In today’s competitive business world, organisations focus on implementing appropriate business strategies in order to maintain a competitive advantage in the industry. The corporations implement business strategies after evaluating the environment in which they operate and changes in technologies to ensure that their products and services remain relevant in the market, and they are able to sustain their sales (Bharadwaj et al., 2013). In this report, the case study of Netflix and Blockbuster will be evaluated in order to analyse the business strategies of both organisations and understand how Netflix beat Blockbuster. Blockbuster was a market leader in the movie rental business, and it was dominating the industry, however, after the introduction of Netflix postal service to distribute DVDs, the business of Blockbuster suffered substantially. Netflix relied on modern technologies and effective business strategies to launch new products and services for its customers which resulted in negatively affecting the business of Blockbuster and making the corporation a market leader in the online streaming industry (Satell, 2014). This report will focus on evaluating the background of both companies and evaluate hoe Netflix beat Blockbuster by analysing factors such as changing technologies, pricing strategies, business strategies and innovations. Furthermore, the report will analyse whether Netflix will continue to dominate the online video streaming industry and evaluate the future of the company.
Blockbuster LLC was founded in 1985 as an American based company, and its headquarters is situated in Meridian, Colorado. In the beginning, the business model of the company focused on providing services such as home video rentals and video game rental services to its customers. A business model is referred to a plan for effective operations of a business, identification of revenue sources and identification of customer base, products/services and financing details. The first Blockbuster store was opened by its founder David Cook in Dallas. By 1990s, the corporation expanded its operations in the United States, and it became internationally known during this decade. In 1994, the company was bought by Viacom for $8.4 billion, and it went public in 1999 (Philips and Ferdman, 2013). The business strategy of the company focused on opening as many stores as it can to reach a wider audience to provide them services near their home. One of the major sources of Blockbuster’s income was from late rental fees for the movies, and in 2000, the corporation takes almost $800 million in late fee which was over 16 percent of its total revenue. By 2005, the enterprise hired over 84,300 employees across the globe from which 58,500 employees were working in the US. The company has around 9,000 stores by 2005, and it has a distribution system of 6,000 DVD public vending machines. Furthermore, the corporation has a solid cash flow; however, it filed sustain its sales due to lack of innovative, and it filed for bankruptcy in 2010 (Forbes, 2011). In 2013, Blockbuster announced that it is closing its remaining stores which are situated in the US.
Figure 1: Blockbuster’s logo
(Source: Seeklogo, 2018)
Netflix operates in the entertainment industry, and it offers online streaming video services to its customers. The corporation was founded in 1997, and its initial business was to offer services of DVD sales and rental by mail (Netflix, 2018). One of the key issues with the business strategy of Blockbuster was that customers have to visit its stores to rent and return the DVDs. On the other hand, the business strategy of Netflix made it convenient for people who live far away from a Blockbuster store to rent a movie. The corporation has managed to move from tripping point in DVD rental service to a new S-curve of digital streaming service. The strategies choices made by the company assist it in generating a competitive advantage in the entertainment industry. Firstly, the company implemented a competitive advantage strategy which is referred to the condition that puts the company or business in a superior position. In case of Netflix, the company gained a competitive advantage over its competitors through its business strategy which assists in addressing the issues faced by customers by offering innovative services (CNN, 2014). For example, providing retail video service through mail due to which customers did not require to visit the store, and they can easily rent DVDs. Due to its business strategy, Netflix becomes the main rival of Blockbuster because it gained a competitive advantage over the company. The corporation continues to innovative new services and schemes for its customers in order to ensure that it stays relevant in the field. Currently, the company has over 125 million subscribers, and its users collectively watched video content of over 1 billion hours in a week (Matney, 2017) (Figure 3).
Figure 2: Netflix’s Logo
(Source: Jackson, 2017)
Figure 3: Number of Netflix’s Subscribers
(Source: Statista, 2018)
Netflix was an upstart company and it beat an entrenched opponent such as Blockbuster through good leadership. However, the success of the company was achieved because it executives understand that emerging technologies are changing the method of delivering movie rentals. Netflix relied on changing technologies to ensure that it is able to provide effective services to its customers. After the launch of Netflix’s video postal service in 1997, Blockbuster faced a fierce competition in the market. The strategy of Blockbuster was focused on opening a large number of stores to reach a wide audience; however, the postal video rental service was more convenient for customers because they could easily get the DVD delivered directly to their home (Payton, 2011). Moreover, Netflix launched video on demand services for its customers through which they can watch movies directly on their computer. The lack of innovation in the business strategy and adaptation of the latest technologies in the business resulted in negatively affecting the business of Blockbuster and the company went bankrupt. The management of Netflix knew that renting video cassettes would soon become obsolete; therefore, the corporation implemented a new business strategy to gain a competitive advantage over its competitors. While this strategy was in action, it provided new business opportunities to Netflix regarding production of new media content which assist the company in becoming the market leader in the entertainment industry (Newman, 2010). The company continuous to improve its technology strategy, for example, it uses cloud computing and big data technology to analyse the content watching patterns of its customers and providing them customise recommendations which resulted in increasing its customer base.
Blockbuster’s business strategy focused on opening as many stores as it could in order to expand its market share and reach a large number of audiences. Strategic choices made by the corporation changed as per the locality of its stores, for instance, if the neighbourhood is filled with children then the company offers a wide range of children films which assist it in expanding its business quickly. Furthermore, the strategy of the corporation is to stock up on the latest movies rather than older ones which was a practical decision however this strategy failed because people prefer to watch classic movies (Stross, 2010). On the other hand, the online operating systems enable Netflix to reach a global audience without spending substantial costs as compared to Blockbuster. Netflix was able to avoid the burden of retail outlets by operating online due to which the company operates its business from only few warehouses and offices. The corporation manages its operations with the help of few staff members, whereas, Blockbuster had to hire new employees for every new stores that it opened. The key gap in the strategy of Blockbuster was that its services were inconvenient and customers have to pay high charges if they failed to return the DVD to the store (Matney, 2017). Netflix addressed this gap by adopting an online structure in which customers did not have to go outside their home to rent a movie. Furthermore, there was no issue of late fees or long lines were the primacy issues with retail outlets of Blockbuster. Therefore, operating the business online provided more benefits to Netflix than compared to retail outlets.
The pricing strategy implemented by Netflix is an integral part of its business strategy because its services are always priced lower than compare to cable costs. Furthermore, the corporation also leverages the technology to keep the data consumptions of its customers to a bare minimum. Due to lack of various costs such as maintaining of physical stores and salaries of a high number of employees, the company is able to reduce its overall costs which enable it to offer its services at low prices. Following is a pricing chart of Netflix.
Figure 4: Price chart of Netflix
(Source: Hall and Hasting, 2018)
On the other hand, one-day rental costs for new movies in Blockbuster were $2.99, and for older movies, it was $1.99. In case of a three-day rental, customers were charged $4.99 (Fritz, 2011). Above all that, in case customers missed the deadline for the return of DVDs than they have to pay late fees which were usually very high. In case of Netflix, users can stream all of its content in just a base price of $8, and they did not have to face issues such as late fees or costs relating to visiting the store. Therefore, effective pricing strategy played a crucial role in assisting Netflix in beating Blockbuster.
Netflix is considered as one of the most innovative companies in the world because it continuously innovates new products and services for its customers as per changing the market environment to stay relevant and sustain its profitability. In 1997, the company innovated ‘rental by mail’ service for its customers which changed the DVD rental industry, and it enabled the company to provide fierce competition to Blockbuster. Along with a number of disruptive innovations, there are many small innovations as well which assist Netflix in becoming a market leader in online video streaming and entertainment industry. The executives of Netflix follow SAF criteria while implementing business strategies which include factors such as suitability, acceptability and feasibility (Fast Company, 2017). Senior-level executives evaluate whether the proposed strategy addresses the threats or create opportunities for the company and whether it meets the expectations of stakeholders. Furthermore, they evaluate whether the strategy is feasible which means whether it can be financed, resources are obtainable, and human capital has skills to achieve desired results.
For example, Reed Hastings, founder of Netflix, is a Stanford computer scientist, and he knew that in the future it would be possible to stream videos online. However, investing in this strategy was risky at the time. Hasting took the chance, and he decided to invest in the field of online streaming which was proven to be a disruptive innovation, and it provided a competitive advantage to the company. Moreover, the company invested in cloud computing technology which assisted it in offering its services across the globe. The company developed an algorithm through which it measured the watching patterns of its customers and started investing in producing original content some of which become huge success such as stranger things, Orange is the new black, House of cards, 13 reasons why and others (Walker et al., 2017). Therefore, a number of small and disruptive innovations assisted Netflix in becoming the market leader in the entertainment industry.
Along with the popularity of Netflix’s online video streaming services, the number of competitors increased in the market as well. Currently, the main competitors of Netflix include Amazon, Hulu and YouTube. There is no doubt that Netflix is dominating the online video streaming industry with revenue of US$11.69 billion in 2017 and over 75 percent of the US streaming market share (Perez, 2017). However, Blockbuster had similarly dominating the rental video industry as well before its demise. The company was the market leader and other competitors were nowhere near the success of the company. But still the company was bankrupted in the past decade due to the introduction of online video streaming services. Similarly, another disruptive innovation can resulted in negatively affecting the business of Netflix as well. However, the main difference between both companies is that Netflix relies on innovation to ensure that its services are relevant in the market whereas Blockbuster relied on traditional business approach to ensure that it continue to dominate the market. A number of small and disruptive innovations generated a competitive advantage in Netflix which is difficult for its competitors to replicate (Houser, 2018).
In 2011, Netflix faced a dilemma as the competitors in online video streaming industry were increasing such as Amazon and Hulu, whereas, the DVD rental business was striving to keep its customers. In order to address this issue, the corporation decided to divide its business into two parts. The online video streaming part was under Netflix whereas the DVD rental business was managed by Qwikster (Rodriguez, 2018). The purpose of the company was to redesign its DVD rental business by introducing new facilities. The company decided that along with renting DVDs through the mail, it will also give them the option to rent games. Furthermore, the company launched a website for Qwikster to make it easier for its customers to order DVDs and games online. The senior-level executives believed that this strategy would enable the company is focusing on both businesses equally which would increase their profitability. There were many other reasons for division of both business, for example, DVD rental business required large warehouses along with logistics operations. On the other hand, streaming videos required large internet resources such as data servers and others.
Figure 5: Qwikster’s Logo
(Source: Patel, 2011)
Although the decision of the company was focused towards improving its operations, however, it has a negatively impact on customers because they have to make two separate accounts to stream their media and rent DVDs (Javed, 2011). The website of Qwikster had more options for movies and it had the latest releases. The recommendations given by one website did not transfer to other website which made it difficult for customers keep track of their favourite movies. The response given by customers was hostile due to which Netflix lost hundreds of thousands of subscribers. The share prices of the company fall by 60 percent due to which it values reduced by $3 billion. Three weeks after the announcement, Hasting made an announcement on his blog that the company did not divide it business into two parts and the DVD section will continue to operate under the label of Netflix. This decision had a significant impact on the business of Netflix because it reduced its market share and profitability which affected its online video streaming business as well.
The loss suffered by Netflix resulted in negatively affecting the profitability of the company. It gave a chance to its competitors to capture the lost market share of Netflix. In order to regain its competitive advantage, Netflix relied on technology and innovative disruption. The company decided to invest in original content by creating its own television series and movies. Firstly, the company used the data it was collecting on its customers regarding their watch habits and their favourite shows and movies. Based on such data, the corporation decided to produce an original serious which was showed exclusively on its website. The company used big data to found out that people like to watch television dramas based on politics, and they like to watch movies and shows starring Kevin Spacey based on which its produced ‘House of Cards’ which is still one of the most critically acclaimed and liked series of Netflix (Petraetis, 2017). After the success of House of cards, the company understands that investment in original content is highly beneficial and it decided to produce more series and movies to target a large audience. Based on its strategy to focus on the likes and dislikes of viewers, the company has made many original series that became highly successful such as Stranger things, Narcos, Orange is the new black, the Crown, Master of None, and many others.
In the past few decades, Netflix has gained substantial success due to use of technologies and effective business strategies. In the future, the company is likely to sustain its profitability due to a number of factors. The business strategy of Netflix focuses on three key factors which include convenience, cost and content. These three factors provide a competitive advantage to Netflix, however, there are various threats faced by the company as well in the future (Ingram, 2017). For example, the main competitor of Netflix, Amazon, also provides convenient services at relatively lower costs and it is also investing in creating original content. Another benefit in Amazon services is that for the same fee, the customers also gets access to its prime shopping facilities and online music streaming services and its fees are cheaper as well. Furthermore, due to threat of net neutrality, it might be possible that value from online streaming shifts to those players that are lower in supply chain (Philleo, 2018). Even after all these threats, the corporation would be able to sustain its growth due to success of its content and its business strategy which allow it to change as per the demand of its customers. Competitors of Netflix did not have the brand loyal, and they certainly did not have original content which is liked by a large number of audience. Therefore, Netflix would be able to maintain its growth in the entertainment industry and it would sustain its profitability in the future.
Conclusion
In conclusion, Blockbuster was an incumbent in the DVD rental industry, whereas, Netflix was the challenges, however, Netflix overthrow Blockbuster due to effective business strategy and leveraging the latest technologies. Netflix introduced rental by mail service for its customers which resulted in providing it a large market share. The business model of Blockbuster was focused on opening more stores to reach more customers, whereas, Netflix was reaching such customers through the mail without incurring any cost on the construction of stores and management of employees. Furthermore, Netflix relied on technologies to provide better services to its customers such as customised recommendations, original content based on likes of users, low data use and others. As compared to retail outlets, operating online is more beneficial for the company, and its pricing strategy provided it a competitive advantage. The company suffered a major setback after the demise of Qwikster, however, it regains its position by relying on developing original content which becomes substantially popular. In the future, the company would face a number of issues; however, it would be able to sustain its profitability due to brand loyalty, original content and effective business strategy. Therefore, implementation of an effective business strategy and use of the latest technologies enable organisations to expand their business to reach a larger audience and sustain its future success.
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