netflix

NetflixThe Blue Ocean of the Movie Rental Industry

Jules BoletisGera LenssenLotte HuisinghJoost VerbakelAnn-Kathrin Beiderwellen

Martin’s Quality Model

Full Balance

• “We care for you and we are here to serve you!”• Netflix takes care of the quality procedure to serve the customers

needs. • New activities are introduced to satisfy the customers with a DVD

delivery service.

Fundamental Core Activities:

Online DVD rental• Shipped through postal services

Subscription instead of pay per view• No late fees

Large movie assortment including old movies• Unlimmited shelf space

Movie recommendation• Data base

Means-End Chain

Subscription

End Value

Consequences

Attributes

Large movieassortiment

Movie recommen-

dation

Online DVD rental

No late feePostal

servicesUnlimmited shelf space

Data base

Customer input

Up to 5 movies

“Freedom”

Enjoyment of movie variation

“Convenience”

All core processes of Netflix result in satisfying the customer in their needs around freedom and convenience when looking at movie rental. Next to that the actions, consequences and end values are all results of the Full Balance strategy of Martin’s Quality Model.

Value innovation is created when Netflix’s actions affect both its

cost structure and its value proposition to buyers.

Due to `revenue-sharing agreements with the major studios´ Netflix could rearrange its cost structure so that the company could offer lower rental prices per movie. However, the actual price was higher than those of competitors as Blockbuster, because Netflix offered subscriptions. In addition to that more cost savings were made by eliminating and reducing certain factors the rental movie industry competes on. (Please find those factors in step 2.)

Netflix lifted up buyer´s value by raising and creating elements the industry has never offered; as for example raising rental periods and creating customer´s awareness of unknown movies. (Please find more factors Netflix created or raised in step 2.)

When looking at the criteria Value Innovation it is to conclude that Netflix creates a Blue Ocean !

Blue Ocean Strategy Step 1 – Does Netflix create Value Innovation?

Eliminate `Bait and Switch` perceptions

(recommendation system) Stores with part-time employees Sales of `old` movies Claiming late fees Advertising of the newest movie

Raise Actual prices (subscriptions) National Network Amounts of movies rented Duration of rental Inventory selection Facilitating movie rental (home service)

Reduce Ability to obtain a movie quickly (movie

night) Importance of location choice Share position of newest movies Price per movie rented Level of difficulty to cancel subscription

Create Data Base of al subscriptions Recommendation System based on data Base Demand for `old` movies Home Service by internet order Automatical replacement based on

recommendation system (if a movie returned a new one is going to the client)

Based on the Four Actions Model regarding Netflix´s activities you can say that those activities change the standard of competing factors. Netflix eliminates; reduces; raises; and creates new competing factors inside the movie rental industry. For that reason it is valid to say the company is creating a Blue Ocean !

Blue Ocean StrategyStep 2 – Do the actions of Netflix fulfill the Four Actions Model?

By making use of the Strategy Canvas it is easier to determine in what the competition is currently investing, on what factors the industry currently competes and what customers receive from the existing competitive offerings on the market.

The horizontal axis captures the range of factors the industry competes on and invests in.

The vertical axis captures the offering level that buyers receive across all these key competing factors.

The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition.

Blue OceanStep 3 – Does the model of the Strategy Canvas indicate visually that Netflix creates a Blue Ocean?

We decided to take BlockBusters as suitable example for the movie rental industry: Netflix BlockBusters


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Strategy Canvas

Off

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evel

Eliminating Raise Reduce Create

The Strategy Canvas clearly visualizes that Netflix is operating on a different offering level than the other companies; especially BlockBusters. The gradient of those curves indicates that Netflix is creating a Blue Ocean Strategy comparing to the other companies in the industry!

Summarized you can state that Netflix is creating a Blue Ocean Strategy

However, BlockBuster already adopted several of its operation activities so that the Blue Ocean of Netflix already starts turning into a Red Ocean. Due to the fact that the Blue Ocean of Netflix is already attacked by other companies of the industry it is to say that the Blue Ocean Netflix created is not that sustainable.


Enabler Scheme before Blockbusters Entrance

This schema is based on Netflix before the VOD market. Unique pricing system Netflix offers an attractive pricing system. Customers

are able to rent unlimited amount of movies with a fixed price; ‘All you can eat model’. There are also no late fees and costumers can rent an unlimited amount of movies.

Convenience Home delivery service. Customers can rent an unlimited amount of movies, receive them within 24 hours and have an on time delivery; all is included in the subscription. Netflix offers the customer help with choosing a movie, this thanks to their software database.

Efficient & customized Netflix offers a database which shows recommendations to customers. This database is based on the interests of the customer. Furthermore, Netflix offers an automatic replacement system. This means that when a customer sends back the movie, they will automatically receive the next movie of their preference list.

Image Pro-active, Netflix knows which movies are interesting for the customer. Trustworthy, on time delivery is essential for Netflix and this requests trust of the customer.

Enabler Scheme before Blockbusters Entrance

Unique pricing model

Convenience

Efficient & customize

dImage

Software database

Unlimited rentals

Subscriptions

Home delivery

No late fee

Unique offering

Online ordering

On-time delivery

Automatic replacement

Enabler Scheme after Blockbusters Entrance

This schema is based on Netflix before the VOD market.Customer Value is core to competitive advantage, if it is distinctive and relevant. Unique pricing system Netflix offers an attractive pricing system. Customers are

able to rent unlimited amount of movies with a fixed price; ‘All you can eat model’.

Personalized Netflix offers a database which shows recommendations to customers. This database is based on the interests of the customer. Furthermore, Netflix offers an automatic replacement system. This means that when a customer sends back the movie, they will automatically receive the next movie of their preference list.

Image Pro-active, Netflix knows which movies are interesting for the customer. Trustworthy, on time delivery is essential for Netflix and this requests trust of the customer.

Assortment Netflix promoted old movies and owns the rights for independent movies. ‘Netflix hoped to enhance it’s reputation as the highest quality source of independent films, a designation that contributed to its popularity’.

Enabler Scheme after Blockbusters Entrance

Unique pricing model

Personalized Image

Software database

Unlimited rentals

Subscriptions

Old movies

Assortment

Independent movies

Automatic replacement

Conclusion Enabler Scheme

Before the entrance of Blockbuster, Netflix had an unique value proposition. This because they offered a total new dimension of renting a video. They had many competitive advantages towards their competition; e.g. ‘ No late fees’ , ‘Database’, ‘Home-delivery’ and ‘ Subscriptions’.

After the entrance of Blockbuster, many of Netflix’s competitive advantages weren’t so competitive anymore. Blockbuster offered e.g. also ‘ No late fee’, ‘ Home –delivery’ and ‘ Online ordering’. Fortunately, according to us, Netflix still has a value proposition on which they can compete, e.g.; ‘Database’, ‘Automatic replacement’, ‘Assortment’. In the second enabler scheme you will find their current value proposition.

Distinctive: Even though the value proposition decreased, they still have strong competitive advantages as is visible in the enabler scheme after blockbusters entrance.

Durable demand Looking 10 years from now, we think the demand for movies will shift to online demand in stead of renting a tangible movie. We do not think the demand of renting tangible movies is durable.

Inimitability It is not difficult to imitate the core business of Netflix, this shows by the entrance of Blockbuster and the many competitors of Netflix (movie rent stores). But the full database of Netflix is hard to imitate. This because of the strong relationship between Netflix and the studios. Concluding, the inimitability of Netflix is medium. Because of their database Netflix is able to distinguish itself.

Non-substitutability There are substitutes for renting a tangible movie with home delivery. E.g.; Downloading and renting a movie in a physical store.

Constituents of Sustainability

Constituents of Sustainability

Operational efficiency Netflix has a very strong operational efficiency. Blokbusters ‘suffered from significant operation loses’ while Netflix reported a profit in 2006.

Appropriability Netflix came up with the this new dimension of renting a video. Blockbuster copied parts of this new dimension but is not as successful as Netflix. This could be the case because they are a starting company (Netflix also had problems during the beginning phase) or because Netflix is a to strong competitor. To conclude whether or not Netflix has a strong appropriability, these two factors are important. We choose for the second one; Netflix is a to strong competitor. This by looking at the second enabler scheme, Netflix still has many competitive advantages towards Blockbusters and other competitors. So Netflix has a strong Appropriability.

Resource superiority Also this factor you can approach on two different manners. First; Netflix offers movies, this product not rare and it is not difficult to offer this products. The second one; Netflix offers unique movies. Movies of independent movies and old rare movies. It is difficult to purchase these movies because you need a strong relation with the suppliers. Looking at the second manner and the competitive advantage of Netflix, we think the resources of Netflix are rare. So they have a high superiority.

Conclusion Constituents of Sustainability

Based on the previous mentioned six constituents of sustainability, a high value @company is clearly visible through the database and the high operational efficiency.

The value@customer is mixed as Netflix offers superior products but the demand is not durable as there is big competition from VOD services.

Barrier@competition it is not difficult to imitate and the product Netflix offers has strong substitutes. So the barrier competition is low.

Conclusion: Looking at the future (popularity of downloading and watching movies on the PC is increasing), Netflix does not have a sustainable product, even though at the moment they do have strong competitive advantages.

Decision MatrixOptions\ criteria

Low risk (20%)

Profit (20%)

Sustainability(30%)

Customer acceptanceNetflix (30%)

Total

License 5 2 4 5 4.1

Integrate 3 5 3 4 3.7

Stand-alone 2 3 4 5 3.7

Do not enter 5 1 2 3 2.7

Ranking where 1 is low, 5 is high.

Not entering the market would bear a low risk and would not effect the Netflix brand but has also no future value. Stand-alone business would bear high risk but would be sustainable in the future without potential of effecting the main brand. The integration of VOD in the Netflix business would have high profit and the assumption is that the customer would see this as a added value.

License strategy has proven to be most valuable to Netflix when implemented. This has been ranked by looking at the risk level, where low risk is in favor of Netflix. When looking at profit, sustainability and customer acceptance the higher the ranking the better results are expected on the long-term. This is why the License strategy is recommended.

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