Americas Business Review - July-August/2020

Porter’s Competitive Strategy:

Netflix Case Study
Prof. Ricardo Britto
Doctor in Business Administration at USP
Dean of the IBS Americas

“Lean” packages of cable TV or other streaming services?

Follow the segmentation of the increasing multimillionaire television
market.

A
t first it was just TV and it was present
in almost 1.4 billion households
on the planet in 2017. In 1972, HBO
was created, and it was the first channel
with exclusive content for subscribers. In
1997, Netflix was created in the USA (Van
Der Werff, 2019). It had a huge success
as the service offered affordable prices,
movies and shows via streaming. The
content was produced by Netflix itself or
by big studios that were hired. The latter
ones, however, realized how profitable the
industry was and entered the market as
well. These tendencies are slow, but they
constantly reduce the number of cable TV
subscribers. Moreover, there is also the
increase of streaming services because
of such companies as Disney, CBS, HBO,
Amazon and others that mainly offer their
own movies and shows (Heritage, 2019).
Given that, the consumer, who already
appears to be a cable TV subscriber, will
pay a lot to access those services.
Many people wondered: “How can I
watch my favorite shows?”. Marketing
professionals make another question
instead: considering the segmentation
of the increasing television market, what
would be the strategy for a company to be
established in the market and grow?
This is what we are trying to answer.
Michael Porter’s Competitive Strategy
(1979) can be helpful in order to answer
some of these questions. He offers an
analysis framework that could help
companies improve their position in the
market and increase competitiveness as
well as financial results in general.

Americas Business Review - Sao Paulo - July-August 2020, pp.08-14. www.ibs-americas.com

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 Americas Business Review - July-August/2020
Among the concepts Porter offers, there is
one that deserves special attention: five
competitive forces in a particular industry:
1. The Threat of New Entrants: new
competitors can change the market share
of existing companies. Apart from this, new
firms can affect the access to resources
for the firms that have already been long
established in the industry.
2. Intensifying Industry Rivalry: competition
tends to increase as new firms might
appear or the industry in which existing
companies operate is relatively limited.
3. Threat of Substitutes: when the prices of
substitute products created by competitors
remain low, the industry becomes less
profitable.
4. Bargaining Power of Buyers: the more
powerful the buyer groups, the less
profitable the industry will be.
5. The Bargaining Power of Suppliers: by
threatening to raise prices or reduce the
quality of goods or services, suppliers
can greatly reduce the profitability of an
industry.
Porter’s Five Forces Framework, Source: Harvard
Business Review, 1979
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Other key concepts of the author include
choosing a strategy and stick to it:
• A cost reduction strategy, in which a firm
achieves dominance over its competitors
and gains greater returns thanks to a policy
of a reduced production and sales costs
without affecting quality.
• A product differentiation strategy. A firm
creates a unique product or a service within
the industry changing design, brand image
or incrementing new technologies, which
reinforces the sense of exclusivity and
brand loyalty and, consequently, generates
higher profits.
• A focus strategy, targeting a specific
buyer group, product line segment or a
geographic market.
In many cases, in order to implement the
chosen strategy, a firm must also develop
more than one of the strategies mentioned
above.
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 Americas Business Review - July-August/2020
Markets where business competes
Porter, M. E. Competitive Strategy: Techniques for Analyzing Industries and Competitors.
New York Free Press, 1980.
Nevertheless, it is hard to predict a
competitor’s future steps and perform
appropriate competitive actions. One
of the solutions is to determine relative
profitability of a firm by subdividing industry
into strategic groups. To undertake an
industry analysis, a company must list all
firms in the industry in “strategic groups,”
and then assess each group according
to the five competitive forces. Secondly,
it is necessary to predict the industry’s
evolution. To anticipate the necessary
strategic adjustments, a firm must consider
the likelihood that the industry will be
affected by evolutionary processes such as
new entrants, innovations, and changes in
consumer segments (Porter, 1980).
As it was expected, the Competitive Strategy
received both praise and criticism. It can
be observed that the use of typologies,
such as Porter’s, reduces the wide range of
combinations that a manager would have
to consider. Some authors oppose Porter’s
view that firms that achieve cost leadership
should encourage competitors to do so as
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well. In addition, as multiple companies
seek cost leadership (or a low-cost
approach), the market gradually becomes
more homogeneous. Thus, the cost leader
would benefit as there would be less room
for differentiation.
It is important to note that Porter’s
thinking has evolved since the publishing
of the Competitive Strategy. In this work,
he emphasizes the importance of the
industry as a whole - that is, the external
environment - in choosing the company’s
strategy. Already in 1985’s, in the book
called “Competitive Advantage” (1985),
he seeks to describe how a company
can gain a sustainable cost advantage or
differentiate itself from its competitors.
Here Porter pays more attention to internal
dynamics, based on the exploration of
unique content or distinct execution mode,
which will enable the company to achieve a
more advantageous position in the market.
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 Americas Business Review - July-August/2020
In any case, the knowledge of Porter’s
strategies - as well as the criticisms and
adjustments to his works is essential
for managers to be able to improve
their performance. The next step will be
examining strategies efficiently developed
in different segments of audiovisual
industry and verifying if the Competitive
Strategy analysis helps understand them
better.
One can note that in a shrinking cable TV
market scenario and given the expansion
of streaming movie and series providers,
each of the main companies in these
segments sought to follow a differentiated
strategy.
Among cable TV companies, some
continued with “fat packages” containing
dozens of channels. Others are betting on
“lean packages” that offer fewer channels
at an affordable price. This is what Sling TV
has been doing: the company was launched
in the US in 2015 and gives access to a small
number of cable TV channels and a large
streaming network (Jason, 2018). Sling TV
can fit into at least two of Michael Porter’s
five competitive forces: a “new entrant”
that launched “substitute products” priced
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lower than those of competitors.
Among streaming services, Netflix, which
in 2018 became the world’s most market
valued entertainment company estimated
at $ 153 billion, has several competitive
advantages listed by Porter. Netflix remains
loyal to its relatively low-cost policy offering
thousands of movies and series produced
by itself or by many other companies. In
order to do this, it applies three competitive
strategies mentioned in the book. First, it
strives to reduce its production and sales
costs maintaining high quality. Secondly, it
differentiates its products by offering some
unique features within the industry in the
form of technological advances. Third,
while prioritizing the US and European
markets, it also tries to attract specific
consumer segments on the periphery of
the audiovisual media world.
It is clear that following its strategy, Netflix
tried to kill two birds with one stone, or
even better, three birds, while focusing
on differentiation, cost leadership and
niche markets. Despite having achieved
unprecedented market success, the
company risks losing its leadership position
due to the dispersed focus.
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 Americas Business Review - July-August/2020
Indeed, it remains unclear whether Netflix
will be able to maintain its policy offering
high quality diversified products at low
prices. Many movie producers refuse to
renew their contracts with other companies
to allow them to show their popular series,
but even if they do, they charge high prices
for that. This is the case of the NBC series
“The Office”, which from 2021 will be shown
only by NBC Universal streaming platform.
Netflix paid Warner no less than $ 100
million to continue showing “Friends” for a
year, but after that the show should move
to Warner Media’s streaming service which
is being created (Van Der Werff, 2019).
Considering this policy, producers use
the fifth competitive force: the bargaining
power of suppliers. By threatening to
raise prices - or withdraw the goods they
produce - they get more money from the
buyer.
Source: disneyplus.com
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In fact, a number of the competitive
forces mentioned by Porter manifest
themselves in the increasingly fierce
competition between Netflix and other
streaming audiovisual media providers.
New entrants threaten market share and
often offer cheaper substitute products.
Not surprisingly, there is also the growing
“rivalry between competitors, resulting
from different factors such as the presence
of numerous competitors of equivalent
strength”.
One of these competitors is Disney, a giant
of Netflix’s size. Stuart Heritage notes in the
article “Streaming TV is about to become
very expensive – here’s why” (2019) Disney
“will launch Disney +, a streaming platform
that … will block a huge amount of content:
Disney movies, ABC shows, Marvel and
Pixar movies, Lucas movies, The Simpsons
and everything else produced by 20th
Century Fox”.
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 Americas Business Review - July-August/2020
Taking this scenario into account, it does
not seem easy, according to Porter (1980),
to “predict a competitor’s future moves”.
Profits may decline, which will require
managers in the industry to have theoretical
knowledge, analytical skills, and good
decision-making abilities. Moreover, the
consumer will definitely suffer the rise in
the price.
The analysis conducted above allows us to
identify the decay of two existing dominant
structures. The first is a cable TV, with
its “fat” packages. In the article “Media
Companies Are Launching Streaming
Services to Survive - Here’s How They
Can Thrive” (2018), Daniel Jackson reports
that in the US, the number of cable TV
households has dropped from 103 million
in 2012 to 92 million in 2017.
While the rise in the number of these
providers seems to be an irreversible
trend, other factors indicate the blurring of
the boundaries between the segments of
audiovisual media. This is the case of Sling
TV, a successful blend of cable TV (with
“lean” packages) and a streaming network.
This fusion may be one of the paths for the
future of the media industry, and managers
and future managers need to look closely
at it.
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Conclusion
The impact of new technologies on
traditional competitive models can be
clearly observed in this particular market
as well as in many others. While Michael
Porter’s vision used to help managers
understand their competitive landscape in
the 1980s and 1990s, nowadays companies
can build their strategies in a much more
complex way. This approach opens new
perspectives for managers, creating
additional opportunities for growth. At the
same time, it brings challenges, especially
for those companies that are having hard
time adapting to new technologies. The
current challenge for managers is to drive
the digital transformation in their firms
as well as being able to reinvent their
strategic options. Organizations that failed
to cope with this dual mission tend to face
growing difficulties in remaining profitable
in the coming years. It is also important
that the society and the government follow
industries’ structural transformations. In the
midst of the great transformations that are
taking place in countless markets, some
key sectors can end up being consolidated
to the point of becoming monopolies, which
leads to reduced competition and the loss
of incentives for innovation commonly
brought by healthy competition between
companies. In a media communication
sector, a monopoly would also bring the
additional risk of losing the desirable
diversity of ideas and points of view. This
is something very relevant for democratic
societies.
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 Americas Business Review - July-August/2020
REFERENCES

Heritage, S. (2019). Streaming TV is about to get very expensive – here is why. The Guardian.
Retrieved from: https://www.theguardian.com/tv-and-radio/2019/jun/27/streaming-tv-is-about-to-get-very-expensive-heres-why

Jason, D. (2018). Media companies are launching streaming services to survive – here is how they can thrive. Business Insider. Retrieved from:
https://www.businessinsider.com/media-companies-are-launching-streaming-services-to-combat-cord-cutting-2018-5

Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York Free Press.

Porter, M.E. (1979). How Competitive Forces Shape Strategy. Harvard Business Review, Vol. 57, No. 2, pp. 137-145.

Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. The Free Press. New York.

Van Der Werff, E. (2019). The future of streaming is the cable bundle. Vox. Retrieved from:
https://www.vox.com/culture/2019/3/15/18225269/streaming-future-cable-netflix-hulu-disney

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