Paper 1_WCJWMLYS

Chartrand, Wong, Li, and Sun 1

SUNY binghamton universityGLOBAL STRATEGIC MANAGEMENT (MGMT 411-05)

October 29, 2015Authored by: Wyatt A. Chartrand, Mengyao Li, Justin Wong, and Yingli Sun

Strategic Analysis


Table of ContentsExecutive Summary.................................................................................................................................................

Background and History..........................................................................................................................................

Issues to be Analyzed..............................................................................................................................................

Internal Analysys.................................................................................................................................................

External Analysis.................................................................................................................................................

Alternatives………………………………………………………………………………………..6

Recommendations……………………………………………………………………………6, 7, 8

Implementations

Appendix……………………………………………………………………………..……9, 10, 11

Sources…………………………………………………………………………………………...12


Executive Summary

The emergence of VOD (“video on demand”) technology threatened Netflix’s DVD

(“digital versatile disc” or “digital video disc”) rental business. As Reed Hastings, the founder

and CEO of Netflix stated, Netflix’s purpose was not to provide DVD rentals through the

Internet but rather to allow for the best home video viewing for its customers. Netflix is now

preparing to enter the VOD market. However, there are three large impediments for Netflix to

the widespread adoption of VOD, the first of which are the connectivity between a user’s

computer and television. Secondly, the current limitation of available content, and lastly, the

adoption of the technology itself. The next step that Netflix needs to focus on is to determine

one viable overarching strategy that can generate competitive advantage in the VOD market.

Netflix currently has a large online membership. In this analysis, the internal and external

strengths and weaknesses Netflix has will be broken down, after a brief overview of the

company’s background and current issues. The possible alternatives for a course of action for

Netflix will then be presented as well our final strategic recommendation on the tradeoffs Netflix

needs to take to succeed in the new VOD market. Finally, we give some possible

implementation strategies for Netflix to execute on in order to make our recommendations

utilizable. Included at the end are two graphical diagrammatic representations, one of Netflix’s

strengths and weaknesses in its industry and the other a summary of our recommendation for

Netflix. Two sources have also been cited for this work.


Brief Background and History

Netflix was founded in 1997 by Reed Hastings. The company began as an online service

to rent movies on DVD. Instead of attempting to lure customers to a traditional brick-and-mortar

location, Netflix offered deliveries of their DVDs by mail straight to the consumer’s home.

Initially the pricing model charged customers for each rental, but by 1999 Netflix had introduced

a monthly no-late-fee subscription model. This allowed consumers to rent unlimited DVDs for a

single monthly rate.

Issues to be Analyzed

Netflix’s entrance into the VOD market and online streaming services:

The three primary impediments to widespread adoption of VOD: movie

recommendations, product delivery, and technology adoption.

Strategies regarding Netflix’s rental and streaming business among three possible

alternatives.

Lack of an obvious customer base for any online viewing feature.

Analysis

Internal.

o Strengths.

1. Customer loyalty—make the service one that former customers would

return to.

2. Recommendation system.

A. Proprietary algorithm to recommend films to consumers.

B. A filter placed between the output of the recommendation system

and the results shown to customers.


C. Personalized aspect of Netflix’s service to customers.

3. Large market share of online customers, size, and growth rate.

4. More distribution centers across the country, reducing the delivery time

significantly and growing their relationship with the United States Postal

Service (USPS).

5. “No late fee” subscription model.

A. Adopted a monthly subscription model which enabled customers to

rent unlimited films per month.

o Weaknesses.

1. Delivery time of the video rentals compared to instant VOD access.

External.

o Competitive environment.

Video rental business—Blockbuster.

VOD businesses—Vongo, CinemaNow, MovieBeam, and Blockbuster

(after acquiring MovieLink).

o Technological complementors—cable TV.

o Entry—low barrier to entry, but high rivalry of existing competitors.

o Suppliers—video rental, a small number of movie distributors, direct revenue-

sharing agreements with nearly all of the major studios after the year 2000.

o Buyers—large number of buyers for focal firm’s output, the product being sold is

differentiated because of the web portal and delivery, people use more money on

entertainment than before and the product is therefore valuable to the buyers.

o Substitutes—VOD offered by traditional cable and satellite companies.


o See attached Porter’s Five Forces Model in Appendix for graphical summary

(Graphic #1).

Alternatives

The three alternatives for Netflix’s online video and DVD rental strategies are:

1. Licensing arrangement.

2. Streaming online video.

3. Stand-alone online video business.

Recommendations

Our recommendation regarding the strategy Netflix should take is to pursue building an

online movie library for customers to stream.

o This should be achieved via the first alternative, which is licensing agreements.

o While it may not be in Netflix’s best interest to partner with a cable or satellite

TV competitor, it makes strategic sense for Netflix to continue to develop

licensing agreements with major movie studios and channels.

o We do not believe that a standalone online DVD business would be a good

recommendation, as the brand recognition that Netflix is building would be lost if

they spun off their DVD service into a different strategic business unit.

o The DVD rental business, while in decline, should serve Netflix well as an

ancillary business alongside its growing online subscription-based streaming

business, which is poised to overtake rentals.

o The DVD rental business can slowly be grandfathered out. See graphical

representation in the Appendix (Graphic #2).


There is a strong likelihood that Netflix could partner with existing cable companies.

o They partnered with the USPS to outsource delivery to their customers and cable

would be another medium that they can use.

Netflix has their recommendation system, which they should leverage to have customers

pay a higher price to view content from them due to some price elasticity.

o This option is also viable because of the technology that cable companies have;

they are able to directly beam the content to a user’s television without having to

worry about an individual’s internet capabilities.

o However, with the advancement of technology, in the near future we believe that

the partnership between Netflix and cable will decline because users will have

access to better bandwidths and will be able to stream directly to their televisions.

In the meantime, because Netflix has a large market share of online customers, it should

not focus solely on licensing arrangements with other companies.

o We recommend that Netflix integrate an online streaming video feature into their

core offering as well.

o Offering a new feature to its existing market, would, we believe, attract more

online users in order to compete with other stand-alone sites.

o Expending more cash on content acquisition and software and website

development is unavoidable, but the cost of its distribution centers and DVD

delivery would decline in tandem with market demand.

Spinning off a stand-alone DVD rental service would mean that Netflix would be shifting

to a model similar to that of its start-up competitors such as Vongo or MovieLink, which


means that Netflix would no longer have the advantage of being a complete offering

compared to its competitors.

o Additionally, a standalone business would take away from the brand recognition

Netflix currently has with its consumers. This could be a great business risk for

Netflix as it already has a successful share of the traditional DVD rental business.

o Moreover, this strategic decision would directly result in a draining of both

human and technological resources because Netflix would need separate support

systems for this new service, even if it was only ancillary.

Implementations

How Netflix can carry out this strategy:

o Reach out to current content suppliers to further strengthen relationships to

Netflix’s advantage and execute efficiently in order to develop partnerships with

new suppliers to grow their online library.

Who can do what:

Studios and content providers can license content to stream, or rent upon terms

acceptable to Netflix.

A number of partners can offer instant streaming of content from Netflix to

various devices.

Organizational structure and control:

o Hire, promote, and offer competitive salaries to computer programmers and

software engineers in order to build out the online infrastructure of Netflix’s

website in order to support increased traffic and streaming.


Appendix

Graphic #1—Porter’s Five Forces

Explanatory Sample of Graphic #1—Porter’s Five Forces


Graphic #2—Graphical Summary of Primary Recommendation


Build streaming library and devlop stronger, more advantageous supplier

relationships.

Build streaming business to eventually replace rental business but keep rental and streaming business

under one brand.

Grandfather out rental business but do not spin it off in order to avoid brand

confusion.


Sources

Netflix Logo. 2014. Netflix, Los Gatos. Web. 19 Sept. 2015. <https://www.google.com/search?site=imghp&tbm=isch&source=hp&biw=1366&bih=602&q=Netflix%27s+New+Logo&oq=Netflix%27s+New+Logo&gs_l=img.3.0i30j0i8i30.281.6924.0.7173.26.19.7.0.0.0.121.1626.14j4.18.0.ccy>.

Shih, Willy, Stephen Kaufman, and David Spinola. Netflix. Boston: Harvard Business School, 2007. 1-13. Harvard University. Web. 2 Sept. 2015. <file:///C:/Users/Wyatt/Documents/ SUNY%20Binghamton%20Classes_WC/Global%20Strategic%20Management%20(MGMT%20411)_WC/Case%20Studies_WC/Netflix_WC.pdf>.

United States Department of Justice. United States of America, 26 Oct. 2006. Web. 28 Sept. 2015. <http://www.justice.gov/atr/david-reibstein-presentation>.