MANAGING INNOVATION IN NETFLIX USING INNOVATION THEORIES

Table of Contents

Executive Summary...............................................................................................................................3
Introduction...........................................................................................................................................4
Blue Ocean Strategy..............................................................................................................................6
Application of Blue Ocean Strategy in Netflix......................................................................................7
Future developments of Netflix using the Blue Ocean Strategy............................................................9
Disruptive Innovation Theory..............................................................................................................11
Application of Disruptive Innovation Theory on Netflix.....................................................................14
Future development in Netflix using Disruptive Innovation theory.....................................................15
Conclusion...........................................................................................................................................17
References...........................................................................................................................................19
 Executive Summary

The main aim of the project is to identify innovation theories used in Netflix, and

implementation of the innovation theories to create an impact in the market and the future

development of the products or services. Netflix is one of the largest organizations in the

entertainment industry, the company offers services such as online video streaming, movies,

series, television shows, and documentation. The project will focus on their products,

customers, marketing strategies, and product future developments. There exist many

innovation theories for developing a strategy to create and develop a new opportunity, the

project will focus on two main innovation theories which include the blue ocean strategy and

disruptive innovation theory.

 Introduction

Innovation is the process of identifying new opportunities, ideas, and concepts, then

establishing the best strategies to create competitiveness in the market. Innovation can also

mean creating more opportunities in the market in a unique way to attract more customers to

the company’s product. Innovation can affect products, systems, processes, or service

delivery (KTimur, 2017) It all depends on what the management of the company wants to

improve. In summary, Innovation is a process of adding value to a product, service, or

process (Tylor, 2017).

Managing Innovation is a strategy undertaken by the organization to create a new

product, service, or process from the initiation stage, implementation stage to the final

consumption stage. As also stated in the definition of management it involves planning,

coordination, monitoring, and administration of processes or activities to attain its goals

(Wajdi, 2017). Netflix being an entertainment industry requires continuous evolution of its

services, and this can be achieved through creating a roadmap on how the services will be

improved, introduced to the market, and marketed. The process of managing innovation as

well involves the same activities with a defined goal to achieve.

The main stages of managing innovation include identifying an opportunity,

implementation, or development, then monitoring the progress. Managing Innovation is a

process of identifying, planning, implementing, controlling, and analyzing the result of the

creativity of the products and services created. It also defines the impact of creativity on the

new opportunity in the market.

The project will explain the application of the blue ocean strategy and disruptive innovation

theory in Netflix in developing their products, how the application affects the demand and

supply model, the inception of the services or products by the customers, and the evolution of
the products with time. The application of the innovation theories will form the main and

critical part of the project since it explains the new opportunities, the reaction of the markets,

and the effects on the profitability of the company.

 Blue Ocean Strategy

The Blue Ocean strategy is a model or a theory that is developed by the management

to advise the organization to move from the existing market to a new market. The red ocean

in this case means all the companies offering the same services at a time and the Blue Ocean

strategy means creating a new market to differentiate the company from the existing

companies (Ferdi, 2021). This process helps the company to reduce the effects of the

competition, increase the sales base and attract new customers. The best time for this strategy

to be developed is during the initiation of a company or a new product. The earlier the

introduction of the product the better, since it creates the demand in the market hence higher

profitability (Rahman & Chaoudhury, 2019). The competition can be reduced through the

introduction of the product to the market earlier than the competitor.

This model aims at making the competition irrelevant and insignificant because it

encourages companies to create new segments which involve innovating the existing

products into new products. The segment in this case means identifying unutilized markets

may be in terms of customers, products, services, or processes. The management should

ensure that the company ventures into the segment-first before the competitors identify the

market.

The main focus of the blue ocean strategy is to create value both in the segment and

the company. The buyer should feel the value or the quality of the product offered, and how

different they are from their competitors (Kim & Mauborgne, 2017). The value can also be

created by offering quality products to the markets at a lower cost, this helps the company to

create new consumers by also ensuring cost-effectiveness. The production cost reduces and

value increases. Competitive advantage is created by shifting the focus from older styles to
new styles, which the competitor might find unbearable hence rendering the competition

insignificant (Koch & Windsperger, 2017). The competitive advantage can be identified by

the focus on the satisfaction of the consumers, the impact on the total sales, the cost of

offering the service or production of the product, the effect on the demand and supply of the

product, and the difficulty of the competitors entering the new segment.

Summary of Blue Ocean Strategy  

           
      Costs    
 
         
  Uncontested markets        
  Create New
  Make Competition irrelevant Value Innovation   Demands
           
           
      Value    
           
Source: (Pancheva, n.d.)

In Summary, the diagram shows that using the blue ocean strategy the buyer value is

maximized and the cost is reduced.

Application of Blue Ocean Strategy in Netflix

Netflix is media offering streaming services for award-winning TV shows, movies,

series, and documentaries. It was founded 24 years ago by Reed Hastings and Marc

Randolph. It started by mailing movies through DVDs to subscribers who used to order

movies through the Netflix website, and when they finish watching they would mail them

back (Schmidt, 2019). Netflix would allow its subscribers to have a monthly package. Netflix

has been growing interestingly over the years, from DVDs to movie streaming websites.

Netflix used mail-order rental model which was described as the process of customers

ordering the movies, then Netflix mailing them through DVDs to Customers. The customer
would then watch them, and mail the DVDs back to Netflix (Bernat, 2018). This model was

so limited that the customers would stay with the DVDs even post one month without

returning them and the company would also be blamed for not delivering the orders.

The Blue ocean strategy would be applied to Netflix by identifying what to eliminate,

raise, create and reduce. Those are the four factors to be considered when applying the

theory. The first factor is to decide what to eliminate, in this case, Netflix eliminated DVDs,

Stores, mailing, and storage (Bernat, 2018). The elimination factors such use of DVDs, to

stream movies online, gave Netflix a competitive advantage since it came with lower costs

and higher values to both the customer and the company.

The next factor would be reducing the prices of obtaining licenses and reducing the

prices of subscribing. Licenses are considered much cheaper than placing an order and

mailing (Mandal, et al., 2017). Streaming online only requires subscription fees and the

innovation has reduced the cost hence making the new services unique.

Creating unlimited movies, series and documentaries would add value to the

company. Creating is another factor considered important in the blue ocean strategy since it

focuses on value (Bernat, 2018). Netflix by providing unlimited movies created a value for

customers since before they could watch a limited number of movies. Value is also created

since movies are created in different languages which suits the targeted customers.

Making easier payments, providing bonuses, and offering comfort to the watchers

would raise the value of Netflix. The payment methods have been made unique by providing

better and faster ways of doing the payment. The payment method is unique since it suits the

location of the user. The customers can also watch the movies in the comfort of their homes

and at them anytime they wish. This has created a competitive advantage because customers

do not need to order movies and wait like they used to do before.
 Eliminate-Raise-Reduce-Create Grid

Raise
(Value
Eliminate (Cost Addition
  Reduction)     )  
 Eliminating the
  use of DVDs    Raising the comfort of watching movies
 Eliminating  Providing easy
  Mailing of movies   subscription  
 Eliminating the need to store  Making many movies available for
  movies subscribers
           
           
Create
(Value
Addition
  Reduce (Cost Reduction)     )  
 Reducing the use  Interesting movies to
  of license   watch  
 Reducing  Creating quality
  subscription cost   movies  
 Creating feedback
button
 Making movies
      visible internationally  
           
Source: (Bernat, 2018)

Future developments of Netflix using the Blue Ocean Strategy

Netflix offers streaming services for the most rated TV shows, series, movies, and

documentaries. Netflix needs to form a strong partnership in the future with local actors,

comedians, and musicians. The partnership with musicians will attract more customers since

most customers will be willing to subscribe to their website to watch songs in their local

languages. The partnership should be such that the partners will promote their songs to their
fans, and once their fans watch through Netflix, the partners are paid. The new content

acquisition will generate enough revenue in the future.

Netflix should focus on reducing subscription fees, and creating bonuses. This acts as

a marketing strategy since the bonus will attract more customers and also lower subscription

fees will encourage more customers to subscribe monthly. The license fees should also be

reduced to encourage many Movie shops to subscribe to the monthly package.

Netflix should expand its territories to countries that they have not reached so far.

With technological advances, the expansion will be much easier. Expansion to the new

market will create a competitive advantage since their coverage will be higher than the

competitors.

Merchandising is a critical part of marketing, Netflix should promote its products and

services through social media accounts, TV, and also through the actors. This can be made

possible through promoting through Ads, Twitter, and YouTube. Netflix should also promote

its products through influencers and actors. This can be made possible by encouraging them

to advise their fans to watch their content on Netflix.

Some licensing agreements are an expense to Netflix, costing more than the revenue.

Netflix should do a cost analysis of their licensing agreement in the future to avoid

unprofitable deals which are too expensive to sustain.

Future focus on Netflix

Raise
(Value
Eliminate (Cost Addition
  Reduction)     )  
 Eliminating
overvalued
licensing
  agreement  Partnership with actors and musicians
 Advance in customer
  comfort
 Free trial to new customers
 Introduction of paid gaming
 
         
           
Create
(Value
Addition
  Reduce (Cost Reduction)     )  
 Create movies in local
   Subscription fees   languages  
     Worldwide expansion  
 Merchandising
 Creating advanced
      technology  
           

Disruptive Innovation Theory

In business terms, Disruption is a process of slowing or changing the course of the

business may by changing the process, introducing a new product, or improving the existing

products, Innovation means the process of coming up with new ideas, products, or processes.

Disruptive innovation means that a company comes up with a new product, service, or

process to change the course of the business operation such as changing the tactic for

competitive advantage (Oroszi, 2020).

 Disruptive Innovation is a process in which expensive and complex products or

services are converted into simpler and cheap products which are easily accessible to the

customers (Danesi, 2021). This theory originated from Christensen when he analyzed the

effect of new entrants in marketing hard disks (C.M.Christensen, 2018). The main concept in

disruptive Innovation theory is the existence of new entrants in the market who design cheap

and simple products which were recently complex and expensive.

The disruption occurs when a new entrant in the market disrupts the already existing

products by offering cheaper products and easy to use. This makes the existing product exit

the market since it is no longer needed by the end-user (Moorhead, 2018) The disruptive

innovation describes the invasion of new products to the market but not already existing

products, this helps in differentiating technological advancements on the existing products

and new products that have invaded the existing market to cause disruption.

Analysis done by (Ostrower, 2018) and (Macharia, 2019) described the characteristics

of disruptive innovation which include the performance of the new products keeps improving

with time, the innovation focuses on cost more than it focuses on the market segment, the

new products are simpler to use and cheaper and features of the innovation are not very

commanding to the market.

Disruptive innovation model (C.M.Christensen, 2018)

The diagram below shows how an incumbent company focuses on satisfying the high end of

the market hence leaving a gap for the new entrants since the low-end markets feel neglected.

The red arrow for the incumbent has shown in the diagram shows that at one point it served

the low-end markets, but as the time goes on and the product performance increases, the

incumbent firm forgets the low-end market (Chua, 2021).

The shorter red arrow shows the new entrant in the market notices a gap in the neglected low-

end market and develops a new product that is easy, simpler, and cost-effective. The entrance

to the market is slow since the high-end market is still under the incumbent company (Chua,

2021).

                   

  Product Performance         High End of the market

                   
                   
              Mainstream  
                   
                   
              The low end of the market
                   
        Entrants disruptive trajectory      
                   
                   
    Incumbent sustaining trajectory          
                   
                   
            Time      
                   
As per Diagram, Netflix is the entrant, and Blockbuster is the incumbent. Blockbuster entered

the market by mailing DVDs to customers, at the start they paid attention to low-end markets,

then after the product became known and the performance increased, with time they started

penalizing customers for the delay. Also from the diagram, the entrants introduced a new

product later when the incumbent was serving the high end. The entrant with time will gain a

competitive advantage over the incumbent. The high-end market will notice new entrants and

with time they will start consuming the product hence forcing the incumbent to exit the

market.

Application of Disruptive Innovation Theory on Netflix

Netflix was competing with Blockbuster LLC when it was trading with trading using

DVDs. Blockbuster LLC had stores all over the US and it was focused on the profitable

services only Netflix was the smaller company compared to Blockbuster LLC. In 2007,

Netflix introduced digital online streaming which was a disruptive innovation. Online

streaming was simple and cheap since there were no delayed fees and DVDs were no longer

required to be posted (Christensen, et al., 2015). The innovation attracted Blockbuster LLC

subscribers, who started streaming too. The quality of online streaming was less quality

compared to DVDs, which the competitor was using which form the main feature of

disruptive innovation.

After the innovation, Blockbuster went into bankruptcy in 2010. As characterized by

disruptive innovation the innovation at the end disrupts the incumbent wave and takes over.

That is how Netflix innovation disrupted the operation of their competitor by introducing

online streaming which customers liked most in the end (Paap & Katz, 2004).In summary,

the incumbent products were DVDs and the new disruptive innovation was online streaming,

the competitor's products and services were complex and expensive and the online streaming
was simpler and cheap. The innovation that entered the market has underdogs, and in long

run captured the demand of the market.

Netflix recognized neglected aspects of the entertainment sector and decided to

venture into them. Blockbuster after becoming monopolistic forgot about the simplicity and

cost-effectiveness of their services, they started charging late fees. Netflix noticed a gap,

where most customers were unsatisfied, then they entered the market with a disruptive

innovation that had no penalties (Vinini, 2017).

Future development in Netflix using Disruptive Innovation theory

Netflix is faced with a lot of competition from new entrants in the markets such as

Disney plus and Amazon prime video (Hansen, 2017). The future of Netflix looks more

threatened and they have to develop other disruptive innovations to beat their competitors.

Currently, Netflix is carrying very crucial strategies to stay relevant in the market. Those

strategies include building a library of content that is giving a competitive advantage, they are

also offering a range of content that includes comedies, latest movies, series, and

documentaries (Hansen, 2017).

The future of Netflix depends on the innovation it will carry on. Technological

advancement is crucial today, and they can ensure that they offer a safe and fast online

platform that is simple to use as compared to competitor websites. The platform should have

a click button for sharing movies and series this will boost their marketing strategies.

Content creation partnership should be the disruptive innovation that they should

focus on. This means that Netflix should agree with content creators such as musicians,

movie actors, and comedians to use their content and then they pay royalties to the content

creator. The most local actor has been ignored for a long and this offers a gap in business

expansion. Netflix should create a link whereby actors can post their content on the Netflix
website more simply and cheaply. The content should be protected and guided. Just like

Youtube does, if Netflix can allow individuals to post content to the website it would give a

competitive advantage.

Revenue creation through the range of products and services will be a disruptive

innovation in the future. This means that instead of focusing on movies and series like their

competitor, they can create various products and services for their customers. Example for

kids, they can partner with cartoon design companies such as Cocomelon and ABC Kids so

that they can reach that target group. Netflix can also partner with gaming companies to

create gaming services for their customers, this enables Netflix to add value to their

customers and also the company (Yoon, et al., 2021). Most entertainment industries have not

been focusing on local content, and this is a gap that Netflix should venture on. Also, they

should divide their content as per the targeted market, to make the search easier and simpler.

In summary, the future of Netflix depends on disruptive innovation that will give

them a competitive advantage such as grouping the target market, Partnering with local

content creators, and developing new ways of generating income.

 Conclusion

The main aim of this project was to discuss two innovation management theories and

how the two theories have been used by Netflix to manage performance and competition. The

two which have been discussed are the blue ocean strategy and disruptive innovation theory.

The Blue Ocean strategy is a theory that explains how companies increase their

competitive advantage by reducing production costs and maximizing buyers' value. The

theory has been explained through creating values for the company, raising values for buyers,

reducing costs on products, and eliminating unnecessary costs on the company value. The

project has explained how Netflix has used all the four-factor to gain a competitive advantage

over time. In summary, Netflix has created comfort for its customer since they have made its

website fast for streaming, there are mailing DVDs longer, and there are no penalties on

delayed fees. Netflix has reduced the cost of products and the firm by eliminating penalties

on customers, eliminating movie stores, and reducing license costs. The project has

highlighted the future development of the theory by indicating that the value of the company

and the buyer can be improved by offering a range of products such as gaming and content

creation partnership. The second theory discussed is disruptive innovation theory. This

theory explains how the new entrants in the markets gain a competitive advantage over the

incumbent firm. The entrant identifies a gap that the incumbent has been ignoring over time,
and ventures into it. The new product introduces to the market is simple, easy to use, less

costly, and takes some time to be noticed in the market. Concerning Netflix, the theory was

used against its competitor Blockbuster. Netflix was the new entrant and Blockbuster was the

incumbent. The customers were not comfortable since Blockbuster was charging them late

fees and also neglected the low-end markets. Netflix notices the gap and introduced online

streaming which did not require mailing and posting of DVDs, and also no late fees. Netflix

gained the competitive advantage after some time since the low end and high-end markets got

attracted.

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