Netflix Strategy and Competitive Environment Research Paper

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Introduction

Netflix is a media distribution company. It started with DVD distribution via mail, but has evolved substantially over the course of its existence. Today, Netflix is focused on streaming video. Some of its content is licensed, and some of the content is produced in-house. Netflix originally focused on movies, but today television shows are probably the more common format. Netflix works on a subscription model, where users get unlimited access to content with a paid subscription. This paper will analyze the corporate and business-level strategies behind Netflix as the company exists today, and the state of the competitive market in which the company exists.

Business-Level Strategy

According to the textbook, business level strategy is an approach that a company uses to exploit core competencies to gain competitive advantage. There are several types of business-level strategies that a company can adopt: cost leadership, differentiation, focused cost leadership and focused differentiation. Netflix utilizes the differentiation strategy, because it targets the broad market and does so with a distinctive offering.

The current business-level strategy that Netflix utilizes was the result of a couple of different strategic choices that the company has made in recent years. The company started by using mail to deliver DVDs, but as technology for streaming video improved and allowed for the mass market to adopt video streaming, Netflix became an early mover into that market (SeekingAlpha, 2014). It has since developed a couple of core competencies around that – its ability to deliver streams to customers, and its installed base of subscribers. According to the company's recent announcements, it has around 130.1 million paid subscribers, including 85 million in international markets, which grew at 40% year over year (Trefis, 2018).

There are two other core competencies that Netflix is leveraging. The company began to produce its own content around 2014, and this has become a source of strength for Netflix. Its competitors also produce their own content, but Netflix produces more of it, and it produces content around the world, which has become a core part of its international expansion strategy (Hartung, 2016).

The third core competency is marketing. Netflix has been able to successfully become one of the world's leading brands, and its brand value is now estimated at $8.1 billion, making it the 66th most-valuable brand in the world according to Interbrand (2018). The success of the brand is testament to the quality of the marketing, and now we see Netflix shows becoming household names, actors having their careers springboarded by Netflix programming, and terms like "Netflix and chill" that showcase how the company and its products have entered daily discourse. It actually seems strange to think that they only have 45 million subscribers in America.

This business-level strategy has been incredibly effective for Netflix. First, there is an inherent logic to it. The company deals with streaming technology. Porter's five forces model points out that barriers to entry can help define the profitability of an industry, and high up front cost is one of the main barriers to entry.

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Netflix doesn't own all of the physical infrastructure it needs to deliver content, but it needs entire buildings of servers, storage, switches, routers, etc. Plus, it needs these all over the world. Then there's the up-front cost to produce content – remember that each piece of content is produced to contribute to an overall content library, rather than to be individually profitable. Major companies like Amazon compete with Netflix and find it difficult, so a start-up would find it almost impossible to enter this market. But these high costs can only be paid for with a massive subscriber base, so Netflix had to serve the mass market. It could not exist as a niche provider.

Netflix's core competencies also support its differentiated positioning. It is differentiated by being global and multilingual. It…

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…be the first. Netflix has invested a lot of money into developing content in major foreign markets such as India, Brazil and Europe, in order to win share in the largest markets. There are still some major markets to be targeted, such as China and the Arab world. Amazon is highly likely to adopt this strategy itself, now that it is ramping up its installed base of Prime subscribers substantially. Amazon is enjoying first mover advantage in the international arena, but all told this is a fast-cycle market, and Amazon's response will be swift, and potentially disruptive.

In a fast cycle market, speed is critical. Both companies have massive amounts of money and human resources at their disposal, so responses should be fairly quick. Amazon's international move was a great strategy in this respect, because creating high quality television content takes a bit of time, more than, say building out faster networks or coding web applications. From the time a show is greenlit to the time Netflix knows if it will be a hit or not is well over a year. By moving internationally so early in the game, Netflix has now established the relationships and contacts critical to attracting the best producers, writers and directors in those countries. While doubtless Amazon can spend a lot of money to overcome this, Netflix will enjoy first mover advantage because relationships are critical in the entertainment business, and the reputation of Netflix for supporting international creative talent will stay with the company for a long time. That said, it should not be assumed that this is a source of sustained competitive advantage – the fast pace of the industry all but means that no competitive advantage is truly sustainable, other than brand loyalty.

If this market was a slow cycle market, the strategic choice for competition would not change. Ultimately, despite the fast pace of the market, both of these companies are investing….....

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