Netflix: The Evolution of a Business Strategy

Christopher L. Stevens

DIT – 8210: Information Technology Leaders as Partners in Organizational Strategic Planning

Capella University     

January 19, 2025

Netflix: The Evolution of a Business Strategy

     Netflix's business strategy evolved from 1997 – 2011 (Shih & Kaufman, 2014). Like Alcan, later known as Alean (Kipping & Cailluet, 2010), Netflix implemented a series of emergent business strategies that evolved later into its live video streaming deliberate strategy. Netflix's Chief Executive Officer (CEO) Reed Hastings and his senior leadership team’s decisions to pursue these business strategies enabled Netflix to adapt to external market forces that have made Netflix today’s industry leader. Blockbuster, Netflix's direct competitor, failure to adjust its business strategy to address similar external factors (Shih & Kaufman, 2014) resulted in its exit from the industry from the industry. This paper examines Netflix's emergent and deliberate business strategies from 1997 – 2011.

Business Strategy Evolution

        A review of Netflix CEO Hastings’s initial emergent business strategies resulted in several different strategies being implemented from 1997 until 2011. Initially, Netflix developed a strategy that allowed it to enter the U.S. home video rental market as a new market entrant (Shih & Kaufman, 2014, pp. 2-4). It expanded this business model to offer customers a prepaid subscription service (Shih & Kaufman, p, 5.). Netflix's proprietary recommendation system attracted new customers interested in receiving recommendations aligned with their viewing habits (Shih & Kaufman, pp. 5 – 7).

       The Ted Sarandos hiring enabled Netflix to implement a business strategy that improved its relationships with the major studios, which resulted in lower DVD costs and an expanded movie library (Shih & Kaufman, pp. 7 – 8). Its shift from a centralized distribution center into regional distribution centers reduced DVD delivery and return costs and times (Shih & Kaufman, pp. 8 – 9). The company’s shift from focusing on new movie releases to independent and lesser-known movies contributed to new revenue streams (Shih & Kaufman, p. 9). Netflix's decision to divest itself of its home DVD business, and to focus on live video streaming delivery evolved its emergent business strategies into its deliberate business strategy (Shih & Kaufman, pp. 12 – 14), Netflix's adoption of its deliberate business strategy enabled to focus on producing and streaming its own original video content. It also enabled Netflix to live stream the video content of independent and major studios, which have made it the market leader within the live video streaming industry.

Netflix's Emergent Business Strategies and External Factors: 1997 – 2011

        Unanticipated industry challenges tend to force new market entrants to adopt emergent business strategies to ensure their profitability and their survivability (Mier & Kohli, 2021). Henry Mintzberg posited that businesses implementing emergent strategies adapt their business strategies over time as they deal with the realities of doing business (Moore, 2020). Netflix haphazardly adjusted its business strategies every time that it faced a new business challenge. Its adaptability allowed it to stay ahead of industry paradigm shifts (Lombroso, 2020; Mier & Kohli, 2021) as it transitioned its home DVD rental industry business model to its live video streaming industry business model.

         Netflix's ability to address these challenges allowed it to remain competitive, while its nearest competitor, Blockbuster, failed to remain viable in the market. Customer dissatisfaction with slow delivery times, high customer investments, and late fees forced Netflix to eliminate its late return fee pricing model (Shih & Kaufman, p.4). It also contributed to Netflix's decision to adopt a prepaid subscription service (Shih & Kaufman, p. 5). Consumer needs for expanded content availability and content recommendations directly contributed to Netflix's implementation of its recommendation system. Customer dissatisfaction with slow DVD delivery and return times pressured Netflix to adopt a strategy of establishing more regional and local distribution centers (Shih & Kaufman, p. 8 – 9). Waning consumer interest in home DVD rentals, increased Internet availability, original content production, and the emergence of video-on-demand services directly Netflix's decision to enter the live video streaming industry (Shih & Kaufman, p. 12 – 14).

Blockbuster vs. Netflix 

         Blockbuster’s competitive advantage within the video DVD rental industry depended on its ability to satisfy customer demands more efficiently than its nearest competitors. Its deliberate strategy of physical stores, DVD rental pricing, new content availability, and late return fees made it the dominant industry leader. Its poor strategic forecasting and strategic vision failed to identify Netflix as a serious market challenger (Shih & Kaufman, p. 10). Netflix's implementation of adaptive and emergent strategies forced Blockbuster to revise its business strategy in the early 2000s (Shih & Kaufman, p. 10). Unfortunately, it was too late for Blockbuster to remain a viable competitor in the market, which led to its departure from the market in 2010 (Dutter, 2024; Shih & Kaufman, p.11).

     Conversely, Netflix's disruptive and emergent business strategies enabled it to adapt to external market forces quickly. Its senior leadership team’s willingness to take risks allowed Netflix to implement a deliberate strategy that satisfied customer content availability and pricing needs (Mier & Kohli, 2021, p. 195; Shih & Kaufman, 2014). Netflix's identification and pursuit of its “relative performance goals” enabled it to overtake Blockbuster in the home DVD rental industry (Tarakci et al., 2024, p. 1). Unlike Blockbuster, Netflix transitioned from its home DVD rental model, increased its content availability, adjusted its pricing strategy, developed a customer recommendation system, and embraced the live video streaming business model. Netflix CEO Hastings suggested that Blockbuster’s failure to adjust its business model to compete in the online DVD rental market enabled Netflix to expand in this market (Shih & Kaufman, pp. 10 – 11).

Conclusion

     Blockbuster is an example of a company that owned a competitive advantage, but that lacked a strategic vision for the future. Its failure to adapt its business model to address changing external market forces caused it to lose its competitive advantage to Netflix. Today, Blockbuster no longer exists. Conversely, Netflix's willingness to adapt its business model by implementing a series of successful emergent strategies allowed it to overtake Blockbuster within the home DVD rental market. Netflix's deliberate strategy of developing its live video streaming business model have made it today’s industry leader.

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