Netflix meets Porter

When two game-changers collide, can one learn

something from the other?

This essay was written for the Strategic Practice course,

taught by Prof. Richard Gerstenberg.

Ana Fernanda Corbalá Naranjo

M.A. Management

Karlshochschule International University

acorbala@karlshochschule.de
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 2

Table of contents

1. Introduction 3
2. Literature review 3

2.1 Tracing back strategy: the founders 3

2.2 The emergence and evolution of strategy within the management field 5

2.3 The selected scholar: Porter as key contributor to strategic management 7

3. Case study: How did Netflix became an industry leader 10

4. Netflix through Porter´s perspective 13

4.1 Netflix Five-forces analysis 13

4.2 Netflix Value chain analysis 15

4.3 Netflix Generic strategy analysis 17

5. Scope of Porter´s models 18

6. Bottomline 20
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 3

Netflix meets Porter

When two game-changers collide, can one learn something from the
other?

Both Netflix and Michael Porter have become iconic brands in their own field, one
having revolutionized the entertainment industry through innovative strategy in
practice and the latter by laying the groundwork of business strategy theory. What
insights would arise from matching up strategic management frameworks developed
almost forty years ago with the strategy of one of the most innovative companies
to date? Would Porter´s models be of relevance for Netflix´s strategy development?
Do theoretical propositions meet strategy in practice?

This essay will challenge these questions through an analysis of Netflix´s

business strategy through three of Michael Porter´s most relevant models regarding
strategy; Five-forces, Value chain & Generic strategies.

2. Literature review

2.1 Tracing back strategy: the founders

Before diving into three of the most famous frameworks developed by this
essay´s first game changer, Michael Porter, it is worth to take a glimpse into the
concept of strategy detached from a business management perspective through a
couple of selected theorists. After all, strategy is not a contemporary business
novelty but rather an art of execution and response readiness in complex situations
that has been present in humanity for quite a long time.

For this reason, the development of strategy can be certainly traced to the
so-called heavy lineage of political theorists, whose approaches on strategy were to
the greatest extent related to bellicose contexts. Machiavelli, for instance, was a
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 4

late fifteenth century political theorist who was an enthusiast of terror and power
games claimed through a normative theory that citizens need from their rulers
effectiveness rather than generosity. He reassured that “power, conflict and war are
at the center of strategy.” (Clegg, Carter, Kornberger & Schweitzer, 2012, p.6) Living
amidst a political explosion in Florence not only influenced him to make such dark
statements but it led him to develop “a practical manual of strategic and tactical
advice that allowed leaders to govern their states effectively”. (Clegg, Carter,
Kornberger & Schweitzer, 2012, p.6) For this reason, he is often referred to as being
one of the founders of strategy. Two centuries later, Hobbes found himself
questioning “how might one envisage a society in which people could live together
in peace and in harmony?” (Clegg et. al., 2012, p.8) Then as well, Hobbes came up
with a considerable obscure solution by envisioning a legitimate sovereign in the
form the Leviathan, as a ruler with an outright authority. The idea behind was that
of a social contract, in which people willingly handout power to a being who ensures
peace through its absolute power even if it means making use of violence. “With his
Leviathan, Hobbes delivered the first systematic account of how systems of
interacting contracts could, in theory, produce a society of people in equilibrium.”
(Clegg et. al., 2012, p.8) Lastly, Clausewitz pointed out the tight relationship between
strategy and armed conflicts through his work On War. He illustrated war as “an
act of force to compel our enemy to do our will’ (Heuser, 2014, p. 6) Strategy for
him was not a completely rational process since passions and emotions are central
to its accomplishment and our engagement in it. Overthrowing Clausewitz´
standpoint would be a hard task, notably if we take into account that the Second
World War was a major contributor of current strategic knowledge.

It is clear that far-reaching moments in history depicted the development of

strategy. Whether through a Prince, a Leviathan or a book On War, by early 20th
century we had already gathered a vast compendium of knowledge regarding
strategy. Further detailed elucidation of the evolution of strategy would most likely
result in an interesting hard cover book that dives into the Greek word strategiké,
eastern strategists such as Sun Tzu, the strategy mindset of the Middle Ages, the
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 5

Napoleonic paradigm, more details about Machiavelli, Hobbes & Clausewitz as

some like to call founders of strategy, and further developments of strategy as one
of the only positive outcomes of the World Wars. Nonetheless, a far more interest
matter, at least for the purposes of this essay, is identifying when did one of these
far-reaching moments finally favor management?

2.2 The emergence of strategy within the management field

Acknowledging these couple of founders is of importance because they were

critical precursors of a further development of the conception of strategy within the
managerial field. Multiple authors such as Clegg et. al. (2012) reassure that strategic
management was not officially born until the 1960s (p.9) and it flourished from
economic studies. During this decade research was in a permutation state from a
“deterministic approach to a more contingent perspective where organizations
needed to adapt to their external environment.” (Furrer & Thomas, 2007, p. 5) and
three publications that embraced this particular shift. It was precisely Alfred DuPont
Chandler, through his book Strategy and Structure published in 1962, who began
presenting ideas that worked as the basis of what later on would become the
foundations of strategic thinking. His thesis was quite straightforward, “Structure
follows strategy”. According to DuPont, “a firm would achieve its full performance
potential only if its organizational structure optimally supported the pursuit of its
objectives and could adapt this structure in response to the strategy chosen to
achieve these objectives.” (Richter & Littmann, 2013, p. 800) Chandler was one of
the early scholars to make use of strategy within a business context and giving one
the first definitions of strategy within this framework. Under his judgement, strategy
begins by organizations establishing long-term goals and objectives followed by the
implementation of specific actions and the use of the required resources for the
accomplishment of these goals. Three years after Chandler´s work was published,
Igor Ansoff, who was named the “father of strategic management”, presented
Corporate Strategy. At the heart of Ansoff´s work lied the objective to develop a
resource that could be used by firms to meet their objectives. For this reason, his
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 6

work “contained a series of rigorous processes and checklists designed to help

managers reach strategic decisions.” (Hindle, 2008) One of these resources was the
famous Ansoff Matrix, a tool for people in business and marketing positions to
visualize strategies for the growth of their companies. Additionally, to Chandler´s
and Ansoff´s work, the Harvard textbook “Business Policy: Text and Cases” was
also one of the first to give a definition of strategy.

It is worth to notice that during the emergence of strategic management its

development was somewhat limited to conveying “the required applied knowledge
to business practitioners, rather than to hunting thorough knowledge for pursuing
genuine scientific advancements.” (Dagnino & Cicini, 2017, p. 3) The problem or the
advantage of business strategy, is that it can be approached in multiple ways.
However, one can agree that sometimes an incompetence to find a common ground
nourishes a positive diverse environment. In response to the normative prescriptive
stance that the field had until then, a transition towards a more analytical research
began during the 1970s. According to Furrer and Thomas (2007) strategic
management research during this decade took two main paths. The first one was
oriented towards the process behind strategies in organizations. For instance,
Mintzberg´s and Waters´ Emergent Strategy (1978, 1985) illustrated not only the
way strategies are developed but also the way they are implemented. The second
main research focus during the 1970s was understanding the connection between
strategy and performance. Researchers´ motivation to establish this somewhat new
field as a more rigorous one led to the production of more practical and functional
results and it was already noticeable (e.g. an increased number of companies during
the 1970s began adopting portfolio planning techniques). Until that period of time,
strategy research was mostly qualitative, it was conducted mainly through single
case studies, it had a focus on micro and macro domains, and some of its dominant
frameworks were the SWOT analysis, PESTEL by Francis Aguilar, PIMS studies
and long-range planning.
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 7

2.3 The selected scholar: Porter as key contributor to strategic management

Right at the beginning of 1980s, the Strategic Management Journal (1980),

and the Strategic Management Society in (1981) were established. It was evident
that strategic management research began shifting again during the 1980s. One of
the most noticeable attention shifts was the focus towards micro levels since a great
number of studies “switched their focus from industry structure as a unit of analysis
to that of the firm’s internal structure, resources, and capabilities.” (Furrer & Thomas,
2007. p.6) This can be observed through the work of authors such as Wernerfelt
(1984), who suggested that “strategy should be understood in terms of internal
resources” (Clegg et. al., 2012, p. 17) In accordance to this new focus, two courses of
research were of main interest: transaction costs economics and agency theory.

However, a micro dimension research was not entirely dominant. It was

during this period of time that Michael Porter, the best-known strategy theorist and
so-called guru of strategy, published Competitive Strategy: Techniques for analyzing
industries and competitors (1980) and began changing the way that strategy within
management was being researched.

Porter argued that it was the entire industry´s structure (IO) that would
dictate an organization´s success.

Following this idea, “the industry structure will largely determine

conduct, which in turn determines performance, and therefore actual
managerial conduct can be ignored and performance can be explained
by structure, a perspective that has been coined the structure-conduct-
performance (S-C-P) approach” (Clegg et. al., 2012, p. 49)

In other words, it is the characteristics of the external environment what

determine a company´s profitability. Porter reassures that the main purpose of
strategic management is ensuring that the company occupies a competitive spot in
this environment. This is what Porter called a Sustainable Competitive Advantage
(SCA) and to have a leverage in this matter Porter introduced the Five-Forces
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 8

Model. Through this model managers are able to have a clear picture of the
competitive structure of the industry. The model was designed to grasp how much
room for maneuver do customers have (Bargaining power of customers), how much
pressure the suppliers can exert on the organization (Bargaining power of suppliers),
how complex it is to enter an industry (Threat of new entrants), how many products
are in the market that can replace the company´s (Threat of substitution), and finally
how strong is the competition in the industry (Intensity of competitive rivalry).

Interestingly, Porter did not remain fixated in external strategy research for
too long since he moved on to publish the Value Chain Framework in 1985 through
his Competitive advantage book. This framework stood as a tool for analyzing
companies´ internal processes in order to identify how and where exactly the value
is added. It is worth to mention that throughout time he kept micro and macro
dimensions into account in his work, as a matter of fact he later developed the
Drivers of competitiveness model which includes a “distinction between
macroeconomic factors that set the broader context in which firms operate,
microeconomic factors that have a more direct impact on firm productivity and
endowments that affect both of them.” (Ketels, 2016, p.14). Porter emphasized
through the Value Chain framework that it is not through looking at the final service
or product that one can understand a company´s competitive advantage. It is rather
by understanding that it is within each one of the processes along the value chain
where potential added value is hidden. One can see it as a Lego puzzle; every other
company might have the exact same pieces to build its organization but it is only by
understanding the potential of each piece of your puzzle pieces that you can build
a taller and stronger tower and stand out from the rest. Porter classified those main
puzzle pieces into primary activities (Inbound logistics, Operations, Outbound
logistics, Marketing & sales, and Services) and support activities (Procurement,
Technology development, Human resource management, and Firm infrastructure).
This framework broke new grounds back when it was published but more than that
it has maintained relevant. As a matter of fact, it is recognized as a “powerful tool
for disaggregating a company into its strategically relevant activities in order to
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 9

focus on the sources of competitive advantage, that is, the specific activities that
result in higher prices or lower costs” by the Institute for Strategy and
Competitiveness from the Harvard Business School.

Another key contribution from Michael Porter was the concept of Generic
strategies. Back in 1980, Porter proposed three types of strategies to leverage
competitive advantage from which a company must appoint in order to maintain a
long-term profitability; i.e., Cost leadership, Product differentiation, and Focus. Cost
leadership is one of the most common strategies; nonetheless, “a firm following a
cost leadership strategy must find and take advantage of all sources of cost
advantage to sustain its position; only then can it command prices at or near the
industry average that will result in above-average returns” (Clegg et. al., 2012, p.69)
A company that has adopted this strategy is the Spanish low-cost airline Vueling.
Product differentiation strategy aims attention at offering a unique product or
service that stands out from competition. This strategy “is effectively implemented
when the business provides unique or superior value to the customer through
product quality, features, or after-sale support” (Allen, Helms, Jones, Takeda & White,
2007, p.10 ) and it usually favors the ability to implement premium costs. Finally, a
Focus strategy is implemented by targeting a sure-enough narrow market. According
to Clegg et. al. (2012), by targeting such a specific segment your objective becomes
meeting its needs while achieving customer loyalty. The focus strategy can either
be oriented towards addressing a specific portion of the market with needs that
have not been met by your competitors or towards a cost focus that can be achieved
by developing specific processes or equipment that allow a preservation of lower
costs.

Porter is the selected scholar for this essay because he was, and still is to
some extent, a true game-changer of business strategy. His work represents such a
great relevance that the Harvard Business School and Harvard University
established the Institute for Strategy & Competitiveness to host his research. Not
only did he develop the previous models but he also went to develop a series of
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 10

frameworks throughout his career such as the Value-based health care delivery,
Drivers of competitiveness, the Diamond model, Clusters, and Creating shared value.
According to HBS; his extensive research is widely recognized in governments,
corporations, NGOs, and academic circles around the globe, his research has
received numerous awards, and he is the most cited scholar today in economics and
business. Dr. Porter’s work has defined the modern strategy field.” However, this
essay will focus on the Five-forces, the Value chain and his Generic strategies
models to analyze the strategy of the case study as an attempt to challenge whether
Porter´s frameworks encompass all the dimensions necessary nowadays to develop
a business strategy and to question whether these two business icons could feed
from each other.

3. Case study: How did Netflix became an industry leader

The second game-changer is Netflix, one of those few companies that have
truly managed to disrupt an entire industry. In the same way as Airbnb is changing
the way we do tourism and Uber is changing the way we commute, Netflix is
reshaping not only the way we watch television but also what we watch and when
we do it. Because of its innovative approach to streaming, viewers have now access
to a catalogue of thousands of films and series that can be accessed any time
through a tablet, a phone or an “old-school” television. By taking a look into the
company´s numbers its success becomes even more evident. According to Statista´s
reports the company's annual revenue in 2018 amounted to 15.8 billion U.S. dollars
and in the fourth quarter of the same year, it had over 148 million streaming
subscribers worldwide. In addition, a performance review of the company by
Macrotrends LLC disclosed that Netflix EBIT for the twelve months ending
December 31, 2018 was $1.605B, a 91.4% increase year-over-year.

This section will dive into the strategy that took a small DVD rental business
founded in 1997 into a giant that “led the stock trade in 2018” (Vlastelica, 2018) out
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 11

of the five technology giants (FAANG) trading publicly in the market today.
Furthermore, it will be challenged whether Michael Porter´s frameworks, namely
the Five-forces, the Value chain model and the Generic strategies models, are still
of relevance by analyzing its scope through this case study.

The first question is then, how was Netflix transition from being a DVD mail-
delivery rental service to being the ultimate leader of Over-the-top (OTT) media
services? The origins are traced back to when its founder, Reed Hastings, saw an
opportunity to offer customers an uncomplicated access to DVDs, which was a fairly
new technology at the time and therefore not everyone had access to. Nonetheless,
ever since the company was founded it was evident for Hastings that the future of
the company was in video streaming. Back in 2005, Hastings stated that the
company´s strategy was to be ready when video-on-demand happened. For this
reason, the company is called Netflix, not DVD-by-Mail. Netflix was in preparation
stages towards an internet-based future. However, in parallel to heading to that
future the company had still to leverage its competitive advantage, expressly
towards Blockbuster. Goldman Sachs analyst, Heath Terry, expressed his
concerns; “we thought that Blockbuster and then Wal-Mart were ultimately going to
squeeze the profit out of Netflix in pretty short order”. It was, however, by 2010 that
Blockbuster “filed for bankruptcy and put itself up for sale for the starting price of
$290 million.” (O´Neill, 2011)

But what happened in between and how did Netflix play a major role in
Blockbuster´s breakdown? During that period of time Netflix took a couple of good
decisions. Firstly, by 2007, Netflix finally launched its streaming service which
represented a fresh source of entertainment for the market. “Instead of improving
on a current industry, Netflix paved the way for an entirely new industry.” (Perryman,
2014) However, what began a real change for Netflix was the “acquisition of Starz
entire library of 2,500 pieces of content.” (O´Neill, 2011) in 2008. As reported by
Statista, by that year the company´s total revenue amounted to around 1.36 billion
U.S. dollars, which led to discussions with Blockbuster regarding possibilities to
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 12

merge. Needless to say, this was never consolidated because of trust issues which
might have been the last contingency plan for a company that was once the
industry´s leader. Five years later, the company´s strategy began shifting towards
its current main focus which is its content strategy. Netflix realized that it would not
be until it began creating its own content that the company would completely
differentiate itself from any other competitor. For this reason, Netflix paid
approximately $100 million dollars for the production of their first original series
House of Cards starring Kevin Spacey, which was launched in 2013 and was “the
first online-only program to be nominated for an Emmy” (Holpuch, 2013). Netflix had
found the key for their competitive advantage by shifting from a “content acquisition
and distribution network to a content production and distribution platform” (Fragata
& Gosselin, 2018) and has ever since implemented a strategy led by the production
of original content. However, the company took a further step by launching a whole
portfolio of innovations; from its subscription model, an entertainment platform free
of advertisement, a personal content queue, tailored recommendations and most
recently interactive movies and content download for offline viewing. In fact, the
reason why Netflix prospered so early on was because “they were the first to really
figure those innovations out” stated Michael Pachter Head of Research for the
Private Shares Group (as cited in Davis, 2011).

Regardless of its success, Netflix has faced a couple of challenges which are
directly linked to the overall company strategy. The platform is constantly imbued in
original content; however, the costs behind its productions are remarkably high. This
has “put a financial strain on the company, in that original content requires fixed
costs be incurred years ahead of it becoming a revenue stream during the creation
and development phases.” (McAlone, 2017) Nonetheless, the “main advantage is that
owned content assets are permanent assets in that the company is free to exploit
them into the future, whereas short-term content obligations (licensed content)
results in temporary assets that must be written off the balance sheet once the
licensing contracts expire.” (Fragata & Gosselin, 2018) It is for this reason that
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 13

Netflix original content strategy is tightly related to its financial strategy, which
although it entails some long-term debt it is funding its growth.

4. Netflix through Porter´s perspective

Now that we have taken a concise glimpse into Netflix´s strategy

implementation we can incur into an analysis of Netflix strategy through Michael
Porter´s Five-Forces, Value chain and Generic Strategies Model. Porter has been
recognized as one of the main scholars regarding business strategy; nonetheless, an
analysis of one of the most innovative companies to date through his theoretical
propositions will challenge whether his frameworks are still of relevance. A couple
of questions will drive the following analysis: are Porter´s models aligned to the
strategic decisions undertaken by Netflix or do they fall short? Is it fair to say that
his frameworks are still applicable for today´s business contexts?

4.1 Netflix Five-forces analysis

Although Netflix was an industry pioneer, its (1) Bargaining Buyers Power is
fairly high. This is because of the latent prerogative that their subscribers have to
either downgrade their accounts or to cancel them in order to switch to another
platform. In like manner, streaming audiences are increasingly demanding; this is
exacerbated when Netflix prices increase since subscribers to streaming video
services are very sensitive to pricing. Nonetheless, the high buyer power can be
mitigated by offering high quality, fresh content and by being aware of the elasticity
of its pricing strategy.

When it comes to its (2) Bargaining power of suppliers, it is clear that Netflix
is completely dependent of alliances with networks and manufacturing studios,
which can use their advantage not only to increase prices but also to restrict the
content given to Netflix. At the same time, there is a high risk that Netflix major
suppliers decide to make partnerships with its competitors, which would cause a
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 14

major problem of exclusivity or lost of content leading ultimately to a loss of market

share. This is most likely the most critical force but the strategy that Netflix has
adopted to leverage this power is to invest on the development of their own original
content. It is evident that Netflix is aware of the high bargaining power that their
suppliers have, for this reason “Netflix investment in development in pre-production
has exploded fivefold from 34M$ in 2016 to 168M$ in 2017” (Fragata & Gosslin,
2018), which means that the company is already decreasing the power of their
suppliers.

The last dimension is tightly related to the (3) Threat of new entrants that
the company faces. At the moment, Netflix is still the OTT leader but it faces big
competitors such as Amazon Prime Video and HBO Go with vast capital and power
to surpass it and other smaller OTT providers such as Sling or Hulu. There is also
a latent risk of the entry of companies with a similar concept with additional
services, such as YouTube Red which is also following the strategy of original
content but it also offers music functionalities. Another risk is that from the entry
of an indirect competitor with a focus strategy that offer a very specific service that
could simply replace them such as channels offering thematic content like sports.
What Netflix could do to mitigate this power is closely observing the trends of new
entries and consider adding the same services to their portfolio.

As a way to minimize the (4) Threat of substitution Netflix has had a great
success with changing consumers behaviors and promoting binging. However, not
only is there a great deal of services that could substitute Netflix as an
entertainment solution but customers could simply choose another activity; from
doing exercise up to using Facebook. Hastings stated that most of the time Netflix
employees worry about being substituted by companies that offer a similar service,
“but think about if you didn’t watch Netflix last night: What did you do? There’s
such a broad range of things that you did to relax and unwind, hang out, and
connect–and we compete with all of that.” (as cited by Raphael, 2017) The threat
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 15

of substitution is high but Netflix can face it by ensuring that the content they
deliver meets exactly their viewers expectations.

Figure 1. Netflix Five-Forces analysis

Finally, the (5) Competitive rivalry is once again very latent for Netflix. The
biggest threat for the company comes from Disney, “who announced last summer
the launch of its own streaming service and the removal of its films from Netflix by
2019.” (Fragata & Gosslin, 2018) This rivalry would most likely threat Netflix´s
position as the leader of OTT video services. Other competitive threats are still
cable and a possibility of competitors to begin a pricing war.

4.2 Netflix Value chain analysis

For a long time, Netflix´s primary activities within its value chain were mainly
characterized by the development of its digital systems, this is the creation and
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 16

optimization of content delivery software such as its Netflix Open Connect software
and partnerships with internet providers. Nonetheless, since the company has
implemented a strategy of developing its own content this has had an impact on the
primary activities of its value chain. Consequently, its inbound logistics now include
all the management of production of content, legal affairs such as intellectual
property licensing agreements, and certainly since the company is mainly a tech
company it continues developing its internal content management system for global
distribution. Netflix main operations has become not only the movie production but
also the understanding of what motivates its clients. “Thanks to an inconceivably
large database of clients ‘expressed preferences, intentional appreciations,
conscious choices, unconscious reactions and behavioral patterns, Netflix owns a
part of its viewers psyche” (Fragata & Gosslin, 2018) which is taken into account
when doing agile development of new content or licensing selections. For its
outbound logistics, Netflix major task is ensuring that all the content is appropriately
delivered to the viewer and designing a friendly user interface.

Figure 2. Netflix´s Value chain

On the other hand, Netflix ‘s marketing is somewhat peculiar in the sense

that it does not rely in agencies. Instead, the company is “investing more in
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 17

programmatic as part of its $1 billion-plus marketing spend, with the goal of

improving its ability to “do individualized marketing at scale and to deliver the right
ad to the right person at the right time.” (Chen, 2018) The company is very
conservative when it comes to disclosing its marketing strategies but it has also
begun offline marketing to make its original content reach a broader market. Up
until now, its services have been limited to online distributing of films and series but
it could be the case that in the future the company expands to music distribution or
even niche content such as sports events, although the company still rejects this
possibility.

As for its support activities, Netflix´s infrastructure relies on a large team of

IT employees for ensuring the functionality of all the primary activities of its value
chain, strategic partnerships with networks and local production houses, as well as
a legal affairs team. The main concern for its human resources department is doing
the talent recruitment. Finally, the main procurement activities of the company
revolve around securing those strategic partnerships and licensings.

4.3 Netflix Generic strategy analysis

Netflix has been able to change the rules of the game within the whole
entertainment industry because it has done things differently since the beginning.
Its clear differentiation strategy is supported by its broad array of innovations such
as personalized suggestions, queuing function & its cutting-edge platform, but its
main differentiation is followed by its content strategy. The company is making
important long-term investments in original content that other platforms do not offer
such as interactive movies, stand-up shows, original series, original documentaries,
and even locally focused content. Moreover, Netflix has succeeded in delivering this
differentiation image through its branding. “Users talk about "watching Netflix" as
opposed to watching a specific show on Netflix. They often first decide to binge a
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 18

Netflix show and then pick the series. In other words, the platform is driving the
content.” (Lynch, 2015)

Figure 3. Netflix´s Generic strategy

It is even more evident that the company is following a differentiation

strategy when taking a look into their pricing approach. “Netflix last raised its prices
in October 2017, hiking Standard up from $9.99 and Premium from $11.99.” (Fingas,
2019) “Firms that follow a differentiation strategy are usually rewarded for their
uniqueness with the ability to charge a premium price, which should cover the extra
costs incurred in offering the unique product” (Clegg et. al., 2012) With the adoption
of a premium pricing, it is now imperative that Netflix delivers content that keep its
viewers satisfied since their strategy to achieve competitive advantage through
fresh content might end up in the creation of a sea of low-quality alternatives.

5. Scope of Porter´s models

NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 19

Certainly, the analysis of the Netflix Five forces and its internal breakdown
through the Value chain analysis matches up with the company´s selected strategy.
Porter´s frameworks, namely the Five forces model could have been of Netflix´s
help to look at its environment´s threats and take specific measures for long term
strategies such as the minimization of its suppliers’ power by the creation of its own
content, which is backed up by a long-term investment and followed up by an
increase of its premium pricing strategy.

However, because of the time context in which Porter´s models were

published they fail to include dimensions that are imperative to take into account
when shaping a strategy nowadays. “During the 1980s the global economy was
characterized by cyclical growth. Compared to today´s more dynamic markets, the
development taking place in most industries at that time was comparatively stable
and predictable, so that a firm had to optimize its strategies in relation to the
external environment.” (Clegg et. al., 2012) Porter´s critics, such as Larry Downes,
have suggested that Porter´s frameworks have lost sight overtime of currently
relevant dimensions such as digitalization, globalization and in some cases the lack
of regulations of new industries. Interestingly, these overlooked dimensions are
exactly the ones shaping Netflix´s strategy. Even more than being an entertainment
company, Netflix has become a tech-oriented business which means that its most
important strategic decisions are shaped by digitalization and by ensuring its
content is available across the globe. Just as anticipated, after Porter´s models were
published, new business models emerged “in which even players from outside the
industry are able to vastly change the basis of competition in a market.” (Recklies,
2015) So was the case of Netflix, which managed to envision and merge the industry
of entertainment with digitalization and made its content available to subscribers
from more than 190 countries in only 7 years. “The internet has revolutionized and
changed almost all sectors of the economy in the new millennium and has, therefore,
required for additional competitive strategies.” (Pistner, 2014)
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 20

Moreover, “the more regulated industries are, the less meaningful are the
insights a model such as the five competitive forces can deliver.” (Clegg et. al., 2012)
For this reason, the Five forces analysis of the case study disregards the current
challenge that Netflix has to face when entering the Chinese market, which has a
tendency to adopt protectionist regulations. Since the “Chinese government requires
that any streaming service have no more than 30% of foreign content” (Pistner,
2014), Netflix has been building strategic partnerships with local platforms as an
attempt to penetrate the market.

6. Bottomline

Strategy within a business environment is as complex as in a battlefield. It

has been heavily scrutinized but this exhaustive audit will only continue evolving.
This is in response to new consumer trends, entry companies with innovative
business models, and the emergence of technologies that will only keep feeding up
nowadays Leviathan, which we like to call globalization. Porter was indeed a pioneer
and his frameworks are evidently still of relevance which might as well have been
of use for Netflix. Nonetheless, Porter´s frameworks have a couple of blind spots,
which are to be expected because as a business academic his forecasting skills are
bounded. A couple of these blind spots are clearly noticeable with Netflix´s
forefront strategy. All in all, these blind spots are not necessarily bad news, they are
merely indicators that we are now in a new era that calls for greater backtracking.
What Porter´s theory could pick up from Netflix strategy is that (1) an external
analysis of the industry through five dimensions might be too limited because we
are living in a much more unpredictable environment, (2) neglecting technological
innovations as part of a value chain is most likely a luxury that companies cannot
afford, (3) Globalization should always be taken into account, (4) Strategy is not as
simple as following a game instructive, it is about having a clear goal but mostly,
recognizing moments that call for responsiveness.
NETFLIX. THE STRATEGY OF AN INDUSTRY´S GAME-CHANGER 21

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