Netflix: David Becomes Goliath

Netflix is considered a classic example of innovative strategic planning. From the outset, it was designed primarily as an internet-based company, unlike its principal rival, Blockbuster. The early history of Netflix is a study in looking forward to gaining and keeping a competitive advantage. Remember Porter's Competitive Forces Model as you read this chapter. The pressures of all five forces are present as Netflix tries successfully to enter and eventually command a competitive advantage in the rental film industry. As you read the case of Netflix, consider the following question: What are the long-term threats to Netflix? (Hint: Consider changes in technology and copyright/patent/media law). How would Netflix overcome or avoid those threats and continue to have a competitive advantage?

Tech and Timing: Creating Killer Assets

Key Takeaways

  • Durable brands are built through customer experience, and technology lies at the center of the Netflix top satisfaction ratings and hence the firm's best-in-class brand strength.
  • Physical retailers are limited by shelf space and geography. This limitation means that expansion requires building, stocking, and staffing operations in a new location.
  • Internet retailers serve a larger geographic area with comparably smaller infrastructure and staff. This fact suggests that Internet businesses are more scalable. Firms providing digital products and services are potentially far more scalable, since physical inventory costs go away.
  • The ability to serve large geographic areas through lower-cost inventory means Internet firms can provide access to the long tail of products, potentially earning profits from less popular titles that are unprofitable for physical retailers to offer.
  • Netflix technology revitalizes latent studio assets. Revenue sharing allows Netflix to provide studios with a costless opportunity to earn money from back catalog titles: content that would otherwise not justify further marketing expense or retailer shelf space.
  • The strategically aligned use of technology by this early mover has allowed Netflix to gain competitive advantage through the powerful resources of brand, data and switching costs, and scale.
  • Collaborative filtering technology has been continually refined, but even if this technology is copied, the true exploitable resource created and leveraged through this technology is the data asset.
  • Technology leveraged across the firm's extensive distribution network offers an operational advantage that allows the firm to reach nearly all of its customers with one-day turnaround.