Marketing Strategy - Netflix versus Blockbuster - Case Study Example

Module Competition in the Movie Rental Industry in 2008: Netflix & Block Buster Battle for Market Leadership A company’s strategy is its lifeline in developing and maintaining competitive advantage over rivals in the market. One such avenue is through focusing on consumer convenience and preempting changes in the market. In the movie industry, there has been shift from traditional company-market interaction due to advent of new technology which enhances consumers’ opportunities of viewing movies. Out of this, the movie rental industry has grown in all aspects including the competitiveness. Two of the most visible players in this market are Netflix and Blockbuster where market leadership has gone to the one who is able to have a strategy for competitive advantage over the other. The two thus form a good case study through which the major problems that face organizations can be studied. An in-depth analysis of the companies will be undertaken through a brief background on the two in the movie rental market followed by diagnosis of their situations. A competitive and performance analysis will then be undertaken with recommendations on the way forward being generated. BACKGROUND Netflix was started in 1997 by Reed Hastings and 10 years later had already taken over market leadership in movie rental services. Figures such as $1.2 billion in revenues, 100,000 movies in their catalogue and 7 million subscribers are quite enviable in the market. The main source of their dominance has been pioneering online movie renting through subscriptions (Thompson, Strickland and Gamble). Blockbuster on the other hand enjoyed early market domination since its inception in 1985 by David Cook (Blockbuster.com 2009). Its main source of advantage was availing movies at a much cheaper rental rates through negotiating deals with the major film studios thus reducing its rates to even just a tenth of competitors’. Blockbuster’s competitive advantage was nullified by Netflix’s focus on internet adoption. The two firms are still competing in a highly competitive market as stated by Netflix Inc. (6). Diagnosis of Netflix’s and Blockbuster’s Competitive Situations. Netflix is at the moment the market leader but is facing cutthroat competition from a resurgent Blockbuster which re-strategized and started slicing Netflix’s market share to an extent that forced the later to reduce its subscription fees leading to drop in its stock prices from panic. Other competition is also being felt from other albeit smaller rivals such as Redbox. Netflix (6) is also in recognition that the movie rental market is subject to drastic and rapid changes since customers have multiple options to which they can swiftly shift spending. New technologies are also influential in the market and competitors are gradually recovering from Netflix’s initial onslaught and affecting Netflix’s competitive advantage. Blockbuster is on a recovery mode from losing its leading position in the market and has adopted new strategies that have generated strengths and opportunities in the market. However, loss of reputation, slow adoption of technology and the global economic conditions make the path to recovery for Blockbuster much difficult. CASE ANALYSIS The structure of the analysis will be a market analysis for both Netflix and Blockbuster through Porter’s Five Forces followed by SWOT analysis. Porter’s analysis consists of five considerations; the threat of new entrants, the suppliers’ power, buyer power, substitutes and competitive rivalry. To begin with, the threat of new entrants to Netflix and Blockbuster is diminished due to the fact that the movie retail industry requires a large catalogue of movies and well established channels of distribution in order to fulfill customer requirements and in cost effective ways. Besides, Netflix has established state-of-the-art distribution technologies and economies of scale which would be quite difficult for new entrants to replicate. Hence, it can be concluded that the two movie retail firms are considerably safe from new entrants. The next item in Porter’s analysis is the bargaining power of suppliers where the trend that has been sustained since the turn of the millennium is online subscriptions. Online distribution denies buyers the opportunity to make concentrated subscription groups which may give them power plus online rentals occur at a much retailed level hence lack of power that would arise from bulk bargaining. The buyers however are tied to their subscriptions by termination fees hence may switch from one firm to the other easily which can be viewed as a source of power. Internet consumers are also quite knowledgeable hence their awareness of the best rates makes this switching even more possible. In terms of the bargaining power of suppliers, Netflix and Blockbuster have to deal with very considerably powerful suppliers based on several facts; the qualified suppliers are few and the item being supplied is critical for continuous operations. The two rental firms have to sign revenue sharing agreements with movie suppliers besides also paying content license fees. Besides the content, the other category of suppliers is the computer portal management systems to enhance online packaging and sorting and the actual distribution of the movies. However, the fact that movie studios need to distribute to the largest audiences possible and that computer management systems are in need of firms to be in operation means that Netflix and Blockbuster enjoy mutually beneficial relationships with the two sets of suppliers hence the bargaining power of both is effectively manageable (Gamble and Thompson 305). The threat of substitution is very real in online movie rental industry since consumers have access to several other options of accessing movies. Some of these alternatives include movies from cable television, watching movies at the theatres which may be particularly attractive since this is the main focus of movie premiers and also the experience itself, real-world and virtual movie vendors. Satellite and cable television in particular offer pay-per-view movies which are just as convenient as online rentals. The threat of vendors also becomes particularly serious since prices of DVDs compete favorably with subscription fees. Netflix and Blockbuster have to contend with substantial likelihood of being substituted (Faloye et al. 3). The last item of consideration in Porter’s analysis is competitive rivalry within the movie rental and retail industry. There is fierce competition on all fronts in the market not just between Netflix and Blockbuster but also as Netflix Inc. (6) identifies, from outlets such as Wal-mart, Amazon.com, Best Buy and Movie Gallery. Branding and reliance on preferences are difficult undertakings since consumers are more inclined to deal with the firm providing the most competitive prices (Guthrie 9). Many of the benefits offered by Netflix have been replicated by fellow competitors such as Blockbuster hence can no longer be viewed as competitive advantages. Netflix does however seem to bear competitive advantage based on its well established scalable operations model, extensive library, home delivery and convenience (Griffin and Moorhead 58). Porter’s analysis of the movie rental industry reveals that supplier and buyer bargaining power and the threat from new entrants are not a major concern. The other two items i.e. the threat of substitutes and the competitive rivalry are however serious considerations that should be given weight in the two companies’ future strategy. To make recommendations for such strategies, a SWOT analysis is first necessary. Netflix SWOT Analysis. The main strengths that Netflix enjoys include a comprehensive library with numerous titles hence both actual and perceived availability of movies. The online portal used is friendly and user-minded in development. Besides this, Netflix enhances convenience through unlimited rentals and providing for easy subscription reversal. Its strong relationship with movie studios and a good reputation with the customers are also important strengths (Gamble and Thompson 307). A strong recommendation system has won it many customers and is considered a major strength over competitors (Rosenberger, Nash and Graham 89-94). The main weakness of Netflix is that it focuses on internet users only hence missing out on a larger market. Low volume customers are also alienated while there is the problems of delay of DVDs. Opportunities include the growing use of video streaming, the advent and increasing popularity of downloading content (Maddox 9), and the opportunities to partner with game manufacturers. The high competition, increasing government regulation, numerous substitutes and rapid changes in technology are the main threats faced by Netflix. Blockbuster SWOT Analysis. The main strengths that Blockbuster enjoys include diversification of the channels of delivery through actual stores, vending machines and online avenues. Blockbuster is also not limited to movie as they also offer gaming rentals. Moreover, Blockbuster has global market coverage and fits the needs of low volume movie downloads consumers. However, their loss of brand reputation and market leadership to Netflix are weaknesses besides experiencing considerably high expenses for operations. Shifting of policies and strategy may confuse the customers and the inefficient distribution hurts the planned recovery. Video streaming technology, increased popularity of game rentals, home delivery and the existing market awareness of Blockbuster’s existence are opportunities that can be built on. Like Netflix, Blockbuster is also threatened by increased government regulation, dynamics of changes in technology, heightened competition in the movie rentals market and lastly general declines in the DVD rental industry (Ferrell and Hartline 444). RECOMMENDATIONS 1. Netflix Based on Porter’s Five Forces analysis and the SWOT analysis, it can be seen that Netflix is operating in a market environment that is not only competitive but also changing. As such Netflix should consider several adjustments to its strategy (Mithas and Lucas 4-6). The suggestions provided are deemed to be within the reach of Netflix both financially and operationally. Recommendations that may help Netflix maintain its position as a market leader include; Netflix should build upon its reputation of a comprehensive catalogue through expanding it even further with the latest movies. Partnerships with both major and independent movie studios should be strengthened. The pros of this move is increased reputation and better services while the drawback here is its implications on expenses Netflix should embark on a well-planned corporate responsibility mission to strengthen it as a brand as it heads into what is possibly the maturity stage in its life cycle (Wagner and Hollenbeck 264). Rentals to schools are an avenue that may be pursued. A brand reputation which customers can identify with is an advantage especially in the maturity stage. Netflix should consider charting an expansion strategy in terms of variety (music and games besides movies) and geography (going global). The advantage of this is achieving wider markets while challenges may be operational and increased expenses. Finally, Netflix should embark on an aggressive marketing campaign highlighting the previous recommendations. 2. Recommendations for Blockbuster The analyses indicate that Blockbuster is a company on a recovery strategy and lost reputation besides performing poorly financially (Yahoo! 2010). The main considerations in establishing the considerations for Blockbuster are its financial predicament and status of playing catch up to Netflix. The recommendations will center on financial performance and regaining its customers: Adoption of the latest and best technology which will have the advantage of reducing operational expenses and providing better services to the customers. The drawback to this is that the dire recent financial performance may translate to further ruin in case developments are to be capital intensive. Targeting niche markets is a sure way of managing the ever increasing competition in the industry especially with Netflix’s financial might. Blockbuster could concentrate on gaming services and build an unassailable lead here. Blockbuster needs to concentrate on a strategy that will minimize expenses and increase revenue, possibly through undertaking a thorough check on their internal environment. The employees should be trained to increase efficiency and service delivery. CONCLUSION Netflix and Blockbuster are the two major players in the movie rental industry. The industry outlook based on Porter’s analysis indicates that the movie rental industry is under limited threat of suppliers, buyers and new entrants, while substitutes and competitive rivalry pose quite serious questions on the futures of both companies. In light of this, SWOT analysis is necessary to establish the specific challenges and score-points of both companies with relation to their internal and external environments and the findings utilized in generation of recommendations for both companies. Recommendations for Netflix are based on the view that the company is heading towards a maturation stage while those for Blockbuster are on the premise that the company is on a recovery mission. The pros and cons have been taken into consideration and the recommendations are within reach for both companies. A conclusion can be arrived at that both companies, though in different positions in the market, are in need of strategic restructuring as they head into the future due to several problems and issues. Works Cited Blockbuster.com. Company Overview. Web. 15 Oct 2011. Faloye, Angela et al. Integrated Company Analysis. USA: Coinstar, 2010. Ferrell, O. C. and Hartline, Michael. Marketing Strategy. USA: Cencage Learning, 2010. Print. Gamble, John and Thompson, Arthur. Essentials of Strategic Management: The Quest for Competitive Advantage, second edition. USA: McGraw-Hill, 2010. Print. Griffin, Ricky and Moorhead, Gregory. Organizational Behavior. USA: Cencage Learning, 2010. Print. Guthrie, Kevin. When Books are Bytes, What adds Value? JSTOR, 2010. Web. 14 Oct 2011. Maddox, Braxton. Crafting and Executing Strategy: Concepts and Cases, Netflix, 14th edition. USA: McGraw-Hill, 2004. Print Mithas, Sunil and Lucas, Henry. “What is your Business Strategy?” IT Professional. Vol. 12, no. 6, (2010), 4-6. Netflix Inc. Annual Report. Netflix, 2006. Web. 13 Oct 2011. Rosenberger, Larry, Nash, John and Graham, Ann. “Blazing the New Digital Trail.” Business Strategy Review, vol. 20, no. 1, (2009), 89–94. Wagner, John and Hollenbeck, John. Organizational Behavior: Securing Competitive Advantage. New York: Routledge, 2009. Print. Read More