Home Entertainment

Analysis and Decision

Case Study
June 2011

David Kilburn

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 Scenario
• You are a Marketing Consultant in the home
entertainment sector.
• TASK: You have been asked by Netflix, Inc. to undertake a
strategic audit in relation to the organisation’s
• Core competencies
• Competitive advantage
• Value proposition
You have also been asked to consider how Netflix can remain
competitive in the context of developments in technology,
rising competition and changing consumer
behaviour. Consideration should be given to the organisation’s
financial position, its strategic risks and mitigating strategies
to overcome these risks.

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Where are we now ?

Audit of current situation

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The home entertainment sector today
• Fiercely competitive market
• Fast moving industry
• Discerning consumers
• New technology ever present
• Declining sales in DVD’s
• Increase in sales of blu ray discs
• Blockbuster model becoming obsolete
• Downloading, streaming and blu ray discs are
in vogue
• Digital distribution of home video represents
the future

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 Brand issues
• BRAND DOMAIN (brand’s target market)

• BRAND HERITAGE (how it has achieved success)

• BRAND VALUES (core values and characteristics)

• BRAND ASSETS (what makes brand distinctive)

• BRAND PERSONALITY (character of brand)

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Home Entertainment SWOT
Strengths Opportunities

• Established market • Profiting from technological

• Strong, well known brands advances
• • Possible growth areas – Canada,
Strong record of NPD Mexico, Colombia, Chile, Brazil,
• Innovative U.K. Australia
• Technical innovation • Increase in sales of games
software -20%

Weaknesses
• There is no guarantee that a new
product will be successful
Threats
• Highly competitive and turbulent
market
• NPD process is lengthy and
sometimes challenging
• Proliferation of piracy

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 •Netflix - SWOT
Strengths
• 12 million subscribers
• Website voted top retail site
for customer satisfaction on numerous occasions
• Ships 2 million dvd’s per day
• Offers a range of different pricing models and no late fees charged
• Combination of streaming and discs for rent provides a competitive
advantage
• In 2009, the number of subscribers increased by2.8 million leading to
revenue increases of 22% to $1.7billion and net income increases of 40%
to $115.9 million
• The internet service includes movie recommendation algorithms-
suggests movies that customers may wish to view based on those
previously selected
• Netflix ready devices enable movie and TV streaming without
interruption by commercials
• Netflix offers free trials of its service and continues to bill customers at
the end of the trial period unless the customer cancels - leverages the
benefit of customer inertia!
• Progressive staff policy

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 •Netflix - SWOT
Weaknesses
• Customers can switch between suppliers very easily
• Relatively low start up costs
• Industry is susceptible to price wars
• Movies are becoming widely available over the internet and via multiple
devices including smartphones – Netflix service is continually under
attack
• Revival of the cinema - sales of movie tickets up 10%
• Netflix is unable to rent out discs of Warner Bros films until 28 days
after their release- it is cheaper but could make their service look less
responsive than the competition
• Demand is created for new releases but Netflix is unable to meet this
demand for 28 days!
• Netflix is dependent on the studios to grant permission to stream
content but get out clauses allow the studios to cancel the rights at
short notice
• Demand for certain titles can often exceed capacity leading to delays in
fulfilling customer needs

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 •Netflix - SWOT
Opportunities
• To expand internationally – Canada, and
subsequently Mexico, Colombia, Chile, Brazil, U.K. and Australasia
• To partner with consumer electronics firms such as Apple
• To leverage further business opportunities in gaming and other communications
devices
• To be embedded in almost every Blu-ray player and internet connected TV sold in
2011
• To constantly engage in R & D to ensure that Netflix is at the forefront of new
developments in consumer electronics

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 •Netflix - SWOT
Threats
• Changes in US copyright law could adversely affect the business model –
copyright owned by others- First Sale Doctrine
• Studios could erode Netflix’s differential advantage by putting pay-per-
view, video on demand and premium TV options ahead of DVD’s being the
first available format
• Studio promotion could adversely impact customer retention levels
• Subscribers’ expensive choices of films could adversely affect profitability
• Blu-ray and streaming are more expensive than DVD so a faster than
expected adoption rate of these formats would actually reduce profitability
• Walmart and Amazon could cut prices so there is a reduced differential
between retail and rental.
• If licensing agreements are not renewed Netflix could be adversely affected
• Netflix also relies on its partners to keep up to date with advances in
technology and customer expectations
• Discounted postage rates for Netflix may be increased as discounted postal
rates have been contested in law as being discriminatory.
• Netflix is also vulnerable to failures of its own and third
parties’ computer systems

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 •Netflix - SWOT
Threats

• Netflix’s brand could be damaged by the actions of third parties

(electronics manufacturers or DVD suppliers)
• The sources of new subscribers may not yield the required
growth for the promotional cost, resulting in an adverse impact
on marketing expenditure and customer recruitment
• Netflix has offices in earthquake zones so may suffer power
blackouts which are uninsurable.
• A breach of security of personal customer data would be a risk to
its reputation and may lead to legal claims against the company
• Protection issues – intellectual property infringements, domain
names, legality of the discs, copyright and censorship rights.
• Ability to raise finance may be compromised- borrowing will
incur additional debt, ability to pay suppliers etc are all
important considerations
• Netflix must ensure that its capital funds are sufficient and
accessible

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•Netflix – Culture- staff policy
Staff Policy- 7 core principles
• Values are what we value
• High performance
• Freedom and responsibility
• Context not control
• Highly aligned, loosely coupled
• Pay top of the market
• Promotions and development
Black and white philosophy – good performers get
rewarded, slackers get fired.
Company values effectiveness rather than effort.
Staff can take as much leave as they feel is necessary.
Very interesting policy – it is likely that most staff will take off
less time than the norm. (3 weeks per year).

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Map of competition in the U.S
Non traditional High volume retailers
broadcasters

Apple Walmart
Amazon Amazon
Google Best Buy
Hulu

Rental companies Pay per view/video on

demand
Netflix
Blockbuster Time Warner
Movie Gallery Comcast
Redbox DIRECTV
LOVEFiLM Echostar
AT&T
Verizon

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 PESTLE

Political
• Government legislation

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 Economic

• Global credit squeeze impacts on interest

rates and dampens consumer spending
• Possible downturn in world economy
• Disposable income levels have declined

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 Sociological

• ‘Must have now’ society. We want it now!

• Ideally suited to electronic products and
services
• Home entertainment now a growing
market

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 Technological

• Technology is ever changing

• Opportunities are endless
• Sophisticated database marketing
techniques now possible (companies can
conduct carefully targeted campaigns)
• New media – apps, hand held devices etc
allow viewing of videos, films, DVD’s etc.
24/7 no matter where you are

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 Legal
Legal
• Freedom of information versus database
management. Netflix being sued by a
subscriber because she believed her sexual
orientation was compromised

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Where do we Want to be?

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 Objectives

• Decide
• Objectives
– For U.S.A. and International
• Deliver
• Outcomes

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 Segmentation

• Described and Profiled for each sector

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 Segmentation
16-29 segment
This segment has always known mobile and
has been brought up in a digital environment.
Internet and computer savvy, they use
mobiles as a permanent appendage, like to
live life to the full and enjoy individuality,
whilst using social networking sites like
YouTube and MySpace to communicate with
people. They are turned on by celebrity endorsed
products and like to use the latest ‘hot’ products.

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 Segmentation
30-49 segment
This segment is comprised of couples with children
who are also au fait with the digital environment.
They are Internet and computer savvy, enjoy home
entertainment because of the children and it works
out cheaper than going out. They live a full and
active lifestyle and use social networking sites
to communicate with friends and family.

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 Segmentation

Segment – 50-65
‘Baby Boomers’ –
Have relatively high disposable income,
possibly paid off mortgage, want to enjoy
life, spend money.
‘Empty Nesters’ – new media savvy – so can
be targeted effectively

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 Targeting

Use social networking sites which are

content driven and interactive such as
MySpace, YouTube, etc.
Use consumer electronic websites, use of
blogs, SMS messages to mobiles. Use retailer
websites, and introductory offers to elicit
trial and purchase.

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 Positioning

• Clear and defensible

– Set out USP and Positioning for each sector.
– Are there any commonalities or Single Brand
options

• Vision
• Values

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 USP and Positioning

USP – it is the hottest, latest, must have

Blu ray disc/dvd

Positioning – latest release,

affordable price, instantly available

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Targeting, USP, Positioning
Target consumers using online web sites

Consumer electronics magazines – exclusive

offers, trial products

USP – latest technology at an affordable

price

Positioning – quality, exclusive products,

using the latest technology

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How do we get there?

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 Action

• Decide
• Objective
• Deliver
• Outcomes

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 Strategic Development

• Product
– Sector Selection
– Core/ Physical/Augmented Proposition
– Branding
• Pricing
• Distribution
• Promotion
• People
• Process

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Implementation and Control

• Budgeting Areas
• Metrics
• Balanced Scorecard
• McKinsey 7S

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 Comms Strategy
• Audiences –Internal and External, domestic and
international

• Media
• Messages
• Timing/Budget
• Stakeholders
• Investors
• Suppliers
• Partners
• Customers
• Celebrities
• Media
• Manufacturers
• Retailers
• Who else ?

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 Internationalisation

• Where, when and how

– GE/ Harrel and Keiffer

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Implementation and Control

• Budgeting Areas
• Metrics
• BS
• McKinsey 7S

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 Critical success factors
• Create a sustainable brand image and position
amongst competitors
• Change management (PLC,BCG)
• Internal marketing (stakeholder management,
CRM)
• Funding (Borrowing/J.V/Debt/ Licensing/I.P)
• Constraints – Overstretching
- Competitive landscape
- Changes within the home
entertainment industry

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 Vision

For Netflix to become an established global

force in the home entertainment industry
with a strong and loyal customer base,
enabling it to invest in a robust,
innovative marketing plan which will keep
it top of mind within all its target markets

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 Mission statement

To deliver excellent service and the latest

technology to consumers worldwide.
At the same time valuing honesty,
integrity, empowerment and openness. By
consistently aiming for breakthrough
excellence in technology development, we
believe we will stay close to our
consumers and communities.

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 Values

• Committed to high quality, exclusive

products which delight our customers
• Committed to developing the best home
entertainment package for all our
customers
• Committed to a strategy of continual
product development, licensing
agreements and innovation

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 Corporate objectives

• To ensure that the company can operate

successfully in the USA and other potential
markets, such as Canada, the U.K.
Australia, Mexico, Argentina,Colombia
and Brazil
• To continue to develop new products
quickly giving us a crucial competitive
advantage
• To tailor global brands to suit local
preferences (Think global, act local)

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Strategic management of marketing mix

• Product
Core – sought after products, latest
releases or blockbusters
Augmented – speed of delivery, quality
guaranteed

• Price
Affordable price – value for money

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Strategic management of marketing mix

• Place
U.S. player – but needs to drive more sales in the
USA and open new markets in Canada,
U.K, and possibly Australasia, Mexico,Argentina,
Colombia, Brazil, and India -(Bollywood factor)

• Promotion
Web site – continually update the content.
Always make available the latest releases
featuring famous celebrities – refresh regularly.
Highly interactive with customer base -
encourages viral marketing

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Strategic management of marketing mix

• People
Train and develop the existing staff. Selective
recruitment of key sales/marketing/technical
personnel. Recruit proven staff in overseas
markets to develop sales and distribution.
• Processes
Regular internal/external communication. Long
term relationship building. B2C customer
involvement. Relationship marketing. Customer
Lifetime Value. Branding strategy.

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Implementation and Control
McKinsey 7S

Structure
Netflix Head office based in US
Where will subsidiaries be sited?

Strategy
Focus differentiated aimed at loyal customer base
and potential customers in Canada, U.K. and in
time other markets, such as Brazil and Australasia

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Implementation and Control
Systems
Develop MKIS and control systems to regularly
review and monitor effectiveness of all marketing
strategies
Develop benchmarking system to monitor against
key market indicators and main competitors
Staff
Continual development of key staff. CRM
development. Key relationship building with film
distributors, agents, and retailers.

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Implementation and Control
Skills
Ensure correct training and development
programmes are established to keep Netflix at
the leading edge of new product development,
systems and processes
Shared values
Ensure company strategy is shared by everyone in
the organisation. Growth strategy and national
and international expansion shared with all staff,
agents, distributors, retailers, and key
stakeholders.

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Strategic management of marketing mix

Physical evidence
Interactive, quality web sites
Number of blogs, endorsements from
consumers
The Netflix logo and brand
ROI table – comparison with other home
entertainment providers

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Implementation and Control

Style
Creative, innovative, dynamic

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Control – Balanced Scorecard

Internal
Develop CRM databases for collecting
retailer, consumer feedback and insights
into future needs, wants, industry trends,
(market intelligence)

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Control – Balanced Scorecard

Innovation and learning

Skills training – advanced B2C selling, web
development to inform consumers about
new products, DVD releases, critical
thinking

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Control – Balanced Scorecard
Financial
Sales vs. targets in each sector –U.S.A.
Canada, U.K. Brazil etc. Profitability
metrics, CLV

Customer
Customer satisfaction surveys – customer
feedback. Customer endorsements - web
based
Brand recall/awareness of brand

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 Possible questions

1. What branding strategy should Netflix

adopt to maximise sales and profitability?

2. Devise a marketing plan to make Netflix

the leading player in the home

entertainment business

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 Possible questions

3. Prepare a relationship marketing

campaign which will effectively
increase Netflix’s customer loyalty and
their lifetime value.

4. Prepare an international marketing plan

to ensure that Netflix expands its markets
beyond the USA

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 Possible questions

5. What branding and positioning strategy should

Netflix adopt to improve its appeal to
consumers?

6. There are considerable risks in the fast

moving home entertainments sector. Outline
how Netflix can mitigate these risks in its
pursuit of commercial success.

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