NETFLIX - STRATEGY memo

Alessandra AguiarPepperdine University Strategy 492Dr. Norma Davis

The 2011 Rebranding/Price Increase Debacle

RECOMMENDATION MEMO To: Dr. Norma Davis From: Alessandra K. AguiarDate: June 16th, 2015SUBJECT: NETFLIX INC.

This memo discloses a strategic plan of action for Netflix, and recommended changes to the market structure and business model, which should serve as a remedy for the company’s brand and current declining position in the market. In efforts to repair the PR damage from rebranding, regain subscribers, and improve profitability, customer satisfaction, and long-term success, the following recommendations are suggested: 1. Cancel the Qwikster site and maintain monthly prices, 2. Partner with a television provider to act as an interface to access Netflix, 3. Imitate premium channels such as HBO and Showtime and provide exclusive content. These recommendations will adhere to a more effective strategy, and are believed to yield substantial long term cost savings. Implementation will begin within 45 days to allow strategy formulation.

BackgroundOver the years, Netflix has dominated the DVD rental market in comparison to its competitors such as Blockbuster, Redbox, Apple iTunes, Amazon, Hulu, and Google TV. Netflix’s $9.99 a month rate was key to Netflix’s ability to offer customers a great value for their money. However, in recent years, the U.S. per capita annual spending on DVDs was declining, and due to increasing competition and pricey new content deals, the company was unable to maintain its operating margin levels. (Hoffman, 2011) These factors led to CEO, Reed Hastings’ decision to increase monthly subscription prices and restructure its operations by separating the DVD by mail and streaming services. The goal was to rebrand the DVD by mail business to Qwikster to allow Netflix to focus on streaming services as a means to reduce shipping costs incurred from DVDs by mail. Consequently, customers were displeased, causing a drastic loss of subscribers. Evidently, the financial outcome of this decision negatively affected Netflix’s brand and their position in the market it once dominated.

Recommendations1. Maintain DVD by mail service as well as streaming. Emphasize marketing its streaming

services. Cancel Qwikster and maintain monthly prices.2. Develop and integrate a VOD platform/service3. Create and provide exclusive content

Basis for Recommendations1. Cancelling the Qwikster brand and maintaining its monthly prices will lure lost subscribers, and promote customer satisfaction by eliminating inconvenience and facilitating accessibility. The attempt to rebrand the DVD by mail service and separate the streaming service directly contributed to the dramatic loss of subscribers, thereby weakening the brand that was valued by subscribers primarily for its effective customer preference database technology and price structure. 2.) By offering a video on demand service, Netflix may be able to expand its subscribers’ connectivity preferences and choices through a new platform. Amazon Prime Instant Video currently allows any member to instantly watch individual videos for a small price. With the rise of competitors in the market, it is critical that Netflix maintain competitive. Therefore, a video on demand service would satisfy shifting customer demands and preferences. 3.) With rising new content costs, Netflix would likely gain a strong competitive advantage by emulating premium channels such as HBO or Showtime, who enjoy the benefits and profitability


of having their own exclusive content. As opposed to acquiring pricey new contents, Netflix can focus on the creation of its own exclusive content as a means of differentiating itself from other competitors. This, in turn, will bring back value to the brand and promote long-term growth for the streaming business.

Discussion:

According to Michael Porter, the three competitive strategies for outperforming other corporations are cost leadership, differentiation, and focus. (Wheelen, 2015). A successful company should incorporate more than one of the generic strategies. Netflix can determine the best strategy to use in new business pursuits by evaluating each strategy’s contribution to their success or failure. Netflix can regain its dominant position in the market by reestablishing competitive advantages through a proper utilization of a differentiation focus strategy from Porter’s competitive strategies (Exhibit 1). The alternative for Netflix is to continue its attempt at rebranding through the separation of services, while straying away from a cost leadership strategy by increasing their prices. The risk in doing this however, is that a Netflix must be able to ensure that the price increases directly relate to higher quality and that prices are not too far above the price of the competition. Netflix would face too great of a risk against many competitors (Exhibit 3) pricing similar services below them. According to Porter, in order to be successful, a company must achieve one of the previously mentioned generic competitive strategies, (Netflix’s cost leadership). Without a cost leadership strategy, Netflix risks being “stuck in the middle” of the rising competitive marketplace without a competitive advantage (Business Set Free, 2013) (Exhibit 1) . The options grid (Exhibit 2) should serve to prove that all the recommendations together adhere to a combination of a cost leadership and a more effective differentiation strategy to eliminate the need for price increases.

Next Steps: Prior to implementation of recommendations, the first step suggested is to produce apology letters to all lost subscribers in efforts to demonstrate the company’s value in its customers. The drastic number of subscribers creates sense urgency in regaining subscribers; therefore, CEO Reed Hastings himself should execute this first step within the next 2 weeks. Netflix currently has a subscriber base that is primarily built on early adopters. The next step would be to offer these individuals free VOD access. These individuals will then support the new service and in turn, create buzz to help market the new service.


EXHIBIT 1


(Business Set Free, 2013)


Exhibit 2

OPTIONS GRID – Netflix

Option 1 Option 2 Option 3Description of Option

Separate the DVD mail in service as Qwikster from streaming only as Netflix, and increase prices

Maintain DVD mail service and streaming service as Netflix; maintain prices

Cancel Qwikster, Maintain DVD mail service and streaming service as Netflix, improve services (provide VOD service and exclusive content)

Overall Assessment

Do not recommend because of inconvenience to customers causing loss of subscribers, and stock decline

Do not recommend due to weakening position in competitive marketplace; Rise of competition yields change/improvement;No changes causes redundancy

Recommend because of expected revenue growth from improved and more attractive services to enjoy; increased customer loyalty from convenience and easy of accessibility, and long term growth from benefits of new content

Strategic Fit (Core Competencies)

Allows businesses to operate with different cost structures with increased prices

Retains the value and identity of the brand, with a preferred/optimal low monthly price option that promotes customer loyalty

Provides strong competitive advantages and yields market dominance; increases brand value through the ability to relate subscriptions to better services and content exclusivity

Financial Attractiveness

Increased prices will yield decline in profit from loss

Profits may or may not remain stagnant due to rising

New services, content, and low prices will yield strong financial outcome in short


of subscriptions competitors and possible loss of competitive advantage

&long run due to increase in subscriptions, and market share benefits

Noteworthy Risks

• Loss of subscribers from inconvenience• Lack of competitive advantages needed • Position in the market declines• Customer satisfaction is ignored; Customer loyalty is lost from inconvenience of two websites• Yields declining market growth

• Flat market share• Yields declining or no market growth • Lack of competitive advantage due to increasing competitors with better services to meet shifts in customer demands

•. Company remains stagnant

• May lead to strong or threatening competitive reaction• Improving services may not attract enough subscribers to repair the financial damage caused, which could lead to decline in stock prices• Costs of developing new content and VOD services may be greater than revenue generated


EXHIBIT 3 – Intense Rising Competitive Marketplace

BIBLIOGRAPHY


Hoffman, Alan. (2011) Netflix, Inc. The 2011 Rebranding/Price Increase Debacle. Case 12 from Chapter 6: Concepts in Strategic Management and Business Policy (9TH ed.) Waltham,

MA: Bentley University.

Wheelen, T., & Hunger, J. (2015). Concepts in strategic management and business policy (9th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

Your Small Business Competitive Advantage • BusinessSetFree.com. (2013, April 21). Retrieved June 15, 2015, from http://www.businesssetfree.com/small-business-

competitive-advantage/

http://www.businesssetfree.com/small-business-competitive-advantage/

http://www.businesssetfree.com/small-business-competitive-advantage/

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NETFLIX - STRATEGY memo