Home Entertainment Analysis and Decision Case Study June 2011 David Kilburn C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Where are we now ? Audit of current situation C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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) C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Home Entertainment SWOT Strengths Opportunities • • • • • • Established market Strong, well known brands Strong record of NPD Innovative Technical innovation Weaknesses • • • Profiting from technological advances Possible growth areas – Canada, Mexico, Colombia, Chile, Brazil, U.K. Australia Increase in sales of games software -20% Threats There is no guarantee that a new product will be successful • • • Highly competitive and turbulent market NPD process is lengthy and sometimes challenging Proliferation of piracy C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 •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 algorithmssuggests 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 •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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 •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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 •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-perview, 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 •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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 •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). C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Map of competition in the U.S Non traditional broadcasters High volume retailers Apple Amazon Google Hulu Walmart Amazon Best Buy Rental companies Netflix Blockbuster Movie Gallery Redbox LOVEFiLM Pay per view/video on demand Time Warner Comcast DIRECTV Echostar AT&T Verizon C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 PESTLE Political • Government legislation C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Economic • Global credit squeeze impacts on interest rates and dampens consumer spending • Possible downturn in world economy • Disposable income levels have declined C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Sociological • ‘Must have now’ society. We want it now! • Ideally suited to electronic products and services • Home entertainment now a growing market C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Legal Legal • Freedom of information versus database management. Netflix being sued by a subscriber because she believed her sexual orientation was compromised C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Where do we Want to be? C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Objectives • Decide • Objectives – For U.S.A. and International • Deliver • Outcomes C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Segmentation • Described and Profiled for each sector C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Positioning • Clear and defensible – Set out USP and Positioning for each sector. – Are there any commonalities or Single Brand options • Vision • Values C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 USP and Positioning USP – it is the hottest, latest, must have Blu ray disc/dvd Positioning – latest release, affordable price, instantly available C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 How do we get there? C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Action • • • • Decide Objective Deliver Outcomes C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Strategic Development • Product – Sector Selection – Core/ Physical/Augmented Proposition – Branding • • • • • Pricing Distribution Promotion People Process C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Implementation and Control • • • • Budgeting Areas Metrics Balanced Scorecard McKinsey 7S C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Comms Strategy • Audiences –Internal and External, domestic and international • • • • Media Messages Timing/Budget Stakeholders • • • • • • • • • Investors Suppliers Partners Customers Celebrities Media Manufacturers Retailers Who else ? C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Internationalisation • Where, when and how – GE/ Harrel and Keiffer C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Implementation and Control • • • • Budgeting Areas Metrics BS McKinsey 7S C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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) C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Implementation and Control Style Creative, innovative, dynamic C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Control – Balanced Scorecard Internal Develop CRM databases for collecting retailer, consumer feedback and insights into future needs, wants, industry trends, (market intelligence) C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Control – Balanced Scorecard Innovation and learning Skills training – advanced B2C selling, web development to inform consumers about new products, DVD releases, critical thinking C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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 C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Possible questions 1. 2. What branding strategy should Netflix adopt to maximise sales and profitability? Devise a marketing plan to make Netflix the leading player in the home entertainment business C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 Possible questions 3. 4. Prepare a relationship marketing campaign which will effectively increase Netflix’s customer loyalty and their lifetime value. Prepare an international marketing plan to ensure that Netflix expands its markets beyond the USA C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005 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. C A M B R I D G E M A R K E T I N G C O L L E G ES © CMC 2005