Respond to the following questions:

Netflix was able to gain a competitive advantage over its chief rival Blockbuster. Discuss
the Netflix value proposition and how it successfully gained and advantage over Blockbuster.

Identify and describe some of the technology innovations that Netflix was able to exploit
and how these innovations contributed to competitive advantage.

Netflix is often used as an example of disruptive innovation. Using the LIRC and the
internet, research the concept of “disruptive innovation” and then discuss how Netflix fits the
model of disruptive innovation.

Consider what role technology played in achieving the disruptive innovation that

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provided Netflix with a competitive advantage.

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Netflix gained a competitive advantage over its main competitor, Blockbuster, through offering

its innovative DVD services, and later, online streaming subscription services (Noren, 2013). In
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a market where Blockbuster was the most recognizable brand name, Netflix entered and took on
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its major competitor directly. Netflix had a simple value proposition that successfully gained an

advantage over Blockbuster. In the beginning, all that Netflix offered was a subscription service
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that offered DVDs as a mailing service. The competition was not structured for delivering this

type of service as they rented or owned floor space where they kept their products. In order for
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Blockbuster to receive business, customers would have to physically visit locations and browse
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through their current on-hand selection.

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Netflix has taken advantage and exploited many technological innovations that

contributed to its competitive advantage since its start in 1997(Mohammed, 2018). Netflix fully

understood the leverage they would have over their competitors by understanding the importance

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 of creating a data warehouse that has never been used before (Bourgeois, 2014, pg 47).

According to Madrigal (2014), Netflix has an algorithm that has created 76,897 unique ways to

describe types of movies. To be able to do this, Netflix analyzed and tagged every movie and TV

show that has ever existed from their stockpile of data that no other company, like Blockbuster,

has ever seen (Madrigal, 2014). This stockpile did not appear from thin air, but rather, Netflix

paid people to watch movies and tag them with metadata(Madrigal, 2014), otherwise known as

“data about data” (Bourgeois, 2014, pg 47). It is important to note that when a database is being

designed, a data dictionary that defines all the fields and structures of the database has to be

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created to hold metadata and make it meaningful (Bourgeois, 2014, pg 47). Netflix used its

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metadata and continued to analyze actual customers viewing habits and ratings. This is a major

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way that they created a competitive advantage for themselves through the use of understanding
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their data. The goal is to keep customers, and Netflix focuses heavily on providing customers

with recommendations that are specifically tailored to them because they understand that if they
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show customers they know them, the customers are likely to stick around (Madrigal, 2014).
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Netflix is a company that used disruptive innovation to initially capture a piece of the
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DVD rental market space. Hutt gives Christenson, Raynor, and McDonald the credit for creating

the term disruptive innovation (Hutt, 2016.) In an article in the Harvard Business Review,
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Clayton, Raynor, and McDonald assess that many people have used the term incorrectly. In
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general, people refer to disruptive innovation when a new competitor enters the market, and the

“names” of such marketplace stumbles (Christensen, MacDonald, & Raynor, 2020,) An example
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says Hutt is that of Uber joining the ride for a fee, or “the taxi market” (Hutt, 2016). This was

not disruptive innovation as the concept of a Taxi was already in existence. In the case of Netflix,

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 it is different. Initially, Netflix went after the customers that were underserved by Blockbuster.

It’s not that Blockbuster did not innovate to stay on top of the market, but they just were not

reaching the right customers. The problem for Blockbuster was that it continued its business in a

way that only kept on serving its most profitable customers at the time. So the disruptive

behavior was that Netflix targeted the underserved market at a lower price to get a foothold in the

total market of DVD rentals (Hutt, 2016). Netflix also served a part of the market that

Blockbuster did not serve at all in such that it made it super convenient for the consumer by

mailing DVDs to the customer and providing a return mail envelope to mail DVDs back. As we

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know today, Netflix still has a DVD subscription but its mainstay and current success is a fee for

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streaming service model (Noren, 2013).

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So if we look at how Netflix captured its market share, we need to look at what
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Blockbuster did wrong or could not counter fast enough and how Netflix used technology to
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create its competitive advantage. The first opportunity that Netflix exploited was the entire
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structure of the movie rental business. Blockbuster had to have a physical location that the

customer could visit, pick up and return the rented DVDs or VHS tape to. Netflix never had to
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pay for the costly rental space in every town as Blockbuster had to. When the DVD disk was
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widely accepted by consumers, Netflix climbed into the marketplace. Netflix never offered VHS
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tapes because it would have been cost-prohibitive to mail the bulky tapes as well as having to
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pay for the return label. Netflix only worked with the DVD/Blu-Ray disks which was much

easier and less costly when using mail services. (Noren, 2013) Another opportunity that Netflix
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exploited was the fact that Blockbuster would charge exceedingly high late fees that were strictly

enforced. This is also something that Netflix focused on when it initially entered the market, as it

used its “no late fees” proposition to market to the customers (Noren, 2013). The Netflix service

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 model has always in its entirety been run as a web-based service. For a subscription fee the

Netflix consumer could watch as many movies as they wanted to with the caveat being that the

new DVD would only be sent out once that old DVD was received by Netflix. A consumer

could create a list of DVDs that they would want to watch and simply pay a constant monthly

fee. In the subscription business model, the business creates a constant stream of income,

something that already existed in the physical world, like gym membership fees. The advantage,

however, comes from the fact that the business model had a digital, virtual backbone that is able

to adapt to the world around it. The premise of the subscription model is that not everyone will

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use the service to its fullest benefit, however, will still continue to renew their subscription as it

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is an automatic payment that they do not have to think about. Digital subscription models offer

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two additional advantages in that it is not complex to run and it offers high profit potential
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(Noren, 2013). With that being said, for Netflix to continue to be successful, besides providing

new movies and tailoring watching experiences to its customers, it simply needs the customers
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card on file and everything else falls into place. Most customers prefer the subscription type of
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model because no cash is changing hands, it could be canceled or changed at any time, and is

hassle free. Although the customer may cancel at any time, Netflix still has the ability to charge
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for lost or unreturned DVDs. (Noren, 2013).

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Conclusion
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Being a Netflix subscriber for many years allowed me to reduce my cable fees more than the

price of Netflix. Netflix is still changing the marketplace and are facing more competition than

ever. The slew of new streaming services that you can now sign up for is proof thereof. Netflix

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 now has to work on not becoming the next Blockbuster and innovate to stay ahead and be

relevant.

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References:
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1. Bourgeois, D. T. (2014). Information Systems for Business and Beyond. Saylor.org.

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Licensed under Creative Commons (CC BY) Attribution.

2. Christensen, M., MacDonald, R., & Raynor, M. E. (2020, June 18). What Is Disruptive

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 Innovation? Retrieved from https://hbr.org/2015/12/what-is-disruptive-innovation

3. Hutt, S. (2016, June 25). What is disruptive innovation? Retrieved from

https://www.weforum.org/agenda/2016/06/what-is-disruptive-innovation/

4. Madrigal, A. C. (2014, January 2). How Netflix Reverse Engineered Hollywood.

Retrieved May 22, 2016, from http://www.theatlantic.com/technology/archive/2014/01/how-

netflix-reverse-engineered-hollywood/282679/

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5. Mohammed, S. (2020, May 12). How Did Netflix Build Its Sustainable Competitive

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Advantage? Retrieved from https://medium.com/@shahmm/how-did-netflix-build-its-

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sustainable-competitive-advantage-3b3c7943c897
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6. Noren, E. (2013). Digital Business Models: Analysis of the Netflix Business Model.
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Retrieved May 22, 2016, from

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https://web.archive.org/web/20170407030229/http://www.digitalbusinessmodelguru.com/2013/0

1/analysis-of-netflix-business-model.html
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