advertisements as a downside. While the companies with subscription based pricing get
payments monthly, Youtube gets paid from the advertisements that are played before a video.
Although, now Youtube has brought Youtube Red to the market, which is also a subscription
based pricing model without any advertisements. From having heavy competition mainly in the
same strategic group, it would make it extremely difficult for any companies trying to enter the
industry. If new companies did enter the industry, they would have to find a huge way to
differentiate themselves compared to their competition.
Conclusions
To conclude Netflix’s external analysis, some of the most important issues to note are
that the streaming industry is a dynamic industry, there is fierce rivalry among competition, a
growing threat of substitutes, and that Netflix is almost completely in the maturity stage in its life
cycle. It is important to analyze these external factors because they can be detrimental to
Netflix’s financial performance.

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Section III: Internal Analysis
MissionStatement & Values
Netflix is considered one of the leading online movie streaming rental companies at the
moment. Currently, Netflix is providing services to “86 million members in over 190 countries
enjoying more than 125 million hours of TV shows and movies per day, including original
series, documentaries and feature films” (Overview). Over this small amount of time since
Netflix opened its doors, it has gained the brand recognition as one of the best streaming services
available. This was done by the values set in place imposed within the culture of Netflix; these
being: Judgment, Communication, Impact, Curiosity, Innovation, Courage, Passion, Honesty,
and selflessness (McCord).
Netflix has established its business model thriving off their original mission statement
which states “our appeal and success are built on providing the most expansive selection of
DVDs; an easy way to choose movies; and fast, free delivery” (Topix.com). Throughout its time
of growth, netflix has distinguished itself from its competitors in the ways it innovates and adapts
to changing technology.
Competitive Advantage & Distinctive Competencies Within the Industry
Innovation is the main factor that contributes to the overall success Netflix has been
experiencing. When the technology changed, so did the company allowing for more
cohesiveness in adapting to the industry changes. These shifts in the market demand were
quickly seized as opportunities in which Netflix would capitalize on. From the beginning, Netflix
has designed a set of principles in order to bring about innovation.
They illustrate their model for innovation in four parts:

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● Think Big
● Start Small
● Fail Quickly
● Scale Fast
(Mui, 2016)
Using this model has served beneficially towards Netflix’s expansion. Innovation being
the driver of the company operations is essential when incorporating this way of thinking. Being
in a rapidly growing industry, Netflix needs to utilize resources and expand intellectual capital
appropriately according to cost. The most important part about this model is the fail quickly area,
allowing companies not to invest in an area that looks unpromising in the long run. This model
and its qualities have helped Netflix keep up with consumer trends by being innovative and
fresh.
Netflix also has distinctive competencies in their management teams which has shown in
the creation of value in the eyes of the consumer. Effectively and efficiently are how teams at
Netflix are coordinated. This competency has developed the company to possess a highly
productive employee staff. This has attributed highly to the success of Netflix.
Utilization of information technology is another one of the main distinctive competencies
Netflix possesses. Netflix is considered a technology based and run company. Since the time
Netflix opened their doors for business, they had developed a great interactive platform that
other small companies cannot replicate. Their intellectual capital used from daily operations gave
birth to their subscription model which customers are very attracted towards. Their strength in
information technology gives Netflix a competitive advantage over other companies in the way
capabilities are implemented.

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Efficiency (Organizational Structure)
Netflix operates off a functional organizational structure focusing on prime aspects
within the company. It strives off its ability to successfully accomplish tasks by the
interconnectedness within the company alongside its guidance accompanied by the managerial
staff in charge of teams.
The management style uses a anti-control method in monitoring and evaluating
employees. (Ortner) Netflix invokes freedom and responsibility as the way operations are carried
out daily throughout the company. This cultural outlook is outlined as the “Netflix culture deck,”
which is used throughout Silicon Valley and is a true key to Netflix’s success (Stenovic);
Employees are placed with high levels of trust within the organization. Its values are centrally
placed on output rather than long hours. Netflix strives off of being innovative; in upholding this
competency, Netflix wants their employees to work at a super high-level or they would be shown
the door. In a company like Netflix, it is necessary they explore areas of innovation in order to
survive and stay a key player within in the industry.

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Slide from Netflix Culture Deck
Evaluating Generic Building Blocks for Competitive Advantage
Netflix has done a stellar job in innovation, efficiency and innovation. The only area that
needs more attention is quality. Netflix is a streaming provider that provides a vast amount of
selection in terms of content. Much of the videos are bypassed by viewers because they are
considered unpopular. The best way Netflix is striving to achieve even better competitive
advantage and improving this generic building block is through their own developments in
filming; this is known as a way Netflix is utilizing their competencies through backward
integration. In the completion these activities, Netflix is using its production to bring about more
capabilities by use of new available resources.
Building On New Distinctive Competencies
Creating easier access for availability of Netflix platform on other devices. This is a
continuous area of each streaming company to get better at. Netflix has spotted various
opportunities in innovation such as accessing content. Developers and teams have created the
necessary changes to accommodate consumers effortlessly. In exploring this core competency of

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“convenient content delivery to home, they have manage to outcompete other companies such as
Blockbuster and many other companies in their space” (Penn, 2016).
Efficiency and innovation have led Netflix to gain competencies in their own venture
with their own film studios. They have created TV series such as House of Cards, Narcos,
Orange is the New Black and many others. Netflix realized that many of its TV series and
Movies that were available to be viewed were based on licenses which meant that competitors
would only need to outbid them to acquire the rights to show these various media on other
outlets. The creation of their own film developments have gained more attraction for Netflix
making it the only outlet to watch these popular TV series. The cost of starting this new venture
was expensive but as result of doing this, Netflix has received revenue increases as much as 24%
which amounted to around $1.2 billion (Bushey, 2016).
Pursuing Customer Responsiveness
Netflix realized the different needs of their consumers. From their ability to brand
position themselves, they were able to distinguish their activities that allowed for adaptability in
the market. Netflix has strategically positioned itself by aligning their business model with the
interest of the customer. Since the time they were in the DVD rental market, they were aware of
the idea of creating a subscription based model. Netflix realized that customers really wanted an
unlimited subscription model. (Bariso, 2015). This is an example of how Netflix has coordinated
its efforts in innovation to the fulfill the desires of their customers.
Barriers to Imitating Distinctive Competencies
The distinctive competencies which Netflix has developed relate primarily to outputs in
innovation. Companies not at the top would struggle to imitate the competencies in place at
Netflix because they lack the information technology to drive innovation. Research and

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development are essential to keeping up with the demands of the consumers in this industry
because its rapidly changing. Companies like Amazon with Amazon Prime can emulate areas of
Netflix and their model which are similar in many respects already. The one area that bears
differences is content. Having resources such as those that relate heavily to content brings the
customer more value. In this way can they seek other partners such as Disney and Paramount in
acquiring more content.

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Section IV: Business-Level Strategy
The business model of Netflix can be divided into three segments consisting of domestic
online streaming, international online streaming, and domestic DVD-by-mail. Both the domestic
and international streaming segments of Netflix earn revenue through monthly membership fees
and provide unlimited content streaming services, typically starting around $7.99 per month.
Similarly, the domestic DVD-by-mail business unit earns revenue through monthly membership
fees starting around $7.99, however, members pay solely for DVD-by-mail services and are
unable to access unlimited streaming. (Netflix Annual Report, 2015)
Although reported as separate segments, both domestic online streaming and
international online streaming have grown to become the overwhelmingly dominant business
units of Netflix with each representing roughly 60% and 31% of Netflix’s total revenue for 2015,
respectively; DVD-by-mail, the original core business model, makes up less than 9%. (Netflix
Annual Report, 2015)

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Providing & Perfecting the World’s Leading Streaming Service
With the domestic launch of Netflix’s Internet streaming service in 2007, the company
began to move away from their core business model of DVD-by-mail and re-focused their efforts
on satisfying the growing need for video on demand via Internet streaming; indeed, they
recognized a traditional business model would not be sustainable long-term in such a new,
rapidly changing industry. DVD sales had been steadily declining, and in order to attract and
retain subscribers the company recognized the need to provide compelling content, build and
enhance engaging user experiences, and focus on providing an innovative ecosystem of
technology that makes the overall streaming service unlike any other. (Netflix Annual Report,
2012)
Self-proclaimed pioneers in Internet delivery of TV shows and movies, upon the launch
of their streaming services Netflix immediately had the advantage of becoming the first company
to release an online video on demand service which allowed users to fully control their streaming
experience with the freedom to watch however they please, initially providing around 1,000 titles
for streaming upon launch in 2007; since then, Netflix has built up a broad and deep streaming
content library through backwards integration with thousands of titles available today. Netflix
also has a team of expert programmers with access to more than a decade's worth of data on user
preferences and viewer habits, enabling the company to continue building their compelling mix
of content which is increasingly exclusive and original. (Netflix Annual Report, 2012)
In addition to valuable content, Netflix’s innovative and effective user interfaces have
enhanced user experiences and increased user engagement. Members of Netflix’s online
streaming service were for the first time given the freedom to watch whatever exclusive content
they want, whenever they want, and wherever they want for unlimited amounts of time on almost

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all Internet-connected devices available at the time without the distraction of commercials or ads;
this included PCs, laptops, video game consoles, and tablets which typically had built-in Netflix
apps for easy watching. (Netflix Annual Report, 2012)
Netflix has always been focused on high quality content and experiences for users, but
the concentration on the overall quality through providing users an ecosystem of interconnected
screens with streaming capabilities has truly given Netflix a competitive advantage. By
concentrating on providing a great, affordable subscription streaming service with constant
technical innovations and endless viewing options, Netflix believes they will innovate faster than
competitors and will better satisfy the needs of consumers by helping them more easily discover
and enjoy the service offerings. (Netflix Annual Report, 2012)
Strategy & Segmentation at Netflix
Netflix strives to offer it’s streaming services to people of all ages from all parts of the
world, reflected in their vast and diverse library of thousands of titles and current position as the
world’s leading Internet TV network; with over 80 million streaming members, the market
Netflix seeks to reach is incredibly broad and unfocused by typical strategic standards. However,
they still strategically segment their customers based on the types of content they are interested
in viewing via the filtering algorithm in order to ensure each customer has an enhanced
experience when they sign on and search for content to watch; essentially, Netflix offers 80
million personalized user interfaces and suggested titles for all 80 million users. (O’Reilly, 2016)
Since the development of the filtering algorithm in 2006, Netflix has continued to rely on
the tool as a method of market segmentation. In order to offer users a personalized experience
each time they log on, Netflix relies on their highly advanced filtering algorithm as a tool to
predict user ratings for films and content, effectively segmenting the market/customer base by

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providing users with titles tailored to their viewing patterns and history. Updated every 24 hours,
the algorithm is meant to provide each user with a personalized experience by helping assimilate
the titles available to users, in order to ensure users do not become overwhelmed. (O’Reilly,
2016)
Functional Forces & Growth Drivers
Netflix’s driving forces stem from the company’s core strategy to grow their streaming
subscription business both domestically and internationally and include streaming content
investments, service and quality improvements, and expansion in correlation with the growth of
devices capable for streaming content. (Netflix Annual Report, 2012)
Netflix’s investments in obtaining streaming content that is increasingly exclusive and
original has become a huge functional force for growth. Content is obtained through streaming
content license agreements from various content providers and mainly has been the product of
backwards integration; reports of increased subscriber viewing and positive consumer word-of-
mouth in correlation with increased availability of diverse types of content has lead to subscriber
acquisition and revenue growth, enabling Netflix to continue the growth cycle. (Netflix Annual
Report, 2012)
Continuous service and quality improvements of the streaming service itself have
enhanced member satisfaction and retention at Netflix, and have proven to become valuable
functional forces for growth. Incremental improvements made to refine the technology, user
interfaces, and overall infrastructure of the streaming service are constantly being made to better
improve the customer experience. For example, technology has been developed to optimize the
streaming rate of each user’s Internet speed, minimizing loading and buffering times.

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Capabilities for HD viewing with high quality sound features have also been added over the
years to create a more immersive streaming service. (Netflix Annual Report, 2012)
The overall adaption and growth of Internet streaming has also been a force for growth at
Netflix with the company growing in correlation to the growing demand for Internet streaming
services that allow consumers the control and freedom to watch whatever they want, whenever
they want, and wherever they want on their connected devices. With the full global launch of
Netflix’s streaming services in 2016, Netflix looks forward to continue growing in correlation
with technology and trends across the globe for years to come.
Advantages & Disadvantages of Netflix’s Differentiation Strategy
The main advantages of Netflix’s business-level differentiation strategy are typical of any
company pursuing a differentiation business-level strategy, and stem from the core goal of
creating a product that customers perceive as different in a way that adds value. In Netflix’s case,
brand loyalty is one of the most common advantages associated with exclusive content obtained
through backwards integration, enhanced and personalized streaming experiences, and an
innovative ecosystem that makes the overall streaming service simple have proven to provide
many advantages for Netflix.
Competition mimicking Netflix’s core business model began to emerge a few years after
the launch of Netflix’s streaming service, including Hulu in 2008 and Amazon Instant Video in
2011, both offering unlimited viewing and exclusive content with minor differences such as
commercials and higher fees. The differentiation and brand loyalty advantages, together,
combine to create intense barriers to entry for competitors within the industry, another advantage
for Netflix; substitute products are also no longer a threat because competitors are unable to meet

26
customer needs in the same way a successfully differentiated product can. (Netflix Annual
Report, 2011)
However, disadvantages associated with differentiation strategies oftentimes are
companies having difficulty maintaining long-term levels of distinctness amongst their products
and services. For example, before 2011 Netflix streaming and DVD-by-mail operations were
combined and subscribers could receive both streaming content and DVDs under a single
“hybrid” plan. Later in the year, Netflix announced separated DVD and subscription only plans,
forcing members to have two separate subscription plans for each service; there was also a
resulting price increase. As a result, consumer reaction to the subscription plan and price change
was very negative, leading to significant customer cancellations and a loss in stock value;
although Netflix was able to recover from this incident, it is a reflection of typical disadvantages
faced by differentiation strategies. (Netflix Annual Report, 2011)
Securing A Sustainable Future
Overall, Netflix has remained a top global streaming service for almost a decade since
launching and has managed to maintain sustainable levels of competitive advantage amongst
competitors. Netflix has made public their intentions to broaden their array of Internet connected
devices capable of streaming content in order to enhance the value of their service and position
themselves for continued growth as pioneers of second-screen device streaming, such as tablets
and smartphones. The company is actively engaged with all device partners, constantly
evaluating how Netflix can enhance and improve user experiences with product innovations; by
continuing to follow an un-traditional differentiation model and preparing for whatever may
come their way in the rapidly changing online streaming market, Netflix will surely continue as a
successful industry leader. (Netflix Annual Report, 2012)

27
In 2016, Netflix announced a new offline streaming feature allowing users to download
their favorite television shows and movies directly to their devices in order to be viewed at any
time in any location, regardless of Wi-Fi availability. Once again, Netflix is beginning to move
in directions not previously taken by companies in the online streaming industry with their plans
to offer offline viewing of their content. In addition, 2016 has seen full global availability of
Netflix’s streaming services in nearly every country other than China, which also represent the
company continuing to work towards their long-term growth goals through international
investment in content and marketing. (Victor, 2016)

28
Section V: Additional Strategic Issues
Netflix Technological Innovation
Netflix has successful to capitalized on the online streaming service and increasing
internet speeds of consumer broadband to streaming service of movies, TV shows, dramas, and
cartoons. They provide service through internet rather than delivering DVD by mail. Also,
Netflix still working on perfecting the algorithms that suggest right service, program, and
entertainment to customers based on which TV shows, movies, and dramas subscriber watch and
how they rate them. Netflix also successful from competition to global research about their
algorithm around the world to figure out ways to improve the accuracy. Netflix also provides
their own content called “Netflix Original,” it is possible due to easier to access filming business
and meet with customer needs. However, Netflix's most successful innovation is move to mailing
DVD business to online streaming service because mailing DVDs goes to decline stage very fast
due to personal internet service provided in the market, also people want to have more faster
service, easier to access, and they want to watch most recent TV shows, and movies more faster.
So, online streaming service solved all these customers needs at once, no waiting time for DVD
release, no delivery times, and some of programs uploaded in over night. Also, online streaming
service provide customized system that each customers can create their own DVD shelve in their
account, so customers can access the service easier than before. In addition, Netflix decrease
down DVD loss problem, not extra cost for mailing, warehousing, and cost for managing DVDs.
Dominant Product Technology and Sales
Netflix services can not be separate from online streaming because that is one of their
competitive advantage. The company begins with mail DVD to customer and customer can hold
their favorite DVDs as long as subscribe monthly membership. But after early 2000s, major

29
target customers owned PC and home internet services, also many local and national internet
providers had a format competition of internet service. Basically, most internet providers using
light sensor cable (cable TV line), telephone line (DSL), and satellite dish to provide their
services.
Therefore, Netflix had to move their service through online, and it is wise movement
because there was no competition, so Netflix earned a first mover advantage due to technological
innovation. By using an online streaming service, it gives Netflix a huge advantage by reducing
the cost of labor and operations, providing quick and immediate customer service, and now takes
on a cost leadership position from the service. Netflix online streaming service has most sales
from advertising, streaming contract with broadcast company and film studio.
Netflix’s recommendation algorithm is a very unique technology within the industry. The
company is constantly adding new services and apps to be accessible on new devices which
customers can stream content, also regularly new content adding in the Netflix system. Often
customers confusing to find right content, and there has a demand for find relevant content
easier. This algorithm technology based on customer’s behavior and collecting a data of each
customer's interest in the Netflix matrix to output the relevant result. This Netflix algorithm
leads to increase Netflix sales power to customers because most of time customers do not have to
search to find content, evaluate each content more easier to Netflix, and easier to catch customers
interest and trendy content. It means that Netflix could evaluate each content to make decision,
also same time this algorithm collecting a valuable information and research for future content as
well. Also, this algorithm data can be useful for future contract negotiation with content
providers, like a film and TV studios.

30
Another technological innovation for Netflix is making their own content. Recently,
many content providers become a new competitors because many TV studios tries to streaming
their content from their own website. Also, industry competitors come up with new ideas and
provide better deals to these content providers. Therefore, Netflix making a decision to make
their own content for what Netflix customers wants. Netflix could possible to service their
original content because they have a enough research data and information from the algorithm,
and easier to access filming technology. The point is filming technologies become more concise
than before and easier to access. Also, Netflix create new server management system in the
industry, it calls “Overload system”. This system made for provide high quality, and fast speed
service to customer. But after when Netflix decide to go global, this new system bring huge
advantage to Netflix. This new system gives Netflix cost efficiency for managing online servers,
possible to make good relationship with local internet provider, and stable service outcome to
customer.
Technical Standards
Netflix does created technical standard by customers demand. Most of Netflix
technologies developed base on customer's opinion, and it is important in the industry because
without standard customers need to learn and need time to get used with different format. Netflix
service based on their website, so Netflix sets up the website design only for watching visual
entertainments based on their algorithm. Therefore, Netflix does winning format war from the
online streaming industry. Most of movie studios and broadcast studios desire to launch online
streaming service through the Netflix, and it makes Netflix can dominating the online streaming
format from competitors. Also, Netflix has leverage of online streaming from mobile streaming
service as well. Netflix finds out new technologies, like smart phone, tablet PC, and portable

31
electronic devices, can streaming Netflix contents, so they launched mobile application to access
Netflix website to watch what customer want. Competitors like Amazon Prime, and hulu follow
the path of Netflix service and provide same format of service in general, each competitors have
different detail of service but general service are very similar. Netflix created new service
format, and use new technologies in their service and make their competitors need to follow or
copy the Netflix service format. Therefore, it makes Netflix takes the position of industry leader
and increase their reputation positively.
Technological S-curve, Disruptive Technology, and Risk
Netflix technology is on the nearing the maturity stage from a technology S-curve
because people more easier to access internet, or mobile internet, also global average of internet
access rate over 45% in 2015, and for 3G mobile access rate over 69% in 2015. In the U.S, over
88% of population can access PC internet, and over 89% of population can access 3G mobile.
From the domestic market it is nearing maturity stage industry due to market saturation, but
from a global standpoint, Netflix is still rapidly growing. In the technology S-curve, Netflix
almost reach the early maturity stage. So far, online streaming technologies still need to more
research and development. In the industry, if virtual reality(VR) technology could be combined
with online streaming, it could bring paradigm shift in the industry. Therefore, Netflix has
technological advantage from the innovation, and started new business with new industry area.

32
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