Cost Leadership - Netflix

Even though firms can produce the same products, they can have very different costs. Some of the reasons are (1) size differences and economies of scale, (2) size differences and diseconomies of scale, (3) learning-curve economies, (4) differential access to factors of production, and (5) technological advantages independent of scale. 

Netflix's seems to have established itself as a cost leader through (5) technological advantages independent of scale. Netflix was the first video rental and video streaming company to establish a cost advantage due to their implementation of different technologies. In terms of technological hardware, Netflix has saved money by not having actual storefronts. They only needed storage facilities for the portion of their business that mails DVDs to residents. They have also made advances in technological software through implementing various ways to stream videos online. Some of these examples are the blu-ray player, Ninetendo Wii, the PlayStation 3, etc. Netflix has definitely taken the technological advantages approach to establish cost leadership in the video rental and video streaming business.

Source: Jay B. Barney's Gaining and Sustaining Competitive Advantage

Evaluating Netflix's Strengths & Weaknesses: Applying the VRIO Framework

The questions of value, rarity, imitability, and organization make up the VRIO framework. This framework can be used to understand the return potential associated with a firm's resources or capabilities. 

If a resource or capability is determined to be not valuable, that resource will not permit a firm to apply strategies that exploit environmental opportunities or neutralize environmental threats. If a firm chooses to exploit a particular resource, either a firm's costs will increase or the amount customers are willing to pay will decrease. These resources are deemed weaknesses. Valuable resources that are not rare are considered organizational strengths. 

When a resource or capability is both valuable and rare but not costly to imitate, a company should exploit this resource in order to gain a temporary competitive advantage. This firm will have a first-mover advantage. In order to obtain a sustained competitive advantage, a firm must exploit a resource that is valuable, rare, and costly to imitate. This puts competitors at a deficit because they cannot imitate the firm's strategies. Organization serves as an adjustment factor in the VRIO framework. 

The VRIO can be applied to Netflix. When looking at Netflix's growth over the past several years, the firm's biggest opportunity was the ability to stream movies over the internet on various electronic devices. One can see that the capability is valuable, rare, and costly to imitate. Netflix chose to exploit this opportunity and gained a first-mover advantage. Despite these facts, firms such as Hulu and Amazon have now entered the market of live stream via the internet. 

Source: Jay B. Barney's Gaining and Sustaining Competitive Advantage

Evaluating the Environmental Opportunities of Netflix

Environmental threats a can be used as opportunities. These opportunities are to neutralize the threat using various strategic methods. Both the threat of rivalry and the threat of substitutes can be neutralized in similar ways. A firm can compete on dimensions other than price and improve product attractiveness in comparison to its substitutes by means of methods such as cost leadership, product differentiation, cooperation, and diversification. 

Netflix is arguably the cost leader in the movie rental industry due to the fact that you can access an unlimited amount of movies for a low monthly fee. Netflix also seems to take the lead in product differentiation. Netflix offers a multitude of ways to rent movies. Costumers can access movie rentals via snail mail or using any device with internet capability. These devices include but are not limited to computers, blu-ray players, Nintendo Wii, Playstation 3, and many apples products such as the iPad, iPhone, and iPod. Netflix also cooperates with Amazon, a competing firm by using Amazon servers. A interesting article on this "coopetition" can be found here. 

Source: Jay B. Barney's Gaining and Sustaining Competitive Advantage