netflix case study supply chain management

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4 Qualities That Make Netflix a Good Model for Supply Chain Visibility

Netflix has revolutionized the way we watch movies and TV shows. By embracing innovation and employing new technologies, it has made the process of picking and watching on-demand movies easy and inexpensive.

Innovative companies can follow Netflix’s model and transform their supply chain operations using some of the same technologies. How? A lot of the technology Netflix uses is similar to the technology today’s supply chain management needs as well.

By using real-time content, big data analytics, machine learning and a single system of engagement, supply chain leaders can manage risk, improve efficiency, eliminate blind spots by achieving true in-transit visibility of their supply chain.

4 Things Netflix Does That Can Improve Supply Chain Visibility

Here are four tools that Netflix successfully uses that can be a model for transforming your supply chain to have better real-time, in-transit visibility:

1. Streaming and real-time content

Netflix allows its subscribers to stream its content anywhere, anytime. With streaming video, customers can watch videos wherever they are with no limits on the amount of content they can access.

Streaming can be used in the supply chain as well – live streaming data, that is. With live streaming data, logistics managers can manage shipments in real-time , pinpointing their exact location and collecting data about shipments’ status and condition as well.

Companies can track shipments using a range of data sources , including GPS, sensors , telematics, AIS, weather, traffic, and mobile phones. Collecting real-time information allows companies to not only view and track their shipments end-to-end at any time across their supply chain network but also to optimize their supply chain operations.

2. Big data analytics

Netflix takes the data that it collects from its users to understand patterns. Then, using machine learning algorithms, it predicts what shows and movies people will want to watch next. This feature saves customers’ effort searching, and generates more revenue.

Companies can apply the same concept to logistics. Supply chain managers can combine Internet of Things (IoT) and big data with machine learning algorithms to provide predictive and prescriptive analytics.

But instead of movie preferences, supply chain pros can analyze patterns based on the efficiency of transportation lanes, cost, carrier performance, risk, and other relevant factors. Applications predict and recommend solutions to prevent supply chain disruptions. These insights provide end-to-end visibility across the supply chain network.

3. Single system of engagement

Netflix’s entire database is right at its customers’ fingertips. Viewers can easily switch between hundreds of movies and TV shows across a range of genres. The interface for comparing options and looking at titles and series is simple and easy to use, within a single system of engagement.

By the same token, logistics teams should be able to easily locate all information about every single shipment so that they can quickly make decisions.

There should be a single system of engagement that displays every route in the supply chain network so that companies can see the status of all active shipments at a glance . That way, supply chain managers can quickly identify those shipments at risk of missing their scheduled arrival time.

By tracking shipments in real time, the system accurately predicts the arrival time of inbound, intracompany, and customer shipments.

4. Innovative technology

Before Netflix, streaming video was not popular or affordable. Netflix completely disrupted the DVD rental market and put Blockbuster out of business when it failed to adapt.

Likewise, supply chain leaders have started to transition from using barcode scanning, milestone tracking, TMS, and other legacy technologies to capturing real-time information and achieving global in-transit visibility.

The implementation of IoT, big data, machine learning, and predictive and prescriptive analytics is revolutionizing supply chain management. These new technologies are improving estimated arrival time accuracy, increasing cross-docking efficiency, and reducing transportation costs.

This post has been updated; it was originally published in July 2016. 

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BUS606: Operations and Supply Chain Management

Economies of scale: a case study with netflix.

Read this book section describing Netflix's journey from a startup company to a worldwide brand. Pay particular attention to how Netflix was able to leverage its technology to gain customers and very quickly beat its competition - specifically Blockbuster. Their continuing evolution from DVD, to streaming service, to content developer has created a unique competitive advantage. The article speaks to Netflix's economies of scope, where they could have diversified in many different directions. However, their specific focus directed their strategy to a few key areas. How did their strategic revenue streams generate money for the company?

Netflix: Tech and Timing

Learning objectives.

After studying this section you should be able to do the following:

• Understand the basics of the Netflix business model.
• Appreciate why other firms found Netflix's market attractive, and why many analysts incorrectly suspected Netflix was doomed.
• Understand the  long tail  concept, and how it relates to Netflix's ability to offer the customer a huge (the industry's largest) selection of movies.
• Understand the role that market entry timing has played in Netflix's success.
• Understand the role Amazon Web Services play in Netflix's business.

Netflix is an American media-services provider headquartered in Los Gatos, California, founded in 1997 by Reed Hastings and Marc Randolph in Scotts Valley, California. Netflix allows subscribers to stream movies and TV shows on their devices for a flat subscription fee. The company started as an over the mail DVD rental company in 1997, its streaming service in 2007 and has since become one of the highest valued media service providers.

Studying Netflix gives us a chance to examine how technology helps firms craft and reinforce competitive advantage. We'll look at the components of the firm's strategy and learn how technology played a starring role in placing the firm atop its industry. We also realize that while Netflix emerged the victorious underdog at the end of the first show, there will be at least one sequel, with the final scene yet to be determined. We'll finish the case with a look at the very significant challenges the firm faces as new technology continues to shift the competitive landscape.

Highlights from Netflix's History

Reed Hastings, a former Peace Corps volunteer with a master's in computer science, got the idea for Netflix when he was late in returning the movie  Apollo 13  to his local Blockbuster store. The forty-dollar late fee was enough to have bought the video outright with money left over. Hastings felt ripped off, and out of this initial outrage, Netflix was born – or at least this was the myth created by the founders to fuel sentiment against the then market leader that charged those huge late fees.

The model the firm originally settled on was a DVD-by-mail service that charged a flat-rate monthly subscription rather than a per-disc rental fee. Customers did not pay for mailing expenses, and there were no late fees. Videos arrived in red Mylar envelopes. After tearing off the cover to remove the DVD, customers revealed prepaid postage and a return address. When done watching videos, consumers just slipped the DVD back into the envelope, resealed it with a peel-back sticky-strip, and dropped the disc in the mail. Users made their video choices in their "request queue" at Netflix.com.

In 2007, Netflix started its streaming service and offered a variety of subscription options. While 2.7 million DVD-by-mail subscribers still remain, by early 2019 "Netflix has over 148 million paying streaming subscribers worldwide as well as over 6.56 million free trial customers. Of these subscribers, 60.23 million were from the United States".

In 2013, Netflix debuted original content like  House of Cards  and  Orange is the New Black , both series went on to win multiple traditional television awards. While Netflix continues to stream TV shows and movies from a variety of content providers, as of late 2018/19, they invest around $8 billion in original content with "1,000 originals total on the service by the end of 2018. […] More than 90% of Netflix's customers regularly watch original programming".

The Top 20 TV Shows Streamed In 2018: Only One Isn't On Netflix  (#5 airs on Hulu).

It may be hard to imagine from today's perspective, but Netflix wasn't always considered a success. Businesses are supposed to want to go public. When a firm sells stock for the first time, the company gains a ton of cash to fuel expansion and its founders get rich. Going public is the dream in the back of the mind of every tech entrepreneur. But in 2007, Netflix founder and CEO Reed Hastings told  Fortune  that if he could change one strategic decision, it would have been to delay the firm's initial public stock offering (IPO): "If we had stayed private for another two to four years, not as many people would have understood how big a business this could be". Once Netflix was a public company, financial disclosure rules forced the firm to reveal that it was on a money-minting growth tear. Once the secret was out, rivals showed up.

Hollywood's best couldn't have scripted a more menacing group of rivals for Hastings to face. First in line with its own DVD-by-mail offering was Blockbuster, a name synonymous with video rental. In 2007, 40 million U.S. families were already card-carrying Blockbuster customers, and the firm's efforts promised to link DVD-by-mail with the nation's largest network of video stores. Following close behind was Wal-Mart – not just  a  big  Fortune  500 company but  the  largest firm in the United States ranked by sales at the time. In Netflix, Hastings had built a great firm, but at the time, an Internet "pure play" company without a storefront and with an overall customer base that seemed microscopic compared to Blockbuster and Wal-Mart. Yet, Wal-Mart eventually had cut and run, dumping their experiment in DVD-by-mail. Ultimately, Blockbuster had been mortally wounded, hemorrhaging billions of dollars in a string of quarterly losses. And Netflix? Not only had the firm held customers, but it also grew bigger, recording record profits.

Selection: The Long Tail in Action

During the DVD rental era, customers have flocked to Netflix in part because of the firm's staggering selection. A traditional video store (and in the late '90s and early 2000s Blockbuster had some 7,800 of them) stocked roughly three thousand DVD titles on its shelves. For comparison, Netflix was able to offer its customers a selection of over one hundred thousand DVD titles. At traditional brick-and-mortar retailers, shelf space is the biggest constraint limiting a firm's ability to offer customers what they want when they want it. Which films, documentaries, concerts, cartoons, TV shows, and other things that made it inside of a Blockbuster store, what they carried was dictated by what the average consumer was most likely to be interested in.

For any store, finding the right product mix and store size can be tricky. Offer too many titles in a bigger storefront and there may not be enough paying customers to justify stocking less popular titles (remember, it's not just the cost of a product, as firms also pay for the real estate of a larger store, the workers, the energy to power the facility, etc.). There's a breakeven point that is arrived at by considering the geographic constraint of the number of customers that can reach a location, factored in with store size, store inventory, the payback from that inventory, and the cost to own and operate the store. Anyone who has visited a physical store understands that shelves and show floors can only hold so many products.

Many pure-play (online only) businesses are able to run around these limits of geography and shelf space. Internet firms that ship products can get away with having highly automated warehouses, each stocking just about all the products in a particular category. And for firms that distribute products digitally (iTunes, Hulu, Office Online), the efficiencies are even greater because there's no warehouse or physical product at all.

Offer a nearly limitless selection and something interesting happens: there's actually  more money  to be made selling the obscure stuff than the hits. In the early 2000s at Netflix, roughly 75 percent of DVD titles shipped were from back-catalog titles, not new releases. At Blockbuster outlets the equation is nearly flipped, with some 70 percent of their business coming from (then) new releases. In 2019, Netflix streams obscure things and massive hits. Blockbuster is gone and In 2019, Netflix accounts for 15% of the world's, 19% of the US' internet traffic.

While most stores make money from the area under the curve from the vertical axis to the dotted line, long tail firms can also sell the less popular stuff. Each item under the right part of the curve may experience less demand than the most popular products, but someone somewhere likely wants it. The total demand for the obscure stuff is often much larger than what can be profitably sold through traditional stores alone. While some debate the size of the tail (e.g., whether obscure titles collectively are more profitable for most firms), two facts are critical to keep above this debate: (1) selection attracts customers, and (2) the Internet allows large-selection inventory efficiencies that offline firms can't match.

The long tail works because the cost of production and distribution drops to a point where it becomes economically viable to offer a huge selection. For Netflix, the cost to stock and ship or stream an obscure foreign film is the same as sending out or streaming the latest blockbuster. The long tail gives the firm a selection advantage (or one based on scale) that traditional stores simply cannot match.

Technology Creates a Data Asset That Delivers Profits

Netflix proves there's both demand and money to be made from the vast back catalog of film and TV show content. But for the model to work best, the firm needed to address the biggest inefficiency in the movie industry – "audience finding," that is, matching content with customers. To do this, Netflix leveraged some of the industry's most sophisticated technology, a proprietary recommendation system. Each time a customer visited Netflix after sending back a DVD, the service essentially asked "So, how did you like the movie?" Today we have a single click ("Like" or "Dislike") as opposed to the original five-star rating system.

Netflix algorithms generally develop a map of user ratings and steer you toward titles preferred by people with tastes that are most like yours. This is called collaborative filtering and refers to a classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience. Input from collaborative filtering software can be used to customize the display of a Web page for each user so that an individual is greeted only with those items the software predicts they'll most likely be interested in. The kind of data mining done by collaborative filtering isn't just used by Netflix; other sites use similar systems to recommend music, books, and even news stories. While other firms also employ collaborative filtering, Netflix has been at this game for years and is constantly tweaking its efforts. The results are considered the industry gold standard.

Collaborative filtering software is powerful stuff, but is it a source of competitive advantage? Ultimately it's just math. Difficult math, to be sure, but nothing prevents other firms from working hard in the lab, running and refining tests, and coming up with software that's as good, or perhaps one day even better than Netflix's offering. But what the software has created for the early-moving Netflix is an enormous data advantage that is valuable, results yielding, and impossible for rivals to match. More ratings make the system seem smarter, and with more info to go on, Netflix can make more accurate recommendations than rivals.

Understanding Scale and Timing

Running a nationwide sales network costs an estimated $300 million a year. But Netflix has several times more subscribers than Blockbuster. History confirms the basic math of which firm's economies scaled better.

For Blockbuster, the arrival of Netflix played out like a horror film where it was the victim. Pressure from Netflix forced Blockbuster to drop late fees costing it about $400 million. The Blockbuster store network once had the advantage of scale, but eventually, its many locations were seen as an inefficient and bloated liability. By 2008, Blockbuster had been in the red, meaning it did not make a profit for ten of the prior eleven years. During a three-year period that included the launch of its Total Access DVD-by-mail effort, Blockbuster lost over $4 billion. Blockbuster tried to outspend Netflix on advertising, even running Super Bowl ads for Total Access in 2007, but a money loser can't outspend its more profitable rival for long. Blockbuster also couldn't sustain subscription rates below Netflix's, so it had to give up its price advantage.

For Netflix, what delivered the triple scale advantage of the largest selection; the largest network of distribution centers; the largest customer base; and the firm's industry-leading strength in brand and data assets? Moving first. Timing and technology don't always yield a sustainable competitive advantage, but in this case, Netflix leveraged both to craft what seems to be an extraordinarily valuable pool of assets that continue to grow and strengthen over time.

The Case of Netflix and Amazon Web Services

Watch the Following and Note Key Points About Scale

Discuss How Porter's Theory About Competitive Advantage Comes Into Play in the Streaming Media Field.

• Which is the best provider and why?
• What factors influence your choice as a buyer?
• What are potential threats to your top pick?
• How does rivalry help the buyer?
• What is the role of the supplier here?

Complexity In The Digital Supply Chain

Netflix Technology Blog

Netflix TechBlog

Netflix launched in Denmark, Norway, Sweden, and Finland on Oct. 15th. I just returned from a trip to Europe to review the content deliveries with European studios that prepared content for this launch.

This trip reinforced for me that today’s Digital Supply Chain for the streaming video industry is awash in accidental complexity. Fortunately the incentives to fix the supply chain are beginning to emerge. Netflix needs to innovate on the supply chain so that we can effectively increase licensing spending to create an outstanding member experience. The content owning studios need to innovate on the supply chain so that they can develop an effective, permanent, and growing sales channel for digital distribution customers like Netflix. Finally, post production houses have a fantastic opportunity to pivot their businesses to eliminate this complexity for their content owning customers.

Everyone loves Star Trek because it paints a picture of a future that many of us see as fantastic and hopefully inevitable. Warp factor 5 space travel, beamed transport over global distances, and automated food replicators all bring simplicity to the mundane aspects of living and free up the characters to pursue existence on a higher plane of intellectual pursuits and exploration.

The equivalent of Star Trek for the Digital Supply Chain is an online experience for content buyers where they browse available studio content catalogs and make selections for content to license on behalf of their consumers. Once an ‘order’ is completed on this system, the materials (video, audio, timed text, artwork, meta-data) flow into retailers systems automatically and out to customers in a short and predictable amount of time, 99% of the time. Eliminating today’s supply chain complexity will allow all of us to focus on continuing to innovate with production teams to bring amazing new experiences like 3D, 4K video, and many innovations not yet invented to our customer’s homes.

We are nowhere close to this supply chain today but there are no fundamental technology barriers to building it. What I am describing is largely what www.netflix.com has been for consumers since 2007, when Netflix began streaming. If Netflix can build this experience for our customers, then conceivably the industry can collaborate to build the same thing for the supply chain. Given the level of cooperation needed, I predict it will take five to ten years to gain a shared set of motivations, standards, and engineering work to make this happen. Netflix, especially our Digital Supply Chain team, will be heavily involved due to our early scale in digital distribution.

To realize the construction of the Starship Enterprise, we need to innovate on two distinct but complementary tracks. They are:

• Materials quality: Video, audio, text, artwork, and descriptive meta data for all of the needed spoken languages
• B2B order and catalog management: Global online systems to track content orders and to curate content catalogs

Materials Quality

Netflix invested heavily in 2012 in making it easier to deliver high quality video, audio, text, art work, and meta data to Netflix. We expanded our accepted video formats to include the de facto industry standard of Apple Pro Res. We built a new team, Content Partner Operations, to engage content owners and post production houses and mentor their efforts to prepare content for Netflix.

The Content Partner Operations team also began to engage video and audio technology partners to include support for the file formats called out by the Netflix Delivery Specification in the equipment they provide to the industry to prepare and QC digital content. Throughout 2013 you will see the Netflix Delivery Specification supported by a growing list of those equipment manufacturers. Additionally the Content Partner Operations team will establish a certification process for post production houses ability to prepare content for Netflix.

Content owners that are new to Netflix delivery will be able to turn any one of many post production houses certified to deliver to Netflix from all of our regions around the world. Content owners ability to prepare content for Netflix varies considerably. Those content owners who perform the best are those who understand the lineage of all of the files they send to Netflix. Let me illustrate this ‘lineage’ reference with an example.

There is a movie available for Netflix streaming that was so magnificently filmed, it won an Oscar for Cinematography. It was filmed widescreen in a 2.20:1 aspect ratio but it was available for streaming on Netflix in a modified 4:3 aspect ratio. How can this happen? I attribute this poor customer experience to an industry wide epidemic of ‘versionitis’. After this film was produced, it was released in many formats. It was released in theaters, mastered for Blu-ray, formatted for airplane in flight viewing and formatted for the 4x3 televisions that prevailed in the era of this film. The creation of many versions of the film makes perfect sense but versioning becomes versionitis when retailers like Netflix neglect to clearly specify which version they want and when content owners don’t have a good handle on which versions they have. The first delivery made to Netflix of this film must have been derived from the 4x3 broadcast television cut. Netflix QC initially missed this problem and we put this version up for our streaming customers. We eventually realized our error and issued a re-delivery request from the content owner to receive this film in the original aspect ratio that the filmmakers intended for viewing the film. Versionitis from the initial delivery resulted in a poor customer experience and then Netflix and the content owner incurred new and unplanned spending to execute new deliveries to fix the customer experience.

Our recent trip to Europe revealed that the common theme of those studios that struggled with delivery was versionitis. They were not sure which cut of video to deliver or if those cuts of video were aligned with language subtitle files for the content. The studios that performed the best have a well established digital archive that avoids versionitis. They know the lineage of all of their video sources and those video files’ alignment with their correlated subtitle files.

There is a link between content owner revenue and content owner delivery skill. Frequently Netflix finds itself looking for opportunities to grow its streaming catalogs quickly with budget dollars that have not yet been allocated. Increasingly the Netflix deal teams are considering the effectiveness of a content owner’s delivery abilities when making those spending decisions. Simply put, content owners who can deliver quickly and without error are getting more licensing revenue from Netflix than those content owners suffering from versionitis and the resulting delivery problems.

B2B order and catalog management

Today Netflix has a set of tools for managing content orders and curating our content catalogs. These tools are internal to our business and we currently engage the industry for delivery tracking through phone calls and emails containing spreadsheets of content data.

We can do a lot better than to engage the industry with spreadsheets attached to email. We will rectify this in the first half of 2013 with the release of the initial versions of our Content Partner Portal. The universal reaction to reviewing our Nordic launch with content owners was that we were showing them great data (timeliness, error rates, etc) about their deliveries but that they need to see such data much more frequently. The Content Partner Portal will allow all of these metrics to be shared in real time with content owner operations teams while the deliveries are happening. We also foresee that the Content Partner Portal will be used by the Netflix deal team to objectively assess the delivery performance of content owners when planning additional spending.

We also see a role for shared industry standards to help with delivery tracking and catalog curation. The EIDR initiative, for identifying content and versions of content, offers the potential for alignment across companies in the Digital Supply Chain. We are building the ability to label titles with EIDR into our new Content Partner Portal.

Final thoughts

Today’s supply chain is messy and not well suited to help companies in our industry to fully embrace the rapidly growing channel of internet streaming. We are a long way from the Starship Enterprise equivalent of the Digital Supply Chain but the growing global consumer demand for internet streaming clearly provides the incentive to invest together in modernizing the supply chain.

Netflix has many initiatives underway to innovate in developing the supply chain in 2013, some of which were discussed in this post, and we look forward to continuing to collaborate with our content owning partners supply chain innovation efforts.

Netflix is hiring for open positions in our Digital Supply Chain team. Please visit http://jobs.netflix.com to see our open positions. We also put together a short video about the supply chain for a recent job fair:

— Kevin McEntee VP Digital Supply Chain

Originally published at techblog.netflix.com on December 17, 2012.

Written by Netflix Technology Blog

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Netflix Five Forces Analysis & Recommendations (Porter’s Model)

Netflix’s external environment is examined in this Five Forces analysis of competitive forces and external factors based on Michael Porter’s model. The company provides streaming services and movies, series, and games. Online business operations facilitate Netflix’s international market reach but also position the company against multinational competitors in the industry. This Five Forces analysis of Netflix accounts for the multinational operating environment and the factors of the five forces, namely, competitive rivalry, customers’ power, suppliers’ power, threat of substitution, and threat of new entry. Netflix’s long-term success depends on its competitive advantages and strategies for overcoming competitive pressures illustrated in this Five Forces analysis.

This Five Forces analysis indicates that competitive advantages and effective competitive strategies ensure the achievement of business goals that realize Netflix’s mission statement and vision statement despite competitive challenges in the industry. The achievement of the company’s goals and performance targets are subject to the five forces, but carefully designed strategies can successfully promote Netflix’s business growth despite competition in the entertainment and content streaming industry.

Summary: Porter’s Five Forces Analysis of Netflix

The external factors linked to competitors, customers, suppliers, substitutes, and new entrants create a challenging competitive environment for entertainment content streaming services. This Five Forces analysis of Netflix illustrates the following intensities of the five forces:

• Competitive rivalry: Moderate
• Buyer power: Moderate
• Supplier power: Weak
• Substitution threat: Moderate
• New entry threat: Weak

Recommendations. This Five Forces analysis establishes the significance of competition and variables linked to subscribers in influencing Netflix’s competitiveness and strategic positioning. Although the industry has aggressive competitors, production capabilities and original content are competitive advantages that limit the impact of competition. The core competencies and competitive advantages detailed in the SWOT analysis of Netflix can provide support for strategic efforts to mitigate the effects of competitors, buyers, and suppliers assessed in this Five Forces analysis. For example, the company’s original movies and series help reduce its dependence on content suppliers or producers. It is recommended that Netflix further develop its content production capabilities to improve competitive advantages based on original content that attracts target customers. These competitive advantages mitigate the influence of media and entertainment competitors and limit the impact of customer/buyer power and the threat of substitutes.

Another recommendation is for Netflix’s diversification and product development strategies, which reduce the effects of the competitive challenges detailed in this Five Forces analysis. Netflix’s generic competitive strategy and intensive growth strategies include objectives for new products and business operations in addition to movies and series production and streaming. The company already offers games as part of its product development and diversification strategies. However, with the competition and buyer power in this Five Forces analysis case, it is recommended that Netflix continue developing more games to improve its position as a provider of gaming content that strengthens the popularity of its movies and series used as basis for such games.

Competition/Competitive Rivalry: Moderate

This component of Porter’s Five Forces analysis assesses the degree of competition and competitors’ impact on Netflix. The following external factors lead to the moderate force of competition on Netflix:

• Low differentiation of streaming services
• High differentiation of content producers
• Subscribers’ moderate switching costs

Most streaming services are similar in function and types of content available. In this Five Forces analysis of Netflix, such a competitive condition strengthens rivalry by making it easier for viewers to transfer between streaming services. However, high differentiation of content producers reduces competitive pressure by discouraging viewers from transferring to other service providers that may not have the same content. For example, some Netflix originals are not available from streaming and content-producing competitors, like Disney , Sony , NBCUniversal, as well as YouTube ( Google (Alphabet) ), Apple TV Plus, Amazon Prime Video, Facebook (Meta) , and Microsoft Movies & TV (Films & TV). Netflix subscribers also experience moderate costs when switching to other streamers, such as additional membership or subscription fees and lack of access to some original content. As a result, many customers keep accounts with multiple streaming services. The strategic factors in this Five Forces analysis illustrate that competition is significant but limited because of original content that functions as a competitive advantage of Netflix.

Bargaining Power of Netflix’s Customers: Moderate

Customers’ influence on prices, profits, market share, and business performance is assessed in this component of the Five Forces analysis. The following external factors reinforce the moderate bargaining power of Netflix’s customers:

• Small size of individual subscribers
• Subscribers’ moderate price sensitivity

A subscriber’s payment is small and has insignificant individual impact on Netflix. In Porter’s Five Forces analysis model, this small size limits or reduces individual customers’ effect on the online company. Also, subscribers’ switching costs limit buyer power over Netflix. For example, switching may come with additional expenses and loss of access to the company’s original movies and series, which are a competitive advantage that discourages subscription cancellations. However, Netflix is subject to the price sensitivity of subscribers. The Five Forces analysis model considers this external factor as a contributor to customers’ bargaining power, as streaming competitors can use affordability as a competitive advantage. The external factor of price sensitivity is included in decisions for Netflix’s marketing mix (4Ps) , particularly strategies for pricing the streaming service. Overall, these factors enable moderate customer power in this Five Forces analysis case.

Bargaining Power of Suppliers: Weak

This component of Porter’s Five Forces analysis refers to suppliers’ influence on the cost of supply or inputs and, thus, Netflix’s business costs, performance, and competitiveness. The following external factors lead to the limited and weak bargaining power of suppliers over Netflix:

• Large number of content producers
• High switching costs for content producers/suppliers

Netflix’s most significant suppliers are content producers, such as local and multinational media and entertainment companies. Considering the uniqueness of each movie, series, or game, these suppliers have a high degree of differentiation. In this Five Forces analysis of Netflix, high differentiation is an external factor that increases the bargaining power of suppliers by making their content desirable and not easily replaced. However, the large number of content producers reduces their individual bargaining power. Furthermore, suppliers experience high switching costs in this Five Forces analysis case. For example, because of Netflix’s international market reach, many suppliers are unlikely to pull out of Netflix, although popular multinational entertainment producers can do so more easily. Netflix’s operations management ensures that the streaming service optimizes business performance while managing strategic concerns involving content producers and their weak bargaining power established in this Five Forces analysis.

Substitutes/Substitution Threat to Netflix: Moderate

The impact of substitution and the competitiveness of substitute products are assessed in this component of Porter’s Five Forces analysis model. The following external factors are responsible for the moderate threat of substitution affecting Netflix:

• Moderate costs of switching to substitutes
• Moderate availability of substitutes
• Subscribers’ moderate propensity to substitute

Substitutes for Netflix satisfy customers’ entertainment needs. In this Five Forces analysis case, substitutes include live shows and performances, free TV channels, and content on discs, tapes, and other media. Although these substitutes offer entertainment, customers are only moderately likely to switch to them because of various costs, like additional spending and inconvenience, in contrast to the affordability and convenience of accessing online content from Netflix. Also, many substitutes have limited availability with inflexible schedules or locations. This external factor limits the substitution threat in this Five Forces analysis case. Moreover, many customers are satisfied with Netflix’s online content and streaming services and are only moderately likely to use substitutes, such as during moments of boredom or when seeking different activities. Overall, this component of the Five Forces analysis of Netflix establishes the moderate threat of substitution.

Threat of New Entrants/New Entry: Weak

This component of Porter’s Five Forces analysis assesses the likelihood of new competitors and their impact on Netflix’s prices, profits, and business performance. The following external factors lead to new entrants’ weak threat to Netflix:

• Moderate cost of doing business
• High supply chain costs
• High cost of reaching critical mass for network effect

Netflix’s operations in the entertainment and content streaming industry involve moderate costs for developing and maintaining IT infrastructure. Also, developing original content is costly, while getting support and content from various media companies requires time and accompanying processing, business, and legal costs. These strategic factors reduce the threat of new entry in this Five Forces analysis of Netflix. Moreover, new entrants need to spend considerable time and capital before reaching critical mass, which is the point where they already have enough content and subscribers to easily attract more subscribers and content producers. This component of the Five Forces analysis establishes that new entrants pose a weak threat to Netflix.

• Davis, S. (2023). What is Netflix imperialism? Interrogating the monopoly aspirations of the ‘World’s largest television network’. Information, Communication & Society, 26 (6), 1143-1158.
• Gómez, R., & Munoz Larroa, A. (2023). Netflix in Mexico: An example of the tech giant’s transnational business strategies. Television & New Media, 24 (1), 88-105.
• Netflix, Inc. – Form 10-K .
• Netflix, Inc. – Long-Term View .
• Netflix, Inc. – Top Investor Questions .
• Sforcina, K. (2023). Digitalizing Sustainability: The Five Forces of Digital Transformation . Taylor & Francis.
• U.S. Department of Commerce – International Trade Administration – Media and Entertainment Industry .
• Wayne, M. L., & Uribe Sandoval, A. C. (2023). Netflix original series, global audiences and discourses of streaming success. Critical Studies in Television, 18 (1), 81-100.
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Netflix, Inc.

By: Frank T. Rothaermel, David R. King

The case is set in 2023. The protagonists are Ted Sarandos and Greg Peters, co-CEOs of Netflix, a subscription streaming service and content production company. In Q4 2022, Netflix gained 7.7 million…

• Length: 26 page(s)
• Publication Date: Feb 2, 2023
• Discipline: Strategy
• Product #: MH0080-PDF-ENG

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The case is set in 2023. The protagonists are Ted Sarandos and Greg Peters, co-CEOs of Netflix, a subscription streaming service and content production company. In Q4 2022, Netflix gained 7.7 million new subscribers (223 million worldwide) after losing 1.2 million in the year's first half. The scale of subscriber defection (in Q1 and Q2) across all geographic regions other than Asia concerned investors. By mid-2022, Netflix's share price plummeted by over 72%. The streaming company's market capitalization fell from $306 billion in November 2021 to a low of $74 billion, a loss of $232 billion. Dubbed the streaming wars, Netflix must contend with a host of competitors, some of them with deep pockets: Amazon Prime, Apple TV+, Disney+, HBO Max, Hulu, Paramount+, Peacock, and YouTube TV, among others.

Learning Objectives

Strategic leadership; strategy process, industry life cycle; business strategy (core competencies), innovation & technology strategy (disruptive innovation); business model innovation (matching business model and technology strategy; network effects; long tail; corporate strategy; diversification (vertical integration along the value chain; products and services; geography); international expansion (CAGE distance model; liability of foreignness); strategy implementation and execution

Feb 2, 2023

Discipline:

Geographies:

Asia, Europe, United States

Industries:

Advertising industry, Broadcasting and streaming media industry, Film and video industry, Media industry, Media, entertainment, and professional sports

McGraw-Hill Education

MH0080-PDF-ENG

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Jotted Lines

A Collection Of Essays

Management Case Analysis: Netflix

Case Synopsis DVD rental business is coming to the end of its life-cycle. While Netflix made a name for itself by excelling in this domain, the technological landscape and consumer preferences are constantly in a flux. Netflix’ leadership position in streaming video is somewhat secure for the moment. But rapidly changing technology and competition from niche players pose numerous challenges that require anticipation and proactive implementation.

Key Themes The major themes w.r.t. the Netflix study are ‘emergent technology’, ‘supply-chain innovation’, ‘precision logistics’, ‘saturated market’, ‘key product strategies’, ‘marketing strategy’, ‘customer relations’, and ‘value creation’. To elaborate on a few, let us consider first the theme of emergent technology. Netflix was a pioneer in supply-chain innovation and distribution. Hence its precision logistics was a pivotal factor in its success so far. The patenting of the preference tracking software in 2003 was another technological milestone. Another theme of the case is changing consumer preferences. Likewise, the theme of competition is informed by the highly saturated and predatory environment of the industry today. Netflix has to contend with such major retail firms as Walmart, Best Buy, Target, Time Warner and Amazon. This is on top of competition from DVD rental specialist Redbox and online-only services offered by Google, Apple, Amazon and Hulu.

SWOT Analysis A real strength of Netflix over their years has been its versatility. For a company that is neither a specialist in technology nor spun-off from the retail-chain industry, it has had a remarkable run since its inception. A key reason for this success is the adopted business processes. Great care is given even to even minute details, especially those pertaining to customer preferences. Netflix was able to keep abreast of new modes of communication as well as evolving lifestyles of different target consumer groups. It has also gained goodwill for its efficiency in execution and customer service operations. If it continues to keep up this trend the company is poised to remain a top contended within the digital entertainment industry.

The Qwikster fiasco illustrates one of the weaknesses of the company. Netflix failed to gauge customer preferences properly when it decided to spin-off the DVD-rental vertical under brand Qwikster. The communication strategy was also a failure, as it pithily sent a late email explaining the rationale. Not only was this email from CEO Hastings after the fact, but it also aggravated customer grievances on the issue of increased pricing.

The stupendous rise of RedBox over the last decade poses a potent threat to Netflix. The USP of RedBox has been its affordability and convenience. For as cheap as one-dollar, customers can pick up DVDs across 36,000 strong kiosks installed by the company. These kiosks are strategically located in high-traffic zones and have a ubiquitous presence across America. RedBox has also been able to time its new launches to perfection – be it announcing its online streaming services or mobile entertainment options on Android or iPhone. Indeed, RedBox has been so out-of-the-box in its strategies that it managed to grow exponentially at a period when industry-wide DVD sales were in decline. After the collapse of Blockbuster RedBox has assumed the mantle of Netflix’ biggest competitor. But this very threat can be looked at as an opportunity in disguise.

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Please note you do not have access to teaching notes, movie rental business: blockbuster, netflix, and redbox.

Publication date: 20 January 2017

Teaching notes

Jim Keyes, CEO of Dallas-based Blockbuster Inc., was facing the biggest challenge of his career. In March 2010 Keyes was meeting with Hollywood studios in an effort to negotiate better terms for the $1 billion worth of merchandise Blockbuster had purchased the year before. In recent years, Blockbuster's share of the video rental market had been sharply decreasing in the face of competitors such as the low-cost, convenient Redbox vending machines and mail-order and video-on-demand service Netflix. While Blockbuster's market capitalization had dropped 47 percent to $62 million in 2009, Netflix's had shot up 55 percent to $3.9 billion that year. The only hope for Blockbuster, as Keyes saw it, was to shift its business model from primarily brick-and-mortar physical DVD rentals to increased digital and mail-order video delivery. In Keyes's favor, the studios were more than willing to provide him with that help. Hollywood wanted to see Blockbuster win the video-rental wars. Consumers still made frequent purchases of DVDs at its store—purchases which were much more profitable for studios than the rentals that remained Blockbuster's primary business. Blockbuster had made efforts at making its business model more nimble, but the results had been disappointing, and its debt continued to skyrocket. By the end of 2009, the company's debt had climbed to $856 million, its share of the $6.5 billion video rental business had fallen to 27 percent, and its revenues had tumbled 23 percent to $4.1 billion.

The objective of this case is to discuss how different business models and supply chain structures impact the financials of the firms in the DVD rental business. In particular, the goal is to convey that the characteristics of the movie (recent/big hit or old/eclectic) affect whether it is best rented from a centralized or decentralized model. In addition, as streaming gains market share, the impact will be different for movie types and business models.

• Inventory Control
• Distribution Channels
• Operations Management
• Supply Chain Management

Chopra, S. and Veeraiyan, M. (2017), "Movie Rental Business: Blockbuster, Netflix, and Redbox", . https://doi.org/10.1108/case.kellogg.2016.000220

Kellogg School of Management

Copyright © 2012, The Kellogg School of Management at Northwestern University

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How Netflix Reinvented HR

• Patty McCord

When Netflix executives wrote a PowerPoint deck about the organization’s talent management strategies, the document went viral—it’s been viewed more than 5 million times on the web. Now one of those executives, the company’s longtime chief talent officer, goes beyond the bullet points to paint a detailed picture of how Netflix attracts, retains, and manages stellar employees. The firm draws on five key tenets:

Hire, reward, and tolerate only fully formed adults. Ask workers to rely on logic and common sense instead of formal policies, whether the issue is communication, time off, or expenses.

Tell the truth about performance. Scrap formal reviews in favor of informal conversations. Offer generous severance rather than holding on to workers whose skills no longer fit your needs.

Managers must build great teams. This is their most important task. Don’t rate them on whether they are good mentors or fill out paperwork on time.

Leaders own the job of creating the company culture. You’ve got to actually model and encourage the behavior you talk up.

Talent managers should think like businesspeople and innovators first, and like HR people last. Forget throwing parties and handing out T‑shirts; make sure every employee understands what the company needs most and exactly what’s meant by “high performance.”

Trust people, not policies. Reward candor. And throw away the standard playbook.

Sheryl Sandberg has called it one of the most important documents ever to come out of Silicon Valley. It’s been viewed more than 5 million times on the web. But when Reed Hastings and I (along with some colleagues) wrote a PowerPoint deck explaining how we shaped the culture and motivated performance at Netflix, where Hastings is CEO and I was chief talent officer from 1998 to 2012, we had no idea it would go viral. We realized that some of the talent management ideas we’d pioneered, such as the concept that workers should be allowed to take whatever vacation time they feel is appropriate, had been seen as a little crazy (at least until other companies started adopting them). But we were surprised that an unadorned set of 127 slides—no music, no animation—would become so influential.

• PM Patty McCord was the chief talent officer at Netflix from 1998 to 2012 and now advises start-ups and entrepreneurs. She is the author of Powerful: Building a Culture of Freedom and Responsibility (Silicon Guild, 2018).

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