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Netflix’s Strategy in 2018
Overview
Throughout 2017 and the first three months of 2018, Netflix was on a roll. Movie and TV show enthusiasts
across the world were flocking to become Netflix subscribers in unprecedented numbers, and shareholders
were exceptionally pleased with Netflix’s skyrocketing stock price. Over the past eight years, the company
had successfully transformed its business model from one where subscribers paid a monthly fee to receive an
unlimited number of DVDs each month (delivered and returned by mail with one title out at a time) to a model
where subscribers paid a monthly fee to watch an unlimited number of movies and TV episodes streamed over
the Internet. In 2018, Netflix was the world’s leading Internet television network with over 117 million streaming
memberships in over 190 countries enjoying more than 140 million hours of TV shows and movies per day,
including original series, documentaries, and feature films. Netflix members could not only watch as much
streamed content as they wanted—anytime, anywhere, on nearly any Internet-connected screen—but they could
also play, pause, and resume watching, all without commercials. In the United States, Netflix still had 3.4 million
members in 2018 who, because of slow or limited Internet service, continued to receive DVDs solely by mail
(but the numbers of mail-only subscribers were steadily declining).
Netflix’s swift growth in the United States and its promising potential for further expanding its international
subscribers pushed the company’s stock price to an all-time high of $331.44 on March 5, 2018, up from an
opening price of $124.96 on January 3, 2017. Already solidly entrenched as the biggest and best-known Internet
subscription service for watching TV shows and movies, the only two questions for Netflix in 2018 seemed to
be how big Netflix’s service might one day become in the world market for on-demand streaming of movies and
TV episodes and whether the company had the competitive and financial strength to combat the efforts of larger,
resource-rich rivals looking to steal subscribers away from Netflix.
There is ample information in this case for class members to apply the analytical tools discussed in Chapters 3
and 4 in evaluating Netflix’s external environment and internal circumstances, and there is plenty of information
for them to draw upon the topical coverage in Chapters 1, 5, 6, and 7 in critically evaluating Netflix’s strategy,
business model, and strategy “missteps.”
Suggestions for Using the Case
This freshly updated and revised Netflix case has all the ingredients for an outstanding and enlightening class
discussion. The market for online viewing of all types of entertainment programs has been in a state of rapid
flux during most of the past two years, and Netflix is driving hard to win a commanding leadership position in
most all countries across the world in streaming movies, TV shows, and original content to subscribers. Students
will easily grasp the ins and outs of the business of streamed content via the Internet, and they are virtually sure
to have opinions about Netflix’s recent strategic moves to be the leading provider of many types of streamed
content.
: Does the
case 14 teaching note
Company Have Suffcient Competitive
Strength to Fight O Aggressive Rivals?
Case 14 Teaching Note Netflix’s Strategy in 2018
440
We think the Netflix case is probably best assigned after you have covered Chapters 1-7. It is an ideal case for
drilling students in the tools of analysis covered in Chapters 3 and 4. The material in Chapters 5 and 6 is pertinent
to student identification and assessment of Netflix’s strategy and competitive approaches. And, with Netflix’s
strategy to rapidly grow its worldwide subscriber base, the material in Chapter 7 regarding competing in foreign
markets is very much in play as well. Because the issues in the Netflix case connect strongly to the content of
Chapters 3-7, we suggest that you assign the case in the second half of your module on single-business strategy.
The Netflix case provides an opportunity for class members to evaluate industry and competitive conditions,
weigh an assortment of competitive factors, draw a strategic group map, identify driving forces and key success
factors, think strategically about Netflix’s resources and capabilities versus those of its main rivals, do a weighted
competitive strength assessment of Netflix versus other rivals described in the case, do some number-crunching
(there’s some good financial data in the case that merits careful scrutiny), and make action recommendations
regarding Netflix’s future course of action.
In truth, should you opt to spend class time covering all the assignment questions we have posed in the
Assignment Questions section below, there is enough in this case to fill two 50-minute or the biggest portion of
two 75-minute class periods. However, by focusing on selected assignment questions, you can cover the case
adequately in a single 75-minute class period.
Videos for Use with the Netflix Case. There is a 2016 YouTube video which you might want to show the
class (or have students watch on their own). It is a 3:06-minute video entitled “Inside Netflix’s Plan to Get the
Whole World Watching.” It can be accessed at https://www.youtube.com/watch?v=JdtnX_P-4Qc.
There’s also a second 2:24-minute 2017 video entitled “Netflix’s Big Move into the Movie Business,” accessible
at https://www.youtube.com/watch?v=Nij6vZMKnBI. This video is appropriate for showing at the beginning of
the class or having students watch it on their own prior to coming to the class discussion of the case.
The Connect-based Exercise for the Netflix Case. We developed an exercise for Netflix for inclusion in
the publisher’s Connect™ Management web-based assignment and assessment platform because:
The case ties tightly to many of the topics covered in Chapters 3 through 7.
One of the purposes of the case exercises is to drill students in applying the analytical tools discussed in
the chapters to the circumstances posed in the cases.
This particular Connect-based exercise focuses on concerns the following four questions:
1. What forces are driving change in the streamed entertainment industry? Are the combined impacts
of these driving forces likely to be favorable or unfavorable in terms of their effects on competitive
intensity and future industry profitability?
2. What does your strategic group map of the industry look like as of 2018? How attractively is Netflix
positioned on the map? Why?
3. What concerns do you have about Netflix’s situation, given the financial data contained in case Exhibits
2, 3, 6, and 7?
4. How does Netflix’s competitive strength compare against that of Blockbuster and Amazon? Do a
weighted competitive strength assessment using the methodology presented in Table 4.4 in Chapter 4
to support your answer. Based on your assessment and calculations, does Netflix have a net competitive
advantage over Blockbuster and/or Amazon?
It should take class members roughly 45 minutes to complete the exercise, assuming they have done a
conscientious job of reading the case and absorbing the information it contains.
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However, be alert to the fact that the competitive strength assessment portion of the exercise is not subject to
definitively correct answers because the weights students assign to the strength factors are partly subjective.
For instance, while class members may well view a particular measure of competitive strength as being “very
important”, they may nonetheless vary in their opinions as to whether that measure should be assigned a weight
of 0.20 or 0.25 or 0.30 or 0.35. Likewise, class members may view a company as being competitively strong on
a particular strength measure but still have the subjective latitude to assign the company a rating of 7 or 8 or 9 or
maybe even 10. So, while some weights and ratings are “more correct than others” it is not possible to grade their
entries on parts of the competitive strength assessment as definitively right or wrong. Nonetheless, this should
not deter you from having class members complete the complete strength assessment portion of the Connect
exercise for the Netflix case. Not only do class members need the practice in using/applying this analytical tool
but you can take 10-15 minutes of the class period and call upon various class members to present and defend
the results of their competitive strength analysis. Given that students will have worked on their assessments prior
to coming to class, such a discussion should prove productive and constructive.
What to Tell Students in Preparing the Netflix Case for Class. To give students guidance in what to do
and think about in preparing the Netflix case for class discussion, we strongly recommend two things:
1. Have class members complete the Connect-based exercise for the Netflix case in the event you have
adopted the Connect software for your course.
2. Provide class members with assignment questions (in addition to what is covered in the Connect
exercise) and insist that they prepare good notes/answers to these questions before coming to class.
Our recommended assignment questions for the Netflix case are presented in the next section of this
TN. Since there are 10 assignment questions, you may want to have students focus on a subset of the
questions (depending on how you want to conduct the class discussion).
To facilitate your use of assignment questions and making them available to students, we have posted a file of
the Assignment Questions contained in this teaching note in the instructor resources section of the Connect
Library (You should be aware that there is a set of assignment questions posted in the Connect Library for
each of the cases included in the 22nd edition.) In all instances, these assignment questions correspond to the
assignment questions in the teaching note for the case.
In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case
unless students have conscientiously have made use of pertinent core concepts and analytical tools in preparing
substantive answers to a set of well-conceived study questions before they come to class. In our classes, we
expect students to bring their notes to the study questions to use/refer to in responding to the questions that
we pose. Moreover, students often find that a set of study questions is useful in helping them prepare oral
team presentations and written case assignments—in addition to whatever directive question(s) you supply for
these assignments. Hence, we urge that you provide students with assignment questions—either those we have
provided or a set of your own questions—for all those aspects of a case that you believe are worthy of student
analysis or that you plan to cover during your class discussion of the case.
Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have
class members read the Guide to Case Analysis that is also posted for optional assigned reading. The content of
this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure
about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.
Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis. We
definitely recommend use of the Netflix case for written assignments and oral team presentations. Our suggested
assignment questions are as follows:
Netflix CEO Reed Hastings has employed you as a consultant to assess the company’s overall situation
and recommend a set of actions to improve the company’s future prospects. Please prepare a report to
Mr. Hastings that includes (1) an evaluation of competitive forces confronting the company in 2018, (2)
the forces driving change in the industry, (3) a strategic group map of the industry, (4) an assessment
of Netflix’s strengths, weaknesses, opportunities and threats, (5) an evaluation of Netflix’s strategic
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and financial performance, (6) a weighted competitive strength assessment using the methodology in
Table 4.4, and (7) a set of action recommendations that clearly define the course of action Netflix should
pursue. Your report should be 5-6 pages, plus it should include an assortment of charts, tables and
exhibits to support your analysis and recommendations.
Prepare a brief report to Netflix CEO Reed Hastings outlining the 3-4 top priority issues that Netflix
management needs to address and the actions you think Hastings should initiate to address these issues
and steer Netflix into a commanding leadership position in using the Internet to stream content to
subscribers. Your report should contain detailed and convincing reasons in support of each one of your
recommendations. It is imperative that the support offered for each of your recommendation be based
on (a) conclusions drawn from application of the concepts and analytical tools discussed in Chapters 3
and 4 and (b) the content of Chapters 5-7 regarding strategic moves that may be suitable for Netflix in
striving to gain a sustainable competitive advantage over its rivals.
Assignment Questions
1. How strong are the competitive forces in the rapidly evolving global market for streamed video content? Do
a five-forces analysis to support your answer.
2. What forces are driving change in this “new” global industry? Are the combined impacts of these driving
forces likely to be favorable or unfavorable in term of their effects on competitive intensity and future
industry profitability?
3. What does your strategic group map of this industry look like? How attractively is Netflix positioned on the
map? Why?
4. What key factors will determine a company’s success in this industry in the next 3-5 years?
5. What is Netflix’s strategy? Which of the five generic competitive strategies discussed in Chapter 5 most
closely fit the competitive approach that Netflix is taking? What type of competitive advantage is Netflix
trying to achieve?
6. What does a SWOT analysis of Netflix reveal about the overall attractiveness of its situation?
7. What is your appraisal of Netflix’s operating and financial performance based on the data in case Exhibits 1,
2, 5, 6, and 7? What positives and negatives do you see in Netflix’s performance? Use the financial ratios in
Table 4.1 of Chapter 4 as a guide in doing the calculations needed to arrive at an analysis-based answer to
your assessment of Netflix’s recent financial performance.
8. How does Netflix’s competitive strength compare against that of its primary rivals as of 2018? Do a weighted
competitive strength assessment using the methodology presented in Table 4.4 in Chapter 4 to support your
answer. Based on your assessment and calculations, does Netflix have a net competitive advantage over
some/all of these rivals?
9. What 3-4 top priority issues does Netflix management need to address?
10. What recommendations would you make to Netflix CEO Reed Hastings? At a minimum, your
recommendations should cover what to do about each of the top priority issues identified in question 9.
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Teaching Outline and Analysis
1. How strong are the competitive forces in the movie rental marketplace? Do a five-forces
analysis to support your answer.
Below is a representative five-forces model of competition in the online video streaming industry:
Competitive pressures coming
from the threat of entry of new rivals
Suppliers
of Video
Content
Suitable for
Streaming
Competitive
pressures
stemming
from
supplier
bargaining
power
Competitive
pressures
stemming
from buyer
bargaining
power
Substitutes for
Online Streaming
Competitive pressures coming from
the market attempts of outsiders
to win buyers over to their products
Rivalry among
Streaming Video
Providers
Individual
Subscribers
Threat of New Entry
into the Video
Streaming Industry
Competitive pressures
created by the
jockeying of rival
providers for better
market position
and competitive
advantage
Rivalry among subscription-based providers of streamed video content—a strong to fierce competitive
force that is likely to intensify in the years ahead
In assessing this competitive force, students should be directed to refer to and utilize the presentations in
Table 3.2, Figure 3.4, and the associated discussion on rivalry in Chapter 3.
Students should conclude that rivalry among Netflix, Amazon Prime, Hulu, HBO, and other competitors
(especially video-on-demand providers that stream movie rentals directly to the renter’s TV or PC or
handheld device) seems destined to grow more intense. All competitors are scrambling to attract the
patronage of individuals/households that rent movies—the battle for sales revenues and market shares
is very contested and seems destined to become more fierce. Rivalry is centered on such factors as
• Subscription price.
• Breadth of selection (size and diversity of each competitor’s content library).
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• Ease of browsing through all the selections to identify appealing options and select which content
to watch.
• Advertising and promotion—Much of the advertising is being done online in the case of Netflix and
such streaming providers as Amazon, Apple, Vudu, and Hulu. But the online streaming business is
not one that is a heavy user of TV, radio, and newspaper advertising on a regular basis.
• Power of brand name and reputation to attract subscribers.
Most streaming competitors pursue some version of a differentiation strategy to try to set themselves
apart on the basis of one or more competitive factors—typically subscription price, content, and brand
recognition and reputation.
Several factors were working to intensify rivalry among industry participants:
• All rivals are actively and busily launching fresh promotional initiatives (free trials and ads
promoting new original content, for example) A large number of fresh, ongoing strategic initiatives
on the part of various rivals heightens rivalry.
• Low switching costs on the part of buyers—it is pretty easy for people to (a) switch their subscription
from Netflix to Amazon Prime Video or some other subscription service or (b) order the desired
content through their cable provider or some other video-on-demand provider.
• Some rivals have utilized low subscription rates (and free trials) as a means of attracting new
customers—a factor which intensifies rivalry. Netflix’s monthly subscription fee for unlimited
streaming is clearly a bargain price for subscribers who watch 6 or more movies/programs per
month. It is unclear to what extent subscription prices might have to be raised because of the
high/rising licensing fees that movie studios and TV networks are able to command for their
content. On the other hand, the incremental costs of streaming movies over the Internet are
undoubtedly much lower than DVD distribution by mail.
• Rivalry increases when one or more rivals are dissatisfied with their market position and launch
moves to bolster their standing at the expense of rivals. A case can be made that Netflix, Amazon,
Hulu, HBO, and others offering streamed content will continue to be proactive in broadening their
content and improving the appeal of their subscription prices to attract more viewers/subscribers
and bolster their market positions. All movie rental competitors seem to be actively attempting to
grow their business and be one of the market leaders in streaming video content.
• Rivalry is likely to increase significantly as growing numbers of individuals/households gain access
to affordable high-speed Internet service and the ability to watch streamed content on any Internet-
connected device. Over time, there is reason to expect that streaming competitors with attractive
content libraries will take substantial sales and market share away from traditional cable providers.
• Rivalry increases as the product offerings of rivals become more standardized. We see the
differentiation between Netflix’s online product offering and the offerings of other streaming
providers as growing smaller, not larger—but there may well be ongoing price differentials and
important original content differences (as concerns both quantity and quality) between various rivals.
In the near future,, the main differentiating factor among all the various types of streaming providers
will be the size and content of their respective movie libraries, subscription price differences, and
brand image/reputation differences.
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Threat of entry—a weak to moderate to strong competitive force, depending on geographic location
and subscriber access to high-speed Internet service.
In assessing this competitive force, students should be directed to refer to and utilize the presentation in
Figure 3.5 and the related text discussion.
In 2012, the windows for entering the brick-and-mortar segment of the movie DVD rental business and
the mail-delivery subscription segment are pretty much closed. It will become increasingly difficult for
new entrants using business models like Netflix or Apple or Amazon or Hulu or Vudu or Redbox to
overcome entry barriers and capture enough business to compete profitably. Trying to go head-to-head
against Netflix and Amazon in the online subscription segment seems unattractive to most any new
entrant (the entry barriers are high). The barriers to entry into online subscription segment of the movie
rental business for enterprises wanting to cover a large geographic area and compete on a “national” or
“international” scale include:
• The rapidly escalating cost of licensing attractive content from movie studios and TV networks,
producing original content, and gaining rights to stream live sporting and entertainment events.
• Expenditures for advertising and promotion needed to draw visitors to the web site and convert
them into paying subscribers. (From case Exhibit 1, students can see that Netflix spent over $1.2
billion in 2017 on marketing.)
• The costs of developing a website with convenient video search, video recommendation, and video
selection software capabilities, plus the capability to stream to many different types of devices (TV,
game consoles, desktops, laptops, smart phones, and other handheld devices.
