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Adaptive Cycle of Resilience: Netflix Case Study

by Cristina Meniuc

For the past decade, the entertainment industry has undergone a full reconceptualization. Specifically, the movie and TV programmes sphere has been severely influenced by the rise of Internet and related services, such as YouTube. This case study focuses on the organizational change in the company Netflix, which has been marked by innovation, user empathy, but also by severe market failures that needed correction. 

A brief History 

Netflix was founded in 1997 by Reed Hastings and Marc Randolph. In 1999 it launched the subscription service that allowed members to rent an unlimited number of DVDs. One year later, it introduced the personalized movie recommendation system, aimed at making relevant suggestions to users based on their preferences. In 2007, Netflix launched online streaming, allowing its users to view media content of their choice directly from their computers 

When Netflix started its service of renting DVDs and distributing them through the postal service in 1997, its chances of success seemed rather low. The competition was fierce, with companies like Blockbuster, Amazon and Wal-Mart dominating the market. It seemed so unlikely that a new entrant would succeed, that a Wall Street analyst referred to Netflix as ““a worthless piece of crap” [3]. Yet the launch of the subscription service in 1999, offering unlimited rentals for a low monthly fee, revolutionized the market and proved to be an enormous success. As a result of a carefully designed strategy and accurate implementation, the company had gained 23 million subscribers and above 60% of market share by 2010. At the same time, its biggest competitor, Blockbuster, filed for bankruptcy in 2010. 

THE ADAPTIVE CYCLE OF RESILIENCE 

EQUILIBRIUM 

Despite fierce competition, Netflix managed to position itself on the movie rental market through an innovative strategy. While Blockbuster, for example, was offering DVD rentals from a bricksand-mortar location, Netflix decided to make use of new technology. The DVD-by-mail service did not only save time for customers, but also made the entire experience effortless and more entertaining. By waiving the late fee (fee for returning a DVD too late) and introducing the subscription service, the company changed not only itself, but also the entire industry. By adjusting to customer needs and utilizing new technology, Netflix managed to reach equilibrium, as illustrated in the Adaptive Cycle of Resilience. 

CRISIS  

The crisis period for Netflix started around 2005, when Youtube and other video streaming websites were introduced and started to become popular. This, in combination with the significant growth in Internet speed, created a strong shift in consumer preferences. Users’ interest in DVD rental plunged, thus affecting the entire business strategy of Netflix.  

The company’s management was rather quick in detecting the new trend and deciding to change the strategy accordingly. 

Soon after, Netflix announced its plans to focus on online streaming and move its DVD-by-mail service to a separate website called Qwikster. This plan, however, was severely criticized by both media and users. Less than one month after the announcement, the company’s cofounder Reed Hastings declared that the separation plan would be abandoned. The external circumstances of rising Internet streaming, combined with controversial company decisions, lead Netflix into the phase of deep crisis 

NEW COMBINATIONS AND ENTREPRENEURSHIP  

Following the period of crisis, Netflix understood the need to reinvent the company. The new market of online streaming, however, was not easy to adjust to. The company struggled with its content strategy – large media companies would not agree to license their popular movies and TV programmes on attractive terms. This lead to a poor content on the Netflix website: 

Considering the problems encountered with obtaining licenses for highly demanded content, Netflix decided to adopt the backward integration strategy. In other words, the company started created its own content 

The new strategy of Netflix is still being rolled out, however the initial results are promising: the stock price is growing, as is the customer base. In the first quarter of 2013, Netflix attracted two million new US subscribers 

Through trial-and-error, but also through empathy, transparency and determinacy, the company managed to overcome the crisis and reach the entrepreneurship phase for a second time, steadily moving towards a new equilibrium. 

This is an excerpt from ‘Adaptive Cycle of Resilience: Netflix Case Study’

Netflix Case Study

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