Netflix Innovation Strategy

Let's take a look at how Netflix manages to stay one of the most innovative companies by pursuing an innovation-focused strategic direction in addition to a variety of innovation strategies.

Introduction to Netflix

Netflix Inc. is an American subscription-based video streaming platform. The platform is used internationally to stream movies and TV shows from numerous different countries and genres. Other than operating as a streaming service, Netflix is also a production company producing movies and television series under the Netflix Originals brand name.

Netflix is available in 190 countries, in 30 different languages, and oftentimes the movies and shows available to stream will differ based on your location. The cost of a subscription to the platform also varies depending on the customer's location and the amount they wish to use the service. The company's mission is to 'entertain the world'.

Netflix originally started as a DVD rental company that, over the years, through technological advances, turned into the streaming platform it is today. Let's examine how Netflix has managed to become one of the most widely used movie and video streaming platforms through its innovative strategy.

Netflix innovation strategy

The Netflix innovation strategy focuses on maximizing its competitive advantage through its product and process innovations. The innovations are aimed at making the Netflix streaming service high quality and accessible for the majority of consumers. Netflix aims to achieve this by always looking for ways to make operations more cost-effective so that the majority of consumers are able to afford the subscription price.

Strategic direction to achieve innovation

In order to understand Netflix's innovation strategy and process, we need to understand the strategic direction that the company followed to achieve its innovations. Prior to that, it is important that we understand the key actions that contribute to forming a strategic direction.

Firstly, a business needs to be aware of its overall purpose. This can be in the form of a business vision or mission. For example, it can be becoming a market leader or creating innovations that will improve the lives of consumers.

Secondly, business needs to make a plan on how they are going to achieve their goal. This may involve setting a plan that includes decisions and activities that will assist in achieving the overall business's purpose.

Now let's have a look at an example of strategic direction so that later we can apply it to the Netflix case.

Strategic direction matrix

Another effective way to assist companies in setting strategic direction is making a strategic direction matrix. There are two main types of matrices:

Outsourcing matrix - An important part of this matrix is to assist the company in deciding whether they should outsource some of their organizational tasks or keep them in-house. The matrix analyzes each of the main operational tasks and assesses which ones would be more beneficial for the organization to outsource and which ones would be better to be done by the company.

Ansoff matrix - This matrix assists companies in forming their growth strategy, by analyzing various scenarios. For example, the Ansoff matrix can help a business decide if it would be more profitable for the company to increase sales in the existing market or enter a new market and develop new products.

Netflix Product Innovation

To further understand the company's innovation strategy, we will examine its operations and product offerings throughout the years.

In 1997, the founders of Netflix had an idea to rent DVDs by mail and tested out whether the idea would physically work. They sent a DVD in the mail and once it arrived intact, the company was born. A year later they launched the netflix.com website where customers could rent DVDs which would then be mailed to their house. This is an example of disruptive innovation that the company undertook, as the company developed a completely new service that added significant value to customers.

In the following year, the company developed a subscription service whereby customers could rent an unlimited number of DVDs per month. Shortly after, the company introduced an algorithm that assessed customers' previous ratings of movies they have watched to predict which movies they would choose to watch and rate highly in the future. These two steps in Netflix's development represent a form of product innovation, as they introduced two new options that added value to customers and increased the quality of the user experience.

In 2003, the company announced that there are over 1 million Netflix subscribers. To protect its innovation and intellectual property, the company issued a patent for its subscription rental services.

In 2007, the company introduced streaming which allowed its customers to watch movies and series instantly (rather than waiting for the rental DVD to arrive). This was one of the most significant innovations from both the product and the process point of view, as well as another example of disruptive innovation. Moving the rental platform online allowed customer experience with the company to increase as it completely eliminated the waiting time to watch a movie or show. It also allowed the customer to stream wherever they wanted (within their region) and allowed for more freedom of choice in entertainment.

From a process point of view, the innovation started making Netflix's operations more streamlined. The company initially had to spend less time on shipping products (DVDs), packaging costs eventually became obsolete and the company no longer had to store inventory, making distribution and overall physical operations more efficient.

As seen throughout the service and product innovation process, the strategic direction that Netflix took was to innovate its service, to achieve their overall purpose of making it convenient and accessible for consumers to watch TV shows, movies etc. At first Netflix was an online DVD renting service and although it was convenient, consumers had to wait a while for their DVDs to arrive to watch their requested content. To achieve the set goal, the activities and decisions that were involved were to transform Netflix into an online video streamlining platform so that consumers could watch their chosen content instantly instead of waiting for DVDs to arrive.

Netflix disruptive innovation

In Netflix's case, the disruptive innovation was from the start by introducing the DVD rental service, which allowed customers to get their DVDs mailed to their house. Later, in 2007, Netflix transformed from an online DVD rental company by mail to an online entertainment streaming platform, which is the biggest disruptive innovation that Netflix implemented. Due to this innovation, rather than renting DVDs individually, consumers could subscribe to Netflix online and access all the content. Moreover, this innovation not only made TV shows, movies etc. more comfortable to watch for consumers but also lowered Netflix's cost of production, which lowered the prices of the service. This innovation made Netflix's cost lower, therefore, more accessible and affordable for the majority of consumers.

Moreover, to make services cheaper and have a broader variety of content, Netflix outsources the production of most TV shows, movies, etc, however, in recent years Netflix has been producing more of its original content.

If we look at the strategic direction analysis we can see that according to the outsourcing matrix, Netflix had made a decision that for the company it may be cheaper to outsource the TV shows and movies as it is more beneficial to the company rather than producing them all in house Moreover, if we take a look at the Ansoff matrix we can see that Netflix set a strategic direction to achieve its growth by product innovation. This was done by introducing a new service product of an online video streaming platform available to consumers through subscription. This helped Netflix in achieving its growth, as more users were reached globally.

Netflix innovation process

In this section, we will cover the continuous innovation process of Netflix, which is illustrated as an innovation timeline, as seen in Figure 1.

Figure 1. Netflix Innovation Process, StudySmarter

Netflix innovation process timeline

This innovation process timeline shows how the Netflix service product was improved by incremental innovation and completely transformed through radical innovation.

1. Netflix started as a DVD start-up where the idea was to make the process of renting movies more convenient to the consumers. The concept was that consumers would order a DVD to rent through the internet and get it delivered to their doorstep. This was a product/radical innovation as this service did not exist before.

2. Netflix noticed that the DVD renting service that involved a process of paying for each rented DVD was quite uncomfortable as consumers had to pay each time they order a DVD. In order to resolve this problem, Netflix has introduced a subscription model, which allows subscribers to take advantage of the service as frequently as they like, without having to pay for each DVD rental.

3. The introduction of Netflix Queue in 2000 was an innovation that improved the experience for many. Consumers had the option of selecting a list of movies, TV shows, etc that they would like mailed to them after they have finished watching a DVD. This way consumers did not have to spend time and effort selecting what they would like to watch next.

4. In 2003 Netflix received a patent that allowed it to protect its intellectual property and its users' data regarding renting DVDs, as well as to manage other aspects of the business to make it safe. The patent is another example of Netflix's incremental innovation that improved the company's service security.

5. The video recommendations algorithm is another innovation that has improved the Netflix service significantly. The subscription model that was introduced earlier has helped this innovation to thrive, as Netflix was able to make personalized recommendations to customers, based on their watching history and the ratings of movies, TV shows, etc from previous customers.

6. The biggest radical innovation of Netflix is when Netflix transformed from a DVD rental service into an online streaming platform. This means that customers no longer had to wait for their DVD to be delivered, as they were now able to watch Netflix content through its online streaming platform. This has increased the consumer base, which leads to Netflix becoming the most-visited internet website during non-working hours.

7. Netflix increased their selection of entertainment by producing original content referred to as 'Netflix originals'. This new improvement to the service made Netflix seem original and exclusive as the Netflix original movies, TV shows, series, etc cannot be watched anywhere else.

Pros and cons of Netflix innovation strategy

The innovation strategy that Netflix pursues is gaining a competitive advantage through producing high-quality content and being accessible to a majority of people. Now let's have a look at the pros and cons of this innovation strategy.

Pros of Netflix innovation strategy

Simple to use – The innovation strategy of making it accessible for the majority, means that Netflix develops its service in a way that is easy and simple for everyone to use. To use this platform users do not need to download additional software, they can simply access it through the web or an app on a phone, tablet or computer.

Affordable –The Netflix service is affordable to a majority of the public costing only £5.99 to £13.99 per month, depending on the subscription package that users choose to use. The innovation strategy of cutting costs where possible allows Netflix to be able to offer these low monthly costs to its consumers as well as giving a 1-month free trial.

Available offline – As part of Netflix's strategy to make itself accessible to most users, Netflix now allows consumers who previously downloaded content to watch Netflix via offline mode.

Offers original content – In order to produce high-quality content, Netflix creates original content that cannot be found anywhere else, making Netflix original and exclusive. This gives Netflix a competitive advantage over other streaming websites.

Cons of Netflix innovation strategy

New content is not available – Even though Netflix's innovation strategy is to create and offer high-quality content, the Netflix innovation strategy has not succeeded in making new shows and movies available soon after their release, unless it is a Netflix original production. Usually, users can only access older content from previous seasons, which puts competitors such as cinemas at a competitive advantage.

Content varies depending on the geographical location – Netflix content is tailored based on the location of the user, aiming to suit the consumer's taste in different regions. Despite this, Netflix content may be better in certain regions than others, causing some Netflix users to be disappointed. In order to gain a greater competitive advantage, Netflix's innovation strategy should consider distributing equally high-quality content across all regions of its operations.

In this case study, we have examined Netflix's innovative strategy and how it has allowed the company to become one of the most widely used video streaming platforms in the world. Netflix's innovation strategy was designed to gain a competitive advantage by making Netflix's services widely accessible and offering an overall high-quality service. This was the strategic direction that Netflix took. The innovation process took time, it involved incremental and radical innovations. The biggest Netflix innovation was a transformation from a DVD rental company to an online video-streaming platform which allowed Netflix to become a global market leader.

SOURCES:

Nicholas Thompson, TECHNOLOGY; Netflix's Patent May Reshape DVD Rental Market, 2003

Vuk Mujovic , Netflix, 10 innovations that changed the world , 2018

Netflix, About Us , 2022